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Petropavlovsk Plc (POG)

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Wednesday 28 March, 2012

Petropavlovsk Plc

Annual Results for the year ended 31 December 2011

RNS Number : 2191A
Petropavlovsk PLC
28 March 2012
 



28 March 2012

 

Annual Results for the year ended 31 December 2011

 

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 2011 (the "Period"). 

 

FINANCIAL SUMMARY


YE 31 Dec 2011

YE 31 Dec 2010

Change

Gold produced (koz)

630

507

24%

Gold sold (koz)

676

445

52%

Group average gold price received

US$1,617/oz

US$1,253/oz

29%

Cash costs of hard rock mines*

 

US$586/oz

US$548/oz

7%

Total Group's cash costs*

US$662/oz

US$608/oz

9%

Group Revenue (US$m)

1,262.5

612.0

106%

 

Underlying EBITDA (US$m)

 

597.1

195.5

205%

Net Profit  (US$m)

 

240.5

 

23.0

 

 

945%

 

Earnings per share (basic)(US$)

1.24

0.11

1,027%

Impairment charges (US$m)

(42.1)

(44.8)

n/a

Adjusted earnings per share (basic) before impairment charges (US$)

 

1.46

 

0.35

 

317%

 

Net Debt (US$m)

(787.3)

(171.1)

360%

Interim Dividend paid

£0.05

£0.03

67%

Final Dividend proposed

£0.07

£0.07

-

*       Previous year numbers restated to reflect deduction of co-product (silver) revenue.

 

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 37 to the financial statements.

Impairment charges are those detailed in note 6 to the financial statements.

Adjusted earnings per share (basic) before impairment charges is profit for the period attributable to equity holders of Petropavlovsk PLC before these impairment charges divided by the weighted average number of Ordinary Shares during the period.

Total attributable gold production, as stated throughout this document, is comprised of 100% of production from the Group's subsidiaries and, where applicable, the relevant share of production from joint ventures and other investments. Figures for the comparative period are restated accordingly. No attributable ounces are included in the Group's production figures from its c.1.1% interest in Rusoro Mining Ltd. The Company's direct and indirect interest in Pokrovskiy Rudnik (the holder of the Group's Pokrovskiy and Pioneer interests) is 98.61%. Cumulative gold production, as stated throughout this document, consists of gold physically recovered and gold in circuit. Accordingly, gold produced in the year consists of gold recovered during the period and adjusted for the movement in gold still in circuit. 

FINANCIAL HIGHLIGHTS

Group revenue of US$1.3 billion - more than double the 2010 Group Revenue (US$612 million), due to a 52% increase in gold sold, a 29% increase in the average realised gold sale price and a 374% increase in IRC's revenue;

Group total cash costs for hard-rock assets of US$586/oz, represent a 7% increase compared to 2010, despite a 22% decrease in processed grades at Pokrovskiy and Malomir and strong inflationary pressures. This has been achieved as a result of increased efficiencies of operations, economies of scale, implementation of cost control measures and improved grades of ore mined and processed at Pioneer;

Total cash costs per ounce at Pioneer decreased by 3% due to increased capacity and economies of scale and improvement in grades processed;

Cash costs for alluvial production totalled US$1,167oz; 2011 alluvial production amounted to 14% of the Group's total gold output,  compared to 16% in 2010;

The Group's average realised gold price increased by 29%, from US$1,253/oz in 2010 to US$1,617/oz in 2011;

Underlying EBITDA for the period was US$597.1 million, a substantial 205% increase on 2010;

Earnings per share of US$1.24 increased more than ten times versus the 2010 figure, due to a 1066% increase in net profit for the period attributable to shareholders of Petropavlovsk  from US$19.8 million in 2010 to US$230.9 million in 2011;

During 2011, the Group carried out a review of its existing exploration and evaluation projects and recognized an impairment charge of US$42.1 million against certain mineral properties which are not considered economical;

Adjusted earnings per share before impairment changes of US$1.46 increased almost four times versus the 2010 figure, again reflecting the increase in net profit for the period attributable to shareholders of Petropavlovsk PLC;

On 7 February 2012, the Group disposed of its interest in the wholly-owned subsidiary Sever-Chrome for a total cash consideration of US$7.8 million;

On 27 March 2012, the Board of Directors resolved to recommend a final dividend of £0.07 per share which is expected to result in the payment of £13.2 million;

Net debt as at 31 December 2011 was US$787.3 million reflecting the increased capital expenditure during the year;

As at 31 December 2011, the Group had committed but undrawn loan facilities of US$462.6 million in aggregate, including US$333.0 million available under an IRC facility;

In March 2012 the Group entered into a new US$200 million 6 year loan facility with a Russian Bank.

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 11% to 10.2Moz, compared to 9.1Moz reported in March 2011;

Measured and Indicated Mineral Resources increased by 12% to 14.4Moz (inclusive of Resources upgraded to the  Reserves category) compared to estimates reported in March 2011, and a further 10.2Moz of Inferred Mineral Resources were identified;

Total Mineral Resources increased by 6%, from 23.1Moz of gold at an average grade of 0.98g/t Au in 732Mt of mineralised material to an estimated 24.6Moz of gold at an average grade of 0.97g/t Au in 790Mt of mineralised material;

Group non-refractory Proven and Probable Ore Reserves increased by 40% from 3.7Moz to 5.1Moz;

Grades of the newly-discovered Reserves are at a higher than average grade for the Group, enabling it to maintain similar grade levels in its Reserves estimate, in spite of the depletion of high-grade material;

The increase in Reserves and Resources was achieved despite a depletion of c.650,000oz of reserves as a result of 2011 production;

The increase in Ore Reserves is attributable to the successful exploration programme conducted by the Group during 2011 at its principal assets, predominantly at Pioneer, Visokoe, Albyn and Malomir, as well as an evaluation of Probable Ore Reserves at Visokoe in the Krasnoyarsk region;

The Mineral Resources and Ore Reserves update has been prepared by the Group in conjunction with external experts; the Ore Reserves were independently audited by mining consultants Wardell Armstrong International ("WAI"). With the exception of Albyn and Visokoe where current estimates use  a gold price of 1,200$/oz, both 2011 and 2012 estimates were completed using a US$1,000/oz long-term gold price;

In addition, the Group holds Reserves and Resources at its alluvial projects, which are classified in accordance with the Russian Classification System. 

 

OPERATIONAL AND DEVELOPMENT HIGHLIGHTS

Total attributable gold production for 2011 amounted to 630,100oz, a 24% increase   compared to 2010 (506,800oz);

Following the successful ramp-up of the second crushing and grinding line at Malomir in July 2011, Malomir's plant capacity increased by 33% in Q3 2011 compared to H1 2011, to 80,000t/month; further improvements and expansion at the sorption section in Q1 2012 are expected to lead to a further increase in capacity up to 180,000t/month;

Following its successful commissioning in November 2011, the plant at Albyn has been ramping up steadily; it is expected that the plant will be working at full capacity by the end of Q3 2012;

Following the decision to bring forward the commissioning of the second 1.8Mtpa resin-in-pulp ("RIP") processing line at Albyn and the commissioning of a fourth 2.0Mtpa processing line at Pioneer, work has been commenced and carried out for both lines which are scheduled to become operational in H2 2012;

Test work on refractory bulk samples from Pioneer and Malomir is on-going at the Blagoveschensk metallurgical test plant, modelling detailed parameters for the future POX plant. A comprehensive programme of training the future workforce for the pressure oxidation ("POX") hub is underway at the metallurgical testing plant;

The manufacturing of the main autoclave equipment for the POX plant is on schedule under the supervision of Outotec (Finland) Oy ("Outotec") and the Group, with the first equipment expected on site during Q2 2012;

Work on the foundations for the POX plant at Pokrovskiy and the construction of the flotation line at Malomir remains on schedule for commissioning at the end of 2012.

2012 PRODUCTION PLAN AND OUTLOOK

The Group's attributable gold production for 2012 is currently estimated at 680,000oz, representing an increase of c.8% over the total attributable gold production for 2011;

In line with Group policy to provide conservative guidance, the estimate of 680,000oz does not fully provide for the expansions of the Pioneer and Albyn mines scheduled for H2 2012, nor for gold in flotation concentrate scheduled to be produced at Malomir's flotation plant scheduled for commissioning at the end of 2012. The Group's management has no reason to believe that the commissioning and ramp-up will not run as scheduled;

It is expected that Group production will, as usual, be weighted towards the second half of the year, due to a planned increase in the attributable alluvial production, coupled with increased production from heap leach operations, both of which are seasonal, and to the bigger contribution from Albyn mine which is being ramped up to full capacity through Q1 and Q3 2012.

2013 - 2016 GOLD PRODUCTION OUTLOOK

The Group continues to review its production schedule for the period 2013 - 2016 in light of the latest additions to the reserves base at the main producing assets to optimise grades scheduling;

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

It is expected that four smaller scale projects - Visokoe (Krasnoyarsk region), Tokur (Amur region), Verkhne-Aliinskoye (Chita region) and Novogodnee Monto (Yamal region) - will commence production during this period, thus improving the current base case medium-term production schedule.

CAPITAL EXPENDITURE

In 2011, the Group spent a total of US$544 million of development and maintenance capex (excluding IRC). During the year, the Group accelerated expansion of the Pioneer and Albyn projects and also brought forward construction of the sorption circuit expansion at Malomir  as a result of the discovery of additional non-refractory material;

Approximately US$100 million was spent on on-going exploration work, mainly at the Pokrovskiy, Pioneer, Malomir and Albyn projects. This work yielded a significant increase in Group Reserves and Resources;

Capital expenditure for the development and maintenance of gold projects in 2012 is expected to be  US$354 million with exploration capex at approximately US$60 million;

Going forward, the Group expects a significant decrease in its capital expenditure programme for gold operations with US$175 million and US$84 million to be spent in 2013 and 2014 respectively. The majority of this budget is intended to finalise the stage 2 expansion of the POX hub, to allow the processing of refractory material from Pioneer which is scheduled to commence in 2015.

2011 EXPLORATION HIGHLIGHTS AND LICENCE ACQUISITIONS

Pioneer

-     New zones of both high grade non-refractory and refractory mineralisation have been identified within the NE Bakhmut trend;

-     Significant high grade non-refractory resources and reserves were established through additional metallurgical testing of the material previously classified as refractory.

Pokrovskiy and Flanks 

-     Exploration at Pokrovskiy focused on upgrading Inferred Resources to the Measured and Indicated categories and into JORC compliant ore Reserves;

-     The Zheltunak satellite deposit was explored allowing mining to start in Q3 2011. 

Malomir

-     There has been an increase in both resource size and confidence in the resource estimate for Quartzitovoye;

-     Several new zones of both refractory and non-refractory mineralisation were identified  north of Ozhidaemoye and Malomir Central, as well as a new zone near the Quartzitovoye operating open pit;

-     Metallurgical tests established a non-refractory oxide and a transitional cap over the main Malomir Central ore body, which is expected to provide an additional source of ore for the RIP plant.

Albyn

-     In-fill drilling completed in 2011 allowed an increase in 2010 project resources estimates from 1.8Moz  to 2.24Moz;

-     Promising results were obtained from the nearby Elginskoye area, where an extensive Albyn style mineralisation has been identified.  

Taldan and Osezhinskaya

-     Exploration at the Burinda deposit within the Taldan licence has resulted in an estimated 340koz in Inferred Resources;

-     A significant gold as well as an Ag-Cu-Mo anomaly was identified over the granite-porphyry intrusion.

Krasnoyarsk region

-     The increase in Visokoe Mineral Resources from 2.0 to 2.5Moz;  a maiden ore Reserve of 1.2Moz has been established;

-     A new zone of mineralisation has been discovered and evaluated at Olenka;

-     Several promising gold-arsenic geochemical anomalies with lengths of up to 7km were identified within the Troeusovskaya area.  

 Chita region

-     Measured and Indicated Resources are currently being estimated at the Verkhne-Aliinskoe gold deposit, bringing the asset to a pre-production stage.

Yamal region

-     Additional Inferred Resources were established at the Petropavlovskoye deposit, elevating the total asset resource above 1Moz;

-     Zones of gold mineralisation were discovered at the Sob-Kharbeyskaya licence, where work only started in 2011.

New licences

-           The Nimanskaya licence area, located 90km south of Albyn, was acquired by the Group in June 2011; the licence shows extensive historical placer mining operations and is estimated to be an exploration target of 2-3Moz potential.

n   Licence review

-             During 2011, the Group carried out a review of its existing exploration and evaluation projects and recognized an impairment charge of US$42.1 million against certain mineral properties which are not considered economical.

2012 OPERATIONS UPDATE

Good performance from Group operations sees overall gold production on budget to date.

Pioneer production is ahead of budget, showing a 10% uplift in grade versus budget (2.1g/t versus a budget of 1.9g/t) and  86% recovery;

Malomir production is on target in spite of mining lower grades at the beginning of the year and lower recoveries, after an improvement in grades at the end of the quarter compensated for it;

The ramp up of the first stage at Albyn progressed more slowly than expected due to a temporary shortage of power and water. The second processing line is under construction and expected to be commissioned earlier than planned and should allow the project to catch up with the production budget;

At Pokrovskiy mine the push back of the south wall of the main pit continued on schedule and high grade ore will be mined from the main pit in Q4 2012;

Total production from all mines is in line with the target for Q1 2012.

IRC HIGHLIGHTS 

Petropavlovsk is an indirect 65.6% shareholder in IRC. IRC is a producer and developer of industrial commodities, with operations in the Far East of Russia and North Eastern China. IRC is quoted on the Stock Exchange of Hong Kong Limited. Further information about IRC, and the IRC 2011 Annual Report, can be found on the IRC website, www.ircgroup.com.hk.

Production targets were exceeded at the Kuranakh Mine, generating a US$20 million segmental profit and producing its first one million tonne of iron ore concentrate;

4.7 times increase in revenue from 2010 to US$122.2 million;

K&S construction advancing with funding in place. Material from the K&S project has been tested by a number of steel mills, all confirming that the material is of good quality and paving the way to a potentially diverse customer base;

Ore Resources increased by 16% to 1,345 million tonnes; ore Reserves increased by 24% to 801 million tonnes;

The first draw-down from the Industrial and Commercial Bank of China ("ICBC") project finance facility should ensure that IRC is funded for significant near term growth;

Production commenced at the Steel Slag Reprocessing Plant in North-Eastern China;

800,000 tonnes of iron ore concentrate and 63,500 tonnes of ilmenite concentrate were produced in 2011;

IRC forecasts good production growth in 2012 and firm prices, targeting annual production of 820,000 tonnes of iron ore and 125,000 tonnes of ilmenite concentrates respectively.

CHAIRMAN'S STATEMENT

Results

This is the first Annual Report in which we can measure our financial success in billions of dollars: we more than doubled our total revenue to US$1.3 billion in 2011. Our EBITDA of US$0.6 billion was three times greater than last year's and our fully diluted earnings per share increased to US$1.23, some 11 times more than the previous year. The operating cash flow at US$0.3 billion is seven times higher than 2010.

In order to achieve this we moved record volumes of material, processed record amounts of ore and sold record amounts of gold at record prices.  At the same time we managed to maintain control of operating costs; with total cash costs for hard rock gold production at US$586 per ounce rising by 7%, which is less than input cost inflation of approximately 20%. Total cash costs, including alluvial production which is more dependent on energy, rose by 9% to US$662 per ounce. This cost control is all the more remarkable because it was achieved in spite of a 22% decrease in average grades processed at the Pokrovskiy and Malomir RIPs. At Pokrovskiy - our maturing mine - in addition to the decrease in grades we had a 75% increase in the stripping coefficient but the cost per tonne of ore produced declined by 2% due to reduced overheads.

Our success can be explained in part by economies of scale, since we are now using much bigger equipment at Pioneer, our flagship operation, but I believe that a far more significant explanation is the fact that we are continuing to optimise the way we use such large scale equipment. The learning process involved a comprehensive review of operations followed by the development of a new planning and scheduling regime as well as better operating practices and these have borne fruit. Following implementation of the programme, the daily volumes of mining works at Pioneer increased by 20% and we managed to increase volumes of total material mined by 61% year on year. Indeed, we have now caught up with all the waste stripping that fell behind schedule in 2010. The operating crews and their management deserve our thanks for their enthusiasm for the new regime and I hope that this can be replicated throughout the Group and carried on in future years.

A tighter hold on operational expenditure, staff numbers and wage levels was also a major contributor to our success. Having said that, our hard-working and loyal employees are still well rewarded when compared to other operations in the Amur Region. All senior management also participate in our long-term incentive scheme which is tightly connected to key performance indicators based on our strategy.

Most importantly, tight cost control and high gold price during the year have yielded record operating cash flows which, together with our substantial borrowing powers, allow us to complete our expansion programme. 

To complement this background of operating success, we added a further 1.5Moz to our JORC Mineral Resources in spite of a depletion of 0.65Moz and we commissioned one new mine and two new processing lines. These in themselves are remarkable achievements and as usual were accomplished in-house, with minimal external assistance.

From this operating base we expect to produce 680,000 ounces of gold in 2012.

I am sure that you will be as grateful as I am to management and staff for making this possible.

 

 

Share price performance and dividend  

It both saddens and perplexes me that the price at which the Company's shares change hands on the Stock Exchange reflects neither the achievements set out above nor the great potential that the Group has to continue to develop and grow its business.

I must assume that the market is placing a far higher discount on mining assets in Russia than I, after about 30 years of involvement with Russia, deem necessary. I also think that there are lasting impressions of the difficulties we encountered in 2010 that are hard to improve and that only successive years of successful operations can achieve.

It is my belief that people who invest in gold mining companies on the basis of their net present value do so on a mistaken assumption, unless they get to share in the cash stream.

For this reason, I have always been a strong advocate of a progressive dividend policy and, as soon as the capital expenditure demands from our exceptional growth abate, I hope that we will be able to be among those at the forefront of dividend payment in our sector. In the meantime I am glad that we have been able to increase the total dividend for the year by 20% to £0.12 per share. I am conscious though that this does not yet match the exceptional growth in our after-tax earnings as much of our cash flow is still being ploughed back into the Group's development.

The move to pressure oxidation process

In spite of our success this year, we still need to take account of the changes occurring in the mining environment that are likely to affect us and to look to our future, based on these observations. Most notable of these changes is the decline in the number of new discoveries of gold of significant quality and, in particular, the reduction in the number of new, easy to treat, oxide - as opposed to refractory - deposits that are being found. Nowhere is this more true than in Russia and is something of which we have been aware for some time.

For this reason we invested substantially in the scientific evaluation of alternative methods of treating the harder-to-recover refractory gold that is much more plentiful in Russia. At the same time we continued, within our total exploration effort, the evaluation of the refractory gold occurrences that we had in our own portfolio of gold reserves and resources.

The result of this work - both metallurgical and geological - was the choice of pressure oxidation as the most effective method of releasing and recovering the large amounts of gold contained in our refractory deposits.

It is worth noting that pressure oxidation technology is not new. After all, it is what Mother Nature does all the time; the main difference being that we must do in a few hours what she does in a few million years. The process itself, which is also not new to the industry, having been operated by other gold companies for more than 50 years and for many years in the base metal industry in the former Soviet Union, is straightforward. The gold-bearing ore is heated to 225 degrees centigrade in a pressure vessel containing pure oxygen at 35 times normal atmospheric pressure; the heat coming from the oxidation of the sulphur to which the gold particles are bound.

The prospect of doing so much extra work might seem daunting but, by using a simple flotation concentration process, we can separate a high proportion of gold-bearing material from the waste and by use of this method we only need to pressure oxidise a very small fraction of the ore. Accordingly, there is a cost saving compared to normal ore processing, where all the ore is treated. This counteracts to some extent the expense of pressure oxidation itself.  In contrast with comparable processing methods, pressure oxidation also has a low impact on the environment.

Our two main sources of refractory gold are Malomir and Pioneer and we decided that the most effective way to recover this was to do the concentration on site and to bring the highly charged product to a processing hub at Pokrovskiy. Here we have the existing accommodation facilities, skilled labour, laboratories, smelting and storage facilities, a power supply and other logistical advantages. In addition, Pokrovskiy is located close to an excellent source of lime, which is needed to neutralise the sulphuric acid that is a by-product of the process.

A further advantage of the Pokrovskiy hub site is its proximity to the Trans-Siberian Railway. This is important for the medium term future because, by building facilities capable of producing flotation concentrate at the many Soviet-era gold mines along the route of the westbound line, we would have access to otherwise unprocessed reserves left over from previous operations.

Pressure oxidation is, in our view, the way forward for the gold mining industry both in Russia and worldwide, and we are very proud of our achievements.  These are now complemented by our association with Outotec, a leading and established global provider of process solutions for the mining industry, with whom we have signed contracts for the development and implementation of our pressure oxidation plans. It is expected that the first gold from pressure oxidation will come from the Pokrovskiy hub in 2014.

New projects

The shift to refractory processing is, I am pleased to say, not the only thing in our future. The ores at our recently opened mine at Albyn are easy to process and we are already building the second stage of the processing facility there.

Elginskoye. Some 15 kilometres away from Albyn, we have had some promising intersections from a new gold discovery at Elginskoye. Although not sufficiently explored to be classed as reserves or resources, this deposit is generating considerable interest amongst our exploration teams who believe it has the potential to bring transformational changes to the Albyn project.

Nimanskaya. In June 2011, the Group won the auction for an exploration and extraction licence for the 308km2 Nimanskaya area, located in the Khabarovsk region, some 90km south of Albyn. The area is well-known for producing more than 4 million ounces from alluvial gold mining since 1874, with 80% of the historical production coming from a 14x12km area covered by our licence. Work completed by our predecessors between 1994 -1998, identified mineralisation along 8km strike and up to 5km width, with grades ranging from 0.2 - 0.3g/t to 20 g/t. Our predecessors's specialists envisaged potential for a 2Moz-4Moz resource at an 1.0-2.0g/t average grade.

Visokoe Exploration work in 2011 proved 1.2Moz non-refractory gold reserves at Visokoe, our most advance asset in Krasnoyarsk region. In addition, we have two other promising early stage licences on Yenisey Ridge, also in Krasnoyarsk region which has been the No 1 gold producing region in Russia for more than a decade and hosts Polyus's Olimpiada mine.

With a favourable geological setting and numerous indications of extensive gold mineralisation found within the area we have high expectations of good results from exploration work planned for 2012.

Exploration

Exploration is key to our business and this year our success in increasing our total reserves and resources from 23.1Moz to 24.6Moz notwithstanding a 650,000oz depletion, is testament to the good work that the exploration teams have done. From an economic point of view it is good to know that so many of the new ounces are within production distance of our existing plants, are mostly non-refractory and are of higher grade than the average life-of-mine grades nearby.

IRC

Great things too have been achieved by our iron ore subsidiary, IRC: a maiden operating profit - something that they should be rightfully proud of - and success in undertaking the development of Kimkanskoye and Sutarskoye which will, I believe, bring us a major stake in a major supplier of one of the raw materials most needed in China.

Management

Dr Pavel Maslovskiy, our Chief Executive Officer, our founder and my business partner became a Senator and Member of the Federation Council of Russia (the Upper House of the Russian Parliament). For this reason he has retired from his executive role with the Group but remains as our unpaid Honorary President and we are grateful for the continuing advice and support that he will give us. 

Sergey Ermolenko, who has been at Pavel Maslovskiy's right hand since the Group was founded in 1994, has kindly agreed to take over the Chief Executive Officer role and I welcome him as a Director of the Company. 

Brian Egan, our Chief Financial Officer, has decided to return to his native Ireland and thus to leave us  shortly after the publication of the Annual Report.  Brian has done an excellent job both at Aricom and with Petropavlovsk and we will miss his input. 

Andrey Maruta, who has previously served as Finance Director, Russia, has kindly agreed to replace Brian Egan as Chief Financial Officer. Before the merger with Aricom plc in 2009, Andrey Maruta used to served as Chief Financial Officer of Peter Hambro Mining Plc.

Non-Executive Directors

Dr David Humphreys joined us in August 2011 as a non-executive director to replace Peter Hill-Wood, who retired in May 2011. David has already made a valuable contribution to the Board with his extensive relevant experience in the global mining industry through his work for mining companies and as a consultant and academic.

Rachel English joins the Board with effect from today and is a superb addition to the Board. The wealth of knowledge and experience she has amassed in the global energy sector, in particular her first-hand experience of developing projects in challenging business environments into profitable enterprises, is invaluable. I believe that her appointment will bring a new perspective to the Board as the Group moves into the next phase of its future development.

Challenges

The year end, and the consequent publication of the Annual Report, is a waypoint in the course that I and the Board must navigate for the benefit of the shareholders, the staff and other stakeholders. Economic uncertainties, inflation, gold price volatility, the prospect of sovereign default, threats of war, political unpredictability and many other turbulent events combined this year to make navigation a challenging task.  The impact of external pressures on our business in 2011 shows, once again, the importance of having a clear course to steer and, at the same time, planning both to take advantage of the opportunities presented and to take precautions against the unexpected buffetings and inclement weather along the way. 

I am glad to note that we have reached this year's waypoint with record results but I do not foresee any diminution in the challenges that beset us last year.

Full delivery of the pressure oxidation process remains a major implementation challenge but I believe that the extensive scientific research work that has already been carried out and our involvement with Outotec do much to manage risks involved with the project.

Our capital expenditure programme has been, and remains extensive and encompasses pressure oxidation, construction of the first processing line at Albyn and the bringing forward of the second processing line at Albyn, the fourth processing line at Pioneer and the flotation plant at Malomir. For this reason the level of our net debt is relatively high, which to an extent is opportunistic in order to take advantage of the current high price of gold.  Managing our treasury and the leveraged exposure to the gold price is another major challenge.

The road ahead

2012 has started well for the Group and the prospects for the US dollar price of gold, in my opinion, remain good. I say this because I believe that there is little sign of a lasting solution to the financial turmoil that marked the previous year.

I remain confident that we will have another year of continued production growth.

Finally, I should like to thank you, as shareholders, for the confidence that you place in our management and, above all, to thank our executives and staff for the truly magnificent contribution they have made.

 

 

Peter Hambro,

Chairman

 

PRESENTATION

There will be a presentation of the Petropavlovsk 2011 FY results followed by a question and answer session on March 28th at 11.00 (BST) *

To watch a webcast of presentation, please log onto www.petropavlovsk.net.

To ask a question, please dial:

 

UK Toll Number          + 44 20 7075 6551

US Toll Number          + 1 631 638 5256

RU Toll Number          + 7 499 270 0354

 

Participant PIN Code:  543099#

The conference call may include information relating to the shares and convertible bonds.

ENQUIRIES

 

Petropavlovsk PLC

Dr. Alya Samokhvalova 

Rachel Tuft

 

 

 +44 (0) 20 7201 8900 

 

 

Merlin

David Simonson

 

 +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). While the Russian Classification 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, Group reporting on reserves and resources at its hard rock assets to investor audiences is carried out in accordance with the JORC Code (2004).

The Group's in-house specialists, in co-operation with external independent advisers, prepared an update of Group gold Mineral Resources and Ore Reserves in accordance with the JORC Code (2004) as at 01/01/2012, which was published on 23/02/2012 and is available on the Company's website (www.petropavlovsk.net). The Ore Reserve statement was audited by independent technical consultants WAI, whilst the mineral resource statement was prepared by the Group internally.

A summary of the Group's gold Ore Reserves and Mineral Resources as at 1 January 2012 in accordance with the guidelines of the JORC Code (2004) is shown below. The estimates were completed following an extensive exploration programme conducted by the Group during 2011.

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

67,489

1.22

2.64

Indicated

342,796

1.06

11.73

Measured + Indicated

410,285

1.09

14.37

Inferred

380,865

0.83

10.22

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

40,808

1.29

1.69

Probable

241,139

1.10

8.56

Proven & Probable

281,947

1.13

10.25

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 11%, from 9.1Moz of gold at an average grade of 1.17g/t Au to 10.25Moz of gold at an average grade of 1.13g/t Au. The increase in Ore Reserves is attributable to the successful exploration programme conducted by the Group during 2011 at its principal assets, predominantly at Pioneer and Albyn, as well as to the evaluation of Probable Ore Reserves for Visokoe, in the Krasnoyarsk region of Russia. With the exception of Albyn and Visokoe the new Ore Reserve estimate was completed using a long-term gold price of US$1,000/oz. Reserves for Albyn and Visokoe were estimated using a gold price of US$1,200/oz.

Total Mineral Resources have increased by 6%, from 23.1Moz of gold at an average grade of 0.98g/t Au, to 24.6Moz of gold at an average grade of 0.98g/t Au, in 732Mt of mineralised material. Of the 24.6Moz, 14.4Moz are Measured and Indicated and 10.2Moz are Inferred Mineral Resources. The reported uplift in Ore Reserves and Mineral Resources has been achieved notwithstanding depletion of about 650koz of gold through production at the Pokrovskiy, Pioneer and Malomir mines during 2011.

OPERATIONS AND DEVELOPMENT REPORT

Pokrovskiy

During 2011, Pokrovskiy produced 91,800oz of gold - a planned decrease compared to 2010, due to the decrease in grades processed as the mine approaches the end of its mining life. The mining operations were carried out mainly at two pits: the main pit at the Pokrovka-1 deposit and a second pit at the Pokrovka-2 satellite deposit. In 2011, mining also commenced at a further satellite deposit at Zheltunak.

In terms of mine capacity, 1.78Mtpa of ore were processed at the RIP plant and 0.8Mtpa of ore at the heap leach facilities, slightly outperforming design capacity. 2011 production from Pokrovskiy's heap leach operations accounted for approximately 16.5% of the total annual production of the mine.

Costs

In 2011, the total cash cost per ounce at the Pokrovskiy mine increased by 35% to US$759/oz, from US$561/oz in 2010. This was in line with the Group's expectations as the increase was due to the lower grades of ore mined and processed, a higher strip ratio, and input cost inflation. The year-on-year decrease in grades processed through the mill was 40% and the strip ratio increased by 75%. However, the increase in costs was mitigated significantly following the implementation of efficiency improving measures at operations resulting in a 2% decrease in  costs per tonne mined and processed compared to the previous year.

Outlook

Total production from Pokrovskiy in 2012 is expected to be 68,000oz, as mining progresses to the lower grade areas of the deposits.

Exploration at Pokrovskiy has indicated sufficient quantities of non-refractory material available for processing until the beginning of 2017.

By 2013, the Group is planning to install a POX facility at the Pokrovskiy site to process flotation concentrate from Malomir and Pioneer. After 2013 the RIP plant is expected to be gradually converted to work as an integrated part of a POX hub, whilst remaining low grade reserves will be treated through heap leach operations.

Exploration is continuing at other parts of the Pokrovskiy  area which may result in the discovery of additional resources, providing a possible further extension to the life of the mine.

Pioneer

Pioneer currently processes non-refractory ore only. Mining at Pioneer in 2011 was conducted using open-pit methods from eight pits. The majority of ore, approximately 98%, is processed at the on-site 4.6Mtpa RIP plant. Cyanide heap leaching was used to treat remaining lower-grade ore. 

During 2011, Pioneer produced 359,100oz of gold, a 56% increase on 2010, representing more than half of the Group's total production for the year. This strong overall performance in 2011 followed a series of measures to improve on-site efficiencies at Pioneer, which were implemented following a comprehensive review in Q1 2011. During 2011, daily mining volumes increased by approximately 20%, offsetting inflationary pressures on cash cost of production at the mine.

31.6 million m3 of material was moved during 2011, an increase of 61% on 2010 (19.6 million m3). This increase reflects the contribution of both the final additions to the mining fleet, which were delivered at the beginning of 2011, and changes to the organisation of on-site mining works. Due to the volume of stripping work conducted during 2011, the backlog of stripping accumulated at the end of 2010 was fully cleared.

The increase in production at Pioneer also reflects the scheduled mining and processing of higher grades during Q3 2011, and the full contribution of the third RIP processing line, commissioned in April 2010.

During 2011, small scale heap leach operations were carried out at Pioneer, processing 405,000 tonnes of ore at an average grade of 0.7g/t Au, recovering a total of 8,100oz of gold. It is planned that heap leach operations will be significantly expanded in 2012, processing about 1.4Mtpa of ore.

The Board is pleased to report that management restructuring at Pioneer completed in 2011 has resulted in a significant strengthening of operational efficiency.

Costs

Total Cash Costs at Pioneer decreased by 3% in 2011 to US$530/oz, compared to US$549/oz in 2010, despite on-going pressure from input costs, inflation and a strong rouble. This improvement was achieved due to a series of measures implemented by the management team in response to problems which occurred at the mine in 2010. During 2011, the mine management team continued to implement these measures, delivering further cost savings and increased profitability. Total cash costs also benefited from the increase in grades processed during 2011, partially reflecting good exploration results during the year.

Outlook

Following the success of the 2011 exploration programme, which resulted in a significant increase in non-refractory reserves at the mine, the Group decided to bring forward the expansion of Pioneer's production capacity to Q3 2012, with the commissioning of a fourth 2.0Mtpa RIP processing line. Originally scheduled for 2014, this expansion will significantly improve the Group's production output in both the short and medium-term. The fourth RIP milling line will consist of one 7.5mx2.5m SAG mill and two 4.0mx6.0m ball mills. The new milling line will have a design capacity of 2.0Mtpa, taking Pioneer's overall design capacity, including its heap leaching facility, to 7.6Mtpa.

The 2012 production target at Pioneer is 286,000oz, reflecting the scheduled processing of lower-grade material. However, this target does not fully include the planned milling expansion at Pioneer. 

The current reserves of non-refractory material at the project are expected to support production until 2016. It is anticipated that the processing of refractory ore will commence in 2015, following the installation of a flotation unit at Pioneer. The resulting flotation concentrate will then be transported approximately 40km, using all-weather roads, to be processed at the Pokrovskiy POX hub.

Malomir

The feasibility study proposes a two-stage development:  initial smaller scale production of non-refractory material, followed by large scale mining operations and the commissioning of a flotation plant. Flotation concentrate will be taken to the Pokrovskiy POX hub for further processing. Currently, only non-refractory ore is being processed at an on-site 1.7Mtpa RIP plant.

In 2011, Malomir produced 88,500oz of gold, showing a significant increase on 2010. The increase in production followed the successful 2011 expansion programme which saw the commissioning of the second milling line in July 2011, resulting in a 33% increase in Malomir's plant capacity to 80,000t/month in Q3 2011, compared to H1 2011. Improvements and expansion at the sorption section in Q1 2012 allowed for a further increase in capacity up to 180,000t/month.

A slight decrease in recovery rates during 2011 was caused by the dilution by refractory material bordering the non-refractory zones, resulting in the processing of refractory ore within the blend through the mill. In order to prevent losses, the tailings from the processing of the ore were stored separately for future re-processing.

Costs

In 2011, total cash costs at Malomir increased by 30%, from US$473/oz in 2010 to US$615/oz in 2011. This increase was the result of a significant (30%) decrease in grades processed and input cost inflation. However, the increase in costs was lower than the combined effect of these two factors, due to a number of efficiencies and improvements to mining operations which were implemented on site. This included the optimisation of mining and handling operations and a significant increase in mining and processing capacities. Costs also benefited from economies of scale after the plant's expansion. In spite of strong inflationary pressures which were present throughout the year, the team managed to decrease costs per tonne of ore mined and processed by 13%. 

Outlook

Malomir's 2012 production target of 118,000oz represents a 33% increase on 2011 production. This increase reflects the full-year contribution of the second RIP milling line, successfully commissioned in July 2011 and the effects of the sorption line expansion completed in Q1 2012. The average grade processed is expected to decline slightly as the commissioning of the second RIP processing line has allowed the mine to process lower grade material at similar cost levels to 2011.

The Group anticipates the commissioning of a flotation plant at Malomir by the end of 2012. The resultant flotation concentrate will be stockpiled on site for processing at the POX hub at Pokrovskiy in 2013, after it is commissioned.

The 2012 production target for Malomir excludes gold in flotation concentrate, which is scheduled to be produced following the commissioning of the flotation plant. In its earlier plans, the Group was intending to process this concentrate at a third-party facility, however, after evaluating this option in more detail, it was concluded that a better return could be achieved by processing the concentrate in the Group's own POX plant in 2013. This change of plan was also supported by an increase in non-refractory reserves at Malomir and Pioneer, which should enable the Group to reach the same levels of production without entering into costly contracts for toll treatment of the concentrate.

POX Hub

In 2006, the Group began an extensive testing programme to examine the technological properties of the refractory mineralisation at Pioneer and Malomir, in order to devise the most efficient treatment method. More than three hundred tests, ranging from a scoping stage bench-scale trial to closed-cycle pilot plant experiments, have enabled Group specialists and external technical advisers to complete the design of a hydrometallurgical processing "hub", which will be one of the largest and most advanced of its kind in Russia. 

After examining all of the technical, infrastructural and logistical aspects in a detailed evaluation of several development options, the Group decided to centralise the processing of refractory concentrates at its Pokrovskiy site, which it envisages will act as a regional pressure oxidation and metallurgical processing hub. The hub at Pokrovskiy will be supplemented by two flotation plants at Malomir and Pioneer: concentrates produced at these plants using flotation technology will be transferred to Pokrovskiy for treatment and gold recovery.

Following its own extensive in-house research and test work, in Q4 2010 the Group commissioned Outotec, the global leader in the manufacture of minerals and metals processing technology, to assist the Group with the preparation of the technical design for the POX plant at Pokrovskiy and the flotation plants at Malomir and Pioneer.

The design of the hub will enable flotation concentrates from Malomir and Pioneer to be processed in the same POX plant located at Pokrovskiy. The plant will consist of six pressure oxidation vessels, four of which will process the flotation concentrate from Malomir and two which will process the flotation concentrate from Pioneer. The POX plant is designed to process 600kt of concentrate per annum at full capacity. This additional capacity, the modular nature of the plant and the logistical advantages of Pokrovskiy's location will also facilitate the treatment of concentrate from other mines. 

Permitting

PHM Engineering, the Group`s Moscow-based in-house technical services subsidiary, is at an advanced stage in preparing construction plans and documentation to fulfil Russian technical regulations and to facilitate the permitting process.

Logistics

Based on manufacture and delivery lead times, Outotec split equipment for the POX hub and the two flotation plants into 4 categories. This has allowed the Group to develop the optimal schedule of manufacturing and shipping contracts. Outotec is acting as the principal developer, overseeing and controlling the quality of the equipment and the delivery schedule execution.

To guarantee the timely and safe delivery of all essential equipment, the Group commissioned INTOTEC Group ("INTOTEC"),  a highly experienced and reputable Russian shipping company which has been providing transport services to the Group. INTOTEC will also be responsible for liaising with the relevant Russian authorities for timely and efficient custom clearances. The documentation required to facilitate this is already at an advanced stage.

All large equipment, such as autoclave vessels and receivers, were sized and designed taking into account the transport limitations of the Russian rail system, and will therefore meet all necessary requirements and technical regulations. The permitting process required for the transport of oversized cargo from the Vladivostok port to Pokrovskiy is now at an advanced stage and will be completed in time to comply with the construction schedule.

Smaller items will be delivered by road by INTOTEC, using approximately 450 containers and 60 lorries. A temporary storage area the size larger than a football pitch is being prepared at the site to accommodate the cargo during the construction phase.

The first flotation equipment has been cleared by Russian customs and arrived at the Malomir site in March 2012.

Quality Control and Assurance

Leading manufacturers have been commissioned by Outotec to provide the key equipment for the Pokrovskiy POX hub and the two flotation plants, including Shanghai Morimatsu for autoclave vessels and high pressure pipe lines, LOTERIOS S.p.A (Italy) for pressure pipe lines, DSB Säurebau GmbH (Germany) for titanium inner gear and autoclave linings, Outotec for flotation, filtration, control and automation equipment, Feluva  Pumpen GMBH (Germany) for acid resistant high pressure slurry pumps, MOGRAS Industries (USA) for valvesand Red Mountain Energy Corp for the oxygen plant.  Although internal quality control at these manufacturers is to be of a very high standard, the Group undertakes further regular inspections using in-house and Outotec specialists. In addition, NDE Group was commissioned to provide on-going independent monitoring on all key equipment. NDE Group is a large, reputable international firm which, among other services, provides vendor assessments and independent quality assurance to a wide range of industries. The first checks on the high pressure pumps are being undertaken in March 2012.

Staff Hiring and Training

Recognising that human resources are key to the success of such a large-scale project, the Group launched a specialist training programme in preparation for the commissioning of the POX plant. This comprehensive programme provides training for future plant engineers and operators at the Group's unique pilot autoclave plant facility in Blagoveschensk, which is equipped with the control and automation system of an industrial autoclave plant. Over the last year, the Pokrovskiy Mining College has also been running a course for future POX technicians and skilled workers.

The Group was successful in securing the services of Evgeniy Kudrin as Technical Director of the Pokrovskiy POX plant. Mr Kudrin was the Deputy Director for Production and Operations at the Nadezhdinskiy plant in Norilsk which is of comparable size and uses similar technology to the Pokrovskiy POX plant. Mr Kudrin accordingly has first-hand technical and managerial experience of running such a plant.  

Pilot test plant

The Group's move towards POX processing has been supported by six years of intensive research including four years of work conducted by Prof. Schneerson and his team at the Gidrometallurgiya R&D centre. Their extensive laboratory work was supplemented and tested by bulk sampling at the Group's unique metallurgical pilot plant located in Blagoveschensk.

During 2011, the Group continued tests of Malomir and Pioneer samples at the pilot plant. Encouraging results were received for Malomir using carbon flotation to remove organic carbon and minimise pregrobbing effect. Group specialists where able to establish flotation parameters and regimes enabling removal of the majority of the carbon with only a 2.8% gold recovery into the carbon concentrate. Flotation gold recovery to the sulphide concentrate was between 86.8 and 88.7%. Sulphide concentrate was subjected to pressure oxidation in the Group's pilot autoclave and to cyanidation. These tests indicated stage recovery of 89-92%, resulting in overall recovery from 79 to 81%.

Additional tests on Pioneer samples resulted in 85-92% gold recovery from flotation concentrate. Subsequent pressure oxidation and cyanide leaching showed stage recovery of up to 98% and average 86% overall gold recovery.

The blend of the Malomir and Pioneer concentrates was also subjected to pressure oxidation and cyanide leach tests, resulting in the stage recovery of 91%. 

The pilot plant test results confirmed the previously developed mathematical model of the autoclave oxidation process at the future Pokrovskiy plant. Semi-industrial pressure oxidation tests also provided sufficient pulp material for representative thickeners and filtration tests  showed better than previously expected results.

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 at the beginning of 2013. 

Albyn

Albyn was commissioned in November 2011, slightly ahead of the Group's planned commissioning date of mid-December 2011. This was achieved despite the logistical challenges faced by the team, due to the remoteness of the project, which is located in the far North-East of the Amur region, approximately 836km (by road) from the Pokrovskiy mine, and the severe weather conditions experienced during the period of commissioning and ramp-up. 

Mining at Albyn is conducted by open-pit methods. On the basis of the results of extensive test work, the Group designed an on-site 1.8Mtpa RIP plant for the treatment of ore. The plant is scheduled for further expansion in H2 2012, which should double its current capacity.

The current processing facilities 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 400m3 tanks. Following its commissioning, the RIP plant at Albyn produced 1,100oz of gold during the remaining weeks of 2011. This was ahead of the Group's estimate, reflecting the timely commissioning of the mine.

Costs

As the project will continue to ramp up during 2012 and another line is planned for commissioning, cash costs are expected to be somewhat higher than average for the life of the project. Due to the earlier commissioning and the continued construction of infrastructure elements including power lines, a significant amount of electricity is currently being generated by diesel generators. Electricity produced by diesel generators is relatively expensive and negatively affected operating costs. All mining equipment on site is also currently powered by diesel. Due to the high stripping coefficient, it is expected that total cash costs per tonne of ore mined at Albyn in 2012 will be in line with those at Malomir.

Outlook

The Group expects the Albyn plant to ramp up to its full operating capacity from the beginning of April 2012. Work on connecting the plant to the electricity grid is expected to be finalised during H1 2012. The diesel generators will then be used as a stand-by emergency power supply unit, which is considered essential for reducing operational risk for such a remote site.

Following successful exploration work in 2011, Albyn's reserves and resources base significantly increased and a decision was taken to bring forward the expansion of the plant to H2 2012 from the original plan of 2014. Work on laying the foundations for this project has started.

The capacity of the second RIP milling line is expected to be similar to the first, and it is expected that by the time both milling lines are fully ramped up, the total capacity of the Albyn plant will be approximately 3.6Mtpa.

In 2012, the Group is targeting production of 116,000oz for Albyn. This target takes a conservative view of the ramp-up of the processing plant and does not fully provide for increases resulting from the commissioning of the second milling line in H2 2012.

Tokur

A small-scale operation involving the mining and re-processing of historical low-grade waste dumps was commissioned in 2009. The material is washed through a sluice to recover the free gold and to remove clay and dirt, preparing it for the next stage of X-ray separation. At this stage, the ore is put through a sorting machine which uses an X-ray analyser to separate ore from waste, upgrading it to a c.4g/t Au pre-concentrate.

During 2011, approximately 400oz of gold were recovered at the Malomir RIP plant from Tokur pre-concentrate.

After the successful completion of the feasibility study at the end of 2011, the Group's specialists started work on the design of the future processing plant at Tokur. It is expected that the Tokur plant will be commissioned in H2 2014.

Krasnoyarsk region projects

The Krasnoyarsk region is one of Russia's most prospective mining areas and the location of world-class gold, nickel and other mineral deposits. Group assets include the significant Visokoe non-refractory deposit, currently at a pre-production stage, as well as the Troeusovskaya and Verkhnetisskaya exploration licences. All three assets are located on the Yenisei Ridge, which has been a key area for the Russian gold mining industry for decades.

The Visokoe site is located approximately 50 km north-west of the village of Teya and 70km north-west of Severo-Yeniseyskiy, with its long history of mining of the Sovetskoe gold deposit. Mineralisation at Visokoe is confined within a single large bulk zone 40-70m thick and with a strike length of 1.7km. The zone has been traced to a depth of approximately 440m without any indications of narrowing out.  With its low strip ratio, Visokoe is well suited for low-cost and highly productive open-pit mining.

Exploration and other technical work completed at Visokoe during 2011 enabled the Group to define JORC Ore Reserves and to significantly improve its mineral resource position. Group specialists are finalising the development plan for this asset, considering processing either through a RIP plant or heap-leach operations. This work is expected to be finalised during the course of 2012. The first production from Visokoe deposit is currently scheduled for H2 2013.

Troeusovsksya and Verkhnetisskaya are two adjacent exploration licences with a combined area of over 1,000km2, located approximately 50-70km south of Visokoe and 70-80km west of Severo-Yeniseyskiy.

The Group is exploring the possibility of developing all of the assets in this area as one cluster due to their synergies.

Petropavlovskoye, Novogodnee Monto, Yamal Region

In the Yamal region, the Group holds licences for the Petropavlovskoye and Novogodnee Monto gold deposits, as well as the early stage Sob-Kharbeiskaya exploration licence, approximately 40km west from Petropavlovskoye. The Zapadnoe chromite deposit was successfully sold at the beginning of 2012.

Petropavlovskoye and Novogodnee Monto are two adjacent ore bodies located alongside the Obskaya-Bovanenkovo rail line, which connects them to the Russian National rail network and to the Labitnangi port on the Ob River. Since their acquisition in 2004, the Group has completed extensive exploration and other essential technical work here, progressing Petropavlovskoye and Novogodnee Monto from greenfield sites to projects at an advanced stage of pre-development.

In addition to significant JORC gold reserves and resources, Novogodnee Monto holds c.3Mt of high grade magnetite iron ore and substantial reserves of industrial aggregates within the host un-mineralised waste rock. Metallurgical tests have proved gold to be non-refractory and amenable to direct cyanidation.

In 2011 quarrying began at the site, with the material processed through the mobile crushing and screening plant, producing saleable aggregate products. Sales contracts have now been signed and the first aggregate sales were carried out in Q1 2012. 

The Group is continuing to develop the Petropavlovskoye and Novogodnee Monto deposits towards gold production and is currently in the process of finalising the optimal processing flow sheets and a development plan. It is currently expected that the first gold production will commence here in 2014.

Chita region projects

The Group holds three prospective assets in the Chita region, of which the most advanced,   the Verkhne-Aliinskoye high-grade deposit, is currently at a pre-development stage. Work at the other two licence areas, Kulinskoye and Bukhtinskaya, is less advanced, but already reflects the great exploration potential of the region.

The Verkhne-Aliinskoye deposit is situated 30km west of the town of Baley, a well-known historical gold mining centre. It is a high-grade, narrow vein deposit potentially suitable for underground mining. The deposit is hosted within a monzonite intrusion and comprises a large number of quartz-sulphide veins with a strike length of up to several hundred metres. 

Through exploration and comprehensive technical work, Verkhne-Aliinskoye has been developed to an advanced pre-production stage, with total JORC resources of 0.74Moz of gold at 6.25 g/t, including 0.27Moz in the Measured and Indicated categories. The deposit is underexplored, with many of the veins open both along strike and down dip.

The mineralisation at Verkhne-Aliinskoye varies in composition between refractory and non-refractory, with the majority being non-refractory and amenable to cyanide recovery from flotation concentrate.

The Group is considering two development options: the treatment of the concentrate at the future Pokrovskiy POX hub or the on-site processing of the flotation concentrates. Verkhne-Aliinskoye is at an advanced stage in the permitting process and management is working on an optimal mine plan for the asset.

 

ALLUVIAL OPERATIONS

Following the acquisition of Omchak in 2010, the Group operates a number of subsidiaries exploiting alluvial gold deposits in the Amur, Magadan and Yakutia regions of Russia.

In 2011, the contribution of alluvial operations to the Group's output was 89,600oz, equating to approximately 14% of the Group's overall gold production for the year. This share is expected to decrease with the increase of production from hard rock deposits.

The majority of 2011 production came from the Group's principal alluvial operations located in the Amur and Magadan regions. In 2011, 36,170oz of gold was produced in the Amur region and 49,707oz in Magadan region. A smaller operation in Yakutia (Uduma) contributed 3,685oz of production.

In 2012, the Group is planning to produce 92,000oz of gold from alluvial operations.

Alluvial total cash costs

2011 total cash costs for the Group's alluvial operations were US$1,167/oz - 36% higher than in 2010 (US$861/oz). This figure was broadly in line with expectations, as alluvial mining typically requires more costly overheads than hard rock mining. A large proportion of costs at these operations is attributable to diesel, which has increased by 36% year-on-year.

2011 EXPLORATION REPORT AND LICENCE ACQUISITIONS

2011 was a very successful year for exploration, particularly at Pioneer, Malomir and Albyn in the Amur region, at Visokoe in the Krasnoyarsk region and at Petropavlovskoye in the Yamal region.

Pioneer

In 2010, the Group acquired the larger Alkagan-Adamovskaya licence area surrounding the Pioneer deposit, as geological interpretation suggested that the high-grade NE Bakhmut trend may continue into this new licence area. This concept has now been confirmed by the 2011 exploration programme, which identified a further extension of the NE Bakhmut ore body, including a new high-grade pay shoot. The zone contains both refractory and non-refractory mineralisation, and is yet to be fully evaluated.

Several other zones of mineralisation containing both refractory and non-refractory material were also identified. These include the Zvezdochka zone and a new zone south-east of NE Bakhmut. The latter zone was discovered late in 2011 and is yet to be fully understood and evaluated.

Further exploration and interpretation of the drilling results were completed for Nikolaevskaya, allowing classification of Measured, Indicated and Inferred category JORC Resources and also a JORC-compliant Ore Reserve evaluation for this zone. There is also an indication of potential new undiscovered zones south of Nikolaevskaya, as well as north of NE Bakhmut. Exploration of these areas is on-going.

The Group is continuing active exploration within areas surrounding the Pioneer deposit. Several geochemical anomalies were discovered in 2011, although the Group is waiting for further geological results.

Exploration in 2012 will focus within the area south and south-west of Nikolaevskaya as well as north and north-east of current Pioneer pits at the occurrences known as Alkaganskiy, Zakritiy and Opytniy.

Pokrovskiy

Exploration at Pokrovskiy focussed on upgrading Inferred resources into the Measured and Indicated categories at Pokrovka- 2, as well as expanding resource size and proving ore body extensions. 

At Zheltunak, an ore body located some 20km north-east from the Pokrovskiy deposit, exploration identified JORC-compliant Mineral Reserves and Ore Resources suitable for processing using the existing RIP plant at Pokrovskiy. This discovery was included in the Group's 2012 Reserves and Resources estimate and open-pit mining has already commenced at the site.

Malomir

Drilling at the areas surrounding, and adjacent to, the Quartzitovoye and Malomir Central open pits, as well as north of Ozhidaemoye deposit, has identified several further zones of refractory and non-refractory mineralisation.

These new findings were only partly reflected in the Group's 2012 Reserves and Resource estimate as both the exploration programme and interpretation of results obtained during 2011 are still on-going. The findings include Zone 26, north of the Malomir Central open pit, and the Kanavinskaya zone located north of Ozhidaemoye.

Mineralisation at Kanavinskaya is currently estimated to the Inferred category to be 11Mt at 0.7g/t. However, preliminary metallurgical tests indicate that mineralisation is non-refractory and could add 250koz to the RIP Resource inventory. The current Resource estimate for Zone 26 adds approximately 60,000oz to the refractory Resource, including 800kt at 0.95g/t Indicated and 1,400kt at 0.77g/t Inferred.

During 2011, further zones of mineralisation north-west of the operational Quartzitovoye open pit were identified. These zones are expected to be non-refractory, but due to their location within the blasting safety zone, exploration has been progressing at a slower pace.

However, the Group expects to include these zones in future mineral Reserves and Resources statements. 

At the Quartzitovoye high-grade ore body, new assay results resulted in improvements in both the resource size and the confidence of the estimate. The main Quartzitovoye high-grade ore body is still open to depth, indicating the potential to extend the size of the Resource down dip.

Albyn

The 2011 exploration programme at Albyn and the surrounding area was very successful.

A comprehensive programme of trenching and in-fill drilling at Albyn resulted in an increase in Measured and Indicated Resources from 1.2Moz to 1.7Moz. The total Resource, including the Inferred category, was also upgraded from 1.8Moz to 2.2Moz.

Further mineralised zones were identified west of the main ore body, where both flat dipping and steep high-grade narrow vein structures were explored. In the central area of the deposit, mineralisation was defined by drilling to a depth of 400m from the surface, with the gold grade increasing with depth. The Group has yet to establish where this mineralisation will begin to narrow.

At Kharginskoye, an extension of the Albyn licence area acquired in 2010, exploration identified several "Albyn-style" zones of mica-feldspar metasomatites with elevated gold grades. Exploration in this area will continue in 2012, when more conclusive results will be reported.

At Elginskoye, a new 325km2 licence area, located 15km west of the Albyn plant and acquired by the Group in November 2010, the exploration programme yielded its first positive results.

The area has extensive gold placers which were mined during Soviet times. The primary source of these placers has not yet been traced. The geology of the area is similar to Albyn and the exploration results received during 2011 have confirmed the presence of an Albyn style mineralisation, the extent of which is yet to be ascertained.

During 2011, the first trenching and drilling was completed at the Grozovoye and Elginskoye prospects, the two historically better explored targets within the licence area. At Grozovoye, a shallow dipping mineralised zone with an exposed width of 100m was identified and sampled. Significant trenching and drill intersections include: 39m at 1.25g/t Au (trench K-430-1), 11.9m at 1.18g/t Au (drill hole C-430-32) and 1m at 17.8g/t Au (trench K-414-1).

A further shallow-dipping mineralised zone with a visible thickness of 100-150m was also identified at the Elginskoye prospect. Trench intersections received to date include: 44.3m at 1.45g/t Au, 18.5m at 1.42g/t Au, 27m at 2.44g/t Au and 2.3m at 4.23g/t Au. Drill hole intersections include: 17m at 2.01g/t Au and 9.8m at 1.36g/t Au (all thicknesses are apparent). 

Exploration at the Elginskoye licence area remains at an early stage, with further promising targets due to be tested in 2012. These include a large (approximately 10km long) geochemical gold anomaly identified during the 2011 work. Group geologists believe that this area could become a significant addition to the main reserves and resources base of the Albyn mine.

Taldan and Osezhinskaya

The Taldan and Osezhinskaya licence areas are located in the western part of the Amur region in close proximity to each other. Taldan is situated approximately 150km by road from Pokrovskiy and 4km from the town of Taldan, which itself is situated on the Trans-Siberian railway. The Osezhinskaya area was acquired in 2010 and is located 20km west of the town of Taldan.

In 2011, the Group completed preliminary exploration work at the Burinda deposit, which is located within the Taldan licence area. An Inferred gold Resource of 0.34Moz was identified, with mineralisation open to depth.

In 2011, early stage exploration also started at the nearby Osezhinskaya licence area. Historical geochemical work had identified a large gold anomaly over a granite-porphyry intrusion located on the east side of the licence area. This intrusion is believed to be the source of gold placers, which are wide spread in the river valley on the west flank of the granite. A strong Ag-Cu-Mo anomaly was identified north of the gold anomaly, which may indicate the presence of a copper porphyry style mineralisation.

During 2012, the Group intends to continue exploration of Osezhinskaya. Based on 2012 results, the Group will re-evaluate further exploration plans at both Taldan and Osezhinskaya.

Osipkan

The Group finished its preliminary exploration at Osipkan in 2011. The results indicated the presence of modest-sized non-refractory mineralisation containing 200,000-400,000oz in non-refractory gold at an average grade approximately 1.0g/t which could be amenable for simple heap-leach processing. Preliminary tests showed heap leach recovery of 60%, although fine grinding increases recovery to 90%. The mineralised zone has wide exposure at the surface and is suitable for open-pit mining.

Sagur-Semerotakskaya

Exploration results at Sagur-Semertakskaya included several high grade intersections (up to 1.5m at 15.9g/t and 1.0m at 11.0g/t ), which indicate that this area is prospective for the discovery of a modest to small size narrow vein target for potential underground extraction. The Group is evaluating options to develop this asset further.

Krasnoyarsk region

In the Krasnoyarsk region, the Group has continued successful exploration at its significant non-refractory Visokoe deposit, as well as at the Troeusovskaya and Verkhnetisskaya licence areas. 

Drilling and trenching completed at Visokoe upgraded the size of and increased confidence in the mineral resource estimate. Measured Mineral Resources were classified for the first time and the total Mineral Resources increased from 1.8Moz to 2.5Moz of gold. Geological results indicated that there is currently potential to increase mineral resources further. The Group also completed sufficient technical work to estimate a maiden Probable Ore Reserve for Visokoe (1.2Moz in 33.8Mt of ore at 1.13g/t Au). 

At Troeusovskaya, a large (995km2) licence located about 60km to the south of Visokoe, the Group identified a number of promising gold occurrences, including several significant gold-arsenic geochemical anomalies up to 7km in length. The presence of gold as well as arsenic, together with the overall favourable geological setting, indicates the potential to discover "Olimpiada-style" gold mineralisation. Olimpiada is a world-class gold deposit situated approximately 70km east of Troeusovskaya. The largest geochemical anomaly identified at Troeusovskaya to date is yet to be tested. Significant intersections obtained from the site in 2011 include 2.2m at 4.8g/t Au and 10m at 1.9g/t Au, with individual samples of up to 8g/t Au. Work remains at an early stage and further results will be reported in 2012.

The limited trenching and drilling work completed on the Olenka ore body within the Verkhnetisskaya licence identified a new mineralised structure with a strike in an east-west direction. Similar structures are well known locally as a potential host of economic mineralisation. The latest results are being evaluated and the exploration programme is being adjusted to reflect these findings. The current resource estimate of 540koz of Inferred Resources at Olenka will be updated during 2012 to incorporate these new discoveries.

Yamal region

In the Yamal region, the Group continued its exploration programme at the Petropavlovskoye gold deposit and also started early-stage prospecting at the Sob-Kharbeiskaya licence area, which was acquired in 2010. 

At Petropavlovskoye, the Group re-evaluated drilling results from the Novogodnee Monto gold and iron ore body, estimating an additional Inferred category Resource of 0.26Moz of gold, as well as 3Mt of high-grade by-product iron ore at an average grade of 46% Fe(tot).  Further gold mineralisation was also identified and explored north and south of the Petropavlovskoye main mineralised zone, adding approximately 0.1Moz of gold in the Inferred category to the project's mineral inventory. The total JORC-compliant Mineral Resource estimate for the Group's Yamal region assets has now increased to more than 1Moz of gold.

Preliminary exploration results from the Sob-Kharbeiskaya licence area were promising, identifying a zone of gold mineralisation with potentially economic grades. Exploration at Sob-Kharbeiskaya remains at an early stage and is scheduled to continue into 2012.

New Exploration Licences

In June 2011, the Group won the auction for the 308km2 Nimanskaya exploration and extraction licence area, located in the Khabarovsk region, some 90km south of Albyn. The area is well-known for extensive alluvial gold mining, which started here in 1874. It is estimated that between 4Moz to 5Moz of gold were recovered from the area, with 80% of the historical production from a 14x12km area within the licence.

Work completed by the Group's predecessors between 1994 and 1998 identified several zones of mineralisation along an 8km strike of up to 5km in width.  Grades ranging from 0.2g/t to 20g/t of gold were identified in samples. The Group's predecessors concluded that the area has the potential for a resource of between 2Moz and 4Moz at an average grade of 1.0-2.0g/t Au.

GOLD PRODUCTION OUTLOOK 2012

The Group currently estimates total attributable gold production for 2012 at 680,000oz, including c.588,000oz from the Pokrovskiy, Pioneer, Malomir and Albyn mines and c. 92,000oz from the Group's alluvial operations. This estimated production represents an 11% increase compared to the 2011 attributable gold production.

2012 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 2012. The expected increase in the second half is attributable to the expansion of Pioneer and Albyn plants, which are scheduled for H2 2012 and, full contribution from the first Albyn processing line which has been ramped-up throughout Q1 2012. Second half production will also benefit from alluvial and heap leach operations, which are seasonal and contribute mostly to the second half of the year production.

Expansions at Albyn and Pioneer, which are expected to be completed during H2 2012, are not fully reflected in the 2012 target, as part of the Group's new conservative approach to forecasting its production output.

GOLD PRODUCTION OUTLOOK 2013-2016

The Group continues to review its production schedule for the period 2013 - 2016 in light of the latest additions to reserves base at the main producing assets to optimise grades scheduling.

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.

It is also expected that four smaller scale projects - Visokoe (Krasnoyarsk region), Tokur (Amur region), Vekhne-Aliinskoye (Chita region) and Novogodnee Monto (Yamal region) - will commence production during this period thus improving the current base case medium-term production schedule.

CAPITAL EXPENDITURE

In 2011, the Group spent a total of US$544 million of development and maintenance capex on its gold projects. The key area of focus was the development of the expansion of Malomir and its preparation for the refractory stage of operations, commissioning of the Albyn mine, expansion of the Pioneer and Albyn plants and the development of the Pokrovskiy POX hub.

The Group has also spent US$100 million on on-going exploration works, mainly at the Pokrovskiy, Pioneer, Malomir and Albyn projects. This work yielded a significant increase in Group Reserves and Resources.

Capital expenditure for the development of gold projects in 2012 is expected to be US$354 million. Approximately 30% of this budget will be spent on contract payments for the equipment for the future POX plant, and approximately 30% is allocated for the expansion of the Pioneer and Albyn plants. The 2012 capex also provides for the construction of a flotation plant at Malomir.

Exploration capex for 2012 is approximately US$60 million, which is planned to be spent mainly at the existing operating sites, with a focus on Pioneer and Albyn.

Going further, the Group expects a significant decrease in its capital expenditure for gold projects with US$175 million and US$84 million to be spent in 2013 and 2014 respectively. The majority of this budget is purposed to finalise the second stage of expansion of the POX hub to allow processing of refractory material from Pioneer commencing from 2015.

CASH COSTS

Group total cash costs for hard rock deposits in 2011 were US$586/oz, with total cash costs for alluvial projects of US$1,167/oz. The marginal 7% increase in cash costs for hard rock operations, against strong input cost inflation and the decrease in grades processed at Pokrovskiy and Malomir was achieved through comprehensive cost control, implementation of a number of efficiencies at every level of the mining operations, economies of scale from increased capacities at operations and the improvement in grades at Pioneer.

The Pokrovskiy mine saw the most significant, 35%, increase in total cash costs in 2011, the result of lower processing grades, input cost inflation and the increase in stripping ratio. This was offset by a 3% decrease in total cash costs at Pioneer, caused by improvements to mining works, leading to an increase in grades processed and mined.

Compared to 2010, diesel costs increased by 36%, which created significant upwards pressure, particularly on mining and handling costs, where fuel constitutes c.19% of the total cost. 2011 electricity costs were up 17% year on year, which also significantly affected production costs as electricity accounts for almost a quarter (23%) of total RIP processing costs.

Inflation on consumables prices varied from a 2% increase in the cost of chemical reagents to an 85% increase in the cost of explosives.

The Group was successful in controlling wage inflation, which was up by only 6% against much higher levels around the world.

Cash costs outlook

In 2012, the Group expects some increase in the cash cost of production, in line with somewhat lower grades scheduled to be processed and with operating cost inflation. Continuous expansions of scale at Group operations and an increase in their efficiency is expected to somewhat mitigate those negative effect, as successfully demonstrated in 2011.

2012 OPERATIONS UPDATE

A good performance from Group operations will see gold production on budget at the end of the first quarter. Despite an exceptionally cold period in January, Pioneer has made an impressive start to the year. The tonnes processed were in line with the budget but with a 10% uplift in grade versus the budgeted number (2.1g/t v's a budget of 1.9g/t) and an 86% recoveries, which was higher than expected. The fourth processing line is under construction and expected to be commissioned in Q3 2012.

Malomir's production was marginally below budget due to lower grades mined and a lower recovery rate but by the end of the quarter the scheduled grade profile was achieved and it is expected that the mine will catch up with its schedule of production in Q2 2012. An expansion of the sorption circuit was completed in March taking the plant processing capacity to 180,000 tonnes per month.

The ramp-up of the first stage at Albyn progressed slower than expected due to a shortage of power and water, but the second processing line is under construction and expected to be commissioned two months earlier than budgeted and to allow catch up with the target.

At Pokrovka, the push back of the south wall of the main pit continued on schedule and high grade ore will be mined from the main pit in Q4 2012. Overall production from all mines is in line with the target for Q1 2012.

CORPORATE UPDATE

DIVIDENDS

As the Company grows, 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 Group activities.

On 27 March 2012, 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 31 May 2012, the final dividend is proposed to be paid on 26 July 2012 to the shareholders on the register at the close of business on 29 June 2012.

The Board considers that the proposed dividend level is appropriately covered and is consistent with the Group's development spending.

CHANGES TO EXECUTIVE DIRECTORSHIPS

In December 2011, following his appointment as Senator and Member of the Federation Council of Russia, Dr Pavel Maslovskiy relinquished his role as CEO, in line with Russian legislation, and was replaced by Sergey Ermolenko. Mr Ermolenko was one of the members of the Group's founding management team who previously held the position of General Director of Management Company Petropavlovsk.

In order to retain Senator Maslovskiy's knowledge and experience, the Board conferred on him the title of Honorary President. In this capacity, which is not remunerated, Senator Maslovskiy is able to advise the new CEO and also attend, but not vote at, meetings of the Board. Mr Martin Smith, who was previously holding the position of Technical Director, was appointed Deputy CEO to Mr Ermolenko.

The Chief Financial Officer, Brian Egan, has taken the decision to step down from his position following the publication of the Annual Report, due to his relocation to Ireland. Andrey Maruta,who has previously served as Finance Director, Russia, will replace Mr Egan as Chief Financial Officer.

Dr Alya Samokhvalova joined the Board as Strategic Director in addition her long-standing role as Group Head of External Communications.

CHANGES TO NON-EXECUTIVE DIRECTORSHIPS

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

In August 2011, Dr David Humphreys joined the Board as a non-executive director to replace Peter Hill-Wood who retired in May 2011. Dr Humphreys has extensive relevant experience in the global mining industry through his work for mining companies and as a consultant and academic. He was Chief Executive at Norlisk Nickel, Russia's largest mining company from 2004 to 2008.  He was previously with Rio Tinto for eighteen years, the last eight of these as the company's Chief Economist. Prior to joining Rio Tinto, Dr Humphreys worked for nine years in the UK government service, for six of these as an advisor on minerals policy.

Rachel English joins the Board with effect from 28 March 2012.  Ms English has over 25 years' international experience in blue-chip companies, with responsibilities spanning finance, strategy, planning, business development, and mergers and acquisitions. She is currently a non-executive director of Kuwait Energy Plc, Global Carbon Capture and Storage Institute Ltd, the Audit Committee of the Department for International Development, and NHS London. She is also a non-executive director of Helios Social Enterprise, which she founded with former Scottish Power, BP and Shell senior executives to develop renewable energy access projects in rural sub-Saharan Africa. She was formerly Chief Financial Officer at Gasol Plc and, prior to that, Senior Corporate Strategist at BG Group Plc. She has also held senior positions with British Energy Plc, Entergy Inc and Shell Gas & Power.  Ms English is a graduate of the University of Oxford and a Fellow of the Institute of Chartered Accountants in England and Wales.    

POST-YEAR END EVENTS

On 7 February 2012, the Group disposed of its interest in the wholly-owned subsidiary Sever-Chrome for the total cash consideration of US$7.8 million.

In March 2012 the Group entered into a new US$200 million 6 year loan facility with Russia Bank.

IRC

2011 was a landmark year for IRC as it achieved many key milestones and grew closer to its vision of being a Sino-Russian industrial commodities champion. It was IRC's first full-year in production since listing.  Although still in a ramp-up phase, production at the Kuranakh Mine exceeded targets. Development activities at the K&S project advanced to plan and budget during the year, putting that operation on track to bolster production by an additional 3 million tonnes of high-quality iron ore concentrate in the near-term. Finally, IRC's extensive exploration portfolio continued to add value, both at brownfield and greenfield sites.

2011 Highlights

800,000 tonnes of iron ore saleable product  at the Kuranakh Mine

First shipments of ilmenite to Russian, Chinese and international clients

First drawdown of project debt facility to fund the K&S Project

Commencement of construction of K&S Processing Plant

Kuranakh

The Kuranakh Mine came into production in 2010, becoming IRC's first producing mine. The operation covers 85km2 and comprises the Kuranakh and Saikta deposits, an on-site crushing and screening plant and the nearby Olekma Processing Plant. The final products, an iron ore concentrate with a 62.5% iron (Fe) content and an ilmenite concentrate with 48% titanium dioxide content (TiO2), are directly loaded onto railcar wagons for transportation on the Baikal Amur Mainline and Trans-Siberian railways to IRC's customers. 

Production

In October 2011, the mine achieved full production capacity for iron ore concentrate at an annualised 900,000 tonnes per annum in October. This resulted in a significant increase in production for the year, to a total 800,000 tonnes, 7% higher than the targeted production. Full annual capacity of ilmenite concentrate is targeted during 2012. During 2011, production did, however, increase to 63,500 tonnes, 22% ahead of the 52,000 tonne target. Based on current reserves, the life-of-mine is estimated at 15 years, with opportunities to extend this further.

Financial Performance

During 2011, Kuranakh generated revenues of US$110.4 million. Cash costs for the year averaged US$66.2 per tonne. Longer-term production costs are currently forecast, at approximately US$60 per tonne as the ilmenite circuit ramps up. Transportation costs for Kuranakh iron ore concentrates to Suifenhe, on the Chinese-Russian border, averaged US$43.8 per tonne in 2011. It is anticipated that rail freight rates will reduce in the mid to long-term.

2012 Targets

During 2011, Kuranakh achieved its full production capacity. The target for iron ore concentrate production for 2012 is 820,000 tonnes (62.5% Fe grade content). During 2012, the ilmenite circuit will continue to ramp-up to an annualised capacity of 160,000 tonnes, and therefore 2012 production is targeted at an intermediate level of 125,000 tonnes. Production increases should work towards improving unit and total costs.

K&S

K&S is an advanced stage development project, which is currently on track to be commissioned in 2014, with an initial annual production capacity potential of 3.2 million tonnes of high-grade iron ore concentrate. The operation comprises the twin deposits of Kimkan (the "K") and Sutara (the "S"). The former is currently being mined by open-pit methods, with ore being stockpiled for processing. At full production, it is anticipated the deposits will be mined sequentially, producing on average 10 million RoM tonnes per annum at an average grade of 35% Fe. The K&S processing plant will be located between the two deposits. Construction began in 2010 and is due for completion in mid-2014. It is being funded through a project finance facility provided by the ICBC and is being built by China National Electric Engineering Company Limited ("CNEEC") with supervision from IRC.

K&S is well situated, close to the Trans-Siberian railway which provides a direct route to the market. Furthermore, the recently upgraded main east-west federal highway is located close to the mine site. In addition to transport access, K&S also enjoys excellent electricity and water supplies.

In August 2011, IRC announced the favourable findings of a mine optimisation study for K&S, showing potential to nearly double production estimates from 3.2 to 6.1 million tonnes per annum by accelerating production from the Sutara deposit. IRC is completing a detailed feasibility study in 2012 to decide on the final method to optimise the long-term mine plan.

Costs

Long-term production costs at the K&S operation are currently forecast at US$33 a tonne of iron ore concentrate. The current cost of rail freight to Suifenhe on the Chinese Russian border is approximately US$20 per tonne.

Garinskoye

Garinskoye is an advanced exploration project that covers 11.2km2. In terms of resources, Garinskoye is the largest project in the IRC portfolio. Currently undergoing final geological investigation and mine planning, the project is targeting construction and first production from 2015. Adjacent to the project, IRC has exploration licences covering over 3,500km2 of ground. 

Exploration activities at Garinskoye advanced well during 2011. Based on the results of geological modelling, the concept of a two-stage development of Garinskoye could be considered. This could involve a DSO style operation by mining the higher-grade ore first. This option is currently being studied.

Exploration

In addition to its three main mining assets, IRC also has significant other exploration opportunities, notably in and around the three main assets. In 2012, IRC total attributable resources grew by 16% to 1,345 million tonnes of iron ore. More importantly, group attributable iron reserves grew by 24% to 801 million tonnes.

 

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 Russian 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)").

 

 

 

PETROPAVLOVSK PLC

Consolidated Income Statement

For year ended 31 December 2011

 

 

 

 

 

 

 

 

note

 

 

2011


 

 

2010



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

1,262,490

-

1,262,490


612,016

-

612,016

Operating expenses

6

(863,335)

2,432

(860,903)


(490,556)

(15,417)

(505,973)



399,155

2,432

401,587


121,460

(15,417)

106,043

Share of results of joint ventures


(1,360)

-

(1,360)


(3,168)

-

(3,168)

Operating profit/ (loss)


397,795

2,432

400,227


118,292

(15,417)

102,875

Investment income 

9

3,119

-

3,119


6,525

-

6,525

Interest expense

9

(39,641)

-

(39,641)


(32,172)

-

(32,172)

Other finance (losses)/ gains

9

(2,381)

-

(2,381)


2,285

(10,314)

(8,029)

Profit/ (loss) before taxation


358,892

2,432

361,324


94,930

(25,731)

69,199

Taxation

10

(120,835)

-

(120,835)


(46,228)

-

(46,228)

Profit/(loss) for the period


238,057

2,432

240,489


48,702

(25,731)

22,971

Attributable to:









Equity shareholders of Petropavlovsk PLC


228,453

2,432

230,885


45,508

(25,731)

19,777

Non-controlling interests


9,604

-

9,604


3,194  

-

           3,194  



238,057

2,432

240,489


48,702

(25,731)

22,971

Earnings/ (loss) per share









Basic

11

US$1.23

US$0.01

US$1.24


US$0.25

(US$0.14)

US$0.11

Diluted

11

US$1.22

US$0.01

US$1.23


US$0.25

(US$0.14)

US$0.11

 

 

 

 

 

 

PETROPAVLOVSK PLC

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2011

 

 




2011

US$'000


 2010

US$'000

Profit for the period



240,489


22,971

Other comprehensive income and expense:






Revaluation of available-for-sale investments



(1,941)


(100)

Exchange differences on translating foreign operations



(3,603)


443

Other comprehensive (expense)/ income for the period



(5,544)


343

Total comprehensive income for the period



234,945


23,314

Attributable to:






Equity shareholders of Petropavlovsk PLC



225,617


20,161

Non-controlling interests



9,328


3,153

 

 

 

 

 

 

PETROPAVLOVSK PLC

Consolidated Balance Sheet

At 31 December 2011

 

 

 


note


2011

US$'000


2010

Restated(a)

US$'000

 

Assets






 

Non-current assets






 

Goodwill

13


21,675

 


21,675

 

 

Intangible assets

14


334,737

 


346,862

 

 

Property, plant and equipment

15


1,865,612

 


1,320,333

 

 

Prepayments for property, plant and equipment



207,101


74,995

 

Interests in joint ventures

16


7,086

 


8,446

 

 

Available-for-sale investments

17


561

 


3,443

 

 

Inventories

19


43,187

 


11,611

 

 

Other non-current assets

18


37,871

 


29,196

 

 

Deferred tax assets

24


2,562

 


6,774

 

 




2,520,392


1,823,335

 

Current assets






 

Inventories

19


330,660

 


197,951

 

 

Trade and other receivables

20


208,977


143,513

 

Derivative financial instruments



-


2,381

 

 

Cash and cash equivalents

21


213,556

 


320,986

 

 




753,193


664,831

 

Total assets



3,273,585

 

 


2,488,166

 

Liabilities






 

Current liabilities






 

Trade and other payables

22


(134,904)

 


(142,738)

 

 

Current income tax payable



(12,923)

 


(9,735)

 

 

Borrowings

23


(216,430)

 


(93,104)

 

 




(364,257)

 


(245,577)

 

Net current assets



388,936


419,254

 

 

Non-current liabilities






 

Borrowings

23


(790,408)

 


(399,014)

 

 

Deferred tax liabilities

24


(176,031)

 


(133,542)

 

 

Provision for close down and restoration costs

25


(34,958)

 


(11,085)

 

 




(1,001,397)

 


(543,641)

 

Total liabilities



(1,365,654)

 


(789,218)

 

 

Net assets



1,907,931


1,698,948

 

 

Equity






 

Share capital

26


2,891

 


2,891

 

 

Share premium



377,140

 


377,140

 

 

Merger reserve



331,704

 


570,071

 

 

Own shares

27


(10,444)

 


(10,675)

 

 

Convertible bond reserve

23


59,032

 


59,032

 

 

Share-based payments reserve



13,703

 


3,140

 

 

Other reserves



1,412

 


6,680

 

 

Retained earnings



857,378

 


423,374

 

 

Equity attributable to the shareholders of Petropavlovsk PLC



1,632,816

 


1,431,653

 

 

Non-controlling interests



275,115

 


267,295

 


Total equity



1,907,931

 


1,698,948

 

 

(a)        Prepayments for property, plant and equipment previously reported within current assets as prepayments for property, plant and equipment were reclassified to non-current assets to ensure a better presentation of the Group's consolidated assets that are expected to be realized within more than twelve months after the reporting period (note 2.3)

 

 

These consolidated financial statements for Petropavlovsk PLC, registered number 4343841, were approved by the Directors on 27 March 2012 and signed on their behalf by

 

 

 

Peter Hambro                                     Brian Egan

Director                                                Director


PETROPAVLOVSK PLC

Consolidated Statement of Changes in Equity

For the year ended 31 December 2011

 

 



Total attributable to equity holders of Petropavlovsk PLC





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 2010


2,805

275,742

570,071

(14,003)

-

3,847

6,296

443,136

1,287,894

11,870

1,299,764

Total comprehensive income for the period


-

-

-

-

-

-

384

19,777

20,161

3,153

23,314

Dividends


-

-

-

-

-

-

-

(27,774)

(27,774)

-

(27,774)

Share based payments


-

-

-

-

-

2,574

-

-

2,574

-

2,574

Vesting of Replacement LTIP


-

-

-

3,328

-

(3,260)

-

(68)

-

-

-

Employee options exercised


3

246

-

-

-

(21)

-

21

249

-

249

Issue of convertible bonds


-

-

-

-

59,032

-

-

-

59,032

-

59,032

Exercise of warrants


83

101,152

-

-

-

-

-

-

101,235

-

101,235

Acquisition of subsidiary


-

-

-

-

-

-

-

-

-

15,608

15,608

Issue of ordinary shares by subsidiary 


-

-

-

-

-

-

-

(12,046)

(12,046)

241,653

229,607

Other transaction with non- controlling interests


-

-

-

-

-

-

-

328

328

(4,989)

(4,661)

Balance

at 1 January 2011


2,891

377,140

570,071

(10,675)

59,032

3,140

6,680

423,374

1,431,653

267,295

1,698,948

Total comprehensive income for the period


-

-

-

-

-

-

(5,268)

230,885

225,617

9,328

234,945

Dividends

12

-

-

-

-

-

-

-

(36,856)

(36,856)

-

(36,856)

Share based payments

30

-

-

-

-

-

10,857

-

-

10,857

-

10,857

Vesting of awards within Petropavlovsk PLC LTIP


-

-

-

231

-

(294)

-

63

-

-

-

Other transactions with non-controlling interests


-

-

-

-

-

-

-

1,545

1,545

(1,508)

37

Transfer to retained earnings (a)


-

-

(238,367)

-

-

-

-

238,367

-

-

-

Balance

at 31 December 2011


2,891

377,140

331,704

 

(10,444)

59,032

13,703

1,412

857,378

1,632,816

275,115

1,907,931

 

 

 

(a)      Arises from an adjustment to the book value of the investment in the Company financial statements to reflect the value of the underlying net assets of IRC Limited.


 

 

PETROPAVLOVSK PLC

Consolidated Cash Flow Statement

For the year ended 31 December 2011

 


 



 

note

 

2011

US$'000

 

2010

US$'000

Cash flows from operating activities




Cash generated from operations

28

356,287

80,494

Interest paid


(36,839)

(26,787)

Income tax paid


(60,022)

(15,404)

Net cash from operating activities


259,426

38,303

Cash flows from investing activities




Acquisitions of subsidiaries, net of cash acquired

16

(11,935)

(11,505)

Acquisitions of non-controlling interests


(2,250)

(3,113)

Proceeds from disposal of the Group's interests in joint ventures and available-for-sale investments

6

10,000

-

Purchase of property, plant and equipment and exploration expenditure


(801,062)

(507,400)

Proceeds from disposal of property, plant and equipment


1,407

953

Investments in joint ventures and associates


(616)

(4,731)

Loans granted


(121)

(1,413)

Repayment of amounts loaned to other parties


2,389

18,507

Interest received


1,701

5,812

Net cash used in investing activities


(800,487)

(502,890)

Cash flows from financing activities




Proceeds from issuance of ordinary shares, net of transaction costs


-

101,484

Issue of convertible bonds, net of transaction costs

23

-

370,290

Issue of ordinary shares by subsidiary, net of transaction costs


-

234,589

Proceeds from borrowings


658,081

174,147

Repayments of borrowings


(155,646)

(136,764)

Restricted bank deposit placed in connection with ICBC facility

23

(6,000)

-

Debt transaction costs paid in connection with ICBC facility(a)

23

(25,889)

(4,090)

Dividends paid to shareholders of Petropavlovsk PLC


(36,309)

(27,773)

Dividends paid to non-controlling interests


(548)

(327)

Net cash from financing activities


433,689

711,556





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


(107,372)

246,969

Effect of exchange rates on cash and cash equivalents


(58)

(2,450)

Cash and cash equivalents at beginning of period


320,986

76,467

Cash and cash equivalents at end of period


213,556

320,986

 

 

 

(a)        Including insurance premium of US$22.5 million

 

 


 

PETROPAVLOVSK PLC

Notes to the Consolidated Financial Statements

For the year ended 31 December 2011

 

 

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.         Significant accounting policies

 

2.1.     Basis of preparation and presentation

The consolidated financial statements of Petropavlovsk PLC and its subsidiaries (the "Group") have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union, IFRIC Interpretations and the Companies Act 2006. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial investments, financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

 

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 cash generated from operations and external debt.

 

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance and expenditure and the mitigating actions that the Group could take in the event of adverse changes, show that the Group should be able to operate within the level of its secured facilities for the subsequent 12 months from the date of approval of the 2011 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 going concern basis of accounting in preparing these consolidated financial statements.

 

Exceptional items

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

 

2.2.         Adoption of new and revised standards and interpretations

 

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

There are no IFRSs or IFRIC interpretations that are effective for the first time in the current reporting period that had a significant impact on the amounts reported in these consolidated financial statements.

 

New standards, amendments and interpretations that are applicable to the Group, issued but not yet effective for the reporting period beginning 1 January 2011 and not early adopted

 

§ IFRS 9

"Financial instruments", effective for accounting periods beginning on or after 1 January 2013

§ IFRS 10

"Consolidated financial statements", effective for accounting periods beginning on or after 1 January 2013

§ IFRS 11

"Joint arrangements", effective for accounting periods beginning on or after 1 January 2013

§ IFRS 12

"Disclosure of interests in other entities", effective for accounting periods beginning on or after 1 January 2013

§ IFRS 13

"Fair value measurement", effective for accounting periods beginning on or after 1 January 2013

§ IAS 28 (revised)

"Associates and joint ventures", effective for accounting periods beginning on or after 1 January 2013

§ Amendments to IAS 1

"Financial statement presentation", effective for accounting periods beginning on or after 1 July 2012

§ Amendments to IFRS 7

"Financial instruments: Disclosures", effective for accounting periods beginning on or after 1 July 2011

§ IFRIC 20

"Stripping costs in the production phase of a surface mine", effective for accounting periods beginning on or after 1 January 2013

The directors do not expect that the adoption of the standards, amendments and interpretations listed above will have a material impact on the Group's financial statements, except as follows:

 

§  IFRS 9 introduces new requirements for classifying and measuring financial assets and will impact both measurement and disclosure of financial instruments

§  IFRS 12 will impact the disclosure of Group's interests in other entities

§  IFRS 13 will impact the measurement of fair value for certain assets and liabilities as well as the associated disclosures

§  IFRIC 20 will impact asset recognition criteria and classification of costs from a stripping activity which provide improved access to the ore body as well as amortisation period

 

2.3          Comparatives

Prepayments for property, plant and equipment of US$207.1 million (2010: US$74.9 million, 2009: US$41.6 million) previously reported within current assets as prepayments for property, plant and equipment were reclassified to non-current assets. The reclassification was carried out to ensure a better representation in the Group's consolidated assets that are expected to be realized within more than twelve months after the reporting period.

 

2.4.         Basis of consolidation

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

 

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

 

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where necessary, adjustments are made to the financial statements of subsidiaries to ensure consistency of accounting policies with the policies adopted by the Group.

 

Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. The interests of non-controlling shareholders may be initially measured at fair value or at the non-controlling interests' proportionate share of the fair value of the acquiree's identifiable net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests' share of subsequent changes in equity. The recognised income and expense are attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance.

 

2.5.         Business combinations

The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for each acquisition is measured at the aggregate of the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. Where applicable, the consideration transferred includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition-related costs are recognised in profit or loss as incurred. 

 

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

 

The Group recognises any non-controlling interest in the acquiree at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets, on an acquisition-by-acquisition basis.

 

The excess of the consideration transferred the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of recognised income and expenses.

 

2.6.         Non-controlling interests

The group treats transactions with non-controlling interests as transactions with equity owners. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying vale of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

 

2.7.         Acquisition of assets

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

 

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

 

2.8.         Interests in joint ventures

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

 

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

 

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

 

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

 

2.9.         Investments in associates

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

 

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

 

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

 

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

 

2.10.       Foreign currency translation

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in US Dollars, which is the Group's presentation currency. The functional currency of the Company is the US Dollar.

 

The rates of exchange used to translate balances from other currencies into US Dollars were as follows (currency per US Dollar):

 

 

 


As at
31 December 2011

Average year ended
31 December 2011

As at
31 December 2010

Average year ended
31 December 2010

GB Pounds Sterling (GBP : US$)

0.65

0.62

0.64

0.65

Russian Rouble (RUR : US$)

32.20

29.39

30.48

30.36

 

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

 

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

 

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

 

2.11.       Goodwill

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

 

Goodwill is allocated to those cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the business combination in which the goodwill arose.

 

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

 

2.12.       Intangible assets

 

Exploration and evaluation expenditure and mineral rights acquired

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

 

Exploration and evaluation expenditure comprise costs directly attributable to:

 

§  Researching and analysing existing exploration data;

§  Conducting geological studies, exploratory drilling and sampling;

§  Examining and testing extraction and treatment methods;

§  Compiling pre-feasibility and feasibility studies; and

§  Costs incurred in acquiring mineral rights, the entry premiums paid to gain access to areas of interest and amounts payable to third parties to acquire interests in existing projects.

 

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

 

Exploration and evaluation expenditure capitalised and mining rights acquired are subsequently valued at cost less impairment. In circumstances where a project is abandoned, the cumulative capitalised costs related to the project are written off in the period when such decision is made.

 

Exploration and evaluation expenditure capitalised and mining rights within intangible assets are not depreciated. These assets are transferred to mine development costs within property, plant and equipment when a decision is taken to proceed with the development of the project.

 

2.13.       Property, plant and equipment

 

Land and buildings, plant and equipment

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

 

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

 

Development expenditure

Development expenditure incurred by or on behalf of the Group is accumulated separately for each area of interest in which economically recoverable resources have been identified. Such expenditure includes costs directly attributable to the construction of a mine and the related infrastructure. Once a development decision has been taken, the carrying amount of the exploration and evaluation expenditure in respect of the area of interest is aggregated with the development expenditure and classified under non-current assets as "mine development costs". Mine development costs are reclassified as "mining assets" at the end of the commissioning phase, when the mine is capable of operating in the manner intended by management. No depreciation is recognised in respect of mine development costs until they are reclassified as mining assets. Mine development costs are tested for impairment in accordance with the policy in note 2.14.

 

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

 

Depreciation

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

 

Mining assets, except for those related to alluvial gold operations, where economic benefits from the asset are consumed in a pattern which is linked to the production level, are depreciated using a units of production method based on the volume of ore reserves, which results in a depreciation charge proportional to the depletion of reserves. The basis for determining ore reserve estimates is set out in note 3.1. Where the mining plan anticipates future capital expenditure to support the mining activity over the life of the mine, the depreciable amount is adjusted for such estimated future expenditure.  

                                                                                                                                                                                                                                                                                    

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

Mining assets related to alluvial gold operations are depreciated a straight-line basis based on estimated useful lives.

 

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

 

Mine development costs and capital construction in progress are not depreciated, except for that property plant and equipment used in the development of a mine. Such property, plant and equipment are depreciated on a straight-line basis based on estimated useful lives and depreciation is capitalised as part of mine development costs.

 

Estimated useful lives normally vary as set out below.

 


Average life

Number of years

Buildings

15-50

Plant and machinery

3-20

Vehicles

5-7

Office equipment

5-10

Computer equipment

3-5

 

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

 

2.14.       Impairment of non-financial assets

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

 

When a review for impairment is conducted, the recoverable amount is assessed by reference to the higher of "value in use" (being the net present value of expected future cash flows of the relevant cash generating unit) or "fair value less costs to sell". Where there is no binding sale agreement or active market, fair value less costs to sell is based on the best information available to reflect the amount the Group could receive for the cash generating unit in an arm's length transaction. Future cash flows are based on:

 

·      estimates of the quantities of the reserves and mineral resources for which there is a high degree of confidence of economic extraction;

·      future production levels;

·      future commodity prices (assuming the current market prices will revert to the Group's assessment of the long term average price, generally over a period of up to five years); and

·      future cash costs of production, capital expenditure, environment protection, rehabilitation and closure.

 

IAS 36 "Impairment of assets" includes a number of restrictions on the future cash flows that can be recognised in respect of future restructurings and improvement related capital expenditure. When calculating "value in use", it also requires that calculations should be based on exchange rates current at the time of the assessment.

 

For operations with a functional currency other than the US Dollar, the impairment review is undertaken in the relevant functional currency. These estimates are based on detailed mine plans and operating budgets, modified as appropriate to meet the requirements of IAS 36 "Impairment of assets".

 

The discount rate applied is based upon a pre-tax discount rate that reflects current market assessments of the time value of money and the risks associated with the relevant cash flows, to the extent that such risks are not reflected in the forecast cash flows.

 

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

 

2.15.       Deferred stripping costs

In open pit mining operations, removal of overburden and other waste materials, referred to as stripping, is required to obtain access to the ore body.

 

Stripping costs incurred during the development of the mine are capitalised as part of mine development costs and are subsequently depreciated over the life of a mine on a units of production basis.

 

Stripping costs incurred during the production phase of a mine are deferred as part of cost of inventory and are written off to the income statement in the period over which economic benefits related to the stripping activity are realised where this is the most appropriate basis for matching the costs against the related economic benefits.

 

Where, during the production phase, further development of the mine requires a phase of unusually high overburden removal activity that is similar in nature to pre-production mine development, such stripping costs are considered in a manner consistent with stripping costs incurred during the development of the mine before the commercial production commences.

 

2.16.       Provisions for close down and restoration costs

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

 

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

 

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

 

2.17.       Financial instruments

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

 

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

 

Financial assets

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

 

Financial assets at fair value through profit or loss

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

 

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. They are included within non-current assets unless the investment matures or management intends to dispose of them within 12 months of the balance sheet date. Available-for-sale financial assets are initially measured at cost and subsequently carried at fair value. Changes in the carrying amount of available-for-sale financial assets are recognised in other comprehensive income and accumulated under the heading of other reserve in equity. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in equity is reclassified to the income statement.

 

Loans and receivables

Loans and receivables are non-derivative financial assets fixed or determinable payments that are not quoted on an active market. Loans and receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short term receivables when the recognition of interest would be immaterial.

 

Effective interest method

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

 

Cash and cash equivalents

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

 

Trade receivables

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

 

Other investments

Listed investments and unlisted equity investments, other than investments in subsidiaries, joint ventures and associates, are classified as available-for-sale financial assets and subsequently measured at fair value. Fair values for unlisted equity investments are estimated using methods reflecting the economic circumstances of the investee. Equity investments for which fair value cannot be measured reliably are recognised at cost less impairment. Changes in the carrying amount of available-for-sale financial assets are recognised in other comprehensive income and accumulated under the heading of investments revaluation reserve in equity. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to the income statement as "gains and losses from investment securities".

 

Financial liabilities

Financial liabilities, other than derivatives, are measured on initial recognition at fair value and are subsequently measured at amortised cost, using the effective interest rate method.

 

Borrowings

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

 

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

 

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

 

Derivative financial instruments

In accordance with IAS 39 the fair value of all derivatives are separately recorded on the balance sheet. Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the balance sheet date. The resulting gain or loss is recognised in the income statement immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in the income statement depends on the nature of the hedge relationship.

 

Derivatives embedded in other financial instruments or non-financial host contracts are treated as separate derivatives when their risks and characteristics are not closely related to their host-contract and the host contract is not carried at fair value. Embedded derivatives are recognised at fair value at inception. Any change to the fair value of the embedded derivatives is recognised in operating profit within the income statement. Embedded derivatives which are settled net are disclosed in line with the maturity of their host contracts.

 

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

 

Trade payables

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

 

Equity instruments

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

 

 

Impairment of financial assets

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

 

2.18.       Provisions

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

 

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

 

2.19.       Inventories

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

 

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

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

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

§  Consumable stores are valued at average cost; and

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

 

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

 

As described in note 2.15, deferred stripping costs are included in inventories where appropriate.

 

2.20.       Leases

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

 

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

 

2.21.       Revenue recognition

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

 

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

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

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

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

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

 

2.22.       Borrowing costs

Borrowing costs are generally expensed as incurred except where they relate to the financing of acquisition, construction or development of qualifying assets, which are mining projects under development that necessarily take a substantial period of time to get prepared for their intended use. Such borrowing costs are capitalised and added to mine development costs of the mining project when the decision is made to proceed with the development of the project and until such time when the project is substantially ready for its intended use, which is when commercial production is ready to commence.

 

To the extent that funds are borrowed to finance a specific mining project, borrowing costs capitalised represent the actual borrowing costs incurred. To the extent that funds are borrowed for the general purpose, borrowing costs capitalised are determined by applying the interest rate applicable to appropriate borrowings outstanding during the period to the average amount of capital expenditure incurred to develop the relevant mining project during the period.

 

2.23.       Taxation

Tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in the statement of comprehensive income or directly in equity. In this case, the tax is also recognised in the statement of comprehensive income or directly in equity, respectively.

 

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

 

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

 

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

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

§  Deferred tax assets are recognised only to the extent that it is more likely than not that they will be recovered.

 

Deferred tax is provided in respect of fair value adjustments on acquisitions. These adjustments may relate to assets such as mining rights that, in general, are not eligible for income tax allowances. In such cases, the provision for deferred tax is based on the difference between the carrying value of the asset and its nil income tax base.

 

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised using tax rates that have been enacted, or substantively enacted. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt within equity.

 

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set-off current tax assets against current tax liabilities, when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

 

2.24.       Share-based payments

The Group has a number of equity-settled share-based payment arrangements in place, details of which are set out in note 30.

 

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

 

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

 

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

 

 

2.25.   Employee Benefit Trust

Certain Ordinary Shares underlying the share-based payment awards granted are held by the Employee Benefit Trust. Details of employee benefit trust arrangements are set out in note 30. The carrying value of shares held by the employee benefit trust are recorded as treasury shares, shown as a deduction to shareholders' equity.

 

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

 

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

 

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), adjusted to conform with the mining activity to be undertaken under the Group mining plan 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 charged in 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 the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets are impaired and tests goodwill for impairment annually.

 

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 2011 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 are internal forecasts by management, based on the forecasts of industry market researchers, being US$1,700/oz for gold, US$130/tonne for iron ore concentrate and US$208.1/tonne for ilmenite;

§  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, being in the range between 11.0% and 12.3% for precious metals mining projects and 9.6%  and 12.9% for IRC 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. The impairment assessments are sensitive to changes in commodity prices and discount rates. Changes to these assumptions would result in changes to impairment conclusions, which could have a significant effect on the consolidated financial statements. In particular, with all other assumptions being constant, a reduction in the estimated long-term gold price below $1,500/oz would result in impairment of certain mining assets within precious metals segment.

 

 

3.4 Deferred stripping costs

The calculation of deferred stripping costs requires the use of estimates to assess the improved access to the ore to be mined in future periods. Changes to the Group's mining plan and pit design may result in changes to the timing of realization of the stripping activity. As a result, there could be significant adjustments to the amounts of deferred stripping costs capitalised and their classification between current and non-current assets.

 

3.5. 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.

 

3.6. 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.

 

3.7. 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, Malomir and Albyn), 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. IRC segment includes iron ore projects (Kuranakh, K&S, Garinskoye, Bolshoy Seim, Kostenginskoye and Garinskoye Flanks projects), engineering and scientific operations represented by Giproduda, project for design and development of a titanium sponge production plant in China, project for production of vanadium pentoxides and related products in China as well as various other projects.

 

§  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.

 

 

 

Segment information

               

 

2011

Precious

metals 

IRC

Other

Consolidated


US$'000

US$'000

US$'000

US$' 000

Revenue





Gold

1,093,507

-

-

1,093,507

Silver

7,817

-

-

7,817

Iron ore concentrate

-

110,388

-

110,388

Other external revenue

-

11,820

38,958

50,778

Inter-segment revenue

2,869

-

328,414

331,283

Intra-group eliminations

(2,869)

-

(328,414)

(331,283)

Total Group revenue from external customers

1,101,324

122,208

38,958

1,262,490






Net operating expenses

(602,089)

(101,415)

(43,582)

(747,086)

including





Depreciation and amortisation

(118,564)

(11,287)

(2,351)

(132,202)

Impairment

(40,103)

-

(1,975)

(42,078)






Share of results in joint ventures

(846)

(514)

-

(1,360)

Segment result

498,389

20,279

(4,624)

514,044

Before exceptional items

486,353

18,840

(4,624)

500,569

Exceptional items

12,036(a)

1,439(a)

-

13,475






Central administration(b)




(89,743)

Unallocated impairment of non-trading loans




(14,241)

Foreign exchange losses




(9,833)

Operating profit




400,227

Investment income




3,119

Interest expense




(39,641)

Other finance losses




(2,381)

Taxation




(120,835)

Profit for the period




240,489











Segment Assets

2,077,779

846,981

216,494

3,141,254

Segment Liabilities

(103,391)

(22,832)

(56,567)

(182,790)

Goodwill(c)




21,675

Deferred tax - net




(173,469)

Unallocated cash




107,836

Loans given




263

Borrowings




(1,006,838)

Net Assets




1,907,931






Other segment information





Additions to non-current assets:





Exploration and evaluation expenditure capitalised  within intangible assets

55,497

12,406

226

68,129

Other additions to intangible assets

2,569

-

-

2,569

Capital expenditure

516,724

81,202

22,263

620,189

Other items capitalised

36,832

426

-

37,258











Average number of employees

6,670

2,226

4,489

13,385

(a)        See note 6.

(b)        Including central administration expenses of IRC Limited of US$23 million.

(c)        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).       

 

 

 

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

Inter-segment revenue

6,146

-

231,083

237,229

Intra-group eliminations

(6,146)

-

(231,083)

(237,229)

Total Group revenue from external customers

561,706

25,792

24,518

 

612,016

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(d)

(34,944)(d)

-

(6,062)






Central administration (e)




(73,471)

Foreign exchange losses




(3,165)

Operating profit




102,875

Investment income




6,525

Interest expense




(32,172)

Other finance losses




(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(f)




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

(d)    See note 6.

(e)    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.

(f)     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)


2011

2010


US$'000

US$'000

Russia and CIS

1,151,929

578,152

China

110,388

12,608

Other

173

21,256

  

1,262,490

612,016

(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)


2011

2010


US$'000

US$'000

Russia

2,480,102

1,693,551

China

7,765

10,411

Other

11,220

340

  

2,499,087

1,704,302

(b)        Excluding financial instruments and deferred tax assets.

 

 

 

Information about major customers

During the years ended 31 December 2011 and 2010, 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 2011 are revenues of US$990 million which arose from sales of gold to three banks that individually accounted for more than 10% of the Group's revenue, namely US$521 million to Sberbank of Russia, US$300 million to VTB and US$169 million to the Asian-Pacific Bank (2010: US$511 million revenues from sales of gold to two 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 Bank of Moscow). 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

 

 

2011

2010


US$'000

US$'000

Sales of goods

1,236,446

586,628

Rendering of services

23,469

22,866

Rental income

2,575

2,522

  

1,262,490

612,016

Investment income

3,119

6,525

  

1,265,609

618,541

 

 

 

6.         Operating expenses and income

 


2011


2010


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)

718,483

-

718,483


413,378

-

413,378

Impairment charges

42,078

-

42,078


9,897

34,944

44,841

Impairment of non-trading loans

-

14,241

14,241





Central administration expenses

92,941

(3,198)

89,743


64,116

9,355

73,471

Foreign exchange losses

9,833

-

9,833


3,165

-

3,165

Gain on re-measuring existing interest in Omchak on acquisition

-

-

-


-

(28,882)

(28,882)

Gain on disposal of Group's interest in joint ventures and available-for-sale investment (a)

-

(12,036)

(12,036)


-

-

-

Net gain on acquisition of Jiatai Titanuim (b)

-

(1,439)

(1,439)


-

-

-


       863,335  

      (2,432)  

       860,903  


       490,556  

        15,417  

       505,973  

(a)      Being the difference between the US$10 million aggregate proceeds and US$0.9 million cost of investment on Solovyevskiy Priisk as well as US$2.9 million accumulated losses of Odolgo JV (note 16).

(b)      See note 16.

 

 

 

Net operating expenses (excluding items shown separately)

 


 


2011


2010


US$'000


US$'000

Staff costs

170,499


108,483

Fuel

73,343


34,875

Materials

132,820


84,526

Depreciation

132,202


73,452

Electricity

34,727


20,723

Royalties

67,599


33,886

Smelting and transportation costs

5,944


3,518

Shipping costs

33,704


5,096

Professional fees

12,583


3,586

Other external services

97,382


45,776

Movement in deferred stripping, work in progress and bullion in process

attributable to gold production

(91,713)


 

(46,827)

Insurance

6,447


4,329

Operating lease rentals

1,670


2,056

Provision for impairment of trade and other receivables

1,862


372

Bank charges

2,526


1,436

Office costs

2,648


1,992

Taxes other than income

12,375


8,056

Goods for resale

19,665


10,624

Business travel expenses

3,259


1,879

Other operating expenses

13,637


22,661

Other income

(14,696)


(7,121)


718,483


413,378

 

 

 

 

Impairment charges

 

Following the decision to abandon exploration of the Diagonalnoe area of the Malomir deposits, associated exploration and evaluation costs of US$5.2 million previously capitalised within mine development costs of Malomir were written off.

 

Following the decision to abandon exploration of certain license areas, the following associated exploration and evaluation costs previously capitalised within intangible assets were written off:

 

§  US$13.2 million exploration and evaluation costs associated with projects in Amur region (2010: US$9.9 million); 

§  US$15.2 million exploration and evaluation costs associated with projects in Yamal region (2010: nil);

§  US$8.4 million exploration and evaluation costs associated with projects in other regions (2010: nil).

 

In 2010, the Group 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 Jiatai Titanuim project. As of 31 December 2010, the Group had 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 was uncertainty as to the eventual outcome of the joint venture activities and the recoverability of the amounts invested. As a result, in 2010 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. On 11 April 2011, the Group acquired the remaining 35% equity stake from the joint venture partner. See note 16 for further details.

 

Central administration expenses

 


2011


2010


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

57,542

-

57,542


38,986

-

38,986

Professional fees

7,683

(3,198)(a)

4,485


6,677

9,355(b)

16,032

Insurance

1,924

-

1,924


1,142

-

1,142

Operating lease rentals

3,698

-

3,698


3,641

-

3,641

Business travel expenses

5,805

-

5,805


5,266

-

5,266

Office costs

2,081

-

2,081


1,467

-

1,467

Other

14,208

-

14,208


6,937

-

6,937


92,941

(3,198)

89,743


64,116

9,355

73,471

(a)        Refund of 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 listing of IRC Limited on the Stock Exchange of Hong Kong Limited.

 

7.        Auditors' remuneration                   

                                                                                                                   

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

 


2011

2010


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

356

         395

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

311

         322

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

580

608

Other services pursuant to legislation - interim review(b)

331

160


1,578

1,485

Non-audit fees



Corporate finance services:



Fees for reporting accountants services(c)

-

2,729

Other corporate finance services

-

93

Tax services

146

197

Other services

68

115


214

3,134

(a)        Including the statutory audit of subsidiaries in the UK and Cyprus as well as US$478 thousand (2010: US$459 thousand) payable for the audit of the consolidated financial statements of IRC Limited.

(b)        Including US$125 thousand (2010: nil) payable for the interim review of the consolidated financial statements of IRC Limited

(c)        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.

 

 

8.        Staff costs



2011

2010



US$'000

US$'000

Wages and salaries


176,007

123,689

Social security costs


40,387

20,768

Pension costs


637

427

Share-based compensation


11,010

2,585



228,041

147,469





Average number of employees


13,385

            11,789  

 

 

 

 

9.         Financial income and expenses


2011


2010


Before exceptional items

Exceptional items

Total


Before exceptional items

Exceptional items

Total


US$'000

US$'000

US$'000


US$'000

US$'000

US$'000

Investment income








Interest income

3,119

-

3,119


6,525

-

6,525


3,119

-

3,119


6,525

-

6,525

Interest expense








Interest on bank and other loans

(24,626)

-

(24,626)


(14,551)

-

(14,551)

Interest on convertible bonds

(27,753)

-

(27,753)


(23,269)

-

(23,269)


(52,379)

-

(52,379)


(37,820)

-

(37,820)

Interest capitalised

13,992

-

13,992


7,253

-

7,253

Unwinding of discount on environmental obligation

(1,254)

-

(1,254)


(1,605)

-

(1,605)


(39,641)

-

(39,641)


(32,172)

-

(32,172)

Other finance (losses)/gains








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

-

-

-


-

(10,314)

(10,314)

Fair value (losses)/ gains on derivative financial instruments

(2,381)

-

(2,381)


2,285

-

2,285


(2,381)

-

(2,381)


2,285

(10,314)

(8,029)

(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.

 

 

10.      Taxation

 



2011


2010



Before exceptional items

Exceptional items(a)

Total


Before exceptional items

Exceptional items(a)

Total



US$'000

US$'000

US$'000


US$'000

US$'000

US$'000

Current tax









UK current tax


-

-

-


-

-

-

Russian current tax


73,888

-

73,888


23,429

-

23,429



73,888

-

73,888


23,429

-

23,429

Deferred tax









Reversal and origination of timing differences


                              46,947

-

                              46,947


           22,799

-

           22,799

Total tax charge


120,835

-

120,835


46,228

-

46,228

(a)  Exceptional items were tax neutral.

 

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

 


2011

2010


US$'000

US$'000

Profit before tax

361,324

              69,199




Tax at the UK corporation tax rate of 26.5% (2010: 28%)

95,751

              19,376

Effect of different tax rates of subsidiaries operating in other jurisdictions

(34,186)

               (6,623)

Tax effect of share of results of joint ventures

224

                   887

Tax effect of expenses that are not deductible for tax purposes

18,714

           26,934

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

38,452

  18,622

Income not subject to tax

(5,130)

               (8,090)

Utilisation of previously unrecognised tax losses

(4,184)

               (4,415)

Foreign exchange movements in respect of deductible temporary differences

17,422

     1,099

Other adjustments

(6,228)

(1,562)

Tax expense for the period

120,835

              46,228

 

 

 

 

 

11.      Earnings per share



2011

2010



US$'000

US$'000

Profit for the period attributable to equity holders of Petropavlovsk PLC


230,885

19,777

Before exceptional items


228,453

45,508

Exceptional items


2,432

          (25,731)

Interest expense on convertible bonds, net of tax


20,398

-(a)

Profit used to determine diluted earnings per share


251,283

19,777

Before exceptional items


248,851

45,508

Exceptional items


2,432

         (25,731)







No of shares

No of shares

Weighted average number of Ordinary Shares


186,478,361

183,815,830

Adjustments for dilutive potential Ordinary Shares:




 - assumed conversion of convertible bonds


18,478,083

-(a)

- share options in issue


9,618

23,966

Weighted average number of Ordinary Shares


204,966,062

183,839,796

for diluted earnings per share

 



US$

US$

Basic earnings per share


1.24

0.11

Before exceptional items


1.23

0.25

Exceptional items


0.01

(0.14)





Diluted earnings per share


1.23

0.11

Before exceptional items


1.22

0.25

Exceptional items


0.01

(0.14)





(a)      Convertible bonds due 2015 which could potentially dilute basic earnings per share were not included in the calculation of diluted earnings per share because they were anti-dilutive.

 

As at 31 December 2011 and 2010, the Group had a potentially dilutive option issued to IFC to subscribe for 1,067,273 Ordinary Shares (note 26) which was anti-dilutive (2010: 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.

 

 

 

12.      Dividends

 



2011(a)

2010



US$'000

US$'000

Interim dividend for the year ended 31 December 2011 of £0.05 per share paid on 11 November 2011


15,164

-

Final dividend for the year ended 31 December 2010 of £0.07 per share paid on 28 July 2011


21,692

-

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


-

8,771

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


-

19,003



36,856

27,774

(a)        Information on dividends proposed subsequent to 31 December 2011 is set out in note 36.

 

 

13.     Goodwill

 



2011

2010



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)

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 BMRP.

 

Goodwill recognised on acquisition of Irgiredmet and BMRP in the amounts of US$16 million and US$5 million, correspondingly, 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.

 

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

 

Included in intangible assets are capitalised exploration and evaluation expenditure and mineral rights acquired as set out below.

 


Vysokoe

Verkhne-Aleinskoye

Tokur

Yamal deposits(a)

Flanks of Pokrovskiy

 

Kostengin

skoye

 

Other(c)

 

Total


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

At 1 January 2011

36,826

67,148

62,955

77,834

18,808

29,136

54,155

346,862

Additions

5,379

3,957

381

7,056

16,334

4,424

33,167

70,698

Impairment (note 6)

-

-

-

(15,195)

(2,579)

-

(18,945)

(36,719)

Transfer to mine development

-

-

-

(18,260)

-

-

(613)

(18,873)

Transfer to mining assets

-

-

-

-

(28,587)(b)

-

(1,032)

(29,619)

Reallocation and other transfers

-

1,618

220

-

(226)

-

776

2,388

At 31 December 2011

42,205

72,723

63,556

51,435

3,750

33,560

67,508

334,737

 

(a)      Following approval of a new plan to develop gravel operations at the Novogodneye-Monto area of the Yamal deposits by the Board Committee in June 2011 and commencement of development, associated amounts capitalised have been transferred to mine development costs within property, plant and equipment. Management will continue assessment of the development strategy for expansion of the gravel operations and gold mining operations as the next stage of development of the Yamal deposits. Until such time as the updated development strategy for the gold mining operations is in place and approved by the Board, associated amounts capitalised remain in intangible assets.

(b)      Following completion of exploration and commencement of the mining activity at Alkagan-Adamovskaya, Sergeevskaya and Zheltunakskaya licence areas, the associated amounts capitalised have been transferred to mining assets within property, plant and equipment.

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

 

 


Vysokoe

Verkhne-Aleinskoye

Tokur

Yamal deposits

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

-

66,642

-

-

-

-

6,280

72,922

Impairment

-

-

-

-

-

-

(9,585)(e)

(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

 

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

(e)      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.

 

 

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 2010

583,360

380,206

169,158

49,337

1,182,061

Additions

240,378

68,137

14,773

109,473

432,761

Acquired through business combinations

45

20,897

1,169

1,029

23,140

Interest capitalised (note 9) (a)

1,860

5,393

-

-

7,253

Close down and restoration cost capitalised (note 25)

-

894

-

-

894

Transfers from intangible assets

-

2,106

-

-

2,106

Transfers from capital construction in progress

225

63,509

12,152

(75,886)

-

Transfers from mine development

(336,235)

336,235

-

-

-

Disposals

(66)

(1,429)

(2,797)

(76)

(4,368)

Reallocation and other transfers

(44,259)

(63,050)

(7,238)

(3,082)

(117,629)

Foreign exchange differences

-

-

(363)

-

(363)

At 31 December 2010

445,308

812,898

186,854

80,795

1,525,855

Additions

213,985

99,282

24,703

282,219

620,189

Acquired through business combinations

-

-

658

-

658

Interest capitalised (note 9) (a)

9,689

-

-

4,303

13,992

Close down and restoration cost capitalised (note 25)

-

23,266

-

-

23,266

Transfers from intangible assets (note 14)

18,873

29,619

-

-

48,492

Transfers from capital construction in progress (b)

1,386

202,399

25,700

(229,485)

-

Transfers from mine development (c)

(182,328)

149,064

-

33,264

-

Transfers to mine development (d)

6,925

-

(6,174)

(751)

-

Disposals

(703)

(2,958)

(4,313)

(93)

(8,067)

Reallocation and other transfers

(11,024)

10,283

1,039

(2,585)

(2,287)

Foreign exchange differences

-

-

(2,886)

-

(2,886)

At 31 December 2011

502,111

1,323,853

225,581

167,667

2,219,212







Accumulated depreciation and impairment






At 1 January 2010

1,516

81,663

33,392

-

116,571

Charge for the year

 4,780

57,458

15,322

-

77,560

Disposals

(66)

(1,019)

(1,833)

-

(2,918)

Reallocation and other transfers

(3,741)

3,738

(224)

-

(227)

Impairment

-

-

-

14,572

14,572

Foreign exchange differences

-

-

(36)

-

(36)

At 31 December 2010

2,489

141,840

46,621

14,572

205,522

Charge for the year

4,969

121,602

20,950

-

147,521

Disposals

(510)

(1,268)

(2,824)

-

(4,602)

Reallocation and other transfers

2,329

1,633

(3,635)

-

327

Impairment (note 6)

5,242

117

-

-

5,359

Foreign exchange differences

-

-

(527)

-

(527)

At 31 December 2011

14,519

263,924

60,585

14,572

353,600







Net book value






At 31 December 2011(e)

487,592

1,059,929

164,996

153,095

1,865,612

At 31 December 2010 (e)

442,819

671,058

140,233

66,223

1,320,333

 

(a)   Borrowing costs were capitalised at the weighted average rate of the Group's relevant borrowings being 6.8% (2010: 6.3%).

(b)   Being costs primarily associated with continuous development of Malomir and Pioneer projects.

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

(d)   Being costs associated with development of gravel operations at the Novogodneye-Monto area of the Yamal deposits.

(e)   Property, plant and equipment with a net book value of US$211.7 million (31 December 2010: US$75.2 million) have been pledged to secure borrowings of the Group.

 

 

 

16.          Interests in joint ventures

 

The Group has various interests in jointly controlled entities as set out in note 38. These interests are accounted for in accordance with accounting policies set out in note 2.8.

 

 


2011

US$' 000

2010
US$'000

At 1 January


8,446

31,886

Acquisition of a subsidiary (a)


(3,215)

(8,663)

Contribution to share capital


-

4,731(c)

Disposals


2,975(b)

-

Transfers from property, plant and equipment


-

1,826

Transfers from non-current trade and other receivables


-

355

Impairment (note 6)


-

(19,655)

Share of joint ventures' loss

Unrealised loss

Foreign exchange differences


(1,360)

-

240

(3,168)

249
  885

At 31 December


7,086

8,446

 

(a)        In accordance with the terms of the joint venture agreement between the Group and Aluminium Corporation of China Limited ("Chinalco") signed and approved by the Chinese Ministry of Commerce on 12 August 2008 for establishment of a jointly controlled Chinese titanium sponge processing joint venture project, Heilongjiang Jiatai Titanium Co. Limited ("Jiatai Titanium") was established in the PRC with 65% interest held by the Group and the remaining 35% held by a joint venture partner. Unanimous consent is required from both parties for all strategic financial and operating decisions relating to the Jiatai Titanium. On 11 April 2011, the Group acquired the remaining 35% equity stake from the joint venture partner for a cash consideration of US$11.5 million pursuant to which Jiatai Titanium became a subsidiary of the Group. There was an excess of the assets acquired compared with the consideration paid of US$1.4m which has been recognised as an exceptional gain (note 6).

 

(b)        Being net liabilities of Odolgo JV at the date of disposal (note 6).

 

(c)        On 19 February 2009, the Group signed an agreement with Heilongjiang Jianlong Steel Company Limited and Kuranakii Investment Co. Limited to establish a Chinese Vanadium Production Joint Venture project (the "Vanadium Joint Venture"), Heilongjiang Jianlong Vanadium Industries Co. Limited, which was incorporated in the PRC.  The Group holds 46% of the joint venture and the remaining 49% and 5% are held by Heilongjiang Jianlong Steel Company Limited and Kuranakii Investment Co. Limited respectively, with the parties exercising joint control as the strategic financial and operating decisions relating to the Vanadium Joint Venture require the unanimous consent from the three parties. 

 

 

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


2011
US$'000

2010
US$'000

The Group's share of joint ventures' net assets



Non-current assets

13,530

8,420

Current assets

6,018

12,707

Current liabilities

(5,296)

(3,281)

Non-current liabilities

(7,166)

(9,400)


7,086

8,446

The Group's share of joint ventures' (loss)/ profit for the period



Sales revenue

-

                5,725 

Net operating expenses

(1,430)

(9,811)

Operating loss

(1,430)

(4,086)

Financial income

27

                   1,087  

Financial expenses

(68)

(700)

Taxation

111

(1)

Non-controlling interests

-

                   532  


(1,360)

(3,168)

 

 

 

17.          Available-for-sale investments

 



2011

2010



US$'000

US$'000

Listed securities




Rusoro Mining Limited


543

2,484

Unlisted securities (a)




Solovyevskiy Priisk


-

939

Other


18

                     20  



561

                 3,443  

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

 

 

 

18.          Other non-current assets



2011

2010



US$'000

US$'000

Deferred debt transaction costs (a)



29,430

28,298

 

Restricted bank deposit (b)



6,000

-

 

Other assets



2,441

898

 




37,871

29,196

 

(a)           Paid in connection with ICBC facility (note 23).

(b)           See note 23

 

 

19.          Inventories

 




2011

2010




US$'000

US$'000

Current





Construction materials



16,796

14,950

Stores and spares



149,565

85,332

Work in progress



107,268

44,399

Deferred stripping costs



47,114

51,052

Bullion in process



9,917

2,218




330,660

197,951

Non-current





Work in progress(a)



16,828

8,882

Deferred stripping costs(b)



26,359

2,729




43,187

11,611

(a)        Ore stockpiles that are not planned to be processed within twelve months after the reporting period.

(b)        Production stripping related to the ore extraction which is to be undertaken within more than twelve months after the reporting period.

 

 

20.      Trade and other receivables

 




2011

2010




US$'000

US$'000

Current





VAT recoverable



109,250

76,468

Advances to suppliers 



63,856

32,677

Rusoro exchangeable loan (a)



-

8,833

Trade receivables (b)



11,442

8,761

Advances paid on resale and commission contracts (с)



1,248

-

Other loans receivable



5

1,093

Interest accrued



272

210

Other debtors (d)



22,904

15,471




208,977

143,513

 

(a)        Net of provision for impairment of US$10.2 million (2010: nil).

 

On 10 June 2008, the Group participated in an US$80 million senior secured loan to Venezuela Holdings (BVI) Limited, a wholly owned subsidiary of Rusoro Mining Limited ("Rusoro"), exchangeable into Rusoro common shares at a price of C$1.25 and repayable on 10 June 2010 (the "Rusoro Exchangeable Loan"). The Group subscribed for US$20 million of the Rusoro Exchangeable Loan and the remainder of the funds was provided by other parties (the "Lenders"). On 10 June 2010, the parties entered into the Amendment and Restatement Agreement relating to the Rusoro Exchangeable Loan agreement whereby the Repayment Date in relation to US$30 million principal was extended until 10 June 2011. Exchange option has been extended together with the terms of the loan and the exchange price was adjusted to C$0.40. The loan carries an interest rate of 10% per-annum payable semi-annually in arrears. The loan component is measured at amortised cost, whilst the exchange option is recorded as a derivative financial asset and is measured at fair value.

 

(b)        Net of provision for impairment of US$1.1 million (2010: US$2.2 million).

Trade receivables are due for settlement between one and six months. Included in trade receivables are individual balances totalling US$0.01 million (2010: US$0.6 million) which are past due but not impaired as the amounts are still considered recoverable.

 

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

 

(d)        Net of provision for impairment of US$5.6 million (2010: nil)

 

 

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

 

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

 

 

21.          Cash and cash equivalents

 




2011

2010




US$'000

US$'000

Cash at bank and in hand



105,081

62,808

Short-term bank deposits



108,475

258,178




213,556

320,986

 

22.      Trade and other payables

 




2011

2010




US$'000

US$'000

Trade payables



37,684

32,281

Advances from customers



7,724

3,513

Advances received on resale and commission contracts (a)



6,370

3,431

Outstanding purchase consideration for 32.5% and 7.5% in Omchak



-

12,000

Accruals and other payables



83,126

91,513




134,904

142,738

 

(a)        Amounts included in advances paid on resale and commission contracts at 31 December 2011 and 31 December 2010 relate to services performed by the Group's subsidiary, Irgiredmet, in its activity to procure materials such as reagents, consumables and equipment for third parties.

 

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

 

 

23.      Borrowings

 



2011

US$'000

2010

US$'000

Borrowings at amortised cost




Convertible bonds (a)


338,812

326,258

Bank loans (b)


659,630

161,607

ICBC facility (c)


6,343

-

Other loans (b)


2,053

4,253



1,006,838

492,118





Amount due for settlement within 12 months


216,430

93,104

Amount due for settlement after 12 months


790,408

399,014



1,006,838

492,118

 

(a)        In February 2010, the Group issued US$380 million of convertible bonds due on 18 February 2015 ("the Bonds"). The Bonds were issued at par by the Company's wholly owned subsidiary Petropavlovsk 2010 Limited and are guaranteed by the Company. The Bonds carry a coupon of 4.00% payable semi-annually in arrears and are convertible into redeemable preference shares of Petropavlovsk 2010 Limited which are guaranteed by and will be exchangeable immediately upon issuance for Ordinary Shares in the Company. The conversion price has been set at £12.9345 per share, subject to adjustment for certain events and adjusted to £12.66 with effect from 29 June 2011 for each US$100,000 principal amount of a Bond, and the conversion exchange rate has been fixed at US$1.6244 per £1. The Bonds were admitted to listing on the Official List of the UK Listing Authority and admitted to trading on the Professional Securities Market of the London Stock Exchange on 19 February 2010.

 

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

 

As at 31 December 2011, the fair value of the Bonds, calculated by applying the effective interest rate of 10.5% to the liability component of the Bonds, amounted to US$322.7 million (2010: the carrying value of the Bonds approximated their fair value).

 

(b)        Bank and other loans outstanding as at 31 December 2011 include liabilities of US$168.3 million (2010: US$102.1 million) which are secured against certain items of property, plant and equipment of the Group (note 15).

 

The weighted average interest rate paid during the year ended 31 December 2011 was 6% (2010: 7%).

 

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

 

As at 31 December 2011, bank loans with an aggregate carrying value of US$ 296.2 million (2010: nil) contain financial covenants requiring the maintenance of the consolidated interest cover ratio of not less than 4:1 and consolidated leverage ratio of no greater than 4:1.

 

As at 31 December 2011, the amounts undrawn under the bank loans comprised US$129.6 million (2010: US$15.2 million).

 

(c)        On 6 December 2010, Kimkano-Sutarsky Mining and Beneficiation Plant LLC ("K&S"), a subsidiary of the Group, entered into the HK$3.11 billion (equivalent to US$400 million) Engineering Procurement and Construction Contract with China National Electric Engineering Corporation for the construction of the Group's mining operations at K&S. On 13 December 2010, K&S entered into a project finance facility agreement with the Industrial and Commercial Bank of China Limited ("ICBC") (the "ICBC Facility Agreement") pursuant to which ICBC will lend US$340 million to K&S to be used to fund the construction of the Group's mining operations at K&S in time for the start of major construction works in early 2011. Interest under the facility will be charged at 2.80% above London Interbank Offering rate ("LIBOR") per annum. The facility is guaranteed by the Company and is repayable over a period of 11 years from 2014 and is fully repayable by 2022. On 14 December 2011, the Group made the first drawdown amounting to US$6.9 million and the loan is carried at amortised cost with effective interest rate at 5.63% per annum. As at 31 December 2011, US$6 million was deposited with ICBC under a security deposit agreement related to the ICBC Facility Agreement and is presented as restricted deposit under non-current assets.

 

ICBC Facility Agreement contain financial covenants requiring the maintenance of the consolidated interest cover ratio of not less than 3.5:1 and consolidated leverage ratio of no greater than 4:1.

 

As at 31 December 2011, the amounts undrawn under the ICBC Facility Agreement comprised US$333 million (2010: US$340 million).

 

 

24.          Deferred taxation

 



2011

2010



US$'000

US$'000

At 1 January


126,768

            88,260  

Deferred tax charged to income statement


46,947

            22,799  

Deferred tax recognised as part of business combinations


-

            15,829  

Deferred tax charged/(credited) to equity


153

(43)

Exchange differences


(399)

(77)

At 31 December


173,469

          126,768  





Deferred tax assets


2,562

6,774

Deferred tax liabilities


(176,031)

(133,542)

Net deferred tax liability


(173,469)

(126,768)

 

 


At 1 January
2011

Charged/

(credited)

to the income statement

Charged/

(credited)

directly to equity

Exchange differences

At 31 December
2011

US$'000

US$'000

US$'000

US$'000

US$'000

Property, plant and equipment

86,944

45,646

-

(90)

132,500

Inventory

14,164

15,559

-

24

29,747

Capitalised exploration and evaluation expenditure

2,363

(5,528)

-

-

(3,165)

Derivative financial instruments

321

(321)

-

-

-

Fair value adjustments

23,233

(1,185)

-

(273)

21,775

Tax losses

(4,137)

1,614

-

-

(2,523)

Other temporary differences

3,880

(8,838)

153

(60)

(4,865)


126,768

46,947

153

(399)

173,469

 

 

 

 


At 1 January
2010

Charged/

(credited)

to the income statement

Charged/

(credited)directly to equity

Acquisition of subsidiary

Exchange differences

At 31 December
2010

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Property, plant and equipment

   82,182  

4,440

-

335

(13)

86,944

Inventory

   8,117  

5,449

-

596

2

14,164

Capitalised exploration and evaluation expenditure

(7,710)

8,658

-

1,415

-

2,363

Derivative financial instruments

361

(40)

-

-

-

321

Fair value adjustments

9,999

(592)

-

13,882

(56)

23,233

Tax losses

(7,319)

3,182

-

-

-

(4,137)

Other temporary differences

2,630

1,702

(43)

(399)

(10)

3,880

88,260

22,799

(43)

15,829

(77)

126,768

 

The Group did not recognise deferred income tax assets in respect of tax losses comprising US$384.8 million (2010: US$210.4 million) that can be carried forward against future taxable income. Tax losses of US$134.5 million can be carried forward indefinitely. Tax losses of US$248.8 million substantially expire between 2016 and 2021.

 

The Group did not recognise deferred income tax assets of US$35.4 million (2010: US$41.8 million) in respect of temporary differences arising on certain capitalised development costs.

 

The Group has not recorded a deferred tax liability in respect of withholding tax and other taxes that would be payable on the unremitted earnings associated with investments in its subsidiaries and associates and interests in joint ventures as the Group is able to control the timing of the reversal of those temporary differences and does not intend to reverse them in the foreseeable future. Unremitted earnings comprised in aggregate US$827.3 million (2010: US$512.8 million). 

 

 

25.     Provision for close down and restoration costs

 


2011

2010


US$'000

US$'000

At 1 January

11,085

8,655

Amounts capitalised  

10,042

770

Unwinding of discount

1,254 

1,605 

Change in estimates

13,224 

124 

Foreign exchange differences

(647)

(69)

At 31 December

34,958

11,085

 

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

 

 


2011

2010


Provision recognised

US$' 000

Expected timing of the cash outflows from

31 December(a)

Provision recognised

US$' 000

Expected timing of the cash outflows from

31 December(a)

Pokrovskiy

4,990

at least 4 years

             3,507  

at least 5 years

Pioneer

4,979

at least 10 years

              3,200  

at least 9 years

Malomir

10,843

at least 11 years

                 772  

at least 3 years

Albyn

10,053

at least 6 years

-

-

Kuranakh

4,093

at least 10 years

              3,606  

at least 11 years

(a)        Based on the Group's mining plan

 

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

 

 

 

 

26.     Share capital

 


2011


2010


No of shares

US$'000


No of shares

US$'000

Allotted, called up and fully paid






At 1 January

187,860,093

2,891


182,079,767

2,805

Issued during the period

-

-


5,780,326

86

At 31 December

187,860,093

2,891


187,860,093

2,891

 

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

 

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

 

 

27.          Own shares

 



2011
US$'000

2010
US$'000

At 1 January


10,675

14,003

Vesting of Replacement LTIP


-

(3,328)

Vesting of awards within Petropavlovsk PLC LTIP


(231)

-

At 31 December


10,444

10,675


Own shares represent 1,351,806 Ordinary Shares held by the EBT (2010: 1,381,732) to provide benefits to employees under the Long Term Incentive Plan (note 30).

 

28.      Notes to the cash flow statement

 

Reconciliation of profit before tax to operating cash flow



2011

2010



US$'000

US$'000

Profit before tax


361,324

           69,199  

Adjustments for:




Share of results in joint ventures


1,360

3,168

Investment income


(3,119)

(6,525)

Interest expense


39,641

32,172

Other finance losses


2,381

8,029

Share-based payments


11,010

              2,585  

Depreciation


132,202

73,452

Gain on re-measurement of equity interest in Omchak on acquisition


-

(28,882)

Impairment charges


42,078

44,841

Impairment of non-trading loans


14,241

-

Provision for impairment of trade and other receivables


1,862

-

Loss on disposals of property, plant and equipment


2,118

366

Profit on disposal of the Group's interests in joint ventures and available-for-sale investments


(12,036)

-

Net gain on acquisition of Jiatal Titanuim


(1,439)

-

Exchange (gains)/losses in respect of investment activity


(940)

171

Exchange losses in respect of cash and cash equivalents


58

2,450

Other non-cash items


(3,450)

                 285  

Changes in working capital:




Increase in trade and other receivables


(104,093)

(64,442)

Increase in inventories


(158,137)

(75,761)

Increase in trade and other payables


31,226

19,386

Net cash generated from operations


356,287

80,494

 

Non-cash transactions

There have been no significant non-cash transactions during the years ended 31 December 2011 and 2010.

 

 

 

29.      Related parties

 

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

 

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

 

The Petropavlovsk Foundation for Social Investment (the 'Petropavlovsk Foundation') is considered to be a related party due to the participation of the key management of the Group in the governing board of the Petropavlovsk Foundation and presence in its board of guardians.

 

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

 

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

 

Vanadium Joint Venture is a joint venture of the Group and hence is a related party.

 

Odolgo Joint Venture was a joint venture of the Group and hence was considered to be a related party until it was disposed in May 2011.

 

Titanium Joint Venture was a joint venture of the Group and hence was considered to be a related party until it was acquired and became a subsidiary to the Group in April 2011 (note 16).

 

Omchak Joint Venture was a joint venture of the Group and hence was considered to be a related party until it was acquired and became a subsidiary to the Group in July 2010.

 

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

 

Transactions with related parties the Group entered into during the years ended 31 December 2011 and 2010 are set out below.

 

 

 

Trading Transactions

 

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

 


Sales to related parties

Purchases from related parties

 


2011

US$'000

2010

US$'000

2011

US$'000

2010

US$'000

Asian-Pacific Bank





Sales of gold and silver

168,578

25,617

-

-

Other

281

723

1,064

546


168,859

26,340

1,064

546

Trading transactions with other related parties





Engineering services provided to Apatit

1,732

3,974

-

-

Exploration services provided by Krasnoyarskaya GGK

-

-

13,825

7,216

Other transactions with Krasnoyarskaya GGK

1,132

200

-

-

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

229

 

 

1,214



6,093

 

 

5,866

Entities controlled by key management

-

-

113

-

Joint ventures and associates

562

455

-

26

Other

465

-

-

-


4,120

5,843

20,031

13,108

 

During the year ended 31 December 2011, the Group made US$3.4 million charitable donations to the Petropavlovsk Foundation (2010: US$2.5 million).

 

 

 

The outstanding balances with related parties at 31 December 2011 and 2010 are set out below.

 


Amounts owed by related parties

at 31 December

Amounts owed to related parties

at 31 December

 


2011

US$'000

2010

US$'000

2011

US$'000

2010

US$'000

Krasnoyarskaya GGK

87

263

1,019

1,087

Other entities in which Mr Peter Hambro and/or Dr Pavel Maslovskiy have a controlling interest or exercise a significant influence


60

 

330


1,713

 

1,840

Apatit

1,480

925

-

-

Joint ventures and associates

-

75

-

113

Asian-Pacific Bank

7

-

-

-


1,634

1,593

2,732

3,040

 

 

Banking arrangements

 

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

 

The bank balances at 31 December 2011 and 2010 are set out below:

 



2011

US$'000

2010

US$'000

Asian-Pacific Bank


19,972

35,408

 

 

Financing transactions

 

During the year ended 31 December 2011, the Group received a US$15.1 million unsecured loan from Asian-Pacific Bank. The loan bears 10% interest and is repayable in October 2012.

 

During the year ended 31 December 2010, the Group received an interest-free unsecured loan from Krasnoyarskaya GGK totalling US$2.0 million. The loan principal was outstanding as at 31 December 2011 and 31 December 2010.

 

The Group also invested US$0.7 million in the associate through equity (2010: the Group invested US$1 million in the associate through loans advanced).

 

 

 

 

Key management compensation

 

Key management personnel are those having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any directors (whether executive or otherwise) of that entity.

 

 


2011

2010


US$'000

US$'000

Wages and salaries

14,347

          11,440

Pension costs

325

               164

Share-based compensation

2,869

            1,279


17,541

          12,883

 

 

 

30.          Share based payments

 

The Group operates various equity-settled share awards schemes. The details of share awards outstanding are set out below.

 

Petropavlovsk PLC

 

 


Share option scheme

Petropavlovsk PLC LTIP awards











granted on 25 June 2009

granted on 12 May 2011


Number of Ordinary Shares

Weighted average exercise

price

£

Number of Ordinary Shares

Weighted average exercise

price

£

Number of Ordinary Shares

Weighted average exercise

price

£

Outstanding at 1 January 2011

50,000

6.72

462,961

-

-

-

Granted during the year

-

-

-

-

1,524,347

-

Forfeited during the year

-

-

-

-

(129,313)

-

Exercised and vested during the year

-

-

-

-

(29,926)

-

Expired during the year

-

-

-

-

-

-

Outstanding at 31 December 2011

50,000

6.72

462,961

-

1,365,108

-

 

Employee share option scheme

As part of business combination with Aricom plc, the outstanding options granted under the Share Option Scheme of Aricom plc to its Directors in prior years were exchanged for options over Ordinary Shares of Petropavlovsk PLC, exercisable during the period since 19 July 2009 until 19 July 2012. No further options will be granted under the Share Option Scheme by the Group.

 

The fair value of share awards under the Employee share option scheme are determined using the Black Scholes model at the date of grant using the assumptions detailed in the table below. 

 


Employee share

option scheme

Date of grant

22 April 2009

Share price at the date of grant, £

5.20

Exercise price, £

6.72

Expected volatility, %

102.14

Expected life in years

0.24

Risk-free rate, %

0.86

Expected dividends, £

-

Fair value per award, £

0.57

 

 

Petropavlovsk PLC Long Term Incentive Plan (the "Petropavlovsk PLC LTIP")

 

The Group established a new Petropavlovsk PLC LTIP which was approved by the shareholders of the Company on 25 June 2009 and includes the following awards:

 

§  Share Option Award, being a right to acquire a specified number of Ordinary Shares in the Company at a specified exercise price;

§  Performance Share Award, being a right to acquire a specified amount of Ordinary Shares in the Company at nil cost; and

§  Deferred Bonus Award.

 

Initial performance share awards under the Petropavlovsk PLC LTIP were granted on 25 June 2009 with 482,961 shares allocated to certain Executive Directors and members of senior management of the Group, out of which 296,297 shares are held by the EBT and the Company assumed the obligation to issue the remaining shares upon vesting of the LTIP.

 

Performance Share Awards granted on 25 June 2009 vest or become exercisable subject to the following provisions:

 

§  50% of the shares subject to the award may be acquired based on a condition relating to total shareholder return (the "TSR Condition"); and

§  50% of the shares subject to the award may be acquired based on specific conditions relating to the Group's business development and strategic plans (the "Operating Conditions").

 

The TSR Condition relates to growth in TSR over a three year period relative to the TSR growth of companies in a peer group of listed international mining companies selected upon establishment of the Petropavlovsk PLC LTIP (the "Comparator Group") over the same period.

 

The TSR Condition provides for the award to vest or become exercisable as follows:

 


% of the award vesting

Within top decile

50%

At median

25%

Below median

-

 

The detailed requirements to the Operating Conditions are determined by the Remuneration Committee and will be measured over a three year period from the date of grant.

 

The fair value of performance share awards was determined using the Black Scholes model at the date of grant in relation to the proportion of the awards vesting based on the operating performance conditions and using the Monte Carlo model in relation to the proportion of the awards vesting based on the TSR condition. The relevant assumptions are set out in the table below.

 


Petropavlovsk PLC LTIP performance share awards


vesting based on operating performance conditions

vesting based on TSR Condition

Date of grant

25 June 2009

25 June 2009

Number of performance share awards granted

241,480

241,481

Share price at the date of grant,  £

6.0

6.0

Exercise price, £

-

-

Expected volatility, %

72.98

72.98

Expected life in years

3

3

Risk-free rate, %

2.13

2.13

Expected dividends yield, %

-

-

Expected annual forfeitures

-

-

Fair value per award, £

4.463

6.000

 

 

On 12 May 2011, the Group has granted further performance share awards under the Petropavlovsk PLC LTIP with 1,524,347 shares allocated to certain Executive Directors, members of senior management and certain other employees of the Group, out of which 1,085,435 shares are held by the EBT and the Company assumed the obligation to issue the remaining shares upon vesting of the LTIP.

 

Performance share awards vest or become exercisable subject to the following provisions:

 

§  70% of the shares subject to the award may be acquired at nil cost based on a condition relating to the total shareholder return (the "TSR") of the Company compared with the TSR of a selected comparator group (the "First TSR Condition"); and

§  30% of the shares subject to the award may be acquired at nil cost based on a condition relating to growth in TSR of the Company compared to the FTSE 350 mining index (the "Second TSR Condition").

 

The First TSR Condition relates to growth in TSR over a three year period relative to the TSR growth of companies in a selected peer group of listed international mining companies (the "Comparator Group") over the same period.

 

The First TSR Condition provides for the award to vest or become exercisable as follows:


% of the award vesting

Within top decile

70%

At median

35%

Below median

-

 

 

The Second TSR Condition relates to growth in TSR over a three year period relative to the growth in TSR of companies in FTSE 350 mining index (the "Index Comparator Group") over the same period.

 

The Second TSR Condition provides for the award to vest or become exercisable as follows:


% of the award vesting

At median +13.5% p.a.

30%

At median

15%

Below median

-

 

The fair value of share awards was determined using the Monte Carlo model. The relevant assumptions are set out in the table below.

 


Petropavlovsk PLC LTIP

performance share awards


vesting based on the First TSR Condition

vesting based on the Second TSR Condition

Date of grant

12 May 2011

12 May 2011

Number of performance share awards granted

1,067,043

457,304

Share price at the date of grant,  £

8.15

8.15

Exercise price, £

-

-

Expected volatility, %

73.32

73.32

Expected life in years

3

3

Risk-free rate, %

1.53

1.53

Expected dividends yield, %

-

-

Expected annual forfeitures

-

-

Fair value per award, £

6.16

5.77

 

 

IRC Limited

 

Under the LTIP of IRC Limited, which was established on 11 August 2010, selected employees and Directors of the IRC Group (the "Selected Grantees") are to be awarded shares of IRC Limited which have been purchased by the EBT operated in conjunction with the IRC LTIP. Upon the IRC management's recommendation, the number of shares awarded to the Selected Grantees shall be determined, together with the vesting dates for various tranches, by the Board of IRC Limited.  Any LTIP awarded to a Selected Grantee who is a Director of the Company shall be subject to the Board's approval following a recommendation from the Remuneration Committee of the Board.

 

The scheme has a 3-year vesting period and is subject to the following vesting conditions:

 

§  25% of the award vesting is relating to the achievement of certain production targets;

§  25% of the award vesting is relating to profitability;

§  25% of the award vesting is relating to the growth and development of the IRC Group; and

§  25% of the award vesting is relating to the meeting of certain health, safety and environmental requirements.

 

On 3 November 2010, 91.1 million shares of IRC Limited were awarded to Selected Grantees under the IRC LTIP. The fair value of the services rendered as consideration of the awarded shares was measured by reference to the fair value of the awarded shares at the award dates of US$19.2 million (determined based on the closing share price of IRC Limited as of 3 November 2010 of HK$1.64 per share) which is recognised in the consolidated income statement over the vesting period. 

 

On 1 August 2011, a further 2,332,000 shares of IRC Limited were awarded to Selected Grantees under the IRC LTIP. The fair value of the services rendered as consideration of the awarded shares was measured by reference to the fair value of the awarded shares at the award dates of approximately US$536,000 (determined based on the closing share price of the Company as of 1 August 2011 of HK$1.79 per share) which is recognised in the consolidated income statement over the vesting period.

 

 

31.          Analysis of net debt

 


 

 

At                      1 January 2011

Acquisition of subsidiaries

Net cash movement

Exchange movement

Non-cash changes

 

At

31 December 2011


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Cash and cash equivalents

320,986

9,350

(116,722)

(58)

-

213,556

Debt due within one year

(93,104)

-

(55,903)

(316)

(67,107)

(216,430)

Debt due after one year

(399,014)

-

(431,331)

(31)

39,968

(790,408)

Restricted bank deposit

-

-

6,000

-

-

6,000

Net debt

(171,132)

9,350

(597,956)

(405)

(27,139)(a)

(787,282)

(a)        Being amortisation of borrowings

 

32.     Financial instruments and financial risk management

 

Capital risk management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to optimise the weighted average cost of capital and tax efficiency subject to maintaining sufficient financial flexibility to undertake its investment plans.

 

The capital structure of the Group consists of net debt (as detailed in note 31) and equity (comprising issued capital, reserves and retained earnings). As at 31 December 2011, the capital comprised US$2.7 billion (2010: US$1.9 billion).

 

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group adopts a modular approach in developing its projects in order to minimise upfront capital expenditure and related funding requirements. The Group manages in detail its funding requirements on a 12 month rolling basis and maintains a five year forecast in order to identify medium-term funding needs. Following the listing of IRC Limited on the Stock Exchange of Hong Kong Limited, its capital is managed separately by the Independent Board of IRC Limited. 

 

The Group is not subject to any externally imposed capital requirements.

 

Significant accounting policies

Details of significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 2 to the Consolidated Financial Statements.

 

Categories of financial instruments

  
2011
US$'000
2010
US$'000
Financial assets
Cash and cash equivalents
213,556
320,986
Fair value through profit or loss - derivative financial instruments
-
2,381
Loans and receivables
39,111
35,023
Available-for-sale investments
561
3,443
Financial liabilities
At amortised cost - trade and other payables
85,218
135,669
At amortised cost - borrowings
1,006,838
492,118

   

Financial risk management

The Group's activities expose it to interest rate risk, foreign currency risk, risk of change in the commodity prices, credit risk and liquidity risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.

 

Risk management is carried out by a central finance department and all key risk management decisions are approved by the Board of Directors. The Group identifies and evaluates financial risks in close cooperation with the Group's operating units. The Board provides written principles for overall risk management, as well as guidance covering specific areas, such as foreign exchange risk, interest rate risk, gold price risk, credit risk and investment of excess liquidity.

 

Interest rate risk

The Group's interest rate risk arises primarily from borrowings. The Group is exposed to cash flow interest rate risk through borrowing at floating interest rates and to fair value interest rate risk through borrowing at fixed interest rates. At present, the Group does not undertake any interest rate hedging activities. 

 

The sensitivity analysis below has been determined based on exposure to interest rates for the average balance of floating interest-bearing borrowings.

 

If interest rates had been 1% higher/lower and all other variables held constant, the Group's profit for the year ended 31 December 2011 would decrease/increase by US$0.87 million (2010: decrease/increase by US$0.65 million). This is attributable to the Group's exposure to interest rates on its variable rate borrowings.

 

Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from fluctuations in currencies the Group transacts, primarily US Dollars, GB Pounds Sterling and Russian Roubles.

 

Exchange rate risks are mitigated to the extent considered necessary by the Board of Directors, through holding the relevant currencies. At present, the Group does not undertake any foreign currency transaction hedging.

 

 

The carrying amounts of the Group's foreign currency denominated monetary assets and monetary liabilities at period end are as follows:

 


Assets


Liabilities


2011
US$'000

2010
US$'000


2011
US$'000

2010
US$'000

Russian Roubles

260,573

 189,451  


110,150

       172,879  

US Dollars (a)

12,778

          3,763  


1,822

                   9  

GB Pounds Sterling

            2,269

13,031


14,179

20,154

Other currencies

            4,014

2,485


135

90

(a)        US Dollar denominated monetary assets and liabilities in Group companies with Rouble functional currency.

 

The following table illustrates the Group's profit sensitivity to the fluctuation of the major currencies in which it transacts. A 25% movement has been applied to each currency in the table below for the year ended 31 December 2011, representing management's assessment of a reasonably possible change in foreign exchange currency rates (2010: a 25% movement was applied to each currency in the table).

 


2011

2010


US$'000

US$'000

Russian Roubles currency impact

37,606

        4,143  

GB Pounds Sterling currency impact

2,978

1,781

US Dollar currency impact

2,739

938

Other currencies

970

599

 

Credit risk

The Group's principal financial assets are cash and cash equivalents, comprising current accounts, amounts held on deposit with financial institutions and investments in money market and liquidity funds. In the case of deposits and investments in money market and liquidity funds, the Group is exposed to a credit risk, which results from the non-performance of contractual agreements on the part of the contract party.

 

The credit risk on liquid funds held in current accounts and available on demand is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies, with the exception of Asian-Pacific Bank, which does not have an officially assigned credit rating. Having performed a high level due diligence, management does not consider the credit risk associated with Asian-Pacific Bank to be high. Asian-Pacific Bank has a wide network of branches in the Amur region and, therefore, is extensively used by the entities of the precious metals segment (note 29).

 

The Group's maximum exposure to credit risk is limited to the carrying amounts of the financial assets recorded in the Consolidated Financial Statements. The major financial assets at the balance sheet date are cash and cash equivalents held with the counterparties as set out below.

 

Counterparty

Credit rating

Carrying amount at 31 December 2011
US$'000

Carrying amount at 31 December 2010
US$'000

Royal Bank of Scotland

A

                  62,986

160,237

UBS