13 April 2011
Petropavlovsk PLC (the "Company")
Notice of Annual General Meeting
Notice of Posting of Annual Report and Financial Statements
The Company confirms that its Annual General Meeting will be held on 19 May 2011 at 11 Grosvenor Place, Belgravia, London SW1X 7HH, commencing at midday. A notice convening that meeting has today been posted to shareholders together with the proxy card. In compliance with Listing Rule 9.6.1, a copy of these documents has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.Hemscott.com/nsm.do. The Notice of Meeting is also available to view and download from the Company's website at www.petropavlovsk.net.
The Annual Report, Financial Statements and Sustainability Report for the year ended 31 December 2010 will be posted to shareholders on Monday 18 April 2011. A copy of these documents is now available to view and download from the Company's website at www.petropavlovsk.net. A copy of these documents has also been submitted to the National Storage Mechanism and will shortly be available for inspection at www.Hemscott.com/nsm.do.
The information contained in the Appendix to this announcement, which is extracted from the 2010 Annual Report and Financial Statements, is included solely for the purposes of complying with DTR 6.3.5 and the requirements it imposes on how to make public, annual financial reports. The Appendix should be read in conjunction with the Company's Annual Results and Financial Statements issued on 31 March 2011. Together, these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material should be read in conjunction with, and is not a substitute for reading, the full 2010 Annual Report and Financial Statements.
The information contained in this announcement does not constitute the Company's statutory accounts as defined in section 434 of the Companies Act 2006 (the "Act") for 2010 or 2009 but is derived from those accounts. The auditors have reported on those accounts and their report was unqualified, with no matters by way of emphasis, and did not contain statements under section 498(2) of the Act (regarding adequacy of accounting records and returns) or under section 498(3) (regarding provision of necessary information and explanations). The statutory accounts for the year ended 31 December 2010 have been approved by the Board and will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 19 May 2011. A copy of the statutory accounts for the year ended 31 December 2009 were also delivered to the Registrar of Companies.
Enquiries:
Petropavlovsk PLC +44 (0) 20 7201 8900
Alya Samokhvalova - Group Head of External Communications
Rachel Tuft - Investor Relations
Merlin +44 (0) 20 7726 8400
David Simpson
Fiona Crosswell
Appendix
1. Statement of Directors' Responsibilities
The following responsibility statement is repeated here solely for the purpose of complying with DTR6.3.5. This statement relates to and is extracted from pages 28-29 of the Annual Report 2010. Responsibility is for the full Annual Report 2010 not the extracted information presented in this announcement and the Annual Results and Financial Statements announcement.
Each of the Directors, whose names and functions are listed on pages 28 to 29 of the Annual Report 2010, confirm that, to the best of their knowledge:
· The Financial Statements, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and
· The Directors' Report, taken together with the Chairman's Statement and Chief Executive Officer's Review, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
2. Principal risks relating to the Group
The most significant risks that may have an adverse impact on the Group's reputation, its ability to meet its strategic objectives and to deliver shareholder value are set out below. Summarised alongside each risk is a description of its potential impact on the Group. Measures in place to manage or mitigate against each specific risk, where within the Group's control, are also described.
The risks set out below, should not be regarded as a complete or comprehensive list of all potential risks and uncertainties that the Group may face which could have an adverse impact on its performance. In addition, additional risks may exist that are currently unknown to the Group and certain risks which are currently believed to be immaterial could turn out to be material and significantly affect the Group's business and financial results.
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OPERATIONAL RISKS
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Risk
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Description and potential impact
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Mitigation
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Delay in supply of / or
failure of equipment /
services
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The Group is reliant on the supply and availability of a number of services and equipment in order to successfully run its operations. For example, timely delivery of mining equipment and jaw crushers and their availability are essential to the Group's ability to extract ore from the Group's assets to crush the mined ore prior to production. Delay in the delivery or the failure of mining equipment could significantly delay production and impact the Group's profitability.
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Contingency plans are in place to address disruption to services. High standards of operation and maintenance of equipment are kept including ensuring that sufficient stocks of spare parts are available. Equipment is inspected at the beginning and end of every shift. Management maintains regular communication with manufacturers and suppliers in order to prevent delays in the delivery of equipment.
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Adverse weather
conditions
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The Group's assets are located in the Russian Far East which is an area that can be subject to severe weather conditions. Severe weather conditions such as cold temperatures in winter could have an adverse impact on operations, including the delivery of supplies, equipment and fuel,
and exploration and extraction levels may fall as a result of such climatic factors.
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The Group seeks to mitigate this risk by ensuring that heating plants at operational bases are regularly maintained and that operational equipment is fitted with cold weather options, which could assist in ensuring that equipment does not fail as a result of adverse weather conditions.
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FINANCIAL RISKS
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Risk
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Description and potential impact
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Mitigation
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Commodity prices
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The Group's profitability can be significantly reduced by a fall in commodity prices and more specifically gold prices. The majority of the Group's revenue and cash flows come from the sale of gold. Traditionally the market price for gold has fluctuated and has been affected by a number of factors over which the Company has no control, including demand and supply.
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The Group does not typically implement hedging or price management strategies, however it does aim to minimise overhead costs on an ongoing basis and to operate and maintain low-cost and efficient operations in order to optimise the Group's returns. The Group's business model is to actively maintain the lowest possible cash cost per gold ounce.
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Exchange rate
fluctuations
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The Company reports its results in US Dollars, which is the currency in which gold is principally traded and therefore in which most of the Group's revenue is generated. Significant costs are incurred in and/or influenced by the local currencies in which the Group operates principally Russian Roubles. In addition, Group operating expenses are denominated in GB Pounds Sterling. The Company's financial condition and results of operations could be adversely affected by changes in the exchange rates between these currencies.
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The Group has adopted a policy of holding a minimum of cash and monetary assets or liabilities in non US Dollar currencies and operates an internal funding structure which seeks to minimise foreign exchange exposure.
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Funding and liquidity
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The Group's future production growth is dependent on its success in funding its existing operations and developing additional reserves. The Group requires funds to invest in and develop its greenfield exploration projects as well as to extend the life and capacity of its existing mining operations. If the Group is unable to raise adequate funding, this may mean that the Group is unable to develop and/or meet its operational commitments.
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The Group's long-term strategic funding needs are set out in a five year strategic plan which is periodically reviewed and monitored by the Executive Committee and the Board. A detailed annual budget is approved by the Board and monthly re-forecasts monitored.
During the year the Group took a number of actions to reduce the impact of this risk. Access to funding was increased through the issue of US$380 million convertible bonds and the listing of IRC Limited on the Main Board of the Hong Kong Stock Exchange, which raised gross proceeds of approximately US$240 million to fund development of the Non‑Precious Metals business.
In addition, IRC has entered into a loan facility with ICBC amounting to US$340 million for the development of the K&S iron ore concentrate project.
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Capital programme
Controls
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The Group has an active capital investment programme as it transforms itself from a small scale mining to a large scale mining company. The failure to deliver the capital investment programme and/or to adhere to agreed budgets or timescales may have an adverse impact on the Group's growth plans and its future profitability.
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The progress in meeting capital investment timeframes and budgets is monitored regularly and a formal process exists by which the Executive Committee and the Board can monitor the progress of material capital projects against the original budgets. The newly created Technical and Strategic Committees both have the responsibility for formulating annual and long-term budgets and forecasts including capital investment budgets and monitoring and reporting on performance against these.
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Health, safety and environmental risks
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Risk
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Description and potential impact
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Mitigation
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Health and safety issues
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The Group's employees are some of its most valuable assets. The Group recognises that it has an obligation to protect the health of its employees and that they have the right to operate in a safe working environment. Certain of the Group's operations are carried out under potentially hazardous conditions. Group employees may become exposed to health and safety risks which may lead to the occurrence of workforce-related misfortunes and harm to the Group's employees. These could also result in production delays, reputational damage and financial loss.
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Health and Safety management systems are in place across the Group to ensure that the operations are managed in accordance with the relevant health and safety regulations and requirements.
The Group has an established health and safety training programme under which its employees undergo initial training on commencement of employment and take part in refresher training on an annual basis.
The Group operates a prompt incident reporting system to the Executive Committee and the Board.
Board level oversight of health and safety issues occurs through the work of the Health, Safety and Environmental Committee. During the year, the incident reporting system was reviewed and enhanced to include the reporting of serious incidents to the Chairman of the Health, Safety and Environmental Committee. Inspections at all project sites take place on a regular basis.
In addition, during the year, the Group commissioned an external third party provider to prepare an Environmental and Social Impact Assessment "ESIA" at Malomir which was published in October 2010. The objective of the assessment was to review and assess environmental, social, operational and occupational hazard issues at the site and to enhance the risk management strategy. The assessment at Malomir will provide a framework for future projects that integrate Russian regulatory requirements with international best practice.
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LEGAL AND REGULATORY RISKS
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Risk
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Description and potential impact
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Mitigation
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Licences and permits
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The Group's principal activity is the mining of precious and non-precious metals which require it to hold licences which permit it to explore and mine in particular areas in Russia. These licences are regulated by Russian governmental agencies and if a material licence was challenged or terminated, this would have a material adverse impact on the Group. In addition, various government regulations require the Group to obtain permits to implement new projects or to renew existing permits. Non-renewal of a permit may cause the Group to discontinue the operations requiring the permit and the imposition of additional conditions may cause the Group to incur additional compliance costs.
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There are established processes in place to monitor the required and existing licences and permits on an ongoing basis and processes are also in place to ensure compliance with the requirements of the licences and permits.
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Restatement of Reserves and Resources.
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The Group's ore reserve and resource estimates are based on many factors and assumptions, including the results of exploratory drilling and an ongoing sampling of the ore bodies; past experience with mining properties; and the experience of the expert engaged to carry out the reserve estimates. Other uncertainties inherent in estimating reserves include subjective judgements and determinations based on available geological, technical, contractual and economic information. Some assumptions may be valid at the time of estimation but may change significantly when new information becomes available.
Changes to any of such assumptions, on which the Group's reserve and resource estimates are based,could lead to the reported reserves being restated. Changes in the reserves and resources could adversely impact the economic life of deposits and the profitability of the Group's operations.
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The first stage of assurance of the accuracy of reserves and resources is by detailed analysis of geological samples in the Group's laboratories.
These laboratories are licensed by the Russian authoritiesa nd use multiple QA/QC procedures. The QA/QC procedures include the use of "standards", "blanks"and "duplicates" as well as cross checking a percentage of all samples analysed, in an independent laboratory in Ulan Ude, Republic of Buryatia, Russia.
The Group engages the services of independent experts, Wardell Armstrong International, to review the Group's reserves and resources calculations for operating mines and development projects on an annual basis to provide additional external assurance.
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Country-specific risks
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Actions by governments or changes in economic, political, judicial, administrative, taxation or other regulatory factors or foreign policy in the countries in which the Group operates or holds its major assets could have an adverse impact on the Group's business or its future performance. Most of the Group's assets and operations are based in Russia.
Russian foreign investment legislation imposes restrictions on the acquisition by foreign investors of direct or indirect interests in strategic sectors of the Russian economy, including in respect of gold reserves in excess of a specified amount or any occurrences of platinum group metals.
None of the Group's assets are currently included on the list of subsoil blocks of federal significance, maintained by the Russian Government ("Strategic Assets"), and on the basis of the Russian foreign investment law and the related legislation now in force, it is not currently expected that any of the Group's assets will be classified as Strategic Assets.
However, if the legislative framework changes in the future, so that some assets of the Group become Strategic Assets, the Group entities holding licences in respect of such deposits may, themselves, become strategic. In this case, such Group entities' rights in relation to such assets may be limited or even terminated (with the compensation of incurred expensesin the course of the exploration of such deposits) under the procedure set out by the Russian Government. If the relevant Group entities are allowed to continue exploring such assets, direct or indirect acquisitions of interests in such entities may require clearance under the Russian foreign investments law.
Fluctuations in the global economy may adversely affect Russia's economy. Russia's economy has recently become increasingly dependent on global economic trends and is more vulnerable to market downturns and economic slowdowns elsewhere in the world, as well as to reductions and fluctuations in the prices of hydrocarbons and minerals.
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To mitigate the Russian economic and banking risk the Group strives to use the banking services of several financial institutions and not keep disproportionately large sums on deposit with a single bank.
The Group seeks to mitigate the political and legal risk by constant monitoring of the proposed and newly adopted legislation to adapt to the changing regulatory environment in the countries in which it operates and specifically in Russia. It also relies on the advice of external counsel in relation to the interpretation and implementation within the Group of new legislation.
The Group closely monitors its assets and the probability of their inclusion into the Strategic Assets lists published by the Russian Government.
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Human Resources risks
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Risk
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Description and potential impact
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Mitigation
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Ability to attract and
retain key senior
management
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The Group's success and growth is closely aligned to the experience, abilities and contributions of certain of its key senior managers, and in particular the Group's Chairman and the Group's Chief Executive.
The Group's growth and profitability may be adversely impacted by the loss of the services of these key senior managers or its inability to attract additional highlyqualified and experienced people.
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Regular reviews of reward structures and incentive plans are carried out in order to attract, retain and incentivise key employees. Succession planning is an important issue on the Board's agenda and was addressed in detail at the Board's strategy meeting held in December 2010.
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Lack of skilled labour
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The Group seeks its skilled labour within the
geographies in which it operates, avoiding the need for higher expatriate labour costs. As the scale of the Group's operations increases, it may experience a shortage of skilled labour which may make it difficult to execute its business plans and/or lead to operational inefficiencies.
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The Group has a long standing programme of investing in education in the regions in which it operates to ensure a constant supply of highly qualified specialists for the Group's operations. Details of the various educational and developmental programmes are set out on pages 60 to 61 of the Annual Report 2010.
In response to the challenges of moving from small scale to large scale mining, additional investment is being made in training and recruitment to improve operational efficiencies.
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3. Related parties the Group entered into transactions with during the reporting period
OJSC Asian-Pacific Bank ('Asian-Pacific Bank'), V.H.M.Y. Holdings Limited, OJSC M2M Private Bank ('M2M Private Bank') and OJSC Kamchatprombank ('Kamchatprombank') are considered related parties as Mr Peter Hambro and Dr Pavel Maslovskiy have an interest in these companies.
OJSC Apatit ('Apatit'), a subsidiary of OJSC PhosAgro ('PhosAgro'), is considered to be a related party due to PhosAgro's minority interest and significant influence in the Group's subsidiary Giproruda.
OJSC Krasnoyarskaya GGK is considered to be a related party due to this entity's minority interest and significant influence in the Group's subsidiary Verhnetisskaya GRK.
Aricom plc ("Aricom") and its subsidiaries were considered to be related parties due to Mr Peter Hambro, Mr Jay Hambro and Dr Pavel Maslovskiy's shareholdings and directorships in those companies and in Petropavlovsk PLC. On 22 April 2009, Aricom plc became a subsidiary of the Group and hence ceased to be a related party requiring disclosure.
Odolgo Joint Venture, Titanium Joint Venture and Vanadium Joint Venture are joint ventures of the Group and hence are related parties.
Omchak Joint Venture was a joint venture of the Group and hence was considered to be a related party until it was acquired and became a subsidiary to the Group (note 29).
Uralmining is an associate of the Group and hence is a related party.
Transactions with related parties the Group entered into during the years ended 31 December 2010 and 2009 are set out below.
Trading Transactions
Related party transactions the Group entered into that relate to the day to day operation of the business are set out below.
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Sales to related parties
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Purchases from related parties
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2010
US$'000
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2009
US$'000
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2010
US$'000
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2009
US$'000
|
|
|
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Aricom and its subsidiaries (a)
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Construction and engineering services
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-
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7,327
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-
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1,062
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Exploration services
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-
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97
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-
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25
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Other
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-
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1,325
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-
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1,464
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-
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8,749
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-
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2,551
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Asian-Pacific Bank
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Sales of gold and silver
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25,617
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33,946
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-
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-
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Other
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723
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1,160
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546
|
1,008
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26,340
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35,106
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546
|
1,008
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Trading transactions with other related parties
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|
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Engineering services provided to Apatit
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3,974
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2,051
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-
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-
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Exploration services provided by Krasnoyarskaya GGK
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-
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-
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7,216
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-
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Other transactions with Krasnoyarskaya GGK
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200
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-
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-
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-
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Rent, insurance and other transactions with other entities in which Mr Peter Hambro and/or Dr Pavel Maslovskiy have a controlling interest or exercise a significant influence
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1,214
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1,425
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5,866
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2,721
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Joint ventures and associates
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455
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18
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26
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-
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5,843
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3, 494
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13,108
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2,721
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(a) Until 22 April 2009 when Aricom became a subsidiary of the Group.
The outstanding balances with related parties at 31 December 2010 and 2009 are set out below.
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Amounts owed by related parties
at 31 December
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Amounts owed to related parties
at 31 December
|
|
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2010
US$'000
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2009
US$'000
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2010
US$'000
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2009
US$'000
|
|
|
|
|
|
|
|
Krasnoyarskaya GGK
|
263
|
-
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1,087
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-
|
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Other entities in which Mr Peter Hambro and/or Dr Pavel Maslovskiy have a controlling interest or exercise a significant influence
|
330
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928
|
1,840
|
1,017
|
|
Apatit
|
925
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398
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-
|
-
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|
Joint ventures and associates
|
75
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2
|
113
|
-
|
|
|
1,593
|
1,328
|
3,040
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1,017
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|
|
|
|
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Banking arrangements
The Group has current and deposit bank accounts with Asian-Pacific Bank.
The bank balances at 31 December 2010 and 2009 are set out below:
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2010
US$'000
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2009
US$'000
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Asian-Pacific Bank
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35,408
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27,577
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Financing transactions
During the year ended 31 December 2010, the Group received an interest-free unsecured loan from Krasnoyarskaya GGK totalling US$2.0 million.
The Group received a number of loans from related parties which were fully repaid before 31 December 2009. Interest on loans received from related parties comprised US$ 884 thousand during the year ended 31 December 2009.
The Group provided a number of loans to the joint ventures (note 19). Interest on the loans to the joint ventures accrued during the year ended 31 December 2010 comprised US$0.2 million (2009: US$0.3 million). There was no outstanding interest on the loans to the joint ventures at 31 December 2010 (31 December 2009: outstanding interest comprised US$0.5 million).
The Group also invested US$1 million in the associate through loans advanced (2009: US$0.7 million) (note 6).
Key management compensation
Key management includes Directors (Executive and Non-Executive) and members of the Executive Committee. The compensation to key management for employee services is set out below.
|
|
2010
|
2009
|
|
|
US$'000
|
US$'000
|
|
Wages and salaries
|
11,440
|
12,085
|
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Pension costs
|
164
|
249
|
|
Share-based compensation
|
1,279
|
2,000
|
|
|
12,883
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14,334
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