Information  X 
Enter a valid email address

Petropavlovsk Plc (POG)

  Print          Annual reports

Friday 30 October, 2020

Petropavlovsk Plc

Interim Results and Third Quarter Sales Report

RNS Number : 6946D
Petropavlovsk PLC
30 October 2020
 

 

 

 

30   October 2020

 

Petropavlovsk PLC

Interim Results for the Period Ended 30 June 2020 and Third Quarter Sales Report

 

Petropavlovsk PLC ("Petropavlovsk", or the "Company" and, together with its subsidiaries, the "Group") today issues its Interim Results for the period from 1 January 2020 to 30 June 2020 ("H1 2020" or the "Period") and a Third Quarter Sales Report ("Q3 2020").

James W Cameron Jr, Petropavlovsk Chairman said : EBITDA almost doubled from the first half of 2019 to US$193m, benefitting from higher gold prices and increased production. Petropavlovsk has some excellent assets with substantial opportunities.  Our guiding focus is to deliver greater value for all shareholders.  This will involve reducing costs, improving controls and raising standards of governance across the Company. 

As previously announced, over the past few months the Board and interim CEO have encountered a lack of cooperation from certain employees and received legal actions, which have no legal merit, led by Sergey Ermolenko and Alexey Maslovskiy (Pavel Maslovskiy's son).

The Board is finalising the selection of a forensic investigator to examine all transactions in the past few years which may have involved 'connected parties', as requested by shareholders at the Requisitioned General Meeting on 10 August 2020.

Financial Highlights

 

 

H1 2020

H1 20191

% Change

Total gold produced

koz

320.6

225.0

+42%

Total gold sold

koz

312.4

225.0

+39%

Avg. realised gold price

US$/oz

1,640

1,286

+28%

Total Cash Costs [1]

US$/oz

983

774

+27%

Total Cash Costs from own material

US$/oz

800

774

+3%

All-in Sustaining Costs

US$/oz

1,220

1,029

+19%

Group revenue (including non-precious operations)

US$m

522.7

305.3

+71%

Underlying EBITDA

US$m

192.6

98.5

+96%

Operating profit

US$m

146.1

2.5

n/m

(Loss) / profit for the period

US$m

(22.0)

3.9

n/m

Capital expenditure

US$m

59.6

45.0

+32%

Cash generated from operations before working capital changes

US$m

183.3

85.8

+114%

Cash generated from operations

US$m

172.8

55.2

+213%

(Net debt )

US$m

(538.0)

(561.3)

(4%)

 

1 All figures reflect the H1 2019 period except Net debt of US$561.3m which was the position as at 31 December 2019

§ Total gold produced increased 42% : 320.6koz (H1 2019: 225.0koz), including 178.0koz from the processing of own and third-party refractory gold concentrates at the POX Hub

§ Total gold sales increased 39% : 312.4koz (H1 2019: 225.0koz) driven by the increase in gold production

§ Average realised gold price increased 28% : US$1,640/oz (H1 2019: US$1,286/oz) driven by higher gold prices and zero impact from the Company's hedging arrangements which compares to a H1 2019 hedging loss of US$(26)/oz

§ Total Cash Costs (TCC) increased 27% : US$983/oz (H1 2019: US$774/oz) primarily due to higher costs associated with third-party gold concentrate

§ Total Cash Costs from own material have marginally increased by 3% : US$800/oz (H1 2019: US$774/oz) due to lower grades of non-refractory ore at Albyn and Malomir, lower RIP recoveries at Malomir, inflation of certain Rouble denominated costs, and an increase in mining tax rates from 1.2% to 6.0% at LLC Malomirskiy Rudnik. The increase was partly offset by higher grades and recoveries of non-refractory ore processed at Pioneer, higher grades and recoveries of refractory ore processed at Malomir and Rouble depreciation

§ All-in Sustaining Costs (AISC) increased 19% : US$1,220/oz (H1 2019: US$1,029/oz) mainly due to higher TCC as well as an increase in capitalised stripping expenditure at both Pioneer and Malomir

§ Group revenue (including non-precious operations) increased 71% : US$522.7m (H1 2019: US$305.3m) reflecting higher production volumes and a higher average gold sales price

§ Underlying EBITDA[2]increased 96% : US$192.6m (H1 2019: US$98.5m) due to higher revenues and partly offset by higher TCC

§ Headline loss for the period of US$(22.0)m : compares to a gain in H1 2019 of US$3.9m and caused by a negative non-cash adjustment of US$(122.2)m related to a fair value loss on the conversion option (H1 2019: US$(9.2)m) reflecting the increase in the Company's share price

§ Capital expenditure increased by 32%: to US$59.6m (H1 2019: US$45.0m) with expenditure focused on construction of the Pioneer and Malomir flotation plants, Elginskoye mine development and development work to support underground mining at Pioneer

§ Cash generated from operations increased by 213% : US$172.8m (H1 2019: US$55.2m) driven by higher gold sales, higher gold prices and Rouble weakness, partly offset by an increase in costs associated with the purchase of third-party concentrates and higher mining taxes

§ Net debt reduction : US$538.0m as at 30 June 2020 (31 December 2019: US$561.3m) principally driven by an increase in cash

§ Gold prepays reduction : The Company continues to prioritise settlement of the interest-bearing gold prepays which stood at c.US$121.0m as at 30 June 2020 (US$187.4m as at 31 December 2019), a net decrease of US$66.4m over the period

 

Comments from James W Cameron Jr, Chairman

This is the first report since I became Chairman of Petropavlovsk PLC ("Petropavlovsk" or the "Company"), following the Requisitioned General Meeting of 10 August 2020 (the "RGM"). Since the RGM, the Board has been steadfastly focussed on ensuring the ongoing operational stability of the Company and its subsidiaries (the "Group"). At the same time, we are making good progress in strengthening the governance of the Group and working towards our stated ambition of achieving full compliance with the UK Corporate Governance Code.

 

ASSESSMENT AND ACTIONS

First and foremost, the Company has some excellent assets in its three active gold mines and the world-class POX Hub, a dedicated workforce of highly-qualified employees, robust operational capability and significant future potential.

However, since my appointment as Chairman, it has become increasingly apparent that the substantial opportunities open to us will only be achieved when some fundamental (and largely legacy) issues are addressed, including:

· Ensuring a greater focus on providing returns to all shareholders, who have helped provide the capital for the significant projects and development of the Group.

· Taking advantage of the current pricing environment to further reduce the levels and cost of debt, which have historically been a source of instability and undervaluation.

· Introducing more robust and up-to-date systems, such as SAP, to provide the tools to control and reduce operating costs.

· Continuing to improve standards of governance and transparency across the Group. This comes both from installing relevant controls, but also in demanding integrity in behaviours, in line with our corporate values. This includes simplifying an unnecessarily complex organisational structure, with over 30 subsidiaries.

· Enlarging the Board, which following the RGM is not an appropriate size for the Company. We are actively engaged with an external consultant in appointing new members. Finding the right people with relevant skills and backgrounds will inevitably take some time. We believe that a Board of around seven to eight directors, the majority of whom are independent, would be optimal to provide sufficient diversity and allocate responsibilities effectively.

· Increasing the rigour and realism applied to budgeting and guidance procedures. This is already exemplified by the announcement on 9 October of lower production guidance for 2020, revising the numbers set out on 23 July 2020, which proved to be overly optimistic, particularly in light of the COVID-19 pandemic.

The Board and management team are committed to driving these improvements, to ensure that Petropavlovsk can deliver on its significant potential, providing improved returns and maximising value for all its shareholders.

 

DISRUPTION AND LEGAL MATTERS

As we first announced on 28 August 2020, since his appointment, the interim Chief Executive Officer has encountered a lack of co-operation from certain employees and ex-employees.  This lack of co-operation is still continuing from a very small number of senior employees and officers of the Company's subsidiaries, who appear to have been subjected to pressure to withhold certain documents and operational data from the Board and to disregard the Board's instructions in certain respects.

Further, some individuals, in particular Sergey Ermolenko and Alexey Maslovskiy (Pavel Maslovskiy's son) are pursuing litigation in Russia against certain of the Company's subsidiaries. This litigation, which has no proper legal basis, has arisen principally as a result of the Company's efforts to undo actions taken in June and July of this year, when a few key Russian subsidiaries changed their constitutional arrangements. These changes took place without the knowledge of the current Board, and apparently at the direction of Pavel Maslovskiy.

While the directors believe that these actions have had no material adverse impact on the Group's financial position and its operations to date, they are clearly not in the interests of the Group, its employees nor its many stakeholders.  Not least, the ongoing litigation has caused (and will continue to cause) the Company to incur legal and other costs, which could be more usefully deployed elsewhere.

In this context, we note that 84% of shareholders voted in favour of Resolution 19 at the RGM, which mandated the Board to commission an independent forensic investigation to review all transactions over the preceding three years which may have involved 'connected parties'. The Board is currently finalising the appointment of an independent forensic investigator as required by the terms of the Resolution. 

 

EXECUTIVE COMMITTEE

We have reconstituted our Executive Committee, which now consists of Maksim Meshcheryakov, Danila Kotlyarov, Dmitrii Chekashkin, John Smelt and Dorcas Murray.  The Executive Committee will commence a corresponding refresh of governance controls throughout the organisation.  We are delighted to have recruited John Smelt and Dorcas Murray in London to assist us with these efforts.  Once the enlarged Board is constituted and the ongoing litigations is concluded, the Board will embark on the process of appointing a permanent CEO.

Maksim Meshcheryakov has recently been unwell, as a result of COVID, but I am pleased to say that he is returning to full strength.

 

CONCLUSION

The Board is clear that, going forward, there must be a greater focus on providing returns to all shareholders, who have helped provide the capital for significant projects and development of the Group. Petropavlovsk has not declared a dividend for eight years.

The period since the RGM has been a challenging one, combining continued governance disruption and the COVID-19 pandemic. I would like to thank our employees for their resilience and hard work in the face of these difficulties. 

The Board is unwavering in its dedication to resolving the legacy issues that are currently hampering the Group from achieving its potential. We have a clear plan which will drive change and will ensure that the Company's shares more fully reflect the substantial underlying worth and potential of the business, creating value for all stakeholders.

 

Third Quarter Sales Report

Gold sales

§ A marginal 4% decrease in total gold sales to 121.1koz (Q3 2019: 126.4koz) primarily reflecting the depletion of Albyn non-refractory reserves that are planned to be replaced with Elginskoye reserves per Company development plans and also decrease of Malomir production reflecting transfer to refractory ore processing

§ Brings total gold sales for the first nine months of 2020 to 433.4koz (first nine months of 2019: 351.4koz), an increase of 23%

§ Average realised gold price increase of 38% to US$1,919/oz in Q3 2020 (Q3 2019: US$1,388/oz)

 

Gold sales '000oz

Asset

Three months to

30 Sept 2020

(Q3 2020)

Three months to

30 Sept 2019

(Q3 2019)

Nine months to

30 Sept 2020

(YTD 2020)

Nine months to

30 Sept 2019

(YTD 2019)

JSC Pokrovskiy Mine

65.5

39.8

224.4

92.6

  Pioneer

30.8

31.0

90.8

83.8

  Third-party concentrate (POX Hub)

34.7

8.8

133.6

8.8

LLC Malomirskiy Rudnik (Malomir)

29.1

39.6

110.8

132.6

LLC Albynskiy Rudnik (Albyn)

26.4

47.0

98.2

126.3

Total Group

121.1

126.4

433.4

351.4

 

Note: Numbers may not add up due to rounding effect

Net debt

§ Net debt (unaudited) reduced by c.US$56.8m to c.US$481.2m as of 30 September 2020 (30 June 2020: US$ 538.0m) principally reflecting partial conversion of the US$125 million Convertible Bonds

§ The Company continues to prioritise settlement of the interest-bearing gold prepays which stood at c.US$ 72.3m as at 30 September 2020 (US$121.0m as at 30 June 2020), a net decrease of US$48.7m for the third quarter

COVID-19 Update

§ The Company continues to implement strict quarantine and safety measures at all its operations with remote working practices established at offices in Moscow, Blagoveshchensk and London

§ At the time of reporting, there have been 29 reported cases among the Company's employees, the majority of which have been at the Company's offices in the far east of Russia with a small number of cases reported at the Albyn mine

§ All affected employees are self isolating or receiving medical care

FY 2020 Outlook

The outlook for the full year 2020, assuming no further significant disruption arising from the current COVID-19 pandemic, is as follows:

Total Group Production (includes processing of third-party refractory concentrates):

§ Between 560koz to 600koz (versus previous forecasts of 620koz to 720koz)

Gold production (Company's own ore):

§ Between 395koz and 415koz (versus previous 430koz to 460koz)

§ Lower grades from Malomir underground and slower development of underground operations at the Andreevskaya zone at Pioneer

TCC (Company's own gold production):

§ Between US$800/oz and US$850/oz (versus previous US$700/oz to US$800/oz)

§ Lower production and higher unit costs at the POX Hub due to lower throughput following the delay to the start-up of the Pioneer flotation plant

Capital Expenditure:

§ Between US$90m to US$100m (versus previous US$70m to $80m)

§ Reclassification of part of Pioneer underground workings as Capex, accelerated expenditure on the Malomir flotation plant expansion and POX related upgrade expenditure

IRC Update

Petropavlovsk is a major shareholder in IRC (31.1%), a Hong-Kong-listed producer and developer of industrial commodities

On 23 October 2020, IRC Limited released its Q3 2020 trading update, confirming that US$8.8m had been paid during the quarter to Gazprombank as principal repayment and interest. This is in accordance with the repayment schedule for the facility agreements guaranteed by Petropavlovsk

On 26 August 2020, IRC released its interim results for the six months ended 30 June 2020. The results are available to view on the IRC website at http://www.ircgroup.com.hk

Key highlights from the report are as follows:

Financials

§ Revenue increased by 19% to US$106.2m (30 June 2019: US$89.2m)

§ Cash cost down by 4.7% to US$48.8/t (30 June 2019: US$51.2/t)

§ EBITDA has more than doubled, increasing to US$33.2m (30 June 2019: US$13.2m)

§ Profit of US$5.9m (30 June 2019: loss of US$25.2m)

Operations

§ 14.3% and 11.4% improvement in production and sales respectively over the same period in 2019

§ Stable production capacity of 89% (30 June 2019: 78%)

§ K&S operated at more than 90% capacity in July and the early part of August. Planned ball mill maintenance and a period of heavy rains affected production in August. Normal production has now been resumed, month-to-date capacity of c.80%.

§ Impact of COVID-19 not as yet significant

  Conference Call and Webcast

The Company's Chief Financial Officer will host a webcast conference to present the Company's financial results today at 09:00 GMT (12:00 Moscow). Details of the webcast can be accessed via the following link: https://www.lsegissuerservices.com/spark/Petropavlovsk/events/02cfaef0-7753-4ad4-b1ff-a6e9393dcd0b

About Petropavlovsk

Petropavlovsk PLC (LSE: POG. MOEX: POGR) is a major integrated Russian gold producer with JORC Resources of 21.03Moz Au which include Reserves of 8.46Moz Au. Following its IPO on the Alternative Investment Market (AIM) in 2002, Petropavlovsk was promoted to the London Stock Exchange in 2009, where today it is a Premium Listed company and a constituent of the FTSE 250, FTSE 350 and FTSE All Share indices. The Company's shares also trade on the Moscow Exchange and are a constituent of the flagship RTS / MOEX index.

Petropavlovsk's key operating mines (Pioneer, Malomir and Albyn) are in the Amur Region in the Russian Far East. Petropavlovsk has produced a total of c.8.1Moz of gold since operations began in 1994 and has a strong track record of mine development, expansion and asset optimisation.

The Group recently entered a new era of growth following the successful commissioning and start-up of its flagship asset, the Pressure Oxidation (POX) Hub at Pokrovskiy, which enables the processing of the Company's abundant refractory reserves and resources.

Petropavlovsk is one of the region's largest employers and one of the largest contributors to the sustainable development of the local economy.

For more information

 

Please visit www.petropavlovsk.net and www.ircgroup.com.hk or contact:

 

Petropavlovsk PLC 

Patrick Pittaway / Max Zaltsman / Viktoriya Kim

+44 (0) 20 7201 8900

[email protected]

Citigroup Global Markets Limited

Tom Reid / Andrew Miller-Jones

+44 (0) 20 7986 4000

UBS Investment Bank

David Roberts / Alistair Smith

+44 (0) 20 7567 8000

Hudson Sandler

Charlie Jack / Katerina Parker / Elfie Kent

+44 (0) 20 7796 4133

[email protected]

Citigroup Global Markets Limited ("Citi") is authorised by the Prudential Regulation Authority and regulated in the UK by the Financial Conduct Authority and the Prudential Regulation Authority. UBS AG London Branch ("UBS") is authorised and regulated by the Financial Market Supervisory Authority in Switzerland. It is authorised by the Prudential Regulation Authority and subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority in the United Kingdom. Citi and UBS are acting exclusively for Petropavlovsk PLC ("Petropavlovsk") and for no-one else in connection with the contents of this announcement and will not be responsible to anyone other than Petropavlovsk for providing the protections afforded to clients of Citi or UBS for providing advice in relation to the contents of this announcement or any matters referred to herein.

 

 

Cautionary note on 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 future price of gold, the Group's results of operations, financial position, liquidity, prospects, growth, estimation of mineral reserves and resources and strategies, and exchange rates and the expectations of the industry. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances outside the control of the Group. 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 results and/or developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, the impact of the current Covid-19 pandemic, general economic and business conditions, demand, supply and prices for gold and other long-term commodity price assumptions (and their effect on the timing and feasibility of future projects and developments), trends in the gold mining industry and conditions of the international gold markets, competition, actions and activities of governmental authorities (including changes in laws, regulations or taxation), currency fluctuations (including as between the US Dollar and Rouble), the Group's ability to recover its reserves or develop new reserves, changes in its business strategy, any litigation, and political and economic uncertainty. Except as required by applicable law, rule or regulation (including the Listing and Disclosure Guidance and Transparency Rules), the Group does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Past performance cannot be relied on as a guide to future performance. The content of websites referred to in this announcement do not form part of this announcement.

 

 

 

Financial Review

 

Note: Figures may not add up due to rounding

 

Financial Highlights

 

 

 

H1 2020

H1 2019

 

Gold produced

'000oz

320.6

225.0

Gold sold 

'000oz

312.4

225.0

Group revenue

US$ million

522.7

305.3

Average realised gold price¨

US$/oz

1,640

1,286

Average LBMA gold price afternoon fixing

US$/oz

1,645

1,307

Total Cash Costsu(a)

US$/oz

983

774(c)

All-in Sustaining Costsu (b)

US$/oz

1,220

1,029(c)

All-in Costsu (b)

US$/oz

1,325

1,091

Underlying EBITDAu

US$ million

192.6

98.5(c)

Operating profit

US$ million

146.1

2.5

Profit before tax

US$ million

16.5

7.2(d)

(Loss)/profit for the period

US$ million

(22.0)

3.9(d)

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

US$ million

(23.9)

4.7(d)

Basic (loss)/profit per share (d)

US$

(0.01)

0.00(d)

Cash generated from operations before working capital changes

US$ million

183.3

85.8

Net cash from operating activities

US$ million

112.1

11.9(c)

(a)  Calculation of Total Cash Costsu ("TCC") is set out in the section Hard rock mines below.

(b)  All-in Sustaining Costsu ("AISC") and All-in Costsu ("AIC") are calculated in accordance with guidelines for reporting All-in Sustaining Costsu and All-in Costsu published by the World Gold Council. Calculation is set out in the section All-in Sustaining Costsu and All-in Costsu below.

(c)  Following a review of the nature of the deferred stripping costs the Group has made a reclassification of deferred stripping costs balance from the Inventory balance into the Mining assets within Property, plant and equipment. Comparative information on TCC, AISC, EBITDA and Net cash from operating activities for H1 2019 have been re-calculated accordingly to reflect the effect of the aforementioned re-classification. Please refer to note 2 in the condensed consolidated interim financial statements for further details.

(d)  In the condensed consolidated interim financial statements for the six months ended 30 June 2019 the fair value of the call option over non-controlling interests, net of the remaining unpaid premium, was recognised at US$16.2 million, comprising the initial gain of US$9.6 million, a revaluation loss of US$(0.4) million and the premium paid to date of US$7.0 million, with a corresponding net gain of US$9.2 million recognised within Net other finance gains and losses in the statement of profit or loss. After further analysis and consideration of the IFRS 9 application guidance (which prohibits the recognition of day 1 gains based on valuation techniques that use unobservable inputs), this economic gain previously recognised in the period ended 30 June 2019 has been deferred for accounting purposes in the consolidated financial statements for the year ended 31 December 2019. The comparative financial information has been aligned to be on a consistent basis by restating the comparative amounts. Please refer to note 2 in the condensed consolidated interim financial statements for further details.

 

 

 

30 June2020

31 December 2019

  Cash and cash equivalents

US$ million

73.5

48.2

  Notes(a)

US$ million

(501.1)

(500.4)

  Convertible bonds (b)

US$ million

(110.4)

(109.1)

  Net Debtu

US$ million

(538.0)

(561.3)

(a)  US$500 million Guaranteed Notes due on 14 November 2022 at amortised cost.

(b)  US$125 million convertible bonds due on 03 July 2024 at amortised cost.

 

 

Revenue

 

 

H1 2020

H1 2019

 

 

US$ million

US$ million

Revenue from hard rock mines

 

512.3

290.0

Revenue from other operations

 

10.4

15.3

 

 

522.7

305.3

 

Group revenue during the period was US$522.7 million, 71% higher than the US$305.3 million achieved in H1 2019.

 

Revenue from hard rock mines was US$512.3 million, 77% higher than the US$290.0 million achieved in H1 2019. Gold remains the key commodity produced and sold by the Group, comprising 98% of total revenue generated in H1 2020. The physical volume of gold sold from hard rock mines increased by 39% from 225,031 oz in H1 2019 to 312,354 oz in H1 2020. The average realised gold priceu increased by 28% from US$1,286/oz in H1 2019 to US$1,640 /oz in H1 2020. The average realised gold priceu was not affected by hedge arrangements (H1 2019: US$(26)/oz).

 

There were no sales of silver in H1 2020, compared to 42,976 oz in H1 2019 at an average price of US$15/oz.

 

Revenue generated as a result of third-party work by the Group's in-house service companies was US$10.4 million in H1 2020, a US$(4.9) million decrease compared to US$15.3 million in H1 2019. This revenue is substantially attributable to sales generated by the Group's engineering and research institute, Irgiredmet, primarily through engineering services and the procurement of materials, consumables and equipment for third parties, which comprised US$9.0 million in H1 2020 compared to US$13.0 million in H1 2019.

 

Cash flow hedge arrangements

 

In March 2020 the Group has entered into a number of gold option contracts and currency option contracts, in both cases structured as zero cost collars where the Company purchased a put option and sold a call option, in order to increase certainty in respect of a proportion of its operating cash flows.

 

Zero cost collars for the underlying aggregate of US$21 million (US$7 million per month for the period April to June 2020) with a RUB:USD exercise price of RUB75.00 for put options and a RUB:USD exercise price in the range of between RUB90.65 and RUB100.00 for call options matured during H1 2020 and resulted in US$0.9 million net cash settlement received by the Group. Zero cost collars for the underlying aggregate of US$126 million (US$7 million per month until December 2021) with a RUB:USD exercise price of RUB75.00 for put options and a RUB:USD exercise price in the range between RUB90.65 and RUB100.00 for call options were outstanding as at 30 June 2020.

 

Zero cost collars for the underlying aggregate of 10,500oz of gold (3,500 oz of gold per month for the period from April to June 2020) with an exercise price of US$1,600/oz for put options and US$1,832/oz for call options matured during H1 2020 and expired unexercised. In H1 2019 the Group used gold forward contracts as cash flow hedge arrangements which resulted in US$(6.0) million net cash settlement paid by the Group on forward contracts to sell 99,984 oz of gold. Zero cost collars for the underlying aggregate of 63,000 oz of gold (3,500 oz of gold per month until December 2021) with an exercise price of US$1,600/oz for put options and US$1,832/oz for call options were outstanding as at 30 June 2020.

 

Corresponding fair values for gold and currency option contracts are disclosed in note 16 to the Group's consolidated interim financial statements for the six months ended 30 June 2020.

 

Underlying EBITDA¨ and analysis of operating costs

 

 

 

 

H1 2020

H1 2019

 

 

US$ million

US$ million

(Loss)/profit for the period

(22.0)

3.9

Add/(less):

 

 

Net impairment losses/(impairment reversals) on financial instruments

1.3

(33.1)

Investment and other finance income

(4.0)

(4.9)

Interest expense

33.4

26.0

Net other finance losses (a) 

98.9

7.4

Foreign exchange (gains)/losses

(26.7)

14.0

Taxation

38.5

3.2

Depreciation

64.7

69.2

Reversal of impairment of ore stockpiles

-

(0.8)

Reversal of impairment of gold in circuit

-

(0.1)

Share of results of associates (b) 

8.6

13.7

Underlying EBITDAu

192.6

98.5

    

(a)  Including US$(122.2) million fair value loss from re-measurement of the conversion option of the convertible bonds.

(b)  Group's share of interest expense, investment income, other finance gains and losses, foreign exchange gains/losses, taxation, depreciation and impairment/reversal of impairment recognised by an associate (IRC).

 

Underlying EBITDAu as contributed by business segments is set out below.

 

 

 

 

H1 2020

H1 2019

 

US$ million

US$ million

Pioneer

59.3

12.4

Malomir

70.9

44.9

Albyn

75.0

57.9

Total Hard rock mines

205.1

115.2

Corporate and other

(12.5)

(16.7)

Underlying EBITDAu

192.6

98.5

    

 

 

Hard rock mines 

 

During this period, hard rock mines generated Underlying EBITDAu of US$205.1 million compared to US$115.2 million Underlying EBITDA in H1 2019.

 

Total Cash Costsu for hard rock mines increased from US$774/oz in H1 2019 to US$983/oz in H1 2020.

 

The marginal increase in Total Cash Costs from own material from US$774/oz in H1 2019 to US$800/oz in H1 2020 primarily reflects the effect of lower grades of non-refractory ore processed at Albyn and Malomir and lower recoveries achieved at Malomir, the effect of inflation of certain Rouble denominated costs, and mining tax rates as set out below. This effect was partially mitigated by the effect of higher grades and recoveries of non-refractory ore processed at Pioneerand the effect of higher grades and recoveries of refractory ore processed at Malomir, as well as by the effect of Rouble depreciation.

 

Total Cash Costs from 3d parties concentrate in H1 2020 was US$1,380/oz (in H1 2019 no 3d parties concentrate was processed at POX Hub). Total Cash Costs from 3d parties concentrate is directly dependent on gold price that has significantly increased over H1 2020.

 

The increase in physical ounces sold from 225,031oz in H1 2019 to 312,354oz in H1 2020 resulted in US$44.7 million increase in the Underlying EBITDAu. The increase in the average realised gold priceu from US$1,286/oz in H1 2019 to US$1,640/oz in H1 2020 contributed to a further US$110.6 million increase in the Underlying EBITDAu. This effect was partly offset by the increase in TCC¨ with US$(65.4) million negative contribution to the Underlying EBITDA¨, primarily resulted from the higher TCC of the 3rd parties concentrate

 

The key components of the operating cash expenses are wages, electricity, diesel, chemical reagents and consumables, as set out in the table below. The key cost drivers affecting the operating cash expenses are production volumes of ore mined and processed, grades of ore processed, recovery rates, cost inflation and fluctuations in the Rouble to US Dollar exchange rate.

 

The Rouble depreciated against the US Dollar by 6% in H1 2020 compared to H1 2019, with the average exchange rate for the period of 69.42 Roubles per US Dollar in H1 2020 compared to 65.20 Roubles per US Dollar in H1 2019, somewhat mitigating the effect of Rouble denominated costs inflation.

 

Refinery and transportation costs are variable costs dependent on production volume. Mining tax is also a variable cost dependent on production volume and the gold price realised. The Russian statutory mining tax rate is 6%. Under the Russian Federal Law 144-FZ dated 23 May 2016 that introduced certain amendments to the Russian Tax Code, taxpayers who are participants in Regional Investment Projects ("RIP") have the right to apply the reduced mining tax rate provided certain conditions are met. JSC Pokrovskiy Rudnik and LLC Malomirskiy Rudnik applied full mining tax rate in H1 2020, resulting in US$15.2 million mining tax expense compared to US$6.7 million in H1 2019 when 1.2% mining tax rate was applied by both LLC Albynskiy Rudnik and LLC Malomirskiy Rudnik.

 

 

 

 

H1 2020

 

H1 2019

 

 

US$ million

%

 

US$ million

%

 

Staff cost

 

40.8

15

 

40.8

25

 

Materials

 

40.8

15

 

42.4

26

 

Flotation concentrate purchased

 

130.2

47

 

-

-

 

Fuel

 

17.5

6

 

22.5

14

 

Electricity

 

17.7

6

 

17.0

10

 

Other external services

 

18.1

6

 

28.3

17

 

Other operating expenses

 

12.9

5

 

12.5

8

 

 

 

278.1

100

 

163.5

100

 

Movement in ore stockpiles, gold in circuit, bullion in process, limestone and flotation concentrateattributable to gold production

 

9.3

 

 

0.8

 

 

Total operating cash expenses

 

287.4

 

 

164.4

 

 

 

 

 

 

 

 

 

 

Hard rock mines

H1 2020

H1 2019

 

Pioneer

Malomir

Albyn

Total

Total

 

 

US$

million

US$

million

US$

million

US$

million

US$

million

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

Gold

  258.4

  136.4

  117.6

  512.3

289.4

 

Including:

 

 

 

 

 

 

Gold from own material

99.6

136.4

117.6

353.6

289.4

 

Gold from 3d parties concentrate

158.8

-

-

158.8

-

 

Silver

-

-

-

-

0.7

 

 

  258.4

  136.4

  117.6

  512.3

290.0

 

Expenses

 

 

 

 

 

 

Operating cash expenses 

  191.5

  55.7

  40.2

  287.4

164.4

 

Refinery and transportation

  0.3

  0.1

  0.1

  0.5

0.4

 

Other taxes

  1.2

  2.1

  0.9

  4.1

3.4

 

Mining tax

  6.1

  7.7

  1.4

  15.2

6.7

 

Depreciation

  23.0

  23.9

  16.6

  63.5

68.5

 

Reversal of impairment of ore stockpiles and gold in circuit

-

(0.1)

-

(0.1)

(0.9)

 

Operating expenses

  222.1

  89.4

  59.2

  370.7

242.4

 

Result of precious metals operations 

  36.3

  47.0

  58.4

  141.7

47.6

 

 

 

 

 

 

 

 

Add/(less):

 

 

 

 

 

 

Depreciation

  23.0

  23.9

  16.6

  63.5

68.5

 

Reversal of impairment of ore stockpiles and gold in circuit

-

(0.1)

-

(0.1)

(0.9)

 

Segment EBITDA¨

  59.3

  70.9

  75.0

  205.1

115.2

 

 

 

 

 

 

 

 

Physical volume of gold sold, oz

158,844

81,726

71,785

312,354

225,031

 

Including:

 

 

 

 

 

 

Gold sold from own material, oz

59,925

81,726

71,785

213,436

225,031

 

Gold sold from 3d parties concentrate, oz

98,919

-

-

98,919

-

 

 

 

 

 

 

 

 

Cash costs

 

 

 

 

 

 

 

Operating cash expenses 

  191.5

  55.7

  40.2

  287.4

164.4

 

Refinery and transportation

  0.3

  0.1

  0.1

  0.5

0.4

 

Other taxes

  1.2

  2.1

  0.9

  4.1

3.4

 

Mining tax

  6.1

  7.7

  1.4

  15.2

6.7

 

Operating cash costs

  199.1

  65.5

  42.6

  307.2

174.8

 

Deduct: co-product revenue

  - 

  - 

  - 

  - 

(0.7)

 

Total Сash Сostsu

  199.1

  65.5

  42.6

  307.2

174.2

 

Including:

 

 

 

 

 

 

Total cash costs from own material

62.6

65.5

42.6

170.7

174.2

 

Total cash costs from 3d parties concentrate

 

 

 

 

 

 

concentrate

136.5

-

-

136.5

-

 

 

 

 

 

 

 

 

TCCu, US$/oz

  1,253

  802

  593

  983

774

 

TCC from own material, US$/oz

1,045

802

593

800

774

 

TCC from 3d parties concentrate, US$/oz

1,380

-

-

1,380

-

 

 

 

 

 

 

 

 

           

 

All-in Sustaining Costsu  and All-in Costsu

 

AISCu increased from US$1,029/oz in H1 2019 to US$1,220/oz in H1 2020. The increase in AISCu primarily reflects increase in TCCu and increase in capitalized stripping expenditure during the period at Pioneer and Malomir. This effect was partially offset by the increase in physical ounces sold in H1 2020 with an aggregate of sustaining capital expenditures related to the existing mining operations, underground mining projects at Pioneer and Malomir, POX project, and Malomir flotation plant remaining at approximately the same level as the aggregate of sustaining capital expenditures in H1 2019.

 

AICu increased from US$1,091/oz in H1 2019 to US$1,325/oz in H1 2020, reflecting the increase in AISCu explained above, development expenditure in relation to Pioneer flotation plant and Elginskoye infrastructure. This effect was partially offset by decrease in Capital Expenditureu in relation to the POX project, with POX Hub commissioned in 2019 and being considered as sustaining in the period.

 

 

 

Hard rock mines

H1 2020

H1 2019

 

 

Pioneer

Malomir

Albyn

Total

Total

 

US$

million

US$

million

US$

million

US$

million

US$

million

 

 

 

 

 

 

Physical volume of gold sold, oz

  158,844

  81,726

  71,785

  312,354

225,031

 

 

 

 

 

 

Total Cash Costsu

  199.1

  65.5

  42.6

  307.2

174.2

 

 

 

 

 

 

TCCu, US$/oz

  1,253

  802

  593

  983

774

 

 

 

 

 

 

Reversal of impairment of ore stockpiles and gold in circuit

-

(0.1)

-

(0.1)

(0.9)

Adjusted operating costs

  199.1

  65.5

  42.6

  307.1

173.2

 

 

 

 

 

 

Central administration expenses

  10.5

  5.4

  4.8

  20.7

22.0

Capitalised stripping

  13.0

  10.7

  - 

  23.7

4.9

Close-down and site restoration

  0.6

  - 

  0.1

  0.7

0.5

Sustaining exploration expenditures

  0.4

  - 

  0.2

  0.5

3.4

Sustaining Capital Expenditure

  12.4

  10.6

  3.2

  26.2

27.6

Sustaininglease

0.1

1.0

0.9

2.1

-

All-in Sustaining Costsu

  236.1

  93.3

  51.6

  381.0

231.7

 

 

 

 

 

 

All-in Sustaining Costsu, US$/oz

  1,487

  1,141

  718

  1,220

1,029

 

 

 

 

 

 

Exploration Expenditureu

  (0.0)

  1.3

  3.4

  4.6

4.8

Capital Expenditureu

  16.1

  - 

  12.1 

  28.2

9.2

All-in Costsu

  252.2

  94.6

  67.0

  413.8

245.6

 

 

 

 

 

 

All-in Costsu, US$/oz

  1,588

  1,157

  934

  1,325

1,091

 

 

 

 

 

 

        

 

 

Corporate and other

 

Corporate and other operations contributed US$(12.5) million to Underlying EBITDA¨ in H1 2020 compared to US$(16.7) million in H1 2019. Corporate and other operations primarily include central administration function, result of in-house service companies and the Group's share of results of its associate IRC.

 

The Group has corporate offices in London, Moscow and Blagoveschensk, which together represent the central administration function. Central administration expenses decreased by US$1.3 million from US$22.0 million in H1 2019 to US$20.7 million in H1 2020.

 

The Group's share of profit generated by IRC is US$1.8 million (H1 2019: US$(7.9) million share of losses generated by IRC). IRC contributed US$ 10.5 million to the Group's Underlying EBITDAu in H1 2020 (H1 2019: US$5.8 million).

 

 

Impairment review

 

Impairment of mining assets

 

As at 30 June 2020 and 30 June 2019, the Group identified no impairment indicators or indicators of impairment reversal for the cash generating units related to its gold mining projects and supporting in-house service companies.

 

As at 31 December 2019, the Group recognised impairment reversals at the Pioneer CGU and the supporting in-house service companies of US$43.5 million (US$34.8 million post-tax) and US$9.4 million (US$7.8 million post-tax), respectively.

 

Impairment of exploration and evaluation assets

 

As at 30 June 2020, the Group performed a review of its exploration and evaluation assets and concluded no impairment was required (31 December 2019: the Group performed a review of its exploration and evaluation assets and concluded no impairment was required). Exploration and evaluation assets in the statement of financial position relate to the areas adjacent to the existing mines.

 

 

Investment and other finance income  

 

 

 

H1 2020

H1 2019

 

 

 

US$ million

US$ million

Investment income (a)

 

0.6

2.5

Guarantee fee income (b)

 

3.4

2.4

 

 

4.0

4.9

(a)  Interest income on bank deposits.

(b)  Guarantee fee income under Gazprombank Guarantee arrangements, as set out in section "Corporate activities" below.

 

 

Interest expense

 

 

 

H1 2020

H1 2019

 

 

US$ million

US$ million

Interest expense

 

34.0

35.1

Interest capitalised

 

(1.0)

(9.4)

Other

 

0.4

0.3

 

 

33.4

26.0

 

Interest expense for the period comprised of US$21.0 million effective interest on the Notes, US$6.5 million effective interest on the Convertible Bonds, US$6.3 million interest on prepayments on gold sale agreements and US$0.3 million interest on finance lease (H1 2019: US$20.8 million effective interest on the Notes, US$6.4 million effective interest on the Convertible Bonds, US$7.7 million interest on prepayments on gold sale agreements and US$0.3 million interest on finance lease).

 

As the Group continued with construction of flotation line at Pioneer, this project met eligibility criteria for borrowing costs capitalization under IAS 23 "Borrowing Costs" with US$1.0 million of interest expense capitalized within property, plant and equipment (H1 2019: US$9.4 million of interest expense was capitalised within property, plant and equipment in relation to POX Hub and Malomir flotation). With all four autoclaves of the POX Hub fully functional, interest capitalisation in relation to POX Hub ceased in December 2019, with increase in net interest expense from December 2019 onwards.

 

Net other finance gains/(losses)

 

Net other finance losses for the period totalled US$(98.9) million compared to US$(7.4) million of net other finance losses in H1 2019. Key elements of other finance gains and losses this period include:

 

US$(122.2) million fair value non-cash loss from re-measurement of the conversion option of the convertible bonds, reflecting the increase in the underlying share price of the Company;

US$20.6 million fair value gain on the call option to acquire 25% interest in the Group's subsidiary LLC TEMI from its current shareholder as set out in section "Corporate activities" below, reflecting the gold price increase;

US$3.1 million fair value gain on gold and currency option contracts;

US$(0.3) million net loss on other items.

 

Net impairment reversals/ (impairment losses) on financial instruments

 

In H1 2020, the Group recognised a US$1.3 million increase in the provision for expected credit losses under Gazprombank guarantee arrangements (H1 2019: net of US$30.1 million reversal of provision for expected credit losses under Gazprombank and ICBC guarantee arrangements and US$3.0 million revesal of impairment of financial assets).

 

Taxation

 

 

 

H1 2020

H1 2019

 

 

US$ million

US$ million

Tax charge

 

38.5

3.2

 

The Group is subject to corporation tax under the UK, Russia and Cyprus tax legislation. The statutory tax rate for H1 2020 was 19% in the UK and 20% in Russia.

 

The tax charge for the period primarily related to the Group's gold mining operations and is represented by a current tax charge of US$25.1 million (H1 2019: US$12.3 million) and a deferred tax charge, which is a non-cash item, of US$13.4 million (H1 2019: deferred tax credit of US$9.1 million). Included in the deferred tax charge in H1 2020 is a US$23.7 million charge (H1 2019: US$16.3 million credit) from the effect of foreign exchange which primarily arises because the tax base for a significant portion of the future taxable deductions in relation to the Group's property, plant and equipment are denominated in Russian Roubles, whilst the future depreciation charges associated with these assets will be based on their US Dollar carrying value. The effective tax rate is also affected by expenses that are not deductible for tax purposes which primarily relate to fair value loss on re-measurement of the conversion option of the Convertible Bonds, effect of tax losses for which no deferred income tax asset was recognised which primarily relate to interest expense incurred in the UK and Russian withholding tax on intercompany dividends.

 

During the period, the Group made corporation tax payments in aggregate of US$28.5 million in Russia (H1 2019: corporation tax payments in aggregate of US$16.6 million in Russia).

 

 

 

Earnings per share

 

 

H1 2020

US$ million

H1 2019

US$ million

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

 

US$(23.9) million

 

US$4.7 million

Weighted average number of Ordinary Shares

3,310,369,237

3,308,154,243

Basic (loss)/profit per ordinary share

US$(0.01)

US$0.00

 

Basic loss per share for H1 2020 was US$(0.01) compared to US$0.00 basic profit per share for H1 2019.

 

The total number of Ordinary Shares in issue as at 30 June 2020 was 3,310,369,237 (30 June 2019: 3,308,154,243).

 

 

Financial position and cash flows

 

 

30 June 2020

31 December 2019

 

US$ million

US$ million

Cash and cash equivalents

73.5

48.2 

Notes (a)

(501.1)

(500.4)

Convertible bonds (b)

(110.4)

(109.1)

Net Debt¨

(538.0)

(561.3)

 

(a) US$500 million Guaranteed Notes due on 14 November 2022 at amortised cost.

(b) US$125 million convertible bonds due on 03 July 2024 at amortised cost.

 

 

 

H1 2020

H1 2019

 

US$ million

US$ million

Net cash from operating activities

  112.1 

11.9

Net cash (used in)/from investing activities (c)

(82.7)

1.5

Net cash used in financing activities

(2.0)

(2.8)

 

(c) Including US$59.6 million cash CAPEX (H1 2019: US$45.0 million)¨.

 

 

 

 

Key movements in cash and Net Debtu

 

 

Cash

Debt

Net Debtu

 

 

US$ million

US$ million

US$ million

 

As at 1 January 2020

48.2

(609.5)

(561.3)

 

Net cash generated by operating activities before working capital changes

183.3

 

 

 

Decrease in working capital

(10.5)

 

 

 

Corporation tax paid

(28.5)

 

 

 

Capital Expenditureu

(59.6)

 

 

 

Capitalized stripping

(23.7)

 

 

 

Interest accrued

 

(27.4)

 

 

Interest paid

(32.1)(d)

25.5

 

 

Interest received

0.6

 

 

 

Other

(4.2)

 

 

 

As at 30 June 2020

73.5

(611.4)

(538.0)

 

(d)  Including US$6.3 million interest paid in relation to advance payments from Gazprombank and Sberbank. 

 

 

Capital Expenditure ¨

 

The Group invested an aggregate of US$59.6 million in H1 2020 compared to US$45.0 million in H1 2019. The key areas of focus in this period were on Pioneer and Malomir flotation, Elginskoye mine development and development to support the underground mining at Pioneer. The Group capitalised US$1.0 million of interest expense incurred in relation to the Group's debt into the cost of the Pioneer flotation (H1 2019: US$9.4 million into the cost of the POX Hub and Malomir flotation).

 

 

Exploration expenditure

Development expenditure and other CAPEXu

Total

CAPEXu

 

 

US$ million

US$ million

US$ million

POX (a)

-

4.2

4.2

Pioneer (b), (c)

0.4

24.1

24.5

Malomir(d), (e)

1.3

6.8

8.1

Albyn(f)

3.5

14.1

17.6

Corporate and in-house services

-

5.2

5.2

 

5.2

54.4

59.6

(a)  Including US$4.2 million of development expenditure in relation to the POX Hub which is considered to be sustaining Capital Expenditure for the purposes of calculating AISC and AIC.

(b)  Including US$5.6 million of expenditure in relation to the underground mining project at Pioneer to be sustaining Capital Expenditure for the purposes of calculating AISC and AIC.

(c)  Including US$ 16.1 million development expenditure in relation to the Pioneer flotation (including tailing dams) to be non-sustaining Capital Expenditure for the purposes of calculating the AISC and AIC.

(d)  Including US$0.6 million of development expenditure in relation to the underground mining project at Malomir to be sustaining Capital Expenditure for the purposes of calculating AISC and AIC.

(e)  Including US$4.9 million of development expenditure in relation to Malomir flotation (including tailing dams), which is considered to be sustaining Capital Expenditure for the purposes of calculating AISC and AIC.

(f)  Including US$3.4M of exploration expenditure in relation to Elginskoye, US$5.8M of development expenditure in relation to road between Elginskoye and Albyn processing facilities and US$6.3M of development expenditure in relation to tailing dam for Elginskoye project, which are considered to be non-sustaining  Capital Expenditure for the purposes of calculating AISC and AIC.

 

 

 

 

 

 

 

 

 

Foreign currency exchange differences

 

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

 

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

 

 

 

30 June 2020

31 December 2019

GB Pounds Sterling (GBP: US$)

 

0.81

 

0.75

Russian Rouble (RUB: US$)

 

69.95

 

61.91

 

The Rouble depreciated by 13% against the US Dollar during H1 2020, from RUB61.91: US$1 as at 31 December 2019 to RUB69.95: US$1 as at 30 June 2020. The average period-on-period depreciation of the Rouble against the US Dollar was approximately 6%, with the average exchange rate for H1 2020 being RUB69.42: US$1 compared to RUB65.20 : US$1 for H1 2019. The Group recognised foreign exchange gains of US$27.9 million in H1 2020 (H1 2019: US$14.0 million losses) arising primarily on Rouble denominated net monetary liabilities (including advance payments received from Gazprombank and Sberbank under gold sales agreements).

 

 

Corporate activities

 

Guarantee over IRC's external borrowings

 

The Group historically entered into an arrangement to provide a guarantee over its associate's, IRC, external borrowings, the ICBC Facility ('ICBC Guarantee'). Under the terms of the arrangement the Group was entitled to receive an annual fee equal to 1.75% of the outstanding amount. As at 30 June 2020 the remaining outstanding contractual guarantee fee was US$5.0 million, which had a corresponding fair value of US$4.7 million and is payable by IRC no later than 31 December 2020 (31 December 2019: outstanding contractual guarantee fee of US$5.0 million with corresponding fair value after provision for credit losses of US$4.4 million).

 

In March 2019, IRC has refinanced the ICBC Facility through entering into a US$240 million new facility with Gazprombank ('Gazprombank Facility'). The facility was fully drawn down during the year ended 31 December 2019. The outstanding loan principal was US$214 million as at 30 June 2020.

 

A new guarantee was issued by the Group over part of the Gazprombank Facility ('Gazprombank Guarantee'), the guarantee mechanism is implemented through a series of five guarantees that fluctuate in value through the eight-year life of the loan, with the possibility of the initial US$160 million principal amounts guaranteed reducing to US$40 million within two to three years, subject to certain conditions being met. For the final two years of the Gazprombank Facility, the guaranteed amounts will increase to US$120 million to cover the final principal and interest repayments. If certain springing recourse events transpire, including default on a scheduled payment, then full outstanding loan balance is accelerated and subject to the guarantee. Under the Gazprombank Guarantee arrangements, the guarantee fee receivable is determined at each reporting date on an independently determined fair value basis, which for the six months ended 30 June 2020 was estimated at the annual rate of 3.07% for 2020 by reference to the average outstanding principal balance under Gazprombank Facility. The guarantee fee charged for six months ended 30 June 2020 was US$3.4 million, with corresponding value of US$3.2 million after provision for expected credit losses (H1 2019: US$$2.4 million, with corresponding value of $2.2 million after provision for expected credit losses).

 

The following assets and liabilities have been recognised in relation to the ICBC Guarantee and Gazprombank Guarantee as at 30 June 2020 and 31 December 2019:

 

 

 

 

30 June 2020

31 December 2019

 

US$ million

US$ million

Other receivables - ICBC Guarantee

4.7

4.4

Other receivables - Gazpombank Guarantee

8.4

5.0

Financial guarantee contract - Gazpombank Guarantee

(10.2)

(8.9)

 

 

Option to acquire non-controlling 25% interest in LLC TEMI

 

In May 2019, the Group entered into the option contract to acquire non-controlling 25% interest in LLC TEMI, holder of licenses for the Elginskoye Ore Field and Afanasievskaya Prospective Ore Area, from its shareholder Agestinia Trading Limited for an aggregate consideration of US$60 million (adjusted to US$53.5 million if certain conditions are met). The option premium payable is US$13 million, which was paid in 2019. The exercise period of the option is 730 days from 22 May 2019.

 

The Group employed an independent third-party expert to undertake the valuations of the underlying 25% interest in LLC TEMI and the call option. As at 30 June 2020, the fair value of the derivative financial asset was US$31.6 million reflecting cumulative gain on re-measurement to fair value from initial recognition in the amount of US$18.6 million and the initial US$13 million cash payment.

 

Partial conversion of US$125 million Convertible Bonds

 

During the period after 30 June 2020, the Company has received Conversion Notices in respect of the exercise of conversion rights under the US$125 million Convertible Bonds. The principal amount of the Convertible Bonds in respect of which the Conversion Notices have been served amounted to an aggregate of US$86.8 million, which, at a fixed exchange price of US$0.1350 per ordinary share, resulted in the issue and allotment of an aggregate of 642,962,951 new ordinary shares.

 

 

Going concern

 

The Group monitors and manages its liquidity risk on an ongoing basis to ensure that it has access to sufficient funds to meet its obligations. Cash forecasts are prepared regularly based on a number of inputs including, but not limited to, forecast commodity prices and the impact of hedging arrangements, the Group's mining plan, forecast expenditure and debt repayment schedules. Sensitivities are run for different scenarios including, but not limited to, changes in commodity prices, cost inflation, different production rates from the Group's producing assets and the timing of expenditure on development projects. This is done to identify risks to liquidity and enable management to develop appropriate and timely mitigation strategies. The Group meets its capital requirements through a combination of sources including cash generated from operations, advances received from customers under prepayment arrangements and external debt.

 

The Group performed an assessment of the forecast cash flows for the period of 12 months from the date of approval of the Half Year Report for the period ended 30 June 2020. As at 30 June 2020, the Group had sufficient liquidity headroom. The Group is also satisfied that it has sufficient headroom under a base case scenario for the period to December 2021. The Group has also performed projections under a layered stressed case that is based on:

a gold price, which is approximately 10% lower than the upper quartile of the average of the market consensus forecasts;

processing of third-party concentrate through POX facilities is approximately 10% lower than projected and oxide gold production from underground operations at Pioneer and Malomyr approximately 10% lower than projected; and

Russian Rouble: US Dollar exchange rate that is approximately 10% stronger than the average of the market consensus forecasts.

Following the removal of the majority of the non-executive directors and all executive directors at the Company's annual general meeting on 30 June 2020 and the requisitioned general meeting held on 10 August 2020, and the subsequent appointment of the interim CEO, the Company has encountered a lack of co-operation from certain senior employees and ex-employees in some of the Company's material Russian subsidiaries. While the directors believe that these factors have had no material adverse impact on the Group's financial position and its operations to date, the Group has further stressed its cash flow projections to reflect potential operational inefficiencies for a three-month period from November 2020, including the following:

production from gold mining operations being approximately additional 10% lower;

operating cash costs for gold mining operations being approximately additional 10% higher.

 

The results of this analysis indicate sufficient liquidity for a period of at least 12 months, including if there is underperformance at IRC Ltd (in which the Group holds a 31.1% interest). In selecting the assumptions in its cash flow stress testing, the directors have also considered the potential impact of Covid-19.

 

As at 30 June 2020, the Group had guaranteed the outstanding amounts owed by IRC Ltd to Gazprombank under a credit facility. The outstanding loan principal was US$214 million as at 30 June 2020 and the facility is subject to a $160 million guarantee given by the Group (see note 21). The directors have considered whether there is any material uncertainty that IRC will be able to repay this facility as it falls due in its overall going concern assessment. IRC projections demonstrate that IRC expects to have sufficient liquidity over the next 12 months and expects to meet its obligations under the Gazprombank facility.

 

As at 30 June 2020, the Group has outstanding debt issued under US$125 million Convertible Bonds and US$500 million Guaranteed Notes (see note 19). If the Group fails to comply with its obligations (including interest payment obligations) under the Convertible Bonds, Guaranteed Notes or Gazprombank guarantee arrangements then, if not remedied by the Group, this would result in events of default which, through cross-defaults and cross-accelerations, could cause all of the Group's indebtedness to become repayable on demand. The assessment of whether there is any material uncertainty that the Group will be able to meet its repayment and compliance obligations under debt or guarantee arrangements as they fall due is another key element of the Group's overall going concern assessment.

 

Since the requisitioned general meeting held on 10 August 2020, the Group has made changes to the boards of directors of certain material subsidiaries of the Company in Russia and reversed changes to those subsidiaries' constitutional documents which were instituted by the Group's former CEO during June and July 2020 and which had the effect of entrenching the previous management of those subsidiaries. Those changes have been challenged by certain employees and ex-employees of the Group in legal proceedings in Russia. In the view of Company legal advisors, these actions are entirely baseless and without merit. However, it may take several months for these issues to be resolved and until such time it may be difficult for the Directors to appoint new management and for the newly appointed management of the relevant subsidiaries to interact successfully with 3rd parties as a result of injunctions granted by the Russian courts pending resolution of the proceedings.

 

The Company relies on cash flows from certain Russian subsidiaries to secure repayments under its debt obligations and other ongoing expenses as they fall due. The lack of co-operation from some employees and ex-employees in certain of the Russian subsidiaries as described above has led to delays in receiving cash from those subsidiaries in circumstances where those subsidiaries have not complied fully with the requests of the Company for funds. The Company has received sufficient cash to enable it to meet its October 2020 payment obligations under US$125 million Convertible Bonds and expects to receive cash required to meet its November 2020 payment obligations under US$500 million Guaranteed Notes. The Company is seeking additional external funding sources to meet its obligations in the event that future funding from the Russian subsidiaries is not received.

 

Having taken into account the aforementioned factors and after making enquiries and considering the matters described above, the Directors have concluded that they do not constitute material uncertainties that may cast significant doubt about the ability of the Group to continue as a going concern and have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future, being at least the next 12 months from the date of approval of the Half Year Report for the period ended 30 June 2020. Accordingly, they continue to adopt the going concern basis of accounting in preparing these condensed consolidated financial statements.

 

 

 

 

 

 

 

Principal Risk and Uncertainties

The Group is exposed to a variety of risks and uncertainties which could significantly affect its business and financial results. A detailed review of the key risks facing the Group is set out in the Principal Risks and Mitigation section on pages 26 to 41 of the 2019 Annual Report, which is available on the Group's website, http://www.petropavlovsk.net. This also includes a description of the potential impact of such risks on the Group together with measures in place to manage or mitigate against each specific risk where this is within the Group's control.

The Board's view of the principal risks and uncertainties that could impact the Group for the remainder of the current financial year remains substantially unchanged save as set out below and/or in Note 2 Going concern to these financial statements.

There may be additional risks unknown to the Group and other risks, currently believed to be immaterial, which could turn out to be material. These risks, whether they materialise individually or simultaneously, could significantly affect the Group's business and financial results. The Group will continue to monitor internal and external areas of uncertainty and threat closely as well as remain vigilant on internal controls, and incorporate any further developments as part of the full-year assessment of principal risks and uncertainties.

The principal risks relate to the following:

Corporate

 

§ Legal dispute between the Company and a number of employees and ex-employees

§ Lack of co-operation of certain employees with the interim CEO and the Board

Covid-19

§ Impact of Covid-19 on the Group's employees and its operations

Operational

§ Production

§ Exploration

§ Decline in operational efficiency resulting from the Corporate matters referred to above

§ Disruption in Group reporting processes

Processing 

§ Mechanical failure of POX Hub

§ Processing of third party concentrate being lower than expected

§ Availability of underground oxide ore at Pioneer and Malomir

Financial

§ Lack of funding and liquidity including resulting from the Corporate matters referred to above

§ Gold price

§ Exchange rate

§ Guarantee of IRC's debt

Health, safety and environmental

§ POX

§ Underground mining

§ Contamination

Loss of key personnel

§ The Company is dependent on long-serving members of the senior executive and site teams

§ There have been a large number of recent changes in the senior executive team

Country/Compliance

§ The Group requires various licences and permits in order to operate 

§ Russian sovereign risks

Director's Responsibilities Statement

We confirm that to the best of our knowledge:

§ The condensed set of financial statements, which has been prepared in accordance with IAS34 "Interim Financial Reporting" as endorsed and adopted by the European Union, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the company, or the undertakings included in the consolidation as a whole as required by DTR4.2.4R

§ The interim management report includes a fair review of the information required by DTR4.2.7R (indication of important events and their impact, and description of principal risks and uncertainties for the remaining six months of the financial year); and

§ The interim management report includes a fair review of the information required on related party transactions as required by DTR4.2.8R

By order of the Board,

 

 

 

James W Cameron Jr  Danila Kotlyarov

Chairman      Chief Financial Officer

 

29 October 2020

 

 

Independent Review Report to Petropavlovsk PLC (Auditors)

Introduction

We have been engaged by Petropavlovsk plc (the Company) to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 which comprises the Condensed Consolidated Statement of Profit or Loss, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Cash Flows and related notes 1 to 25. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely for the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

Directors' responsibilities

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

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

Our responsibility

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

Scope of review

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

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

 

MHA MacIntyre Hudson

Statutory Auditor

London

29 October 2020
 

PETROPAVLOVSK PLC

Condensed Consolidated Statement of Profit or Loss

Six months ended 30 June 2020

 

 

 

 

 

Six months ended

30 June 2020

(unaudited)

Six months ended

30 June 2019

(restated) (a)  

(unaudited)

Year ended

31 December 2019

 

note

US$'000

US$'000

US$'000

Group revenue

5

522,731

305,328

741,589

Operating expenses

6

(378,440)

(294,910)

(590,853)

Share of results of associates

12

1,845

(7,905)

(35,376)

Operating profit

 

146,136

2,513

115,360

Net (impairment losses)/impairment reversals on financial instruments

7

(1,274)

 

33,093

 

30,797

Investment and other finance income

7

3,962

4,939

8,826

Interest expense

7

(33,383)

(25,979)

(59,854)

Net other finance (losses)/gains

7

(98,893)

(7,407)

(42,190)

Profitbefore taxation

 

16,548

7,159

52,939

 Taxation

8

(38,542)

(3,233)

(27,246)

(Loss)/profit for the period

 

(21,994)

3,926

25,693

Attributable to:

 

 

 

 

Equity shareholders of Petropavlovsk PLC

 

(23,934)

4,673

26,883

Non-controlling interests

 

1,940

(747)

(1,190)

Profit/(loss) per share

 

 

 

 

Basic (loss)/profit per share

9

US$(0.01)

US$0.00

US$0.01

Diluted (loss)/profit per share

9

US$(0.01)

US$0.00

US$0.01

 

(a)  See note 2 for details regarding the restatement.

 

 

 

 

 

 

PETROPAVLOVSK PLC

Condensed Consolidated Statement of Comprehensive Income

Six months ended 30 June 2020

 

 

 

 

 

 

 

 

Six months ended

30 June 2020

(unaudited)

US$'000

 

Six months ended

30 June 2019

(unaudited)

US$'000

 

 

Year ended

31 December 2019

US$'000

(Loss)/ profit for the period

 

(21,994)

3,926

25,693

Items that may be reclassified subsequently to profit or loss:

 

 

 

 

Exchange differences:

 

 

 

 

  Exchange differences on translating foreign operations

 

(2,261)

1,701

2,102

  Share of other comprehensive income/(loss) of associate

 

425

(6,386)

(1,084)

Cash flow hedges:

 

 

 

 

Fair valuelosses

 

-

(15,624)

(22,652)

Tax thereon

 

-

2,911

4,234

Transfer to revenue

 

-

5,963

31,471

Tax thereon

 

-

(1,103)

(5,865)

 

 

(1,836)

(12,538)

8,206

Total comprehensive (loss)/profit for the period

 

(23,830)

(8,612)

33,899

Attributable to:

 

 

 

 

Equity shareholders of Petropavlovsk PLC

 

(25,770)

(7,838)

35,067

Non-controlling interests

 

1,940

(774)

(1,168)

 

 

(23,830)

(8,612)

33,899

 

 

 

PETROPAVLOVSK PLC

Condensed Consolidated Statement of Financial Position

At 30 June 2020

 

 

 

 

 

note

30 June 2020

 

(unaudited)

US$'000

30 June 2019

(restated) (a)

(unaudited)

US$'000

31 December 2019

 

 

US$'000

Assets

 

 

 

 

Non-current assets

 

 

 

 

Exploration and evaluation assets

10

57,751

47,982

53,123

Property, plant and equipment

11

1,219,716

1,135,497

1, 209 , 817

Investments in associates

12

5 0 , 950

70,848

48,680

Inventories

13

64,556

51,938

60 , 257

Trade and other receivables

1 4

578

538

556

Derivative financial instruments

16

2,730

6,541

11 , 022

Other non-current assets

 

763

974

880

 

 

1,397, 0 44

1,314,318

1,384,335

Current assets

 

 

 

 

Inventories

1 3

221,554

176,135

3 07 , 773

Trade and other receivables

1 4

86,827

83 ,159

10 5 ,97 5

Current tax assets

 

10,535

4,943

5,807

Derivative financial instruments

16

37,647

-

-

Cash and cash equivalents

1 5

73,458

39,138

48,153

 

 

430,021

303,375

4 67 , 708

Total assets

 

1,827,065

1,617,693

1,852,043

Liabilities

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

1 7

(229,648)

(216,700)

(3 89 , 041 )

Current tax liabilities

 

(2,138)

(80)

(535)

Borrowings

1 8

-

(97,045)

-

Derivative financial instruments

1 6

(3,168)

( 30 ,1 10 )

(266)

Provision for close down and restoration costs

 

-

(1,364)

-

Lease liabilities

 

(2,473)

(2,856)

(5, 373 )

 

 

(237,427)

(3 48 , 155 )

(3 95 ,215)

Net current assets/(liabilities)

 

192,594

( 44,780 )

72 , 493

Non-current liabilities

 

 

 

 

Borrowings

1 8

(611 , 436)

(499,504)

(609,463)

Derivative financial instruments

1 6

(171,939)

-

( 46 , 313 )

Deferred tax liabilities

 

(126,045)

(102, 473 )

(1 12 , 566 )

Provision for close down and restoration costs

 

(36,616)

(20,289)

( 36 , 231 )

Financial guarantee contract

2 1

(10,199)

(7,274)

(8,923)

Trade and other payables

17

(19,473)

(43,761)

-

Lease liabilities

 

(2,144)

(3,370)

(7,805)

 

 

(977,852)

(67 6 , 671 )

(8 21 , 301 )

Total liabilities

 

(1,215,279)

(1,0 24 , 826 )

(1, 216 , 516 )

Net assets

 

611,786

592,867

635,527

Equity

 

 

 

 

Share capital

1 9

49,035

49,003

49,003

Share premium

 

518,142

518,142

518,142

Hedging reserve

 

-

(14,992)

-

Share based payments reserve

 

-

49

199

Translation reserves

 

(18,139)

(16,279)

(15,878)

Retained earnings

 

 

 

 

 

50,352

46,094

73,605

Equity attributable to the shareholders of Petropavlovsk PLC

 

599,390

582,017

625,071

Non-controlling interests

 

12,396

10,850

10, 456

Total equity

 

611,786

592,867

635,527

 

(a)  See note 2 for details regarding the restatement.

 

These condensed consolidated financial statements for Petropavlovsk PLC, registered number 4343841, were approved by the Directors on 29 October 2020 and signed on their behalf by

 

James W Cameron Jr   Danila Kotlyarov

Chairman  Chief Financial Officer

 

 

 

PETROPAVLOVSK PLC

Condensed Consolidated Statement of Changes in Equity

Six months ended 30 June 2020

 

 

 

Total attributable to equity holders of Petropavlovsk PLC

 

 

 

 

Share

capital

Share premium

Share based payments reserve

Hedging

reserve

Translation reserve

Retained earnings/ (losses)

Total

Non-controlling interests

Total equity

 

 

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Balance

at 1 January 2019

 

48,963

518,142

227

(7,166)

(17,980)

47,538

589,724

11,6 24

601, 348

Total comprehensive (loss)/income

 

-

-

-

(7,826)

1,701

(1,713)

(7,838)

(774)

(8,612)

Profit for the period

 

-

-

-

-

-

4,673

4,673

(747)

3,926

Other comprehensive (loss)/income

 

-

-

-

(7,826)

1,701

(6,386)

(12,511)

(27)

(12,538)

Deferred share awards

 

40

-

(178)

-

-

269

131

-

131

Balance

at 30 June 2019 (restated) (a) (unaudited)

 

49,003

518,142

49

(14,992)

(16,279)

46,094

582,017

10,850

592,867

Total comprehensive income

 

-

-

-

14,992

401

27,512

42,905

(394)

42,511

Profit for the period (restated)

 

-

-

-

-

-

22,210

22,210

(443)

21,767

Other comprehensive income

 

-

-

-

14,992

401

5,302

20,695

49

20,744

Deferred share awards

 

-

-

150

-

-

(1)

149

-

149

Balance

at 31 December 201 9

 

49,003

518,142

199

-

( 15,878 )

73,605

625,071

10, 456

635,527

Total comprehensive income/(loss)

 

-

-

-

-

(2,261)

(23,509)

(25,770)

1,940

(23,830)

Loss for the period

 

-

-

-

-

-

(23,934)

(23,934)

1,940

(21,994)

Other comprehensive income/(loss)

 

-

-

-

-

(2,261)

425

(1,836)

-

(1,836)

Deferred share awards

 

32

-

(199)

-

-

256

89

-

89

Balance

at 30 June 20 20 (unaudited)

 

49,035

518,142

-

-

(18,139)

50,352

599,390

12,396

611,786

 

(a)  See note 2 for details regarding the restatement.

 

 

 

 

 

 

PETROPAVLOVSK PLC

Condensed Consolidated Statement of Cash Flows

Six months ended 30 June 20 20

 

 

 

 

Six months ended

 

 

 

 

note

Six months ended

30 June 2020

(unaudited)

US$'000

30 June 2019

(restated) (a)

 (unaudited)

US$'000

 Year ended

31 December 2019

US$'000

- Cash flows from operating activities

 

 

 

 

Cash generated from operations

20

17 2 ,7 58

55,194

1 89 , 321

Interest paid

 

(32, 149 )

(32,694)

(67,160)

Guarantee fee received in connection with ICBC facility

21

-

6,000

6,000

Income tax paid

 

(28,5 13 )

(16,558)

(32,723)

Net cash from operating activities

 

112 , 096

11,942

95 , 438

Cash flows from investing activities

 

 

 

 

Purchase of property, plant and equipment

20

(78,618)

( 44,969 )

( 120 , 798 )

Expenditure on exploration and evaluation assets

10

(4,648)

(4,929)

(10,136)

Proceeds from disposal of property, plant and equipment

 

57

3

11 1

Other loans granted

21

-

(389)

(389)

Repayment of loans granted to an associate

21

-

56 , 211

56,243

Interest received

 

558

2,610

3,283

Call option over non-controlling interests

16

-

(7,000)

(13,000)

Net cash (used in) /from investing activities

 

(82,651)

1,537

(84,686)

Cash flows from financing activities

 

 

 

 

Issue of Bonds, net of transaction cost

 

-

-

120,561

Repayment of Bonds

 

-

-

(108,000)

Exercise of the Call Option over the Company's shares

16

-

(2,215)

(2,215)

Exercise of gold options

16

(999)

-

-

Exercise of currency options

16

677

-

-

Funds advanced to the Group under investment agreement with the Russian Ministry of Far East Development

 

-

-

8,772

Funds transferred under investment agreement with the Russian Ministry of Far East Development

 

-

-

(8,772)

Principal elements of lease payments

 

(1,655)

(608)

(1,468)

Net cash (used in)/from financing activities

 

( 1 , 977 )

(2,823)

8,878

Net increase in cash and cash equivalents in the period

 

27 , 4 68

10,656

19,63 0

Effect of exchange rates on cash and cash equivalents

 

(2,163)

2,330

2,371

Cash and cash equivalents at beginning of period

1 5

48,153

26,152

26,152

Cash and cash equivalents at end of period

1 5

73,458

39,138

48,15 3

 

(a)  See note 2 for details regarding the restatement.

 

 

 

 

PETROPAVLOVSK PLC

Notes to the condensed consolidated interim financial statements

Six months ended 30 June 2020

 

1.   General information

 

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

 

These condensed consolidated interim financial statements are for the six months ended 30 June 2020. The interim financial statements are unaudited.

 

The information for the year ended 31 December 2019 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. This information was derived from the statutory accounts for the year ended 31 December 2019, a copy of which has been delivered to the Registrar of Companies. The auditor's report on those accounts was not qualified.

 

The auditor's report did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006.

 

 

2.  Basis of preparation and presentation

 

The annual financial statements of the Company and its subsidiaries (the "Group") for the year ended 31 December 2019 were prepared in accordance with International Financial Reporting Standards ("IFRS"s) as adopted by the European Union.

 

The condensed consolidated set of financial statements has been prepared using accounting policies consistent with those set out in the annual financial statements for the year ended 31 December 2019, with adoption of new and revised standards and interpretations as set out below, and in accordance with IAS 34 "Interim Financial Reporting", as adopted by the European Union.

 

Going concern

The Group monitors and manages its liquidity risk on an ongoing basis to ensure that it has access to sufficient funds to meet its obligations. Cash forecasts are prepared regularly based on a number of inputs including, but not limited to, forecast commodity prices and the impact of hedging arrangements, the Group's mining plan, forecast expenditure and debt repayment schedules. Sensitivities are run for different scenarios including, but not limited to, changes in commodity prices, cost inflation, different production rates from the Group's producing assets and the timing of expenditure on development projects. This is done to identify risks to liquidity and enable management to develop appropriate and timely mitigation strategies. The Group meets its capital requirements through a combination of sources including cash generated from operations, advances received from customers under prepayment arrangements and external debt.

 

The Group performed an assessment of the forecast cash flows for the period of 12 months from the date of approval of the Half Year Report for the period ended 30 June 2020. As at 30 June 2020, the Group had sufficient liquidity headroom. The Group is also satisfied that it has sufficient headroom under a base case scenario for the period to December 2021. The Group has also performed projections under a layered stressed case that is based on:

a gold price, which is approximately 10% lower than the upper quartile of the average of the market consensus forecasts;

processing of third-party concentrate through POX facilities is approximately 10% lower than projected and oxide gold production from underground operations at Pioneer and Malomyr approximately 10% lower than projected;

and Russian Rouble : US Dollar exchange rate that is approximately 10% stronger than the average of the market consensus forecasts.

Following the removal of the majority of the non-executive directors and all executive directors at the Company's annual general meeting on 30 June 2020 and the requisitioned general meeting held on 10 August 2020, and the subsequent appointment of the interim CEO, the Company has encountered a lack of co-operation from certain senior employees and ex-employees in some of the Company's material Russian subsidiaries. While the directors believe that these factors have had no material adverse impact on the Group's financial position and its operations to date, the Group has further stressed its cash flow projections to reflect potential operational inefficiencies for a three-month period from November 2020, including the following:

production from gold mining operations being approximately additional 10% lower;

operating cash costs for gold mining operations being approximately additional 10% higher.

 

The results of this analysis indicate sufficient liquidity for a period of at least 12 months, including if there is underperformance at IRC Ltd (in which the Group holds a 31.1% interest). In selecting the assumptions in its cash flow stress testing, the directors have also considered the potential impact of Covid-19.

 

As at 30 June 2020, the Group had guaranteed the outstanding amounts owed by IRC Ltd to Gazprombank under a credit facility. The outstanding loan principal was US$214 million as at 30 June 2020 and the facility is subject to a $160 million guarantee given by the Group (see note 21). The directors have considered whether there is any material uncertainty that IRC will be able to repay this facility as it falls due in its overall going concern assessment. IRC projections demonstrate that IRC expects to have sufficient liquidity over the next 12 months and expects to meet its obligations under the Gazprombank facility.

 

As at 30 June 2020, the Group has outstanding debt issued under US$125 million Convertible Bonds and US$500 million Guaranteed Notes (see note 19). If the Group fails to comply with its obligations (including interest payment obligations) under the Convertible Bonds, Guaranteed Notes or Gazprombank guarantee arrangements then, if not remedied by the Group, this would result in events of default which, through cross-defaults and cross-accelerations, could cause all of the Group's indebtedness to become repayable on demand. The assessment of whether there is any material uncertainty that the Group will be able to meet its repayment and compliance obligations under debt or guarantee arrangements as they fall due is another key element of the Group's overall going concern assessment.

 

Since the requisitioned general meeting held on 10 August 2020, the Group has made changes to the boards of directors of certain material subsidiaries of the Company in Russia and reversed changes to those subsidiaries' constitutional documents which were instituted by the Group's former CEO during June and July 2020 and which had the effect of entrenching the previous management of those subsidiaries. Those changes have been challenged by certain employees and ex-employees of the Group in legal proceedings in Russia. In the view of Company legal advisors, these actions are entirely baseless and without merit. However, it may take several months for these issues to be resolved and until such time it may be difficult for the Directors to appoint new management and for the newly appointed management of the relevant subsidiaries to interact successfully with 3rd parties as a result of injunctions granted by the Russian courts pending resolution of the proceedings.

 

The Company relies on cash flows from certain Russian subsidiaries to secure repayments under its debt obligations and other ongoing expenses as they fall due. The lack of co-operation from some employees and ex-employees in certain of the Russian subsidiaries as described above has led to delays in receiving cash from those subsidiaries in circumstances where those subsidiaries have not complied fully with the requests of the Company for funds. The Company has received sufficient cash to enable it to meet its October 2020 payment obligations under US$125 million Convertible Bonds and expects to receive cash required to meet its November 2020 payment obligations under US$500 million Guaranteed Notes. The Company is seeking additional external funding sources to meet its obligations in the event that future funding from the Russian subsidiaries is not received.

 

Having taken into account the aforementioned factors and after making enquiries and considering the matters described above, the Directors have concluded that they do not constitute material uncertainties that may cast significant doubt about the ability of the Group to continue as a going concern and have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future, being at least the next 12 months from the date of approval of the Half Year Report for the period ended 30 June 2020. Accordingly, they continue to adopt the going concern basis of accounting in preparing these condensed consolidated financial statements.

 

Call option over non-controlling interests

As disclosed in note 18 to the Group's consolidated financial statements for the year ended 31 December 2019, the fair value of the option was initially recognised as US$9.6 million upon initial recognition, resulting in a corresponding gain recognised within Net other finance gains and losses in the statement of profit or loss. This gain on initial recognition was primarily due to improvement in the gold price outlook between the pricing and completion of the transaction together with the judgements taken with regards to certain inputs into the relevant valuation models, in particular, historic volatility used as a proxy of the expected volatility of the underlying assets and being historic volatility of the comparable listed companies used for the valuations under IFRS 13 as opposed to historic gold market volatility used for the valuation of the contractual option premium.

 

In the condensed consolidated interim financial statements for the six months ended 30 June 2019 the fair value of the call option, net of the remaining unpaid premium, was recognised at US$16.2 million, comprising the initial gain of US$9.6 million, a revaluation loss of US$(0.4) million and the premium paid to date of US$7.0 million, with a corresponding net gain of US$9.2 million recognised within Net other finance gains and losses in the statement of profit or loss. After further analysis and consideration of the IFRS 9 application guidance (which prohibits the recognition of day 1 gains based on valuation techniques that use unobservable inputs), this economic gain previously recognised in the period ended 30 June 2019 has been deferred for accounting purposes in the consolidated financial statements for the year ended 31 December 2019. The comparative financial information has been aligned to be on a consistent basis by restating the comparative amounts as set out below.

 

Condensed Consolidated Statement of Financial Position (extract)

 

30 June 2019

Decrease

30 June 2019

 

 

 

Restated

 

US$'000

US$'000

US$'000

Derivative financial instruments

16,158

( 9,617 )

6,541

Net assets

602,484

( 9,617 )

592,867

 

 

 

 

Retained earnings

55,711

( 9,617 )

46,094

Total equity

602,484

( 9,617 )

592,867

 

Condensed Consolidated Statement of Profit or Loss (extract)

 

 

Six months ended

30 June 2019

Increase/

decrease

Six months ended

30 June 2019

 

 

 

Restated

 

US$' 000

US$' 000

US$' 000

Net other finance gains/(losses)

2,210

( 9,617 )

(7,407)

Profit for the period

13,543

( 9,617 )

3,926

Attributable to:

 

 

 

Equity shareholders of Petropavlovsk PLC

14,290

( 9,617 )

4,673

Non-controlling interests

(747)

-

(747)

Condensed Consolidated Statement of Comprehensive Income (extract)

 

 

 

 

 

Six months ended

30 June 2019

Decrease

Six months ended

30 June 2019

 

 

 

Restated

 

US$' 000

US$' 000

US$' 000

Profit for the period

13,543

( 9,617 )

3,926

Other comprehensive loss for the period net of tax

(12,538)

-

(12,538)

Total comprehensive profit/(loss) for the period 

1,005

( 9,617 )

(8,612)

Attributable to:

 

 

 

Equity shareholders of Petropavlovsk PLC

1,779

( 9,617 )

(7,838)

Non-controlling interests

(774)

-

(774)

         

 

 

Re-classification of deferred stripping costs

As set out in the 2019 consolidated financial statements , following a review of the nature of the deferred stripping costs balance, the Group has concluded that these costs should had been presented as mining assets under property, plant and equipment. The comparative financial information has been aligned to be on a consistent basis with re-classifications in the Consolidated Statement of Financial Position from inventory current and non-current assets to property, plant and equipment non-current assets of US$36.7 million as at the period ended 30 June 2019. As a consequence, a US$4.9 million reclassification from Net cash from operating activities to Net cash used in investing activities in the Consolidated Statement of Cash Flows for the period ended 30 June 2019 has been also made. There is no impact on the Group's consolidated statement of profit or loss, profit per share, retained earnings or net assets for the period ended 30 June 2019.

 

Other re-classifications

As set out in the 2019 consolidated financial statements , impairment losses and impairment reversals on financial instruments have been reclassified to be presented in a separate line item in the Consolidated Statement of Profit or Loss. Other finance gains and other finance losses have been presented in the Consolidated Statement of Profit or Loss on a net basis as the Group believes it is more representative since gains and losses relate to similar financial instruments. The comparative financial information for the period ended 30 June 2019 has been aligned to be on a consistent basis with re-classifications from Other finance losses to Net impairment reversals/(impairment losses) on financial instruments of US$33.1 million and the remaining Other finance losses of US$10.6 million and Other finance gains of US$12.8 million presented on a net basis.

 

 

Adoption of new and revised standards and interpretations

 

During the period the Group adopted all standards, amendments and interpretations that were effective for annual periods beginning on or after 1 January 2020 (such standards, amendments and interpretations were disclosed in note 2 to the Group's consolidated financial statements for the year ended 31 December 2019). These standards, amendments, and interpretations have not had a significant impact on the presentation or disclosure in Group's condensed consolidated financial statements for the interim period ended 30 June 2020. No other changes have been made to the Group's accounting policies in the period ended 30 June 2020. Additional disclosures with respect to the annual period requirements will be included in the Group's consolidated financial statements for the year ending 31 December 2020.

 

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

 

When preparing the consolidated financial statements, management necessarily makes judgements and estimates that can have a significant impact on the financial statements. Areas of judgement in applying accounting policies and key sources of estimation uncertainty are consistent with those set out in the annual financial statements for the year ended 31 December 2019 .

 

 

3.  Foreign currency translation

 

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

 

 

 

As at

30 June

20 20

Average

six months ended

30 June 2020

As at

30 June
 201
9

Average

six months ended

30 June 2019

As at

31 December
201
9

Average

year ended

31 December 20 19

GB Pounds Sterling (GBP: US$)

0.81

0.79

0.79

0.77

0.75

0.78

Russian Rouble (RUB: US$)

69.95

 

69.42

 

63.08

65.20

61.91

64.69

 

 

 

 

 

4.  Segment information

 

The Group's reportable segments under IFRS 8, which are aligned with its operating locations, were determined to be Pioneer, Malomir and Albyn hard rock gold mines which are engaged in gold and silver production as well as field exploration and mine development. POX Hub facilities are allocated between Pioneer and Malomir reportable segments based on the expected use by each segment.

 

Corporate and Other segment amalgamates corporate administration, in-house geological exploration and construction and engineering expertise, engineering and scientific operations and other supporting in-house functions as well as various gold projects and other activities that do not meet the reportable segment criteria.

 

Reportable operating segments are based on the internal reports provided to the Chief Operating Decision Maker ('CODM') to evaluate segment performance, decide how to allocate resources and make other operating decisions and reflect the way the Group's businesses are managed and reported.

 

The financial performance of the segments is principally evaluated with reference to operating profit less foreign exchange impacts.

 

 

 

Six months ended 30 June 20 20

 

Pioneer

 

Malomir

 

Albyn

Corporate

and other

 

Consolidated

 

US$'000

US$'000

US$'000

US$'000

US$'000

Revenue

 

 

 

 

 

Gold

258,378

136,404

117,553

-

512,335

Silver

  - 

  - 

  - 

-

Other external revenue

-

-

-

10,396

10,396

Inter segment revenue

17,169

  179

6,633

  71,166

95,147

Intra group eliminations

(17,169)

  (179)

(6,633)

(71,166)

(95,147)

Total Group revenue from external customers

258,378

136,404

117,553

10,396

522,731

 

 

 

 

 

 

Operating expenses and income

 

 

 

 

 

Operating cash costs

(19 9 , 104 )

(65, 529 )

(42, 560 )

(1 2 , 679 )

(3 19 , 872 )

Depreciation

(22,9 87 )

(23,941)

(16,607)

(1,12 5 )

(64,6 60 )

Central administration expenses

-

-

-

( 20 , 6 71)

( 20 , 6 71)

Reversal of impairment of ore stockpiles

-

15

-

-

15

Reversal of impairment of gold in circuit

-

38

-

-

38

Total operating expenses (a)

(22 2 , 091 )

(89, 417 )

(5 9 , 16 7)

(3 4 , 475 )

(40 5 , 150 )

 

Share of results of associates

 

 

 

1 , 845

1 , 845

Segment result

36, 287

4 6 , 987

58, 38 6

(2 2 , 234 )

1 19 , 426

 

 

 

 

 

 

Foreign exchange gains

 

 

 

 

2 6 , 710

Operating profit

 

 

 

 

14 6 , 136

Net impairment losses on financial instruments

 

 

 

 

  (1,274)

Investment and other finance income

 

 

 

 

  3,962

Interest expense

 

 

 

 

  (33,3 83 )

Net other finance losses

 

 

 

 

  ( 98 , 893 )

Taxation

 

 

 

 

  (3 8 , 542 )

Loss for the period

 

 

 

 

(2 1 , 994 )

Segment assets

622,174

665,757

313,567

2 19 ,735

1,821,233

Unallocated cash

 

 

 

 

5,832

Consolidated total assets

 

 

 

 

1,827,065

 

(a)  Operating expenses excluding foreign exchange gains (note 6).

 

 

 

 

Six months ended 30 June 2019

 

Pioneer

 

Malomir

 

Albyn

Corporate

and other

 

Consolidated (restated)

 

US$'000

US$'000

US$'000

US$'000

US$'000

Revenue

 

 

 

 

 

Gold (b)

67,868

119,447

102,073

-

289,388

Silver

334

221

96

-

651

Other external revenue

-

-

-

15,289

15,289

Inter segment revenue

23,520

284

2,895

75,615

102,314

Intra group eliminations

(23,520)

(284)

(2,895)

(75,615)

(102,314)

Total Group revenue from external customers

68,202

119,668

102,169

15,289

305,328

 

 

 

 

 

 

Operating expenses and income

 

 

 

 

 

Operating cash costs

(55,778)

(74,780)

(44,262)

(15,888)

(190,707)

Depreciation

(21,645)

(22,750)

(24,104)

(652)

(69,152)

Central administration expenses

-

-

-

(21,953)

(21,953)

(Impairment)/ reversal of impairment of ore stockpiles

(3,136)

-

3,959

-

823

Reversal of impairment of gold in circuit

101

-

-

-

101

Total operating expenses (c)

(80,458)

(97,530)

(64,407)

(38,493)

(280,888)

 

Share of results of associates

 

 

 

(7,905)

(7,905)

Segment result

(12,256)

22,138

37,762

(31,109)

16,535

 

 

 

 

 

 

Foreign exchange losses

 

 

 

 

(14,022)

Operating profit

 

 

 

 

2,513

Net impairment reversals on financial instruments

 

 

 

 

33,093

Investment and other finance income

 

 

 

 

4,939

Interest expense

 

 

 

 

(25,979)

Net other finance losses

 

 

 

 

(7,407)

Taxation

 

 

 

 

(3,233)

Profit for the period

 

 

 

 

3,926

Segment assets

476,156

650,924

301,738

187,399

1,616,217

Unallocated cash

 

 

 

 

1,476

Consolidated total assets

 

 

 

 

1,617,693

 

(b)  Including US$(6.0) million net cash settlement paid by the Group for realised cash flow hedges.

(c)  Operating expenses excluding foreign exchange losses (note 6).

 

 

2019

 

Pioneer

Malomir

Albyn

Corporate

and other

Consolidated

 

 

US$'000

US$'000

US$'000

US$'000

US$'000

Revenue

 

 

 

 

 

 

Gold (e)

 

223,193

239,365

229,139

-

691,697

Silver

 

464

267

146

-

877

Other external revenue

 

-

-

-

49,015

49,015

Inter segment revenue

 

45,970

537

4,493

145,326

196,326

Intra group eliminations

 

(45,970)

(537)

(4,493)

(145,326)

(196,326)

Total Group revenue from external customers

 

223,657

239,632

229,285

49,015

741,589

 

 

 

 

 

 

 

Operating expenses and income

 

 

 

 

 

 

Operating cash costs

 

(170,349)

(135,427)

(80,017)

(48,745)

(434,538)

Depreciation

 

(41,225)

(46,549)

(48,144)

(1,857)

(137,775)

Central administration expenses

 

-

-

-

(52,527)

(52,527)

Reversal of impairment of mining assets and in-house service

 

42,755

-

-

9,404

52,159

(Impairment)/reversal of impairment of ore stockpiles

 

(664)

(517)

3,959

-

2,778

Reversal of impairment/(impairment) of gold in circuit

 

101

(243)

-

-

(142)

Total operating expenses (f)

 

(169,382)

(182,736)

(124,202)

(93,725)

(570,045)

 

 

 

 

 

 

 

Share of results of associate

 

-

-

-

(35,376)

(35,376)

Segment result

 

54,275

56,896

105,083

(80,086)

136,168

 

 

 

 

 

 

 

Foreign exchange losses

 

 

 

 

 

(20,808)

Operating profit

 

 

 

 

 

115,360

Net impairment reversals on financial instruments

 

 

 

 

 

30,797

Investment and other finance income

 

 

 

 

 

8,826

Interest expense

 

 

 

 

 

(59,854)

Net other finance losses

 

 

 

 

 

(42,190)

Taxation

 

 

 

 

 

(27,246)

Profit for the year

 

 

 

 

 

25,693

Segment assets

 

629,169

705,230

315,152

199,578

1,849,129

Unallocated cash

 

 

 

 

 

2,914

Consolidated total assets

 

 

 

 

 

1,852,043

        

 

(d)  Net of US$(31.5) million net of cash settlement paid by the Group for realised cash flow hedges.

(e)  Operating expenses excluding foreign exchange losses (note 6).

 

 

 

 

 

5. Group revenue

 

Six months ended

30 June 2020

US$'000

Six months ended

30 June 2019

US$'000

 Year ended

31 December 2019

US$'000

Sales of goods:

 

 

 

Gold

512,335

289,388

691,697

Silver

-

651

877

Other goods

3,976

7,941

33,395

Rendering of services:

 

 

 

Engineering and construction contracts

5,036

5,565

12,535

Other services

1,042

1,463

2,347

Rental income

342

320

738

 

522,731

305,328

741,589

Timing of revenue recognition:

 

 

 

At a point in time

516,311

297,980

725,969

Over time

6,420

7,348

15,620

 

522,731

305,328

741,589

 

 

6. Operating expenses and income

 

 

Six months ended

30 June 2020

US$'000

Six months ended

30 June 2019

US$'000

 Year ended

31 December 2019

US$'000

Net operating expenses (a)

384,532

259,859

572,313

Reversal of impairment of mining assets and in-house service (a)

-

-

(52,159)

Reversal of impairment of ore stockpiles(a)

(15)

(823)

(2,778)

(Reversal of impairment)/impairment of gold in circuit

(38)

(101)

142

Central administration expenses (a)

20,671

21,953

52,527

Foreign exchange (gains)/losses

(26,710)

14,022

20,808

 

378,440

294,910

590,853

 

(a)  As set out below.

 

 

Net operating expenses

 

 

Six months ended

30 June 2020

US$'000

Six months ended

30 June 2019

US$'000

 Year ended

31 December 2019

US$'000

Depreciation

64,660

69,152

137,775

Staff costs

45,178

45,642

97,615

Materials

42,277

43,517

91,004

Flotation concentrate purchased

130,175

-

74,010

Fuel

17,652

22,636

43,612

External services

18,941

28,562

46,392

Mining tax charge

15,238

6,695

15,917

Electricity

17,779

17,038

34,118

Smelting and transportation costs

466

381

858

Movement in ore stockpiles, work in progress, bullion in process, limestone and flotation concentrate attributable to gold production

9,297

781

(34,156)

Taxes other than income

4,238

3,378

7,706

Insurance

2,225

4,210

8,437

Rental fee

1,609

1,247

3,194

(Reversal of)/provision for impairment of trade and other receivables

(27)

(75)

2,021

Bank charges

553

319

876

Repair and maintenance

2,860

2,848

6,896

Security services

2,265

2,181

4,503

Travel expenses

606

1,310

2,902

Goods for resale

2,673

5,907

19,471

Other operating expenses

5,867

4,130

9,162

 

384,532

259,859

572,313

 

Central administration expenses

 

 

Six months ended

30 June 2020

US$'000

Six months ended

30 June 2019

US$'000

 Year ended

31 December 2019

US$'000

Staff costs

13,217

16,008

33,466

Professional fees

3,662

2,174

1,771

Insurance

415

417

797

Rental fee

193

256

481

Business travel expenses

369

930

2,000

Office costs

383

331

832

Other

2,432

1,837

13,180

 

20,671

21,953

52,527

 

 

Impairment charges

 

Impairment of mining assets

 

As at 30 June 2020 and 30 June 2019, the Group identified no impairment indicators or indicators of impairment reversal for the cash generating units related to its gold mining projects and supporting in-house service companies.

 

As at 31 December 2019, the Group identified impairment reversal indicators for the Pioneer CGU and the supporting in-house service companies. Detailed calculations of recoverable amounts, which are value-in-use calculations based on discounted cash flows, were prepared. The estimated recoverable amounts exceeded the carrying values of the associated assets on the statement of financial position as at 31 December 2019. Taking into consideration the above and the removed uncertainty connected with the timing of the final construction and performance of the POX hub, the Directors concluded on the following:

 

A reversal of impairment previously recorded against the carrying value of the assets that are part of the Pioneer CGU would be appropriate. Accordingly, a pre-tax impairment reversal of US$43.5 million (being a post-tax impairment reversal of US$34.8 million) has been recorded against the associated assets within property, plant and equipment. The aforementioned impairment reversal takes into consideration the effect of depreciation attributable to relevant mining assets and intra-group transfers of previously impaired assets to Pioneer.

 

A further reversal of impairment previously recorded against the carrying value of the assets of the supporting in-house service companies would be appropriate. Accordingly, a pre-tax impairment reversal of US$9.4 million (being a post-tax impairment reversal of US$7.8 million) has been recorded against the associated assets within property, plant and equipment. The aforementioned impairment reversal takes into consideration the effect of depreciation attributable to relevant assets and intra-group transfers of previously impaired assets. 

 

The key assumptions which formed the basis of forecasting future cash flows and the value in use calculation are set out below:

 

 

Year ended

31 December 2019

Long-term real gold price

US$1,400/oz

Discount rate (a)

7.0%

RUB/US$ exchange rate

RUB65.8 : US$1

(a) Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 9.8%.

 

 

Impairment of exploration and evaluation assets

 

As at 30 June 2020, 30 June 2019 and 31 December 2019, the Group performed a review of its exploration and evaluation assets and concluded no impairment was required.

 

As at 30 June 2020, 30 June 2019 and 31 December 2019, all exploration and evaluation assets in the statement of financial position related to the areas adjacent to the existing mines (note 10).

 

 

 

 

 

 

 

 

 

 

Impairment of ore stockpiles

 

The Group assessed the recoverability of the carrying value of ore stockpiles and recorded reversals of impairment/ impairment charges as set out below:

 

 

Six months ended 30 June 2020

Six months ended 30 June 2019

Year ended 31 December 2019

 

 

Pre-tax Impairment charge /(reversal of impairment)

Taxation

Post-tax impairment charge/(reversal of impairment)

Pre-tax Impairment charge /(reversal of impairment)

Taxation

Post-tax impairment charge/(reversal of impairment)

Pre-tax Impairment charge /(reversal of impairment)

Taxation

Post-tax impairment charge/(reversal of impairment)

 

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Pioneer

-

-

-

3,136

(627)

2,509

664

(133)

531

Malomir

(15)

3

(12)

-

-

-

517

(88)

429

Albyn

-

-

-

(3,959)

673

(3,286)

(3,959)

673

(3,286)

 

(15)

3

(12)

(823)

46

(777)

(2,778)

452

(2,326)

 

 

7. Financial income and expenses and impairment of financial instruments

 

 

 

 

Six months ended

30 June 2020

US$'000

Six months ended

30 June 2019

US$'000

 Year ended

31 December 2019

US$'000

Net impairment reversals/(impairment losses) on financial instruments

 

 

 

Reversal of impairment of financial assets (a)

2

2,980

2,333

Financial guarantee contract (b)

(1,276)

30,113

28,464

 

(1,274)

33,093

30,797

Investment and other finance income

 

 

 

Interest income

574

2,522

3,216

Guarantee fee income(c)

3,388

2,417

5,610

 

3,962

4,939

8,826

Interest expense

 

 

 

Notes

(20,986)

(20,810)

(41,995)

Convertible bonds

(6,455)

(6,375)

(12,984)

Prepayment on gold sale agreements

(6,295)

(7,682)

(16,019)

Lease liabilities

(281)

(270)

(593)

 

(34,017)

(35,137)

(71,591)

Interest capitalised

1,019

9,431

12,287

Unwinding of discount on environmental obligation

(385)

(273)

(550)

 

(33,383)

(25,979)

(59,854)

Net other finance (losses)/gains

 

 

 

Fair value loss on the conversion option(e)

(122,248)

(9,218)

(31,127)

Loss on repurchase of the Existing Bonds

-

-

(11,211) (g)

Fair value gain on the guarantee receivable(f)

226

3,607

3,607

Fair value gain/(loss) on the call option over non-controlling interests (d)

20,558

(459)

(1,978)

Fair value loss on other derivative financial instruments

(733)

(1,079)

(1,345)

Fair value loss on listed equity investments

(59)

(258)

(302)

Gain on lease modification

224

-

166

Fair value gain on commodity and currency option contracts(h)

3,139

-

-

 

(98,893)

(7,407)

(42,190)

     

 

(a)  Six months ended 30 June and year ended 31 December 2019: including US$3.2 million reversal of ECL in relation to loans granted to IRC (note 21).

(b)  Change in the guarantee contract liability under Gazprombank facility in the amount of 12-month ECL during the period.

(Six months ended 30 June 2019 and year ended 31 December 2019: US$30.1 million gain and US$28.5 million gain, correspondingly, being net of:

recognition of US$7.3 million and US$8.9 million guarantee contract liability under Gazprombank guarantee arrangements as at 30 June 2019 and 31 December 2019, correspondingly, in the amount of 12-month ECL; and

de-recognition of US$(37.4) million guarantee contract liability previously recognised under ICBC guarantee arrangements in the amount of the lifetime ECL following termination of the ICBC Facility Agreement.)

 

The determination of the Group's US$10.2 million and US$8.9 million guarantee liability as at 30 June 2020 and 31 December 2019, correspondingly, relies upon the critical judgement as to whether there has been a significant increase in IRC's credit risk from March 2019 to June 2020 and December 2019. Management have determined that there has not been a significant increase in credit risk since March 2019 and therefore the guarantee liability is measured in the amount of 12-month ECL. This is in contrast to the ICBC guarantee which was measured int the amount of the lifetime ECL as there had previously been a significant increase in credit risk for that guarantee since 2010. This difference in measurement has resulted in the net accounting gain during the six months ended 30 June and year ended 31 December 2019 as referred to above.

 

Further details on the financial guarantee contracts are set out in note 21.

 

(c)  Guarantee fee income under Gazprombank Guarantee arrangements (note 21).

(d)  Result of re-measurement of the TEMI option to fair value (notes 16 and 21).

(e)  Result of re-measurement of the conversion option to fair value (notes 16 and 18). 

(f)  Result of re-measurement of receivable from IRC under ICBC Guarantee arrangements to fair value (six months ended 30 June and year ended 31 December 2019: result of re-measurement of receivable from IRC under ICBC guarantee arrangements to fair value, net of US$0.7 million guarantee fee income) (note 21).

(g)  US$100 million convertible bonds due 2020 (the 'Existing Bonds'): difference between the US$108 million paid to fund the Repurchase Price and the carrying value of the Existing Bonds at redemption (note 18).

(h)  Result of measurement of commodity and currency option contracts (note 16).

 

 

8. Taxation

 

 

 

 

 

Six months ended

30 June 2020

Six months ended

30 June 2019

 Year ended

31 December 2019

 

US$'000

US$'000

US$'000

Current tax

 

 

 

Russian current tax

25,100

12,322

29,660

 

25,100

12,322

29,660

Deferred tax

 

 

 

Origination/(reversal) of timing differences (a)

13,442

(9,089)

(2,414)

Total tax charge (b)

38,542

3,233

27,246

 

(a)  Including effect of foreign exchange movements in respect of deductible temporary differences of US$23.7 million (six months ended 30 June 2019: US$(16.3) million, year ended 31 December 2019: US$(20.4) million) which primarily arises as the tax base for a significant portion of the future taxable deductions in relation to the Group's property, plant and equipment are denominated in Russian Rouble whilst the future depreciation charges associated with these assets will be based on their US Dollar carrying value and reflects the movements in the Russian Rouble to the US Dollar exchange rate.

(b)  Including effect of expenses that are not deductible for tax purposes which primarily relate to fair value loss on re-measurement of the conversion option of the Convertible Bonds (note 7), effect of tax losses for which no deferred income tax asset was recognised which primarily relate to interest expense incurred in the UK (note 7) and Russian withholding tax on intercompany dividends.

 

Tax laws, regulations and court practice applicable to the Group are complex and subject to frequent change, varying interpretations and inconsistent and selective enforcement. There are a number of practical uncertainties associated with the application of relevant tax legislation and there is a risk of tax authorities making arbitrary judgements of business activities. If a particular treatment, based on management's judgement of the Group's business activities, was to be challenged by the tax authorities, the Group may be subject to tax claims and exposures. Management has calculated a total exposure (including taxes and respective interest and penalties) estimated to be US$6.7 million (six months ended 30 June 2019: US$8.6 million and 2019: US$10.5 million) of contingent liabilities, including US$1.1 million (30 June 2019: US$nil and  31 December 2019: US$4.8 million) in respect of income tax and US$5.6 million (30 June 2019: US$8.6 million and 31 December 2019: US$5.7 million) in respect of other taxes.

 

 

9. Earnings per share

 

 

 

 

 

Six months ended

30 June 2020

Six months ended

30 June 2019

Restated

 Year ended

31 December 2019

 

US$'000

US$'000

US$'000

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

(23,934)

4,673

26,883

Interest expense on convertible bonds (a)

-

-

-

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

(23,934)

4,673

26,883

 

No of shares

No of shares

 

No of shares

Weighted average number of Ordinary Shares

3,310,369,237

3,308,154,243

3,309,193,559

Adjustments for dilutive potential Ordinary Shares (a)

-

-

-

Weighted average number of Ordinary Shares for diluted earnings per share

3,310,369,237

3,308,154,243

3,309,193,559

 

US$

US$

US$

Basic (loss)/profit per share

(0.01)

0.00

0.01

Diluted (loss)/profit per share

(0.01)

0.00

0.01

     

 

(a)  Convertible bonds which could potentially dilute basic profit/(loss) per ordinary share in the future are not included in the calculation of diluted profit/(loss) per share because they were anti-dilutive for the six months ended 30 June 2020 and 2019 and the year ended 31 December 2019.

 

 

 

 

10. Exploration and evaluation assets

 

 

 

 

Flanks of Pioneer

Flanks of

Albyn

 

Other

 

Total

 

 

US$'000

US$'000

US$'000

US$'000

At 1 January 2020

 

7,544

43,397

2,182

53,123

Additions

 

-

3,341

1,287

4,628

At 30 June 2020

 

7,544

46,738

3,469

57,751

 

 

 

 

 

 

 

 

11. Property, plant and equipment

 

 

 

Mining

assets

Non-mining assets

Capital construction in progress

Total

 

 

US$'000

US$'000

US$'000

US$'000

Cost

 

 

 

 

 

At 1 January 2020

 

2,509,276

194,515

40,739

2,744,530

Additions (a)

 

41,328

1,327

40,466

83,121

Interest capitalised

 

-

-

1,019

1,019

Transfers from capital construction in progress (b)

 

6,892

165

(7,057)

-

Disposals (c)

 

(10,948)

(10,813)

(17)

(21,778)

Foreign exchange differences

 

-

(2,941)

(73)

(3,014)

At 30 June 2020

 

2,546,548

182,253

75,077

2,803,878

 

 

 

 

 

 

Accumulated depreciation and impairment

 

 

 

 

 

At 1 January 2020

 

1,405,097

129,616

-

1,534,713

Charge for the year (d)

 

63,228

1,976

-

65,204

Disposals

 

(10,402)

(3,126)

-

(13,528)

Reallocation and other transfers

 

(2,365)

2,365

-

-

Foreign exchange differences

 

-

(2,227)

-

(2,227)

At 30 June 2020

 

1,455,558

128,604

-

1,584,162

Net book value

 

 

 

 

 

At 1 January 2020(e)

 

1,104,179

64,899

40,739

1,209,817

At 30 June 2020(e)

 

1,090,990

53,649

75,077

1,219,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 (a)  Including US$23.7 million stripping cost capitalised.

(a)  Being costs primarily associated with the POX hub project.

(b)  Including US$9.2 million of fleet lease modification, US$7.9 million of fully depreciated fleet that is not suitable for future use due to wear and tear, US$2.2 million disposals of mining fleet due to derecognition of the replaced part.

(c)  Including US$13.5 million depreciation charge of capitalized stripping cost.

(d)  Including US$52.0 million net book value of capitalized stripping cost (31 December 2019: US$41.9 million).

 

12. Investments in associates

 

 

 

30 June 2020

30 June 2019

31 December 2019

 

US$'000

US$'000

US$'000

IRC Limited ('IRC')

50,950

70,848

48,680

 

50,950

70,848

48,680

 

 

Summarised financial information for those associates that are material to the Group is set out below.

 

 

IRC

IRC

IRC

 

30 June 2020

30 June 2019

31 December 2019

 

US$'000

US$'000

US$'000

Non-current assets

 

 

 

Exploration and evaluation assets

20,035

7,800

19,877

Property, plant and equipment

512,652

534,189

522,640

Other non-current assets

14,840

10,986

14,859

 

547,527

552,975

557,376

Current assets

 

 

 

Cash and cash equivalents

4,980

8,286

4,292

Other current assets

52,065

46,198

46,106

 

57,045

54,484

50,398

Current liabilities

 

 

 

Borrowings (a)

(19,869)

(20,710)

(20,703)

Other current liabilities

(82,781)

(88,615)

(80,288)

 

(102,650)

(109,325)

(100,991)

Non-current liabilities

 

 

 

Borrowings(a)

(191,981)

(211,113)

(201,204)

Other non-current liabilities

(24,181)

(24,610)

(27,578)

 

(216,162)

(235,723)

(228,782)

Net assets

285,760

262,411

278,001

 

(a)  Gazprombank Facility: On 18 December 2018, IRC entered into two facility agreements for a loan in aggregate of US$240 million (the "Gazprombank Facility"). The Gazprombank Facility will mature in 2026 and consists of two tranches. The principal under the first tranche amounts to US$160 million with interest being charged at the London Inter-bank Offer Rate ("LIBOR") + 5.7% per annum and is repayable in equal quarterly payments during the term of the Gazprombank Facility, the final payment in December 2026. The principal under the second tranche amounts to US$80 million with interest being charged at LIBOR + 7.7% per annum and is repayable in full at the end of the term, in December 2026. Interest charged on the drawn down amounts under the two tranches is payable in equal quarterly payments during the term of the Gazprombank Facility.

 

As at 30 June 2020, the entire facility amount of US$240 million has been fully drawn down.

 

The Gazprombank Facility is secured by (i) IRC's property, plant and equipment with net book value of US$53 million, (ii) 100% equity share of Kapucius Services Limited in LLC KS GOK and (iii) a guarantee from the Company. Please refer to the note 21 for the details on the guarantee arrangements. The Gazprombank Facility is also subject to certain financial covenants and requirements.

 

 

 

IRC

IRC

IRC

 

Six months ended

30 June 2020
US$'000

Six months ended

30 June 2019
US$'000

Year ended

31 December 2019
US$'000

Revenue

106,173

89,244

177,164

Net operating expenses

(86,489)

(91,290)

(178,653)

including

 

 

 

Depreciation

(13,465)

(15,048)

(28,504)

Impairment losses under expected credit loss model

(5,176)

-

-

Foreign exchange gains/(losses)

4,690

(5,681)

(6,181)

 

 

 

 

Investment income

26

26

83

Interest expense

(13,338)

(24,108)

(40,421)

Taxation

(440)

708

3,157

Profit/(loss) for the period  

5,932

(25,420)

(38,670)

Other comprehensive profit/(loss)

1,368

(20,535)

(3,483)

Total comprehensive profit/(loss)

7,300

(45,955)

(42,153)

 

Group's share %

31.1%

31.1%

31.1%

Group's share in profit/(loss) for the period

1,845

(7,905)

(12,026)

Impairment of investment in associate

-

-

(23,350)

Share of results of associate

1,845

(7,905)

(35,376)

 

 

Impairment of investment in associate

As at 30 June 2020, the Group identified no impairment indicators or indicators of impairment reversal in relation to its investment in IRC (30 June 2019: no impairment indicators and 31 December 2019: detailed calculations of recoverable amounts, which are value-in-use calculations based on discounted cash flows, were prepared which concluded a US$23.4 million impairment was required and recorded accordingly).

 

 

 

13. Inventories

 

 

30 June

2020

 

30 June

2019

(restated)

31 December

2019

 

 

US$'000

US$'000

US$'000

Current

 

 

 

Construction materials

9,652

5,456

6,600

Stores and spares

81,956

65,787

86,985

Ore in stockpiles (a), (b)

59,945

55,908

68,479

Gold in circuit

10,055

21,158

37,740

Bullion in process

17,936

528

4,732

Flotation concentrate

33,068

24,124

97,932

Other

8,942

3,174

5,305

 

221,554

176,135

307,773

Non-current

 

 

 

Ore in stockpiles (a), (b), (c)

64,556

51,938

60,257

 

64,556

51,938

60,257

 

(a)  As at 30 June 2020, there were no balances of ore in stockpiles carried at net realisable value (30 June 2019: US$36.4 million, 31 December 2019: US$0.1 million).  

(b)  For details of ore stockpile impairment see note 6.

(c)  Ore in stockpiles that is not planned to be processed within twelve months after the reporting period.

 

 

14. Trade and other receivables

 

 

30 June

2020

30 June

2019

31 December

2019

 

US$'000

US$'000

US$'000

Current

 

 

 

VAT recoverable

33,756

24,033

51,499

Advances to suppliers 

13,329

14,546

10,513

Prepayments for property, plant and equipment

5,411

4,039

9,216

Trade receivables

5,467

8,361

10,254

Contract assets

1,211

1,960

2,856

Guarantee fee receivable (a)

13,041

6,670

9,417

Other debtors

14,612

23,550

12,220

 

86,827

83,159

105,975

Non-current

 

 

 

Other

578

538

556

 

578

538

556

 

(a)  Please refer to notes 2, 12 and 21 for the details of ICBC and Gazprombank guarantee arrangements.

 

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

 

 

15. Cash and cash equivalents

 

 

30 June

2020

30 June

2019

31 December

2019

 

US$'000

US$'000

US$'000

Cash at bank and in hand

20,540

15,563

14,181

Short-term bank deposits

52,918

23,575(a)

33,972 (a)

 

73,458

39,138

48,153

 

(a)  30 June 2019 and 31 December 2019: including restricted bank deposit of US$1.0 million and US$1.1 million, correspondingly.

 

 

16. Derivative financial instruments

 

 

 

30 June 2020

 

30 June 2019

 

31 December 2019

 

Assets

Liabilities

 

Assets (restated)

Liabilities

 

Assets

Liabilities

 

US$'000

US$'000

 

US$'000

US$'000

 

US$'000

US$'000

Current

 

 

 

 

 

 

 

 

Gold option contracts (a), (c)

1,119

(2,936)

 

-

-

 

-

-

Currency option contracts (b), (c)

4,948

(232)

 

-

-

 

-

-

Forward gold contracts - cash flow hedge

-

-

 

-

(18,481)

 

-

-

Conversion option (e), (f)

-

-

 

-

(11,629)

 

-

-

Call option over non-controlling interests (g), (h), (i)

31,580

-

 

-

-

 

-

-

Other

-

-

 

-

-

 

 

(266)

 

37,647

(3,168)

 

-

(30,110)

 

-

(266)

Non-current

 

 

 

 

 

 

 

Gold option contracts (a), (c)

72

(2,799)

 

-

-

 

-

-

Currency option contracts (b), (c)

2,658

(579)

 

-

-

 

-

-

Conversion option (d), (e)

 

(168,561)

 

-

-

 

-

(46,313)

Call option over non-controlling interests (f), (g), (h)

-

-

 

6,541

-

 

11,022

-

 

2,730

(171,939)

 

6,541

-

 

11,022

(46,313)

           

 

(a)  Gold option contracts with an exercise price of US$1,600/oz for purchased put options and US$1,832/oz for issued call options for an aggregate of 63,000 ounces of gold maturing over a period until December 2021.

 

(b)  Currency option contracts with an exercise price of RUB75.00 for purchased put options and in the range between RUB90.65 and RUB100.00 for issued call options for an aggregate of US$126 million maturing over a period until December 2021.

 

(c)  Measured at fair value and considered as Level 2 of the fair value hierarchy which valuation incorporates the following inputs:

Historic gold price and RUB: USD exchange rates volatility;

exercise price;

time to maturity; and

risk free rate.

 

(d)  Note 18.

 

(e)  Measured at fair value and considered as Level 3 of the fair value hierarchy which valuation incorporates the following inputs:

the Group's credit risk and implied credit spreads (Level 3);

historic share price volatility;

the conversion price;

time to maturity; and

risk free rate.

 

(f)  Call option to acquire non-controlling 25% interest in the Group's subsidiary LLC TEMI: In May 2019, the Group entered into the option contract to acquire non-controlling 25% interest in LLC TEMI from its shareholder Agestinia Trading Limited for an aggregate consideration of US$60 million (adjusted to US$53.5 million if certain conditions are met). LLC TEMI holds the licences for the Elginskoye Ore Field and Afanasievskaya Prospective Ore Are, which have substantial non-refractory gold reserves and resources, suitable for processing at the Albyn Plant. Further details on this transaction are set out in note 21.

 

(g)  Measured at fair value and considered as Level 3 of the fair value hierarchy which valuation incorporates the following inputs:

the current valuation of the underlying investment (Level 3);

historic peers' volatility attributed to the valuation of the underlying investment (Level 3);

the exercise price;

time to maturity; and

risk free rate. 

 

(h)  The fair value of the TEMI option at the period ended 30 June 2020 is US$31.6 million, which represent the premium paid to acquire the option of US$13.0 million and a subsequent revaluation gain of US$18.6 million.

 

 

17. Trade and other payables

 

 

 

30 June

2020

30 June

2019

31 December 2019

 

 

US$'000

US$'000

US$'000

Current

 

 

 

 

Trade payables (a)

 

64,217

50,666

134,818

Payables for property, plant and equipment

 

3,865

4,789

5,810

Advances from customers (b)

 

103,482

114,404

188,968

Advances received on resale contracts (c)

 

12,808

  11,287

7,698

Accruals and other payables

 

45,276

35,554

51,747

 

 

229,648

216,700

389,041

Non-current

 

 

 

 

Advances from customers (d)

 

19,473

43,761

-

 

 

19,473

43,761

-

 

(a)  The trade payables as at 30 June 2020 include US$28.5 million payable for flotation concentrate purchased (31 December 2019: US$81.0, 30 June 2019: US$nil).

 

(b)  The current advances from customers as at 30 June 2020 include US$101.5 million (31 December 2019: US$152.5 million, 30 June 2019: US$106.5 million) and US$nil million (31 December 2019: US$34.9 million, 30 June 2019: US$6.4 million) advance payments received from Gazprombank and Sberbank, respectively, under gold sales agreements. Advance payments are to be settled against physical delivery of gold produced by the Group in regular intervals over the period of up to twelve months from the reporting date based on the sales price prevailing at delivery that is determined with reference to LBMA fixing. For details of interest charged in relation to the aforementioned advances please refer to note 7.

 

(c)  Amounts included in advances received on resale and commission contracts at 30 June 2020, 30 June 2019 and 31 December 2019 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)  The non-current advances from customers as at 30 June 2020 include US$19.5 million (31 December 2019: US$nil, 30 June 2019: US$43.8 million) advance payments received from Gazprombank under gold sales agreements. Advance payments are to be settled against physical delivery of gold produced by the Group in regular intervals over the period after twelve months from the reporting date based on the sales price prevailing at delivery that is determined with reference to LBMA fixing. For details of interest charged in relation to the aforementioned advances please refer to note 7.

 

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

18. Borrowings

 

 

30 June

2020

30 June

2019

31 December

 2019

 

US$'000

US$'000

US$'000

Borrowings at amortised cost

 

 

 

Notes (a)

501,051

499,504

500,377

Convertible Bonds (b), (c)

110,385

97,045

109,086

 

611,436

596,549

609,463

 

 

 

 

Amount due for settlement within 12 months

-

97,045

-

Amount due for settlement after 12 months

611,436

499,504

609,463

 

611,436

596,549

609,463

 

(a)  US$500 million Guaranteed Notes due for repayment on 14 November 2022 (the "Notes"), measured at amortised cost. The Notes were issued by the Group's wholly owned subsidiary Petropavlovsk 2016 Limited and are guaranteed by the Company and its subsidiaries JSC Pokrovskiy Rudnik, LLC Albynskiy Rudnik and LLC Malomirskiy Rudnik. The Notes have been admitted to the official list of the Irish Stock Exchange and to trading on the Global Exchange Market of the Irish Stock Exchange on 14 November 2017. The Notes carry a coupon of 8.125% payable semi-annually in arrears. The interest charged was calculated by applying an effective interest rate of 8.35%.

 

(b)  30 June 2020 and 31 December 2019: Debt component of the US$125 million Convertible Bonds due on 03 July 2024 measured at amortised cost and not revalued. The bonds were issued by the Group's wholly owned subsidiary Petropavlovsk 2010 Limited (the "Issuer") on 03 July 2019 and are guaranteed by the Company. The bonds carry a coupon of 8.25% per annum, payable quarterly in arrears. The bonds are, subject to certain conditions, convertible into fully paid ordinary shares of the Company with an initial exchange price of US$0.1350, subject to customary adjustment provisions. The interest charged was calculated by applying an effective interest rate of 12.08%.

 

The Group has used the US$120.6 million net proceeds from the issue of US$125 million Convertible Bonds to fund the repurchase of the outstanding US$100 million convertible bonds as set out below, resulting in the net US$12.6 million cash inflow.

 

Concurrently with the issue of the US$125 million Convertible Bonds, the Group also concluded the invitation to repurchase (the "Repurchase") any and all of the outstanding US$100 million 9.00% convertible bonds due 2020 (the "Existing Bonds"). Holders whose Existing Bonds have been accepted for purchase by the Issuer pursuant to the Repurchase were eligible to receive US$1,080 per US$1,000 in principal amount of the Existing Bonds (the "Repurchase Price"). The Issuer also paid, in respect of Existing Bonds accepted for purchase pursuant to the Repurchase, a cash amount representing the accrued but unpaid interest ("Accrued Interest") on each US$1,000 in aggregate principal amount of Existing Bonds accepted for repurchase from and including 18 June 2019, being the immediately preceding interest payment date applicable to the Existing Bonds, to but excluding the settlement date for the Repurchase (the "Repurchase Settlement Date"). The Accrued Interest, based on a Repurchase Settlement Date of 3 July 2019 comprised US$3.75 per US$1,000 in aggregate principal amount of Existing Bonds.

 

The remaining Existing Bonds were redeemed at the Repurchase Price on 9 July 2019. The Issuer also paid a cash amount representing the Accrued Interest on each US$1,000 in aggregate principal amount of Existing Bonds from and including 18 June 2019 to redemption.

 

The Existing Bonds were subsequently cancelled by the Issuer. The US$11.2 million difference between the US$108.0 million paid to fund the Repurchase Price and the carrying value of the Existing Bonds at redemption was recognized as loss on repurchase of the Existing Bonds (note 7).

 

The conversion option of the US$125 million Convertible Bonds represents the fair value of the embedded option for the bondholders to convert into the equity of the Company (the "Conversion Right"). As the Company can elect to pay the cash value in lieu of delivering the Ordinary Shares following the exercise of the Conversion Right the conversion option is a derivative liability. Accordingly, the conversion option is measured at fair value and is presented separately within derivative financial liabilities (note 16) which the fair value loss is included in the net other finance (losses)/ gains (note 7).

 

The fair value of debt component of the convertible bonds, considered as Level 3 of the fair value hierarchy, amounted to US$124.7 million (31 December 2019: US$122.8 million), with the carrying value of US$110.4 million (31 December 2019: US$109.0 million). Valuation incorporates the following inputs: the Group's credit risk and implied credit spreads, time to maturity and risk free rate.

 

The fair value of the convertible bonds, considered as Level 1 of the fair value hierarchy and calculated by applying the market traded price to the convertible bonds outstanding, amounted to US$293.3 million (31 December 2018: US$169.1 million).

 

(c)  30 June 2019: Debt component of the US$100 million Convertible Bonds due on 18 March 2020, measured at amortised cost. The interest charged was calculated by applying an effective interest rate of 13.89% to the liability component.

 

The conversion option of the US$100 million Convertible Bonds represents the fair value of the embedded option for the bondholders to convert into the equity of the Company (the "Conversion Right"). As the Company can elect to pay the cash value in lieu of delivering the Ordinary Shares following the exercise of the Conversion Right, the conversion option is a derivative liability. Accordingly, the conversion option is measured at fair value and is presented separately within derivative financial instruments.

 

As at 30 June 2019, the fair value of debt component of the convertible bonds, considered as Level 3 of the fair value hierarchy, amounted to US$98.5 million. Valuation incorporates the following inputs: the Group's credit risk, time to maturity and risk free rate.

 

As at 30 June 2019, the fair value of the Convertible Bonds, considered as Level 1 of the fair value hierarchy and calculated by applying the market traded price to the convertible bonds outstanding, amounted to US$110.1 million.

 

The US$100 million Convertible Bonds were refinanced in July 2019 as set out above.

19. Share capital

 

 

 

30 June 2020

 

30 June 2019

 

31 December 2019

 

No of shares

US$'000

 

No of shares

US$'000

 

No of shares

US$'000

Allotted, called up and fully paid

 

 

 

 

 

 

 

 

At the beginning of the period

3,310,210,281

49,003

 

3,307,151,712

48,963

 

3,307,151,712

48,963

Issued during the period

2,615,541

32

 

3,058,569

40

 

3,058,569

40

At the end of the period

3,312,825,822

49,035

 

3,310,210,281

49,003

 

3,310,210,281

49,003

 

The Company has one class of ordinary shares which carry no right to fixed income.

 

20. Notes to the cash flow statement

 

Reconciliation of profit before tax to operating cash flow

 

Six months ended 30 June 2020

Six months ended 30 June 2019

(restated)

Year ended

31 December 2019

 

US$'000

US$'000

US$'000

Profit before tax

16,548

7,159

52,939

Adjustments for:

 

 

 

Share of results of associates

(1,845)

7,905

35,376

Net impairment losses/(impairment reversals) on financial instruments

 

1,274

(33,093)

(30,797)

Investment and other finance income

(3,962)

(4,939)

(8,826)

Interest expense

33,383

25,979

59,854

Net other finance losses

98,893

7,407

42,190

Share based payments

89

130

280

Depreciation

64,660

69,152

137,775

Reversal of impairment of ore stockpiles

(15)

(823)

(2,778)

Effect of processing previously impaired stockpiles

(502)

(5,733)

(6,398)

(Reversal of)/provision for impairment of trade and other receivables

(21)

(75)

2,280

(Reversal of impairment)/impairment of gold in circuit

(38)

(101)

142

Effect of processing previously impaired gold in circuit

(206)

(1,413)

(1,413)

Loss on disposals of property, plant and equipment

663

116

1,118

Foreign exchange losses/(gains)

(26,710)

14,022

20,808

Reversal of impairment of mining assets and in-house service

-

-

(52,159)

Other non-cash items

999

73

129

Changes in working capital:

 

 

 

Decrease/(increase) in trade and other receivables

13,045

(13,990)

(31,204)

Decrease/(increase) in inventories

82,129

(735)

(133,848)

(Decrease)/increase in trade and other payables

(105,626)

(15,847)

103,853

Net cash generated from operations

172,758

55,194

189,321

 

 

 

Reconciliation of cash flows used to purchase property, plant and equipment

 

 

Six months ended 30 June 2020

Six months ended 30 June 2019

Year ended

31 December 2019

 

US$'000

US$'000

US$'000

Additions to property, plant and equipment

83,121

49,513

125,524

Non-cash additions to property, plant and equipment:

 

 

 

Transfer from materials

50

3,014

7,343

Capitalised depreciation

(430)

(399)

(737)

Right-of-use assets additions

(1,735)

(4,552)

(13,279)

 

81,006

47,576

118,851

Associated cash flows:

 

 

 

Purchase of property, plant and equipment

78,618

44,969

120,798

Increase in prepayments for property, plant and equipment

3,804

3,194

(1,982)

(Decrease)/increase in payables for property, plant and equipment

(1,945)

(452)

568

Cash movements presented in other cash flow lines:

 

 

 

Changes in working capital

529

(135)

(533)

 

81,006

47,576

118,851

 

 

 

 

Non-cash transactions

There were no significant non-cash transactions during the six months ended 30 June 2020 and 30 June 2019.

An equivalent of US0.1$ million of VAT recoverable was offset against profit tax during the year ended 31 December 2019 and US$1.5 million of provision of profit tax relating to Albyn, was accrued as at 31 December 2019.

 

21. Related parties

 

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

 

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 board of directors of the Petropavlovsk Foundation.

 

IRC Limited and its subsidiaries are associates to the Group and hence are related parties since 7 August 2015.

 

Transactions with related parties the Group entered into during the six months ended 30 June 2020 and 30 June 2019 and the year ended 31 December 2019 are set out below.

 

 

Trading Transactions

 

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

 

 

Sales to related parties

 

Purchases from related parties

 

Six months

ended

30 June 2020

US$'000

Six months

ended

30 June 2019

US$'000

Year ended

31 December 2019

US$'000

 

Six months

ended

30 June 2020

US$'000

Six months ended

30 June 2019

US$'000

Year ended

31 December 2019

US$'000

 

Entities in which key management have interest and exercises a significant influence or control

-

-

-

 

195

3,287

4,046

 

IRC Limited and its subsidiaries

58

23

42

 

58

219

5,458

 

 

58

23

42

 

253

3,506

9,504

 

          

 

On 13 December 2019, the Group entered into the sale and purchase agreement with a seller (the "Seller"), a related party of the Company, LLC GMMC. Pursuant to the sale and purchase agreement, the Group agreed to purchase, and the Seller agreed to sell, a helicopter for a consideration of RUB316.7 million (equivalent to US$5.0 million). The transaction was completed in February 2020.

 

During the six months ended 30 June 2020, the Group made US$0.2 million charitable donations to the Petropavlovsk Foundation (six months ended 30 June 2019: US$0.1 million and year ended 31 December 2019: US$1.0 million).

 

 

The outstanding balances with related parties at 30 June 2020, 30 June 2019 and 31 December 2019 are set out below.

 

 

Amounts owed by related parties

 

Amounts owed to related parties

 

30 June 2020

30 June

2019

31 December 2019

 

30 June 2020

30 June

2019

31 December 2019

 

US$'000

US$'000

US$'000

 

US$'000

US$'000

US$'000

Entities in which key management have interest and exercises a significant influence or control

-

-

-

 

-

-

759

IRC Limited and its subsidiaries

3,622

2,101

3,651

 

1,166

1,117

5,863

 

3,622

2,101

3,651

 

1,166

1,117

6,622

 

 

Financing transactions

 

Guarantee over IRC's external borrowings

 

The Group historically entered into an arrangement to provide a guarantee over its associate's, IRC, external borrowings, the ICBC Facility ('ICBC Guarantee'). As at 30 June 2020 the remaining outstanding contractual guarantee fee was US$5.0 million, which had a corresponding fair value of US$4.7 million and is payable by IRC no later than 31 December 2020 (30 June 2019: outstanding contractual guarantee fee of US$5.7 million with corresponding fair value after provision for credit losses of US$4.8 million; 31 December 2019: outstanding contractual guarantee fee of US$5.0 million with corresponding fair value after provision for credit losses of US$4.4  million).

 

In March 2019, IRC has refinanced the ICBC Facility through entering into a US$240 million new facility with Gazprombank ('Gazprombank Facility'). The facility was fully drawn down during the year ended 31 December 2019 and was used, inter alia, to repay the amounts outstanding under the ICBC Facility in full, the two loans provided by the Group in the equivalent of approximately US$57 million and part of the ICBC Guarantee fee of US$6 million owed by IRC to the Group.

 

A new guarantee was issued by the Group over part of the Gazprombank Facility ('Gazprombank Guarantee'), the guarantee mechanism is implemented through a series of five guarantees that fluctuate in value through the eight-year life of the loan, with the possibility of the initial US$160 million principal amounts guaranteed reducing to US$40 million within two to three years, subject to certain conditions being met. For the final two years of the Gazprombank Facility, the guaranteed amounts will increase to US$120 million to cover the final principal and interest repayments. If certain springing recourse events transpire, including default on a scheduled payment, then full outstanding loan balance is accelerated and subject to the guarantee. The outstanding loan principal was US$214 million as at 30 June 2020 (31 December 2019: US$225 million and 30 June 2019: US$235 million). Under the Gazprombank Guarantee arrangements, the guarantee fee receivable is determined at each reporting date on an independently determined fair value basis, which for the six months ended 30 June 2020 was at the annual rate of 3.07% for 2020 by reference to the average outstanding principal balance under Gazprombank Facility. The guarantee fee charged for the six months ended 30 June 2020 was US$3.4 million, with corresponding value of US$3.2 million after provision for expected credit losses (six months ended 30 June 2019: US$$2.4 million, with corresponding value of $2.2 million after provision for expected credit losses; year ended 31 December 2019: US$5.6 million, with corresponding value of US$5.0 million after provision for expected credit losses).

 

On 18 March 2020, the Group announced a preliminary agreement to dispose of its 29.9% out of 31.1% interest in IRC to Stocken Board AG for a cash consideration of US$10 million, subject to certain conditions precedent being met, including the release of the Group's obligation to guarantee IRC's debt under the Gazprombank Facility.

 

The following assets and liabilities have been recognised in relation to the ICBC Guarantee and Gazprombank Guarantee as at 30 June 2020, 30 June 2019 and 31 December 2019:

 

 

30 June

2020

30 June

2019

31 December

2019

 

US$'000

US$'000

US$'000

Other receivables - ICBC Guarantee (a)

4,662

4,828

4,436

Other receivables - Gazpombank Guarantee (b)

8,380

1,842

4,981

Financial guarantee contract - Gazpombank Guarantee (c)

10,199

7,274

8,923

 

(a)  The fair value of the receivable, comprising billed fee receivable, less provision for credit losses. Considered Level 3 of the fair value hierarchy which valuation incorporates the following inputs:

Assessment of the credit standing of IRC and implied credit spread;

Share price and share price volatility of IRC as at 30 June 2020, 30 June 2019 and 31 December 2019;

(b)  Amounts of guarantee fee for the period that are expected to be received from IRC and calculated by applying annual rate of 3.07% for the six months ended 30 June 2020 and the year ended 31 December 2019 by reference to the average outstanding principal balance under Gazprombank Facility for the relevant the period, less provision for ECL.

(c)  Measured in accordance with ECL model: the amount of the loss allowance equals to 12-month ECL as it has been concluded that the credit risk on the financial guarantee contract has not increased significantly since initial recognition.

 

The results from relevant re-measurements of the aforementioned assets and liabilities were recognised within Other finance gains and losses and impairments of financial instruments (note 7).

 

 

Other financing transactions

 

In March 2018, the Group entered into a loan agreement with Dr Pavel Maslovskiy. At 30 June 2020, the loan outstanding amounted to an equivalent of US$0.2 million (30 June 2019: US$0.2 million; 31 December 2019: US$0.2 million). Interest charged during the six months ended 30 June 2020 comprised an equivalent of US$0.01 million (six months ended 30 June 2019: US$0.01 million; year ended 31 December 2019: US$0.01 million).

 

In April 2019, the Group entered into a loan agreement with Dr Alya Samokhvalova. At 30 June 2020, the loan outstanding amounted to an equivalent of US$0.4 million (30 June 2019: US$0.4 million; 31 December 2019: US$0.4 million). Interest charged during the six months ended 30 June 2020 comprised an equivalent of US$0.01 million (six months ended 30 June 2019: US$0.01 million; year ended 31 December 2019: US$0.02 million).

 

Investing transactions

 

In May 2019, the Group entered into the option contract to acquire the remaining non-controlling 25% interest in the subsidiary LLC TEMI from Agestinia Trading Limited, a non-controlling holder of 25% interest in LLC TEMI, for an aggregate consideration of US$60 million (adjusted to US$53.5 million if certain conditions are met). This represents a related party transaction as it is over the equity of a subsidiary company. The option premium payable is US$13 million, which was paid during the year ended 31 December 2019. The exercise period of the option is 730 days from 22 May 2019.

 

The Group employed an independent third party expert to undertake the valuations of the underlying 25% interest in LLC TEMI and the call option. As at 30 June 2020, the fair value of the derivative financial asset was US$31.6 million (30 June 2019: US$6.5 million; 31 December 2019: US$11.0 million) reflecting a gain on re-measurement to fair value of US$20.6 million (six months ended 30 June 2019: US$(0.5) million loss; year ended 31 December 2019: US$(2.0) million loss) (note 16). 

 

There are no other related party relationships with Agestinia Trading Limited present. 

 

Key management compensation

 

Key management personnel, comprising a group of 17 individuals during the period (six months ended 30 June 2019: 12 and year ended 31 December 2019: 14), including Executive and Non-Executive Directors of the Company and members of senior management, are those having authority and responsibility for planning, directing and controlling the activities of the Group.

 

 

 

Six months ended

30 June 2020

Six months ended

30 June 2019

Year ended

31 December 2019

 

US$'000

US$'000

US$'000

Wages and salaries

2,255

2,048

5,794

Pension costs

38

32

62

Share-based compensation

91

90

157

 

2,384

2,170

6,013

 

 

22. Analysis of Net Debt¨

 

 

 

At 1 January 2020

Net cash

movement

Exchange movement

Non-cash

changes

 

At 30 June

2020

 

US$'000

US$'000

US$'000

US$'000

US$'000

Cash and cash equivalents

48,153

27,468

(2,163)

-

73,458

Borrowings

(609,463)

25,468(a)

-

(27,441)(b)

(611,436)

Net Debtu

(561,310)

52,936

(2,163)

(27,441)

(537,978)

Lease liabilities

(13,178)

2,053

769

5,739

(4,617)

Conversion option (c)

(46,313)

-

-

(122,248)

(168,561)

 

(620,801)

54,989

(1,394)

(143,950)

(711,156)

 

(a)  Being US$25.5 million interest paid on borrowings, which is presented as operating cash flows in the Statement of cash flows.

(b)  Being accrued interest expense which is presented as operating cash flows in the Statement of cash flows when paid (note 7).

(c)  Notes 16, 18.

 

 

 

 

At 1 January 2019

Net cash

movement

Exchange movement

Non-cash

changes

 

At 30 June

2019

 

US$'000

US$'000

US$'000

US$'000

US$'000

Cash and cash equivalents

26,152

10,656

2,330

-

39,138

Borrowings

(594,177)

24,813(d)

-

(27,185) (e)

(596,549)

Net Debtu

(568,025)

35,469

2,330

(27,185)

(557,411)

Lease liabilities

(1,739)

789

(454)

(4,822)

(6,226)

Conversion option (f)

(2,411)

-

-

(9,218)

(11,629)

Call option over Company's shares

(1,136)

2,215

-

(1,079)

-

 

(573,311)

38,473

1,876

(42,304)

(575,266)

 

(d)  Being US$24.8 million interest paid on borrowings, which is presented as operating cash flows in the Statement of cash flows.

(e)  Being accrued interest expense which is presented as operating cash flows in the Statement of cash flows when paid (note 7).

(f)  Notes 16, 18.

 

 

 

 

 

At 1 January 2019

Net cash

movement

Exchange movement

Non-cash

changes

At 31 December  2019

 

US$'000

US$'000

US$'000

US$'000

US$'000

Cash and cash equivalents

26,152

19,630

2,371

-

48,153

Borrowings

(594,177)

38,128 (g)

-

(53,414) (h)

(609,463)

Net Debtu

(568,025)

57,758

2,371

(53,414)

(561,310)

Lease liabilities

(1,739)

1,879

(570)

(12,748)

(13,178)

Conversion option (i)

(2,411)

-

-

(43,902)

(46,313)

Call option over Company's shares

(1,136)

2,215

-

(1,079)

-

 

(573,311)

61,852

1,801

(111,143)

(620,801)

 

(g)  Being US$50.7 million interest paid on borrowings, which is presented as operating cash flows in the Statement of cash flows, and US$12.6 million net cash inflow from the issue of US$125 million Convertible Bonds and the repurchase of the outstanding US$100 million convertible bonds (note 18).

(h)  Being principally accrued interest expense which is presented as operating cash flows in the Statement of cash flows when paid (note 7).

(i)  Notes 16, 18.

23. Capital commitments

 

At 30 June 2020, the Group had entered into contractual commitments in relation to the acquisition of property, plant and equipment amounting to US$9.7 million (30 June 2019: US$6.6 million, 31 December 2019: US$10.7 million) including US$5.8 million in relation to Pioneer Flotation project (30 June 2019: nil, 31 December 2019: US$7.4 million) and US$2.7 million in relation to POX Hub project (30 June 2019: US$5.1 million, 31 December 2019: US$2.5 million).

 

 

24. Subsequent events

 

Partial conversion of US$125 million Convertible Bonds

During the period after 30 June 2020, the Company has received Conversion Notices in respect of the exercise of conversion rights under the US$125 million Convertible Bonds (note 18). The principal amount of the Convertible Bonds in respect of which the Conversion Notices have been served amounted to an aggregate of US$86.8 million, which, at a fixed exchange price of US$0.1350 per ordinary share, resulted in the issue and allotment of an aggregate of 642,962,951 new ordinary shares.

 

Other

Included in note 2 under the Going Concern section are details of the events that followed the requisitioned general meeting held on 10 August 2020 relating to the certain material subsidiaries based in Russia. An estimate of the financial impact of the events outlined in note 2 cannot be made.

 

 

25. Reconciliation of non-GAAP measures

 

 

 

Six months ended

30 June 2020

US$'000

Six months ended

30 June 2019

(restated)

US$'000

Year ended </