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Petropavlovsk Plc (POG)

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Wednesday 24 April, 2019

Petropavlovsk Plc

2018 Annual Results and Q1 2019 Production Update

RNS Number : 9113W
Petropavlovsk PLC
24 April 2019
 

24 April 2019

 

Petropavlovsk PLC

 

Annual Results for the Year Ended 31 December 2018 and Q1 2019 Production Update

 

Petropavlovsk PLC ("Petropavlovsk" or the "Company" or, together with its subsidiaries, the "Group") today issues its audited annual results for the year ended 31 December 2018 and a Q1 2019 Production Update.

 

The financial and operational highlights of both trading periods are as follows

 

FY 2018

§ A management-led turnaround took place in the second half, enabling the Company to meet upwardly revised guidance provided at the H1 2018 trading update; with full-year gold production of 422.3koz (including 51.2k oz of gold contained in refractory concentrates from the new Malomir flotation circuits) (2017: 439.6koz)

§ FY 2018 total cash costs (TCC¨) were contained at $786/oz (2017: $741/oz) due to operational measures taken by the new CEO which brought TCC down to $650/oz in H2 2018 following suboptimal organisation of mine works in H1 2018

§ Group revenue of $499.8m (2017: $587.4m) was affected by the build-up of refractory gold concentrates as at 31 December 2018 leading to EBITDA¨ of $143.0m (2017: $196.8m)

§ All-in Sustaining Costs1 (AISC) were $1,117/oz (2017: $963/oz), reflecting the growth in TCC as well as higher sustaining capital expenditures related to the existing mining operations

§ Profit before tax of $82.4m (2017: $48.9m) reflecting a $101.7m reversal of impairment

§ Net debt¨ of $568m (2017: $585.1m)

§ Commissioning of Autoclaves 1 and 2 completed smoothly and ahead of target at the Pressure Oxidation (POX) Hub

§ The fully ramped-up Malomir flotation circuits have achieved significant improvements on the original design parameters, including up to 50% higher concentrate grades and concentrate yields of up to 50-60% above design

§ Board and Management teams have been strengthened by new appointments.  The Board is now fully compliant with the UK Corporate Governance Code

Q1 2019 (unaudited)

§ Total gold sales of 107.7koz slightly above management expectations with a strong contribution from underground mining at Malomir where grades averaged 8.26g/t

§ 28koz gold recovered from 32kt of high-grade refractory concentrates at the POX Hub

§ Recoveries at the POX Hub were consistent at 91% in March and on track to meet the 94% target set for June 2019

§ Autoclaves 3 and 4 tested and fully functioning in advance of processing additional material from Petropavlovsk's mines and third-party concentrates

§ Completion of the refinancing of IRC's project finance facility with Gazprombank enabling full repayment of the ICBC loan and $57m of bridging loans plus $6m guarantee fee to Petropavlovsk

§ Net debt¨ (unaudited) as of 31 March 2019 reduced to $550.1m

 

Outlook for FY2019 onwards

§ Gold sales[1] are on track to meet the full year target of 450 - 500koz (after processing gold concentrate stockpiles from FY2018)

§ 2019 TCC¨ guidance of $850 - $950/oz (based on a $:RUB exchange rate of 66) reflecting additional costs associated with ramp-up of the POX Hub and optimisation of flotation operations

§ Once the POX Hub is operating at full production from 2020, cash costs are expected to normalise at c.15% below 2019 guidance

§ In 2019, production from the Malomir flotation plant is expected to range between 125kt - 145kt of material grading between 29g/t - 32g/t and the POX Hub is expected to treat 155kt to 175kt of refractory gold concentrates grading 30g/t - 31g/t

§ The above guidance includes processing of gold concentrate produced in 2018 (28.9kt of 26koz contained gold) but excludes potential upside from the processing of third-party refractory gold concentrate.  The Company is currently in discussions with several producers to secure supplies of high-grade concentrates

§ CAPEX¨ in 2019 is expected to range from $45m to 55m and is principally comprised of sustaining, exploration and the remaining POX Hub investment capex

§ Net debt¨ should reduce with the ramp up of production and increase in free cash flow

§ Working capital is expected to be positively affected by the processing of stockpiled concentrates from Pioneer and Albyn, plus the positive impact of a deferred stripping write-down at Pioneer

§ Capital Markets Day to take place in Q3 2019 to provide a detailed update on the progress of the POX Hub, capital expenditure and growth plans for POG

 

Comment from Dr Pavel Maslovskiy, CEO, on the FY 2018 Results and Q1 2019 Production Report:

"Despite re-joining the Company only during the second half of 2018 and after a weak first half performance, I am pleased the team was able to exceed the revised full year guidance given at the time of the half year trading update.  Beyond this, the principal highlight of the year was the completion of the POX Hub which has seen throughput and gold recoveries exceed expectations from even the earliest stage of its ramp-up.  This progress has continued apace in the first quarter of the current financial year, with approximately one quarter of our total production in Q1 being attributed to the processing of our own refractory material.  We remain on target to meet guidance of between 450 - 500koz sales for 2019 with an increasing contribution from processing refractory concentrates.  This guidance excludes the processing of third party concentrates and I look forward to updating the market during the year on our progress on this area of potential upside.

The first quarter gold sales included 28koz of gold from the newly commissioned POX Hub of which we are very proud, and I congratulate the team on this achievement.  Production rates are expected to increase from Q2 2019 once the Malomir flotation plant begins processing higher grade material to produce higher concentrate grades.  Our technical team continues to improve gold recoveries at POX towards its design-rate of 94% and was successful in achieving consistent recoveries of 91% in the month of March.

Significant engineering work has been carried out at the newly-commissioned Malomir flotation plant leading to up to 50% higher gold concentrate grades and up to 50-60% improvement in concentrate yields.  The improvement in these parameters has enabled the Company to carry out test work concerning the viability of mining and processing lower grade ores at Malomir.  Initial stripping at the central pit at Malomir has resulted in the build-up of significant low-grade stockpiles.  This material graded 0.73g/t gold and was trial processed at the flotation plant, yielding economic concentrates grading between 22-24g/t.  This is both a remarkable and significant result which means we will be able to economically treat lower grade ores at Malomir.  There is significant flexibility embedded in our reserves at Malomir where changes in the cut-off grade can be introduced in response to changes in the gold price.  At current gold prices, this implies there is a potential to economically mine lower grade ore reserves.

In preparation for the launch of autoclaves three and four, we are purchasing third-party refractory concentrates at grades of up to 75g/t.  These lines were tested by our engineers and are ready for commissioning once we are confident there is enough availability of stockpiled material to ensure stable production can be achieved at full capacity.  Your Board is also giving due consideration to the proposal of advancing construction of an additional flotation line at Malomir and a two-line flotation plant at Pioneer and accelerating the rate at which we process our refractory ores.  This will allow the Company to optimise utilisation rates at the POX Hub and enable us to leverage the considerable hidden value of 5.31m ounces of refractory ore reserves and, in turn, generate substantially higher cash flows from our asset base.

Corporately, the new $240 million facility for IRC with Gazprombank is on more favourable terms than the previous ICBC facility and provides IRC with an extended period to repay its debt finance through to 2026. This new facility de-risks the Company's liability due to the longer maturity of the facility, alongside a more relaxed amortisation schedule that aligns more closely with the ramp-up of production at the K&S mine. As part of the new facility, 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 Petropavlovsk's initial $160 million liability reducing to $40 million within two to three years, subject to certain conditions being met. For the final two years of the new facility, the guarantee liability will increase to a maximum $120 million to cover the final principal and interest repayments.

Our teams on the ground will continue to work hard to meet the production, development and cost targets we have set for the year and I look forward to updating on our progress against these as the year continues."

Conference Call and Webcast

A live conference call and webcast will take place today at 8:15am BST. Participants will be able to listen to the call by dialling one of the following numbers shortly before 8:15am BST:

            UK toll free number:       0800 358 9473

            UK local number:           +44(0) 3333 000 804

            Participant Password:    74397671#

 

A presentation will be webcasted and can be accessed via this URL, from which a recording of the call will also be made available: http://webcasting.buchanan.uk.com/broadcast/5ca379faeb566331974d517c  

 

 

 

Full Year 2018 - Summary

Note: Figures may not add up due to rounding

 

FY 2018 Financial Highlights

 

 

 

31-Dec-18

31-Dec-17

Total gold produced

koz

422.3

439.6

Gold sold

koz

369.6

439.8

Total Cash Costs¨

$/oz

786

741

All-in Sustaining Costs¨ (AISC)

$/oz

1,117

963

Average realised gold price¨

$/oz

1,263

1,262

 

 

 

 

Group revenue

$m

499.8

587.4

Underlying EBITDA¨

$m

143.0

196.8

Operating Profit

$m

126.6

100.4

Profit before tax

$m

82.4

48.9

 

 

 

 

Capital expenditure¨

$m

134.4

88.1

Net cash from operating activities

$m

217.2

124.0

(Net debt¨)/cash

$m

(568.0)

(585.1)

 

§ Gold production of 422.3koz (2017: 439.6koz) including 51.2koz of gold contained in refractory concentrate stockpiles for later processing at the newly-commissioned Pressure Oxidation Hub (POX)

§ Gold sales of 369.6koz (2017: 439.8koz) reflecting lower production and the stockpiling of refractory concentrates

§ Group revenue was $499.8m (2017: $587.4m) primarily reflecting a 16% decrease in physical volumes of gold sold

§ Total cash cost (TCC) increases were contained to a 6% rise to $786/oz from 2017 levels despite H1 2018 cash costs reaching $899/oz due to suboptimal mine performance in terms of grade control and stripping rates under previous management

§ Underlying EBITDA¨ of $143.0m (2017: $196.8m) was affected by lower sales volumes contributing $36.6m to the decrease with a further $16.4m resulting from an increase in total cash costs

§ Net cash from operating activities increased by 75% to US$217.2m (2017: US$124.0m) primarily due to US$131.8m of advance payments under the gold sales agreements

§ Reduction in year-end Net Debt¨ by $17.1m to $568.0m (2017: $585.1m) due the above operating cash inflows being partially offset by continued investment in fixed assets of US$131m and the provision of bridging loans to Group's associate IRC of $57.0m.

§ Profit before tax rose to $82.4m in 2018 compared to $48.9m in 2017, reflecting the US$102m impairment recognised

§ Capital expenditure¨ investments increased to $134.4m (2017: $88.1m) due to spending on underground development at Pioneer and Malomir and construction of the POX Hub

 

2018 Operational Highlights

§ Gold production of 422.3koz in line with increased H1 2018 guidance of 420 - 450Koz, including 52.1koz of gold contained within high-grade gold refractory concentrate (for processing at the POX Hub)

 

§ JORC Reserve update

§ Ore Reserves increased by 0.56Moz despite depletion to 8.21Moz due to new discoveries at Pioneer and Malomir

 

2018 Development Highlights

§ POX Hub successfully commissioned in Q4 2018

§ Following Q4 commissioning, the first two autoclave lines reached design capacity in record time and consequently first gold was poured on 21 December 2018

§ Stable gold recovery of 93% was achieved in line with design parameters

 

§ Malomir flotation (Stage 1 - 3.6Mtpa)

§ The first flotation line (1.8Mtpa capacity) was commissioned in July, with the second line (1.8Mtpa capacity) coming on stream in October

§ Operating at full capacity, both lines enabled the Company to build up a high-grade refractory stockpile, ready for processing at the POX Hub

§ Significant improvements made to flowsheet resulting in up to 50% increase in gold concentrate grades from c.24g/t to c36-40g/t and an improvement in concentrate yield to around c.2.8% vs. design of 5.5%

 

Corporate Update

§ Refinancing of ICBC project finance facility and renegotiation of Petropavlovsk's guarantee

§ On 12 March 2019, Petropavlovsk shareholders approved the Company's proposal to guarantee the obligations of K&S, a wholly owned subsidiary of IRC Ltd ("IRC"), under two facility agreements with JSC Gazprombank ("Gazprombank") totalling $240m

§ The new facility agreements have an improved loan repayment term along with a reduced guarantee resulting in lower risk for Petropavlovsk

§ This facility allowed IRC to repay in full an outstanding project finance facility K&S had with Industrial and Commercial Bank of China Ltd ("ICBC") and has enabled repayment to Petropavlovsk of $57m of bridge loan financings advanced in 2018 and payment of $6m in guarantee fees owing to it

 

§ Board and Management teams strengthened

§ Following election at the 2018 AGM of Sir Roderic Lyne (Chairman), Mr Robert Jenkins and Dr Pavel Maslovskiy, and the reappointment of Mr Bektas Mukazhanov (Fincraft nominee Director), the Board was strengthened with the appointment of three additional Independent Non-Executive Directors

§ As a result, the Board is fully compliant with the UK Corporate Governance Code and comprises Directors with a wide range of skills and experience, including in the mining industry

§ Mr Harry Kenyon - Slaney was appointed as the Senior Independent Director on 23 April 2019.

§ The return of Dr Maslovskiy as Chief Executive Officer has restored authoritative and expert leadership to the executive team, reflected in much improved performance

 

IRC Limited (IRC)

Petropavlovsk is a major shareholder (31.1%) of IRC and guarantor of two facility agreements for a loan in aggregate of $240m with Gazprombank. In accordance with IAS 28, IRC is treated as an investment in associate.

 

IRC is a vertically integrated iron ore producer and developer in the Russian Far East, listed on the Hong Kong Stock Exchange (ticker: 1029.HK).

 

The following selected summary is extracted from IRC Annual Results for the year ended 31 December 2018:

 

Highlights

§ Financials

§ 39% increase in total revenue to $151.5m (2017: $ 109.3m) on the back of increased production volumes at K&S

§ 42% increase in EBITDA to $28.5m (2017: $20.0m) due to stronger revenues and stricter cost-control

 

§ Operations

§ Iron ore concentrate production up 43% to 2,235Kt (2017: 1,563Kt)

§ Iron ore concentrate sales up 44% to 2,224Kt (2017: 1,539Kt)

§ During December 2018, K&S achieved record-breaking monthly production, operating at an average capacity of 84%

§ Russian and Chinese sections of the 2.2km Amur River Bridge have been successfully connected, and the bridge is expected to be operational in September 2019

 

Q1 2019 Production Update (unaudited)

 

§ Production

 

Gold production (000oz)

 

Asset

Q1 2019

Q1 2018

 
 

Pioneer

21.9

40.9

 

Albyn

41.3

39.4

 

Malomir1

44.5

27.9

 

Pokrovskiy

-

4.3

 

Total

107.7

112.6

 

 

1Production at Malomir includes 27.7koz produced via the POX Hub

 

§ Operations

§ First quarter gold production and sales of 107.7koz which is in-line with the budget and includes c.28koz of gold produced from refractory ore at the POX Hub.  This level of production puts the Company on course to meet the delivery of its FY2019 targets

§ A successful start to the year at Albyn which produced 41.3koz, 12% above budget

§ A strong quarter for Malomir with 44.5koz produced, 22% above budget

§ Production at Pioneer was below expectations due to a combination of delays in the underground workings caused by the persistence of underground water and lower grade material from the open pit (0.60g/t vs 0.87g/t in Q1 2018).  This has been offset by strong performances at Albyn and Malomir

§ A highlight for the quarter was a strong contribution from underground operations at Malomir which produced 17.7koz contained gold from 67kt of ore grading 8.26g/t

 

§ Flotation

§ Test works successfully produced concentrate from lower grade (0.73g/t) material removed during stripping activities ahead of opening the main orebody

§ These activities resulted in 25kt of refractory concentrate being produced at an average grade of 23g/t with an 87% recovery and with improved concentrate yields (c.2.8% instead of 5.5% design)

§ As of the end of the quarter, around 29kt of concentrate at 28.2g/t containing 26koz of gold was stockpiled for processing at POX facilities

 

§ Refractory ore processing at the POX Hub

§ Approximately 32kt of high-grade refractory concentrate was processed through the POX Hub during Q1 at an average grade of 32g/t including stockpiled material

§ POX recoveries were consistent in March at 91%, with the expectation that 94% design-rate recovery will be achieved later in the year

§ The third and fourth lines at the POX Hub were tested during Q1 and shown to be fully-functioning.  These additional lines are ready to begin operating at full capacity once supplies of third-party concentrate can be secured

 

§ Purchase of third-party refractory concentrate

§ The Company has successfully trialled third party concentrates from two different sources and is actively seeking to increase supply from across the region

§ As of the date of this release, two batches of third-party material have been secured, including 20kt at a grade of 40-60g/t and 17kt of material at a grade of 65-75g/t

§ Pilot testing carried out at the Group's in-house scientific and research institute RDC Hydrometallurgy, indicates POX recovery of between 92% to 96%, depending on the properties of the concentrate

 

2019 Outlook

§ 2019 Outlook

§ 125kt -145kt of refractory gold concentrate is planned to be produced at Malomir flotation plant

§ To reach its target, the Company expects to treat a total of 155kt - 175kt of refractory concentrates grading between 29g/t - 32g/t in 2019

 

§ Production

§ Production is expected to increase from the second quarter due to a combination of higher grades treated at the Malomir flotation plant, POX recoveries improving towards their design rate and two further autoclaves are being commissioned

§ POX autoclaves 3 and 4 are ready for commissioning when a sufficient stockpile of third-party concentrate is secured to ensure stable production at full capacity

§ Capex¨

§ Capex guidance remains between $45m to $55m, although Management and the Board are considering the benefits of accelerating the construction of additional flotation lines at Malomir

 

§ Working capital

§ Working capital is expected to be positively affected by the processing of stockpiled concentrates from Pioneer and Albyn

 

Capital Markets Day

Petropavlovsk is planning an institutional capital markets day to be held in London during Q3 2019. The event will focus on technical aspects of the Company's flagship POX Hub development project and medium-term guidance.

 

Enquiries

 

For more information, please visit www.petropavlovsk.net and www.ircgroup.com.hk or contact:

 

 

Petropavlovsk PLC                                         

Patrick Pittaway

Max Zaltsman

+44 (0) 20 7201 8900

[email protected]

 

 

Buchanan

Bobby Morse

Ariadna Peretz

+44 (0) 207 466 5000

[email protected]

 

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014.

 

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, 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 does not form part of this announcement

 

The financial information set out in this release does not constitute the Company's statutory accounts for the years ended 31 December 2018 or 2017 but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2017 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of the Companies Act 2006.
 

FY 2018 CFO Statement

 

Note: Figures may not add up due to rounding

 

Financial Highlights

 

 

 

2018

 

2017

(restated)(c)

Gold produced

'000oz

422.3

439.6

Gold sold 

'000oz

369.6

439.8

Group revenue

US$ million

499.8

587.4

Average realised gold price¨

US$/oz

1,263

1,262

Average LBMA gold price afternoon fixing

US$/oz

1,269

1,257

Total Cash Costsu (a)

US$/oz

786

741

All-in Sustaining Costsu (b)

US$/oz

1,117

963

All-in Costsu (b)

US$/oz

1,332

1,065

Underlying EBITDAu

US$ million

143.0

196.8

Operating profit

US$ million

126.6

100.4

Profit before tax

US$ million

82.4

48.9

Profit for the period

US$ million

25.9

37.1

Profit for the period attributable to equity shareholders of Petropavlovsk PLC

US$ million

24.5

37.0

Basic profit per share

US$

0.01

0.01

Net cash from operating activities

US$ million

217.2

124.0

(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)   See note 2 of the Consolidated Financial Statements for details regarding the restatement which resulted in the 2017 deferred tax expense decrease by US$7.3 million and the depreciation expense increase by US$11.6 million.

 

 

 

31 December 2018

US$ million

31 December

 2017

US$ million

  Cash and cash equivalents

 

26.2

11.4

  Notes(d)

 

(499.0)

(497.7)

  Convertible bonds (e)

 

(95.2)

(91.6)

  Loans(f)

 

-

(7.1)

  Net Debt u

 

(568.0)

(585.1)

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

(e)   US$100 million convertible bonds due on 18 March 2020 at amortised cost.

(f)    US$4 million principal under Sberbank facility at amortised cost.

 

 

Revenue

 

 

 

2018

2017

 

 

US$ million

US$ million

Revenue from hard rock mines

 

470.7

556.2

Revenue from other operations

 

29.1

31.2

 

 

499.8

587.4

 

Group revenue during the period was US$499.8 million, 15% lower than the US$587.4 million achieved in 2017.

 

Revenue from hard rock mines during the period was US$470.7 million, 15% lower than the US$556.2 million achieved in 2017. Gold remains the key commodity produced and sold by the Group, comprising 93% of total revenue generated in 2018. The physical volume of gold sold from hard rock mines decreased by 16% from 439,834oz in 2017 to 369,611oz in 2018. The average realised gold priceu slightly increased from US$1,262/oz in 2017 to US$1,263/oz in 2018. The average realised gold priceu includes a US$(9)/oz effect from hedge arrangements (2017: US$2/oz).

 

The Group recognised a further US$3.2 million revenue from sales of refractory ore concentrate produced at the Malomir flotation plant (2017: nil).

 

Hard rock mines sold 54,746oz of silver in 2018 at an average price of US$15/oz, compared to 65,503oz in 2017 at an average price of US$17/oz.

 

Revenue generated as a result of third-party work by the Group's in-house service companies was US$29.1 million in 2018, a US$2.1 million decrease compared to US$31.2 million in 2017. 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$25.1 million in 2018 compared to US$29.0 million in 2017.

 

Cash flow hedge arrangements

In order to increase certainty in respect of a significant proportion of its cash flows, the Group has entered into a number of gold forward contracts.

 

Forward contracts to sell an aggregate of 200,000oz of gold matured during the 2018 and resulted in a US$(3.4) million net cash settlement by the Group (2017: US$0.8 million cash contribution to revenue from forward contracts to sell an aggregate of 212,501oz of gold).

 

The Group constantly monitors the gold price and hedges some portion of production as considered appropriate. Forward contracts to sell an aggregate of 200Koz of gold at an average price of US$1,252/oz were outstanding as at 31 December 2018. Forward contracts to sell an aggregate of 133Koz of gold at an average price of US$1,252/oz are outstanding as at 24 April 2019.

 

Underlying EBITDA¨ and analysis of operating costs

 

 

 

 

2018

2017

(restated)(b)

 

US$ million

US$ million

Profit for the period

25.9

37.1

Add/(less):

 

 

Investment income

(3.8)

(0.8)

Interest expense

29.5

25.9

Other finance gains

(13.9)

(2.2)

Other finance losses

32.4

28.5

Foreign exchange (gains)/losses

(8.5)

0.7

Accrual for additional mining tax (a)

-

19.9

Taxation

56.5

11.8

Depreciation

102.2

104.8

Impairment of exploration and evaluation assets

12.2

-

Impairment/(reversal of impairment) of ore stockpiles

18.0

(4.7)

Impairment of gold in circuit

2.1

3.9

Impairment of non-trading loans

-

0.6

Reversal of impairment of mining assets

(101.7)

-

Share of results of associates (c)

(8.1)

(28.7)

Underlying EBITDAu

143.0

196.8

       

 

(a)     Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavorable court decisions.

(b)     See note 2 of the Consolidated Financial Statements for details regarding the restatement.

(c)     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 EBITDA¨ as contributed by business segments is set out below.

 

 

 

 

2018

2017

 

US$ million

US$ million

Pioneer

63.1

75.5

Pokrovskiy

(0.5)

0.8

Malomir

37.7

22.1

Albyn

76.6

130.7

Total Hard rock mines

177.0

229.1

Corporate and other

(34.0)

(32.3)

Underlying EBITDAu

143.0

196.8

       

 

 

Hard rock mines 

 

During this period, the hard rock mines generated Underlying EBITDAu of US$177.0 million compared to US$229.1 million Underlying EBITDAu in 2017.

 

Total Cash Costsu for hard rock mines increased from US$741/oz in 2017 to US$786/oz in 2018. The increase in TCCu primarily reflects the effect of inflation of certain Rouble denominated costs, higher volumes of stripping and suboptimal organisation of mining works in the first half of 2018. This effect was partially mitigated by higher grades of ore processed at Pioneer and Malomir and higher recoveries achieved at Pioneer, Albyn and Malomir as well as by the effect of Rouble depreciation. The decrease in physical ounces sold from c.439,834oz in 2017 to c.369,611oz in 2018 resulted in US$36.6 million decrease in the Underlying EBITDAu. The increase in TCCu contributed to a further US$16.4 million decrease in the Underlying EBITDAu. This effect was partially mitigated by the increase in the average realised gold priceu from US$1,262/oz in 2017 to US$1,263/oz in 2018 and US$0.6 million profits from the sale of gold concentrate in 2018.

 

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 stripping ratios, 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.

 

Compared with 2017 there was ongoing inflation of certain Rouble denominated costs, in particular, electricity costs increased by 3% in Rouble terms (decreased by 4% in US Dollar terms) and the cost of diesel increased by 26% in Rouble terms (increased by 17% in US Dollar terms). The Rouble depreciated against the US Dollar by 7% in 2018 compared to 2017, with the average exchange rate for the period of 62.68 Roubles per US Dollar in 2018 compared to 58.32 Roubles per US Dollar in 2017, 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. The Group's mining entities (JSC Pokrovskiy Rudnik, LLC Malomirskiy Rudnik and LLC Albynskiy Rudnik) met eligibility criteria and continued applying 0% mining tax rate in 2018.

 

The Group initially applied a reduced rate of mining tax from 1 July 2016 in its capacity of a RIP participant. The position of the Russian tax authorities was that the effective date for the aforementioned concession should be 1 January 2017 and, accordingly, the Group should be liable for the mining tax of for the six month period to 31 December 2016. Following unfavorable court decisions, the Group has settled an aggregate equivalent of US$19.9 million of mining tax for the six month period to 31 December 2016, interest and penalties, which amounts were recognised as an expense in 2017.

 

 

 

 

 

 

2018

 

2017

 

 

US$ million

%

 

US$ million

%

Staff cost

 

67.3

22

 

72.1

23

Materials

 

93.2

31

 

107.1

34

Fuel

 

45.5

15

 

43.8

14

Electricity

 

26.5

9

 

30.1

10

Other external services

 

46.8

15

 

36.2

12

Other operating expenses

 

23.4

8

 

24.1

7

 

 

302.7

100

 

313.4

100

Movement in ore stockpiles, gold in circuit, bullion in process, limestone and flotation concentrate attributable to gold production (a)

 

(55.6)

 

 

(19.2)

 

Total operating cash expenses

 

247.1

 

 

294.2

 

(a)   Excluding deferred stripping

 

 

 

 

Hard rock mines

2018

2017

 

Pioneer

Pokrovskiy

Malomir

Albyn

Total

Total

 

US$

million

US$

 million

US$

million

US$

million

US$

million

US$

million

Revenue

 

 

 

 

 

 

Gold

171.0

8.2

98.3

189.1

466.7

555.1

Silver

0.6

0.0

0.1

0.2

0.8

1.1             1.1

Flotation concentrate

-

-

3.2

-

3.2

-

 

171.6

8.2

101.6

189.3

470.7

556.2

Expenses

 

 

 

 

 

 

Operating cash expenses 

105.3

8.6

51.2

82.1

247.1

294.2

Refinery and transportation

0.2

0.0

0.1

0.2

0.6

0.8             0.8

Other taxes

2.0

0.1

2.0

2.1

6.2

5.9             5.9

Accrual of additional mining tax(a)

-

-

-

-

-

19.9

Deferred stripping costs

0.9

-

10.6

28.2

39.8

26.2

Depreciation

37.0

0.7

22.7

41.4

101.8

104.6

Reversal of impairment of mining assets

-

-

(83.0)

-

(83.0)

-

Impairment of exploration and evaluation assets

 

 

-

-

12.2

-

12.2

-

Impairment/(reversal of impairment) of ore stockpiles

-

-

0.3

17.7

18.0

(4.7)

Impairment of gold in circuit

1.4

-

0.5

0.2

2.1

3.9

Operating expenses

146.9

9.4

16.7

172.0

344.9

450.7

Result of precious metals operations 

24.8

(1.2)

84.9

17.3

125.8

          105.5

 

 

 

 

 

 

 

Add/(less):

 

 

 

 

 

 

Accrual of additional mining tax(a)

-

-

-

-

-

19.9

Depreciation

37.0

0.7

22.7

41.4

101.8

104.6

Reversal of impairment of mining assets

-

-

(83.0)

-

(83.0)

-

Impairment of exploration and evaluation assets

-

-

12.2

-

12.2

-

Impairment/(reversal of impairment)/ of ore stockpiles

-

-

0.3

17.7

18.0

            (4.7)

Impairment of gold in circuit

1.4

-

0.5

0.2

2.1

             3.9

Segment EBITDA¨

63.1

(0.5)

37.7

76.6

177.0

229.1

 

 

 

 

 

 

 

Physical volume of gold sold, oz

135,001

6,442

77,448

150,720

369,611

439,834

 

 

 

 

 

 

 

Cash costs

 

 

 

 

 

 

 

Operating cash expenses 

105.3

8.6

51.2

82.1

247.1

294.2

Refinery and transportation

0.2

0.0

0.1

0.2

0.6

0.8

Other taxes

2.0

0.1

2.0

2.1

6.2

5.9         

Deferred stripping costs

0.9

-

10.6

28.2

39.8

26.2

Operating cash costs

108.5

8.7

63.9

112.7

293.7

327.1

Deduct: co-product revenue

(0.6)

(0.0)

(0.1)

(0.2)

(0.8)

(1.1)

Deduct: cost of flotation concentrate

-

-

(2.6)

-

(2.6)

-

Total Cash Costsu

107.9

8.6

61.3

112.5

290.3

326.0

 

 

 

 

 

 

 

TCCu, US$/oz

799

1,341

791

747

786

 

741

 

 

 

 

 

 

 

               

(a)   Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavorable court decisions.

All-in Sustaining Costsu  and All-in Costsu

 

AISC¨  increased from US$963/oz in 2017 to US$1,117/oz in 2018. The increase in AISCu  reflects the growth in TCC as well as higher sustaining capital expenditures related to the existing mining operations and impairment of non-refractory ore stockpile at Albyn due to suboptimal organization of mining works in the first half of 2018.

 

AICu  increased from US$1,065/oz in 2017 to US$1,332/oz in 2018, primarily reflecting the increase in AISCu  explained above and Capital Expenditureu in relation to the POX and Malomir flotation plant projects.

 

 

Hard rock mines

2018

2017

 

Pioneer

Pokrovskiy

Malomir

Albyn

Total

Total

 

US$

million

US$

 million

US$

million

US$

million

US$

million

US$

million

 

 

 

 

 

 

 

Physical volume of gold sold, oz

135,001

6,442

77,448

150,720

369,611

439,834

 

 

 

 

 

 

 

Total Cash Costsu

107.9

8.6

61.3

112.5

290.3

326.0

 

 

 

 

 

 

 

TCCu, US$/oz

799

1,341

791

747

786

 

741

 

 

 

 

 

 

 

Impairment/(reversal of impairment) of ore stockpiles

-

-

0.3

17.7

18.0

            (2.5)

Impairment of gold in circuit

1.4

-

0.5

0.2

2.1

             3.9

Adjusted operating costs

109.3

8.7

62.1

130.4

310.5

327.4

 

 

 

 

 

 

 

Central administration expenses

14.3

0.7

8.2

16.0

39.2

39.9

Capitalised stripping at end                  of the period

22.9

-

11.5

12.6

47.0

            39.8

Capitalised stripping at beginning of the period

(0.9)

-

(10.6)

(28.2)

(39.8)

           (26.2)

Close down and site restoration

0.2

-

0.6

0.5

1.2

             1.5

Sustaining exploration expenditures

8.9

-

5.5

4.1

18.5

            16.1

Sustaining Capital Expenditureu

20.0

-

4.6

11.5

36.1

24.9

All-in Sustaining Costsu

174.7

9.3

81.9

146.8

412.7

423.5

 

 

 

 

 

 

 

All-in Sustaining Costsu, US$/oz

1,294

1,449

1,058

974

1,117

963

 

 

 

 

 

 

 

Exploration expenditureu

1.1

-

1.1

1.0

3.1

5.8

Capital Expenditureu

22.7

-

53.9

-

76.7

41.2

Reversal of impairment of ore stockpiles (a)

-

-

-

-

-

(2.2)

All-in Costsu

198.5

9.3

136.9

147.8

492.5

468.3

 

 

 

 

 

 

 

All-in Costsu, US$/oz

1,470

1,449

1,768

980

1,332

1,065

 

 

 

 

 

 

 

 

(a)   Refractory ore stockpiles to be processed at the POX Hub.

 

 

 

 

Corporate and other

 

Corporate and other operations contributed US$(34.0) million to Underlying EBITDA¨ in 2018 compared to US$(32.3) million in 2017. Corporate and other operations primarily include central administration function, the results of in-house service companies and related charges, and the Group's share of results of its associate IRC.

 

The Group has corporate offices in London, Moscow and Blagoveshchensk, which together represent the central administration function. Central administration expenses decreased by US$0.7 million from US$39.9 million in 2017 to US$39.2 million in 2018.

 

The Group recognised US$15.5 million profit in relation to its associate IRC, including US$28.1 million effect from partial reversal of impairment at K&S mine and US$(5.7) million impairment of investment in IRC (2017: US$35.2 million share of profit generated by IRC, including US$40.3 million effect from partial reversal of impairment at K&S mine). IRC contributed US$7.4 million to the Group's Underlying EBITDAu in 2018.

 

Impairment review

 

The Group undertook a review of impairment indicators and impairment reversal indicators of the tangible assets attributable to its gold mining projects and supporting in-house service companies. Detailed calculations of recoverable amounts, which are value-in-use calculations based on discounted cash flows, were prepared which concluded no impairment was required as at 31 December 2018 and 2017.

 

Having considered the excess of estimated recoverable amounts over the carrying values of the associated assets on the balance sheet as at 31 December 2018 and taking into consideration 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 Malomir CGU would be appropriate. Accordingly, a post-tax impairment reversal of US$66.4 million (being US$83.0 million gross impairment reversal net of associated deferred tax liabilities) 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 Malomir.

 

-     A further reversal of impairment previously recorded against the carrying value of the assets of the supporting in-house service companies would be appropriate to the extent of the headroom available at Malomir and Albyn CGUs and relevant carrying values allocated to these CGUs. Accordingly, a post-tax impairment reversal of US$15.2 million (being US$18.7 million gross impairment reversal net of associated deferred tax liabilities) 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:

 

 

2018

2017

Long-term real gold price

US$1,300/oz

US$1,300/oz

Discount rate (a)

8.5%

8.0%

RUB : US$ exchange rate

RUB67 : US$1

RUB60 : US$1

(a)   Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 12.5% (2017: 11.6%)

 

 

 

 

 

 

Impairment of exploration and evaluation assets

The Group performed a review of its exploration and evaluation assets and concluded to suspend exploration at the Flanks of Malomir and surrender relevant licenses. An aggregate impairment charge of US$12.2 million was recorded against associated exploration and evaluation assets.

 

As at 31 December 2018, all exploration and evaluation assets on the balance sheet related to the areas adjacent to the existing mines with ongoing drilling and technical studies being performed.

 

Interest income and expense

 

  

 

2018

2017

 

 

US$ million

US$ million

Investment income

 

3.8

0.8

 

The Group recognised US$2.7 million interest income on loans granted to IRC and US$1.1 million interest income on cash deposits with banks.

 

 

  

 

2018

2017

 

 

US$ million

US$ million

Interest expense

 

62.8

60.2

Interest capitalised

 

(33.7)

(34.6)

Other

 

0.4

0.3

 

 

29.5

25.9

 

Interest expense for the period comprised US$41.9 million of effective interest on the Notes, US$12.6 million of effective interest on the Convertible Bonds, US$1.1 million of effective interest on bank facilities and US$7.2 million of interest on prepayments on gold sale agreements (2017: US$5.3 million of effective interest on the Notes, US$12.2 million of effective interest on the Convertible Bonds and US$42.7 million of effective interest on bank facilities).

 

As the Group continued with active construction of the POX Hub and flotation at Malomir, these projects met eligibility criteria for borrowing costs capitalisation under IAS 23 "Borrowing Costs". US$33.7 million of interest expense was capitalised within property, plant and equipment (2017: US$34.6 million interest capitalised in relation to the POX Hub, Malomir flotation and underground projects at Pioneer and Malomir). With the POX Hub having now achieved commercial production, interest captialisation will cease, resulting in an increased interest expense from 2019 onwards

 

Other finance gains and losses

 

Net other finance losses for the period totalled US$(18.4) million compared to US$(26.3) million of net other finance losses in 2017. Key elements of other finance losses this period include:

-      US$(25.5) million losses recognised in relation to the ICBC guarantee contract to reflect the expected credit losses associated with the ICBC guarantee arrangement;

-      US$(3.7) million result of re-measurement of receivable from IRC under ICBC guarantee arrangements to fair value (net of US$4.0 million contractual guarantee fee charges);

-      US$(2.4) million lifetime expected credit losses recognised on origination of loans granted to IRC and US$(0.8) million further impairment charges in relation to those loans;

-      US$11.7 million gain from re-measurement of the conversion option of the Convertible Bonds to fair value and US$1.9 million gain from re-measurement of the issued the Call Option over the Company's shares to fair value.

 

  

 

Taxation

 

 

 

2018

2017

(restated)

 

 

US$ million

US$ million

Tax charge

 

56.5

11.8

 

The Group is subject to corporation tax under the UK, Russia and Cyprus tax legislation. The statutory tax rate for 2018 was 19.0% in the UK and 20% in Russia. Under the Russian Federal Law 144-FZ dated 23 May 2016 taxpayers who are participants in Regional Investment Projects ("RIP") have the right to apply the reduced corporation tax rate over the period until 2027, subject to eligibility criteria. In 2018 and 2017, LLC Albynskiy Rudnik has received tax relief as a RIP participant and was entitled to the reduced statutory corporation tax rate of 17%.

 

The tax charge for the period arises primarily related to the Group's gold mining operations and is represented by a current tax charge of US$19.9 million (2017: US$24.4 million) and a deferred tax charge, which is a non-cash item, of US$36.6 million (2017: deferred tax credit of US$12.6 million). Included in the deferred tax charge in 2018 is a US$30.6 million charge (2017: US$8.6 million credit) foreign exchange effect 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.

 

During the period, the Group made corporation tax payments which were partially offset by refunds of excessive advance payments made in prior periods and giving a net of US$5.0 million in Russia (2017: corporation tax payments in aggregate of US$31.1 million in Russia).

 

 

Earnings per share

 

 

2018

 

 

2017

(restated)

 

Profit for the period attributable to equity holders of Petropavlovsk PLC

US$24.5 million

US$37.0 million

Weighted average number of Ordinary Shares

3,305,069,755

3,303,768,532

 

Basic profit per ordinary share

US$0.01

US$0.01

 

Basic profit per share for 2018 was US$0.01 (2017: basic profit per share was US$0.01). The total number of Ordinary Shares in issue as at 31 December 2018 was 3,307,151,712 (31 December 2017: 3,303,768,532).

 

Financial position and cash flows

 

 

31 December

2018

31 December 2017

 

US$ million

US$ million

  Cash and cash equivalents

26.2

11.4

  Notes (a)

(499.0)

(497.7)

  Convertible bonds (b)

(95.2)

(91.6)

  Bank loans (c)

-

(7.1)

  Net Debt¨

(568.0)

(585.1)

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

(b)   US$100 million convertible bonds due on 18 March 2020 at amortised cost.

(c)   US$4 million principal under Sberbank facility at amortised cost.

 

 

 

2018

2017

 

US$ million

US$ million

Net cash from operating activities

217.2

124.0

Net cash used in investing activities (d)

(186.5)

(87.0)

Net cash used in financing activities

(13.0)

(38.6)

(d)   Including US$134.4 million Capital Expenditureu (2017: US$88.1 million) and US$56.75 million loans advanced to IRC (2017: US$nil).

 

 

Key movements in cash and Net Debtu

 

 

Cash

Debt

Net Debtu

 

US$ million

US$ million

US$ million

 

As at 1 January 2018

11.4

(596.5)

(585.1)

 

 

Net cash generated by operating activities before working capital changes

122.6

-

 

 

 

Increase in working capital (e)

160.3

-

 

 

 

Income tax paid

(5.0)

-

 

 

 

Capital Expenditureu

(134.4)

-

 

 

 

Amounts repaid under bank loans

(4.0)

4.0

 

 

 

Interest accrued

-

(55.5)

 

 

 

Interest paid

(60.6)(f)

53.8

 

 

 

Transaction costs in connection with bank loans

(6.4)

-

 

 

 

Transaction costs in connection with notes

(2.6)

-

 

 

 

Loans granted (g)

(57.0)

-

 

 

 

Interest received

3.7

-

 

 

 

Other

(1.8)

-

 

 

 

As at 31 December 2018

26.2

(594.2)

(568.0)

 

               

(e)    Including an aggregate of US$163.8 million advance payments received from Gazprombank and Sberbank outstanding as at 31 December 2018. Advance payments are to be settled against physical delivery of gold produced by the Group in regular intervals over the period of up to twenty-four months from the reporting date based on the sales price prevailing at delivery that is determined with reference to LBMA fixing.

(f)    Including US$6.7 million interest paid in relation to advance payments from Gazprombank and Sberbank. 

(g)   Including loans to IRC in the equivalent of US$56.75 million.

 

 

 

Capital Expenditure¨ 

 

The Group invested an aggregate of US$134.4 million in 2018 compared to US$88.1 million in 2017. The key areas of focus in 2018 were on the POX Hub project, for which active development continued ahead of scheduled commissioning in the end of 2018, exploration and development to support the underground mining at Pioneer and Malomir, expansion of tailings dams at Pioneer and Albyn and ongoing exploration related to the areas adjacent to the ore bodies of the Group's main mining operations. The Group capitalised US$33.7 million of interest expense incurred in relation to the Group's debt into the cost of the POX Hub and Malomir flotation (2017: US$34.6 million into the cost of the POX Hub, Malomir flotation and underground development at Pioneer and Malomir).

 

 

Exploration expenditure

Development expenditure and other CAPEXu

Total

CAPEXu

 

 

 

US$ million

US$ million

US$ million

 

 

POX (a)

-

61.5

61.5

 

Pokrovskiy and Pioneer (b)

10.0

19.1

29.1

 

Malomir(c), (d)

5.5

19.3

24.8

 

Albyn

5.0

10.5

15.5

 

Other

1.1

-

1.1

 

Upgrade of in-house service companies

-

2.4

2.4

 

 

21.6

112.8

134.4

                 

(a)   Including US$61.5 million of development expenditure in relation to the POX Hub which is considered to be non-sustaining Capital Expenditureu for the purposes of calculating AISCu and AICu.

(b)   Including US$8.1 million of expenditure in relation to the underground mining project at Pioneer to be sustaining Capital Expenditureu for the purposes of calculating AISCu and AICu.

(c)   Including US$6.1 million of expenditure in relation to the underground mining project at Malomir to be sustaining Capital Expenditureu for the purposes of calculating AISCu and AICu.

(d)   Including US$15.2 million of expenditure in relation to Malomir flotation (including tailing dams), which is considered to be non-sustaining Capital Expenditureu for the purposes of calculating AISCu and AICu.

 

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.

 

 

 

 

31 December 2018

 

31 December 2017

 

GB Pounds Sterling (GBP:US$)

 

0.78

0.74

Russian Rouble (RUB: US$)

 

69.47

57.60

 

The Rouble depreciated by 21% against the US Dollar during 2018, from RUB57.60: US$1 as at 31 December 2017 to RUB69.47: US$1 as at 31 December 2018. The average year-on-year depreciation of the Rouble against the US Dollar was approximately 7%, with the average exchange rate for 2018 being RUB62.68: US$1 compared to RUB58.32: US$1 for 2017. The Group recognised foreign exchange gains of US$8.5 million in 2018 (2017: losses of US$0.7 million) arising primarily on Rouble denominated net monetary assets.

 

 

 

 

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 2018 Annual Report and Accounts. As at 31 December 2018, 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 May 2020. The Group has also performed projections under a layered stressed case that is based on a gold price, which is approximately 10% to 14% lower than the average of the market consensus forecasts, non-refractory gold production approximately 5% lower than projected, and Russian Rouble : US Dollar exchange rate that is approximately 8-9% stronger than the average of the market consensus forecasts. This layered stressed case indicates that mitigating actions will be required to be taken in order to ensure sufficient liquidity for the relevant period to May 2020. This includes sufficient liquidity for the repayment, if necessary, of the Company's US$100 million 9% Convertible Bonds, due in March 2020. The mitigating actions include items within the control of the management, such as cost cutting, reduction of capital and operating expenditure, the deferral of prepayment settlements as well as working capital management.

 

As at 31 December 2018, the Group has guaranteed the outstanding amounts IRC owed to ICBC. The outstanding loan principal was US$169 million as at 31 December 2018. On 19 March 2019, the ICBC Facility was fully refinanced by the loans from Gazprombank. The Group has provided a guarantee in respect of IRC's new $240 million facility, of which approximately $233 million has been drawn down to date. The Gazprombank Facility is subject to an initial $160 million guaranteed by the Group. The assessment of whether there is any material uncertainty that IRC will be able to repay this facility as it falls due is another key element of the Group's overall going concern assessment. IRC projections demonstrate that IRC expects to have sufficient working capital liquidity over the next 12 months and expects to meet its obligations under the Gazprombank Facility. If a missed repayment under debt or guarantee obligations occurs, this would result in events of default which, through cross-defaults and cross-accelerations, could cause all other Group's debt arrangements to become repayable on demand.

 

Having taken into account the aforementioned factors, and after making enquiries and considering the uncertainties described above, the Directors 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 2018 Annual Report and Accounts. Accordingly, they continue to adopt the going concern basis of accounting in preparing consolidated financial statements.

 

2019 Outlook

The Group is currently aiming to achieve 2018 production guidance in the range of 450 - 500 koz. The Group's operating cash expenses are substantially Rouble denominated. The Group expects its TCC in 2019 to be in the range of c.US$850-950/oz at current exchange rates.

 

 

 

 

 

 

 

 

 

FY 2018 Consolidated Annual Financial Statements

PETROPAVLOVSK PLC

Consolidated Statement of Profit or Loss

For the year ended 31 December 2018

 

 

 

2018

2017

(restated) (a)  

 

note

US$'000

US$'000

Group revenue

5

499,775

587,420

Operating expenses

6

(388,643)

(522,267)

Share of results of associate

14

15,480

35,208

Operating profit

 

126,612

100,361

Investment income 

9

3,775

760

Interest expense

9

(29,520)

(25,905)

Other finance gains

9

13,905

2,199

Other finance losses

9

(32,354)

(28,470)

Profit before taxation

 

82,418

48,945

Taxation

10

(56,489)

(11,804)

Profit for the period

 

25,929

37,141

Attributable to:

 

 

 

Equity shareholders of Petropavlovsk PLC

 

24,493

37,006

Non-controlling interests

 

1,436

135

Profit per share

 

 

 

Basic profit per share

11

US$0.01

US$0.01

Diluted profit per share

11

US$0.01

US$0.01

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

 

 

 

 

PETROPAVLOVSK PLC

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2018

 

 

 

 

2018

 

US$'000

2017

(restated)

US$'000

Profit for the period

 

25,929

37,141

Items that may be reclassified subsequently to profit or loss:

 

 

 

Revaluation of available-for-sale investments

 

-

(758)

Exchange differences:

 

 

 

Exchange differences on translating foreign operations

 

(3,183)

832

Share of other comprehensive loss of associate

 

(329)

(458)

Cash flow hedges:

 

 

 

Fair value gains/(losses)

 

20,238

(39,148)

Tax thereon

 

(3,743)

7,343

Transfer to revenue

 

3,419

(808)

Tax thereon

 

(633)

162

Other comprehensive profit/(loss) for the period net of tax

 

15,769

(32,835)

Total comprehensive profit for the period

 

41,698

4,306

Attributable to:

 

 

 

Equity shareholders of Petropavlovsk PLC

 

40,203

4,334

Non-controlling interests

 

1,495

(28)

 

 

41,698

4,306

 

 

 

 

PETROPAVLOVSK PLC

Consolidated Statement of Financial Position

At 31 December 2018

 

 

 

note

31 December 2018

 

US$'000

31 December 2017

(restated)

US$'000

1 January 2017

(restated)

US$'000

Assets

 

 

 

 

Non-current assets

 

 

 

 

Exploration and evaluation assets

12

43,115

53,518

 49,270

Property, plant and equipment

13

1,097,075

937,547

 918,811

Investments in associates

14

85,140

70,890

 36,140

Inventories

15

56,805

72,720

 51,686

Trade and other receivables

16

547

8,931

 11,383

Other non-current assets

 

1,177

347

1,105

 

 

1,283,859

1,143,953

 1,068,395

Current assets

 

 

 

 

Inventories

15

205,844

172,652

 183,266

Trade and other receivables

16

68,394

75,830

 90,430

Loans granted to an associate

25

50,966

-

 -  

Derivative financial instruments

 

-

-

 7,478

Cash and cash equivalents

17

26,152

11,415

 12,642

 

 

351,356

259,897

 293,816

Total assets

 

1,635,215

1,403,850

 1,362,211

Liabilities

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

19

(219,845)

(88,333)

(55,638)

Current income tax payable

 

(1,571)

(940)

(2,288)

Borrowings

20

-

(7,137)

(85,306)

Derivative financial instruments

18

(9,955)

-

 -  

Provision for close down and restoration costs

22

(804)

(200)

 -  

 

 

(232,175)

(96,610)

(143,232)

Net current assets

 

119,181

163,287

 150,584

Non-current liabilities

 

 

 

 

Borrowings

20

(594,177)

(589,337)

(525,906)

Derivative financial instruments

18

(2,411)

(49,684)

(10,314)

Deferred tax liabilities

21

(113,354)

(72,380)

(92,396)

Provision for close down and restoration costs

22

(20,584)

(20,804)

(19,152)

Financial guarantee contract

25

(37,387)

(8,603)

(9,229)

Trade and other payables

19

(33,779)

-

 -  

 

 

(801,692)

(740,808)

(656,997)

Total liabilities

 

(1,033,867)

(837,418)

(800,229)

Net assets

 

601,348

566,432

 561,982

Equity

 

 

 

 

Share capital

23

48,963

48,920

 48,920

Share premium

 

518,142

518,142

 518,142

Hedging reserve

 

(7,166)

(26,388)

 5,900

Share based payments reserve

 

227

144

 -  

Other reserves

 

(17,980)

(17,500)

(17,574)

Retained earnings/(losses)

 

47,538

32,985

(10,602)

Equity attributable to the shareholders of Petropavlovsk PLC

 

589,724

556,303

 544,786

Non-controlling interests

 

11,624

10,129

 17,196

Total equity

 

601,348

566,432

 561,982

 

 

These consolidated financial statements for Petropavlovsk PLC, registered number 4343841, were approved by the Directors on 24 April 2019 and signed on their behalf by

 

 

Sir Roderic Lyne                                                  Pavel Maslovskiy

Director                                                                Director

 

 

PETROPAVLOVSK PLC

Consolidated Statement of Changes in Equity

for the year ended 31 December 2018

 

 

 

 

 

Total attributable to equity holders of Petropavlovsk PLC

 

 

 

 

 

Share

capital

Share premium

Share based payments reserve

Hedging

reserve

Other  reserves(a)

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 2017

 

 

48,920

 

518,142

 

-

 

5,900

 

(17,574)

(1,502)

 

553,886

 

16,447

570,333

 

Correction of errors in accounting for property, plant and equipment and deferred tax liabilities (b)

 

-

-

-

-

-

(9,100)

(9,100)

749

(8,351)

 

Balance

at 1 January 2017 (restated)

 

 

48,920

 

518,142

 

-

 

5,900

 

(17,574)

(10,602)

 

544,786

 

17,196

561,982

 

Total comprehensive (loss)/income (restated)

 

-

-

-

(32,288)

74

36,548

4,334

(28)

4,306

 

Profit for the period (restated)

 

-

-

-

-

-

37,006

37,006

135

37,141

 

Other comprehensive (loss)/income

 

-

-

-

(32,288)

74

(458)

(32,672)

(163)

(32,835)

 

Deferred share awards

 

-

-

144

-

-

-

144

-

144

 

Issue of shares by subsidiary

 

-

-

-

-

-

7,039

7,039

(7,039)

-

 

Balance

at 31 December 2017 (restated)

 

48,920

518,142

144

(26,388)

(17,500)

32,985

556,303

10,129

566,432

 

Impact of adopting IFRS 9 (c)

 

-

-

-

-

2,703

(9,959)

(7,256)

-

(7,256)

 

Impact of adopting IFRS 15 (c)

 

-

-

-

-

-

58

58

-

58

 

Total comprehensive income/(loss)

 

-

-

-

19,222

(3,183)

24,164

40,203

1,495

41,698

 

Profit for the period

 

-

-

-

-

-

24,493

24,493

1,436

25,929

 

Other comprehensive income/(loss)

 

-

-

-

19,222

(3,183)

(329)

15,710

59

15,769

 

Deferred share awards

 

43

-

83

-

-

290

416

-

416

 

Balance

at 31 December 2018

 

48,963

518,142

227

(7,166)

(17,980)

47,538

589,724

11,624

601,348

 

                             

 

(a)             Including translation reserve of US$(18.0) million (31 December 2017: US$(14.8) million).

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

(c)             See note 2 for details of adoption of IFRS 9 and IFRS 15.

 

 

 

PETROPAVLOVSK PLC

Consolidated Statement of Cash Flows

For the year ended 31 December 2018

 

 

note

 

2018

US$'000

2017

US$'000

Cash flows from operating activities

 

 

 

Cash generated from operations

24

282,826

204,306

Interest paid

 

(60,577)

(49,205)

Income tax paid

 

(5,024)

(31,098)

Net cash from operating activities

 

217,225

124,003

Cash flows from investing activities

 

 

 

Purchase of property, plant and equipment

24

(131,213)

(82,295)

Expenditure on exploration and evaluation assets

12

(3,153)

(5,763)

Proceeds from disposal of property, plant and equipment

 

1,170

334

Loans granted

25

(56,960)

-

Interest received

 

3,667

752

Net cash used in investing activities

 

(186,489)

(86,972)

Cash flows from financing activities

 

 

 

Issue of Notes, net of transaction costs

 

-

495,035

Repayments of borrowings

 

(4,006)

(525,789)

Notes related costs

 

(2,599)

-

Debt transaction costs paid in connection with bank loans

 

(6,412)

(9,040)

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

29

-

31,225

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

29

-

(31,225)

Guarantee fee in connection with ICBC facility

 

-

1,158

Net cash used in financing activities

 

(13,017)

(38,636)

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

 

17,719

(1,605)

Effect of exchange rates on cash and cash equivalents

 

(2,982)

378

Cash and cash equivalents at beginning of period

17

11,415

12,642

Cash and cash equivalents at end of period

17

26,152

11,415

 

 

 

 

 

PETROPAVLOVSK PLC

Notes to the Consolidated Financial Statements

For the year ended 31 December 2018

 

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.

 

 

2.         Significant accounting policies

 

2.1.     Basis of preparation and presentation

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

 

Going concern

 

The Group monitors and manages its liquidity risk on an ongoing basis 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 2018 Annual Report and Accounts. As at 31 December 2018, 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 May 2020. The Group has also performed projections under a layered stressed case that is based on a gold price, which is approximately 10% to 14% lower than the average of the market consensus forecasts, non-refractory gold production approximately 5% lower than projected, and Russian Rouble : US Dollar exchange rate that is approximately 8-9% stronger than the average of the market consensus forecasts. This layered stressed case indicates that mitigating actions will be required to be taken in order to ensure sufficient liquidity for the relevant period to May 2020. This includes sufficient liquidity for the repayment, if necessary, of the Company's US$100 million 9% Convertible Bonds, due in March 2020. The mitigating actions include items within the control of the management, such as cost cutting, reduction of capital and operating expenditure, the deferral of prepayment settlements as well as working capital management.

 

As at 31 December 2018, the Group has guaranteed the outstanding amounts IRC owed to ICBC. The outstanding loan principal was US$169 million as at 31 December 2018. On 19 March 2019, the ICBC Facility was fully refinanced by the loans from Gazprombank. The Group has provided a guarantee in respect of IRC's new $240 million facility, of which approximately $233 million has been drawn down to date. The Gazprombank Facility is subject to an initial $160 million guaranteed by the Group (see note 30). The assessment of whether there is any material uncertainty that IRC will be able to repay this facility as it falls due is another key element of the Group's overall going concern assessment. IRC projections demonstrate that IRC expects to have sufficient working capital liquidity over the next 12 months and expects to meet its obligations under the Gazprombank Facility. If a missed repayment under debt or guarantee obligations occurs, this would result in events of default which, through cross-defaults and cross-accelerations, could cause all other Group's debt arrangements to become repayable on demand.

 

Having taken into account the aforementioned factors, and after making enquiries and considering the uncertainties described above, the Directors 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 2018 Annual Report and Accounts. Accordingly, they continue to adopt the going concern basis of accounting in preparing these consolidated financial statements.

 

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. At 31 December 2018 the principal amounts outstanding subject to the guarantee were US$169.6 million (2017: $233.75 million). Under the terms of the arrangement the Group is entitled to receive an annual fee equal to 1.75% of the outstanding amount.

 

The financial guarantee contract liability and the guarantee fee income receivable are accounted for under IFRS 9 "Financial instruments". This standard was adopted as at 1 January 2018 (note 2.2). The valuation of these instruments is complex, as set out within the key estimation disclosures in note 3.

 

As at 31 December 2018, the value of the financial guarantee contract liability recognised was US$37.4 million (1 January 2018: US$11.9 million). The additional provision for expected credit losses (ECL) of US$25.5 million, which reflects the declining credit status of IRC during the year prior to the refinancing agreed in March 2019, has been recognised within Other finance losses (note 9).

 

As at 31 December 2018, the fair value of the receivable under ICBC guarantee arrangements was US$6.8 million (1 January 2018: US$10.5 million) comprising both billed and future fees receivable, less provision for credit losses. The result from re-measurement of the guarantee receivable to fair value of US$3.7 million was recognised within Other finance losses (note 9).

 

As set out in note 30, IRC has subsequently refinanced the ICBC Facility through entering into a US$240 million new facility with Gazprombank. In March 2019, IRC drew down an aggregate of US$228.9 million on the Gazprombank Facility that were used to repay the amounts outstanding under the ICBC Facility of approximately US$169 million in full, the two loans provided by the Group in the equivalent of approximately US$57 million in full and to finance the K&S Project's working capital of approximately US$3 million. Part of the remaining proceeds from the Gazprombank Facility is to be used to repay part of the guarantee fee of US$6 million owed by IRC to the Group in respect of the guarantee of the ICBC Facility. The remaining outstanding contractual guarantee fee of approximately US$5 million is payable by IRC no later than 31 March 2020. In April 2019, IRC has further drawn down US$4.5 million on the Gazprombank Facility.

 

As part of the refinancing the Group issued a new guarantee which was approved by the Company's shareholders on 12 March 2019. The initially guaranteed borrowings total US$160 million. Further description of the revised arrangements are set out in note 30. Under the new guarantee arrangements, the guarantee fees receivable is determined at each reporting date on an independently determined fair value basis.

 

Correction of errors related to property, plant and equipment and deferred tax

 

In calculating depreciation expense for mining assets calculated using the units of production method (described in note 2.8), the Group uses volumes of ore processed during the period divided by total ore reserve estimates, including both refractory and non-refractory ore reserves. This ratio is then applied to the depreciable asset base. As the planned processing of the refractory ores required further capital investment, future budgeted capital expenditure has been added to the net book value of mining assets to determine the depreciable amounts. In 2018, the Group undertook a detailed review of application of these accounting policies and discovered that capital expenditure incurred to date in relation to POX Hub and carried within capital construction in progress was excluded from adjustments to the depreciable amounts. As a result, matching between expected capital expenditure and the mining activity over the life of mine was not fully achieved and depreciation charges in prior periods were understated. As a consequence, property, plant and equipment was overstated by US$35.0 million as at 1 January 2017 and US$46.6 million as at 31 December 2017 and associated deferred tax liability was overstated by US$7.0 million as at 1 January 2017 and US$9.3 million as at 31 December 2017.

 

When preparing consolidated financial statements for relevant prior periods, management applied judgement with regards to whether it was probable that future taxable profits would be available against which the unused tax losses can be utilised and whether it would be appropriate to recognize relevant deferred tax assets accordingly. Management concluded that there was insufficient certainty with regards to relevant project development and availability of future taxable profits against which unused tax credits could be utilised by relevant entities. This was the basis for concluding that recognition of deferred tax assets in relation to unused tax losses would be inappropriate. In 2018, the Group re-analysed criteria for recognising deferred tax assets arising from the unused tax losses under IAS 12 "Income Taxes" and concluded that recognition of deferred tax assets to the extent that the relevant entity has sufficient taxable temporary differences would be appropriate. As a consequence, deferred tax liabilities were previously overstated by US$19.6 million as at 1 January 2017 and US$24.6 million as at 31 December 2017.

 

These errors have been corrected by restating the comparative amounts and the opening balances of assets, liabilities and equity as set out below.

 

Consolidated Statement of Financial Position (extract)

 

 

31 December 2017

(Decrease)/

increase

31 December 2017

1 January 2017

(Decrease)/

increase

1 January 2017

 

 

 

Restated

 

 

Restated

 

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Property, plant and equipment

984,114

 (46,567)

937,547

953,794

 (34,983)

918,811

Deferred tax liabilities

106,271

 (33,891)

72,380

119,028

 (26,632)

92,396

Net assets

579,108

 (12,676)

566,432

570,333

 (8,351)

561,982

 

 

 

 

 

 

 

Retained earnings/ (losses)

47,457

 (14,472)

32,985

 (1,502)

 (9,100)

 (10,602)

Non-controlling interests

8,333

1,796

10,129

16,447

749

17,196

Total equity

579,108

 (12,676)

566,432

570,333

 (8,351)

561,982

 

 

 

 

Consolidated Statement of Profit or Loss (extract)

 

 

2017

(Decrease)/

2017

 

 

increase

Restated

 

US$' 000

US$' 000

US$' 000

Operating expenses

510,683

11,584

522,267

Taxation

19,063

 (7,259)

11,804

Profit for the period

41,466

 (4,325)

37,141

Attributable to:

 

 

 

Equity shareholders of Petropavlovsk PLC

42,378

 (5,372)

37,006

Non-controlling interests

 (912)

1,047

135

 

 

Consolidated Statement of Comprehensive Income (extract)

 

 

2017

(Decrease)/

2017

 

 

increase

Restated

 

US$' 000

US$' 000

US$' 000

Profit for the period

41,466

 (4,325)

37,141

Other comprehensive loss for the period net of tax

 (32,835)

-

 (32,835)

Total comprehensive profit for the period 

8,631

 (4,325)

4,306

Attributable to:

 

 

 

Equity shareholders of Petropavlovsk PLC

9,706

 (5,372)

4,334

Non-controlling interests

 (1,075)

1,047

 (28)

 

 

 

 2.2.        Adoption of new and revised standards and interpretations

 

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

 

The following new and revised Standards and Interpretations that were effective for annual periods beginning on or after 1 January 2018 and applicable to the Group have been adopted:

 

-      IFRS 9 "Financial Instruments".

-      IFRS 15 "Revenue from contracts with customers".

 

The Group applied the modified retrospective transition approach and has not restated comparative information on the initial application of IFRS 9 and IFRS 15. The impact of the adoption of these standards is disclosed below.

 

Impact of adoption - IFRS 9 "Financial Instruments":

 

The standard addresses the classification, measurement and recognition of financial assets and financial liabilities, and introduces new rules for hedge accounting and a new impairment model for financial assets.

 

Classification and measurement: IFRS 9 establishes a principles-based approach to determining whether a financial asset should be measured at amortised cost or fair value, based on the cash flow characteristics of the asset and the business model in which the asset is held.

 

Impairment: The new impairment model requires the recognition of impairment provision based on expected credit losses (ECL) rather than only incurred credit losses as under IAS 39. This may result in an earlier recognition of credit losses.

 

Hedge accounting: The adoption of the new standard did not materially change the amounts recognised in relation to existing hedging arrangements and the Group elected to continue to adopt the hedge accounting provisions of IAS 39.

 

The classification and measurement of financial assets and financial liabilities under IAS 39 and IFRS 9 on the date of initial application, 1 January 2018, are set out below.

 

 

 

 

 

Measurement category

 

Carrying amount as at 1 January 2018

 

Original

under IAS 39

New

under IFRS 9

 

Original

under IAS 39

New

under IFRS 9

Difference

 

 

 

 

US$'000

US$'000

US$'000

Financial assets

 

 

 

 

 

 

Cash and cash equivalents

Amortised cost

Amortised cost

 

11,415

11,415

-

Trade and other receivables:

 

 

 

 

 

 

Trade receivables and contract assets (a)

Amortised cost

Amortised cost

 

9,297

9,256

 (41)

Other receivables - ICBC guarantee arrangements (b), (c)

Amortised cost

FVPL

 

13,077

10,566

 (2,511)

Other receivables (a)

Amortised cost

Amortised cost

 

5,401

4,926

(475)

Other non-current assets (d)

Available for sale

FVPL

 

347

347

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

Trade and other payables

Amortised cost

Amortised cost

 

53,695

53,695

-

Borrowings

Amortised cost

Amortised cost

 

596,474

596,474

-

Financial guarantee (b), (c)

Financial guarantee contract

Financial guarantee contract

 

8,603

11,928

(3,325)

Derivative financial instruments

FVPL

FVPL

 

17,207

17,207

-

Derivative financial instruments - cash flow hedge

FV designated as

a hedging instrument

FV designated as

a hedging instrument

32,477

32,477

-

 

(a)   The difference in carrying amounts is the result of applying new ECL model.

(b)   Please refer to notes 14 and 25 for the details of the financial guarantee issued to IRC in relation to ICBC Facility.

(c)   The following criteria were evaluated when concluding on classification of the financial asset:

- Business model test: Reflects how the financial asset is managed. Business model for the ICBC guarantee asset is concluded to be "hold to collect" and

- SPPI ("Solely payments of Principal and Interest") test: the cash flows the Group is entitled under the guarantee arrangement are not considered to be consistent with a "basic lending arrangement".

In view of the above, the financial asset was classified at FVPL. The difference in carrying amounts is the result of re-measurement of the receivable at fair value.

(d)   US$2.7 million associated accumulated revaluation losses previously recognised through other comprehensive losses were re-classified from Other reserves to Retained earnings.

(e)   The difference in carrying amounts is the result of re-measurement of the associated liability in accordance with ECL model.

(f)    A further US$0.9 million increase in loss allowance was recognised to reflect the impact of adopting the ECL approach by the Group's associate IRC on the Group's share in net assets of IRC (note 14).

 

 

Impact of adoption - IFRS 15 "Revenue from contracts with customers":

 

The main principle under IFRS 15 is that revenues earned from contracts should be apportioned to individual performance obligations on a relative standalone selling price basis, based on a five-step model that involves identifying the contract with a customer, identify the performance obligations in the contract, determining the transaction price, allocating the transaction price to each performance obligation and recognising revenue when a performance obligation is satisfied by transferring a promised good or service to a customer. The timing of revenue recognition under IFRS 15 occurs when control is transferred to the customer, while under IAS 18 this took place when risk and rewards were transferred.

 

Sales of gold and silver: The point of revenue recognition for gold and silver sales is dependent on the contract sales terms. As the transfer of risks and rewards coincides with the transfer of control at a point in time, the Group retains no continuous involvement over the goods sold and consideration is fixed when control is transferred, the timing and amount of revenue recognised for the sale of gold and silver was not affected as a result of adoption of IFRS 15.

 

Other revenue: The adoption of IFRS 15 has resulted in earlier recognition of revenue from procurement of certain materials and consumables for third parties. This change resulted in a corresponding increase in costs of sales and, therefore, did not have material impact on previously reported operating profit. Revenue from engineering and construction contracts was not materially affected as a result of adoption of IFRS 15.

 

 

 

New standards, amendments and interpretations that are applicable to the Group, issued but not yet effective for the reporting period beginning 1 January 2018 and not early adopted.

 

At the date of approval of these financial statements, the following Standards and Interpretations which have not been applied in these consolidated financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

 

-      IFRS 16 'Leases'.

 

The standard replaces IAS 17 'Accounting for Leases' and related interpretations and is effective for annual periods beginning in or after 1 January 2019.

 

The standard will affect primarily the change the accounting treatment by lessees of leases currently classified as operating leases. Lease agreements will give rise to the recognition by the lessee of an asset, representing the right to use the leased item, and a related liability for future lease payments. Lease costs will be recognised in profit or loss in the form of depreciation of the right-of-use asset over the lease term, and finance charges representing the unwind of the discount on the lease liability. The only exceptions are short-term and low-value leases. The accounting for lessors will not change significantly.

 

The Group reviewed the Group's lease and other contractual arrangements over the last year in light of the new lease accounting rules in IFRS 16. The Group expects to recognise right-of-use assets of approximately US$2 million and corresponding lease liabilities.

 

-       Annual improvements to IFRS Standards: 2015-2017 Cycle.

 

There are no other standards and amendments that are not yet effective and would be expected to have a significant impact on the Group's financial statements.

 

 

2.3.         Basis of consolidation

These consolidated financial statements consist of the financial statements of the Company and its subsidiaries as at the reporting date. Subsidiaries are all entities over which the Group has control.

 

Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. Specifically, the Group controls a subsidiary if, and only if, it has all of the following:

 

-      Power over the subsidiary (i.e. existing rights that give it the current ability to direct the relevant activities of the subsidiary).

-      Exposure, or rights, to variable returns from its involvement with the subsidiary.

-      The ability to use its power over the subsidiary to affect its returns.

 

When the Group has less than a majority of the voting rights of a subsidiary or similar rights of a subsidiary, it considers all relevant facts and circumstances in assessing whether it has power over the subsidiary including:

 

-      the size of the Group's holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

-      potential voting rights held by the Group, other vote holders or other parties;

-      rights arising from other contractual arrangements; and

-      any additional facts and circumstances that indicate that the Group has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings.

 

The Company reassesses whether or not it controls a subsidiary if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

 

Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of income and other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary.

 

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

 

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

 

2.4.         Non-controlling interests

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

 

2.5.         Investments in associates

An associate is an entity over which the Group is in a position to exercise significant influence but not control or joint control.

 

Investments in associates are accounted for using the equity method of accounting. Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise the Group's share of the post-acquisition profits or losses of an associate in profit or loss and the Group's share of movements in other comprehensive income of an associate in other comprehensive income.

 

Losses of an associate in excess of the Group's interest in that associate (which includes any long-term interests that, in substance, form part of the Group's net investment in the associate) are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

 

When a Group entity transacts with an associate of the Group, unrealised profits and losses are eliminated to the extent of the Group's interest in the relevant associate.

 

The carrying amount of equity-accounted investments is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

 

2.6.         Foreign currency translation

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

 

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

 

 

As at                          31 December 2018

Average year ended                           31 December 2018

As at                          31 December 2017

Average year ended                           31 December 2017

GB Pounds Sterling (GBP : US$)

0.78

0.75

0.74

0.78

Russian Rouble (RUB : US$)

69.47

62.68

57.60

58.32

 

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

 

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

 

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

 

2.7.         Exploration and evaluation assets

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

 

Exploration and evaluation expenditure comprise costs directly attributable to:

 

-      researching and analysing existing exploration data;

-      conducting geological studies, exploratory drilling and sampling;

-      examining and testing extraction and treatment methods;

-      compiling pre-feasibility and feasibility studies; and

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

 

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

 

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

 

2.8.         Property, plant and equipment

 

Mine development costs

Development expenditure incurred by or on behalf of the Group is accumulated separately for each area of interest in which economically recoverable resources have been identified. Such expenditure includes costs directly attributable to the construction of a mine and the related infrastructure. Once a development decision has been taken, the carrying amount of the exploration and evaluation expenditure in respect of the area of interest is aggregated with the development expenditure and classified under non-current assets as 'mine development costs'. Mine development costs are reclassified as 'mining assets' at the end of the commissioning phase, when the mine is capable of operating in the manner intended by management.

 

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

 

Mining assets

Mining assets are stated at cost less accumulated depreciation. Mining assets include the cost of acquiring and developing mining assets and mineral rights, buildings, vehicles, plant and machinery and other equipment located on mine sites and used in the mining operations.

 

Mining assets, where economic benefits from the asset are consumed in a pattern which is linked to the production level, are depreciated using a units of production method based on the volume of ore reserves. This results in a depreciation charge proportional to the depletion of reserves. The basis for determining ore reserve estimates is set out in note 3.2. Where the mining plan anticipates future capital expenditure to support the mining activity over the life of the mine, the depreciable amount is adjusted for the related assets under construction and estimated future expenditure.

 

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

 

Non-mining assets

Non-mining assets are stated at cost less accumulated depreciation. Non-mining assets are depreciated on a straight-line basis based on estimated useful lives.

 

Capital construction in progress

Capital construction in progress is stated at cost. On completion, the cost of construction is transferred to the appropriate category of property, plant and equipment. Capital construction in progress is not depreciated.

 

Depreciation

Property, plant and equipment are depreciated using a units of production method as set out above or on a straight-line basis based on estimated useful lives. Estimated useful lives normally vary as set out below.

 

 

 

Average life

Number of years

Buildings

15-50

Plant and machinery

3-20

Vehicles

5-7

Office equipment

5-10

Computer equipment

3-5

 

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

 

2.9.         Impairment of non-financial assets

Property, plant and equipment, exploration and evaluation assets and other non-financial assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. This applies to the assets held by the Group itself as well as the Group's share of the assets held by the associates.

 

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

 

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

-      future production levels;

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

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

 

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

 

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

 

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

 

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

 

2.10.       Deferred stripping costs

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

 

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

 

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

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

 

2.11.       Provisions for close down and restoration costs

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

 

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

 

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

 

Changes in the measurement of a liability relating to the decommissioning of plant or other site preparation work (that result from changes in the estimated timing or amount of the cash flow or a change in the discount rate), are added to or deducted from the cost of the related asset in the current period. If a decrease in the liability exceeds the carrying amount of the asset, the excess is recognised immediately in profit or loss. If the asset value is increased and there is an indication that the revised carrying value is not recoverable, an impairment test is performed in accordance with the accounting policy set out above.

 

2.12.       Financial instruments

Financial assets and financial liabilities are recognised in the consolidated statement of financial position when the Group entity becomes party to the contractual provisions of the instrument.

Financial assets and liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs attributable to financial assets and financial liabilities carried at FVPL are expensed in profit or loss.

 

The subsequent measurement of financial assets and liabilities is set out below.

 

Effective interest method

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

 

Financial assets

Classification and subsequent measurement

From 1 January 2018, the Group classified its financial assets in the following measurement categories:

-       those to be measured subsequently at fair value (either through profit or loss or through OCI); and

-       those to be measured at amortised cost.

 

The classification depends on the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset.

 

Financial assets the meet the following conditions are subsequently measured at amortised cost:

-       the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and

-       the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

All other financial assets are subsequently measured at fair value either through OCI or profit or loss.

 

The Group may, at initial recognition, irrevocably designate a financial asset as measured at FVPL if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases.

 

Impairment

From 1 January 2018, the Group assesses on a forward looking basis the ECL associated with its financial assets carried at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk.

 

For trade receivables and contract assets, the group applies the IFRS 9 simplified approach to measuring ECL which uses a lifetime expected loss allowance for all trade receivables and contract assets. Trade receivables and contract assets are written off when there is no reasonable expectation of recovery.

 

Credit-impaired financial assets

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of

that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following

events:

-       significant financial difficulty of the issuer or the borrower;

-       a breach of contract, such as a default or past due event;

-       the lender(s) of the borrower, for economic or contractual reasons relating to the borrower's financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;

-       it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

-       the disappearance of an active market for that financial asset because of financial difficulties; or

-       the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.

 

For credit-impaired financial assets, the credit-adjusted effective interest rate is applied to the amortised cost of the financial asset from initial recognition. When calculating the credit-adjusted effective interest rate, The Group estimates the expected cash flows by considering all contractual terms of the financial asset and ECL.

 

Cash and cash equivalents

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

 

Trade receivables

Trade receivables are recognised initially at fair value and are subsequently measured at amortised cost using the effective interest rate method, less loss allowance.

 

Financial assets - accounting policies applied until 31 December 2017

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

 

Financial assets at fair value through profit or loss

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

 

Available-for-sale financial assets

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

 

Loans and receivables

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

 

Impairment

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

 

Financial liabilities and equity

 

Equity instruments

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

 

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost, using the effective interest method. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method.

 

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

 

 

Trade and other payables

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

 

Financial guarantee contracts

Financial guarantee contracts are recognised as a financial liability at the time the guarantee is issued. The liability is initially measured at fair value and subsequently at the higher of:

-      the amount determined in accordance with the ECL model under IFRS 9 Financial Instruments; and

-      the amount initially recognised less, where appropriate, the cumulative amount of income recognised in accordance with the principles of IFRS 15 Revenue from Contracts with Customers.

 

Derivatives and hedging activities

Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and are subsequently re-measured at fair value. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.

 

The Group designates certain derivative financial instruments as hedging relationships. For the purposes of hedge accounting, hedging relationships may be of three types:

-      fair value hedges are hedges of particular risks that may change the fair value of a recognised asset or liability;

-      cash flow hedges are hedges of particular risks that may change the amount or timing of future cash flows; and

-      hedges of net investment in a foreign entity are hedges of particular risks that may change the carrying value of the net assets of a foreign entity.

 

Currently the Group has only cash flow hedge relationships.

 

To qualify for hedge accounting the hedging relationship must meet several strict conditions on documentation, probability of occurrence, hedge effectiveness and reliability of measurement. If these conditions are not met, then the relationship does not qualify for hedge accounting. In this case the hedging instrument and the hedged item are reported independently as if there were no hedging relationship.

 

The effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The fair value gain or loss relating to the ineffective portion is recognised immediately in profit or loss.

 

Amounts previously recognised in other comprehensive income and accumulated in hedging reserve in equity are reclassified to profit or loss in the periods when the hedged item is recognised in profit or loss, in the same line of the statement of profit or loss as the recognised hedged item.

 

Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income at that time is accumulated in equity and is reclassified to profit or loss when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in profit or loss.

 

Changes in fair value of any derivative instrument that does not qualify for hedge accounting are recognised in profit or loss immediately and included in other finance gains or losses.

 

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

 

2.13.       Provisions

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

 

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

 

2.14.       Inventories

Inventories include the following major categories:

 

-      Stores and spares represent raw materials consumed in the production process as well as spare parts and other maintenance supplies. 

-      Construction materials represent materials for use in capital construction and mine development.

-      Ore in stockpiles represent material that, at the time of extraction, is expected to be processed into a saleable form and sold at a profit. Ore in stockpiles is valued at the average cost per tonne of mining and stockpiling the ore. Quantities of ore in stockpiles ore are assessed through surveys and assays. Ore in stockpiles is classified between current and non-current inventory based on the expected processing schedule in accordance with the Group's mining plan.

-      Work in progress inventory primarily represents gold in processing circuit that has not completed the production process. Work in progress inventory is valued at the average production costs.

-      Deferred stripping costs are included in inventories where appropriate, as set out in note 2.10.

-      Flotation concentrate represents very fine, powder-like product containing the valuable ore mineral from which most of the waste mineral has been eliminated. Flotation concentrate is valued at the average production costs.

 

Inventories are valued at the lower of cost and net realisable value, with cost being determined primarily on a weighted average cost basis.

 

Provisions are recorded to reduce ore in stockpiles, work in process, flotation concentrate and finished goods inventory to net realisable value where the net realisable value is lower than relevant inventory cost at the reporting date. Net realisable value is determined with reference to relevant market prices less estimated costs to complete production and bring the inventory into its saleable form. Provisions are also recorded to reduce mine operating supplies to net realisable value, which is generally determined with reference to salvage or scrap value, when it is determined that the supplies are obsolete. Provisions are reversed to reflect subsequent recoveries in net realisable value where the inventory is still on hand at the reporting date.

 

 

 

2.15.       Leases

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

 

2.16.       Revenue recognition

 

To recognise revenue under IFRS 15, the Group applies the following five steps:

 

-       Identify the contract(s) with a customer.

-       Identify the separate performance obligations in the contract: Performance obligations are promises in a contract to transfer to a customer goods or services that are distinct.

-       Determine the transaction price: The transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring promised goods or services to a customer. If the consideration promised in a contract includes a variable amount, the Group estimates the amount of consideration to which it expects to be entitled in exchange for transferring the promised goods or services to a customer.

-       Allocate the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of each distinct good or service promised in the contract.

-       Recognise revenue when a performance obligation is satisfied by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). A performance obligation may be satisfied at a point in time or over time. For a performance obligation satisfied over time, the Group selects an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied.

 

Sales of gold and silver

The majority of the Group's revenue is derived from the sale of refined gold. The sale of gold is classified as a single performance obligation and revenue is recognised at a point in time when control has passed to the customer, as specified in individual sales contracts. The sales price is determined with reference to LBMA fixing at the time of sale.

 

Silver is a co-product of gold production. Revenue from the sales of silver is recognised in revenue. Sales of silver is classified as a single performance obligation and revenue is recognised at a point in time when control has passed to the customer, as specified in individual sales contracts.

 

Other revenue

Other revenue is recognised as follows:

-      engineering contracts: revenue under each engineering contract is classified as a single performance obligation and revenue is recognised over time based on percentage completion applied to the contract price;

-      flotation concentrate: the sale of flotation concentrate is classified as a single performance obligation and revenue is recognised at a point in time when control has passed to the customer, as specified in individual sales contracts;

-      sales of other goods represent the procurement of materials, consumables and equipment for third parties. Revenue from sales of other goods is classified as a single performance obligation and revenue is recognised at a point in time when control has passed to the customer;

-      other services: revenue from other services is classified as a single performance obligation and revenue is recognised over time during the term of the relevant contract; and

-      rental income from operating leases is classified as a single performance obligation and revenue is recognised over time during the term of the relevant lease.

 

2.17.       Borrowing costs

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

 

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

 

2.18.       Taxation

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

 

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

 

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

 

3.1.         Critical accounting judgements

 

Significant influence over IRC

As at 31 December 2018, the Group was the single largest shareholder of IRC, holding approximately 31.1% of IRC's issued shares. The Group considers that it exercises significant influence, but does not control, over IRC such that it is equity accounted as an investment in an associate, in accordance with IAS 28 "Investments in associates". Significant influence is defined as the power to participate in the financial and operating policy decisions of the investee. If control were to exist then IRC would be required to be consolidated as a subsidiary into the Group's consolidated financial information.

 

In making this assessment, the Group also considered the definition of control under IFRS 10 "Consolidated Financial Statements" being where an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

 

The factors considered included:

-       relative shareholdings

-       shareholder voting rights;

-       rights to nominate and appoint Directors and executive management of IRC;

-       influence over the IRC Board and executive management; and

-       operational independence of IRC. 

 

After taking into account the aforementioned control factors in aggregate, it is considered that the Group does not exercise de facto control over IRC and IRC is not a subsidiary to the Group. Accordingly, accounting treatment applied to treat the Group's investment in IRC is as an investment in associate in accordance with IAS 28 "Investments in associates".

 

Functional currency

IAS 21 "The Effects of Changes in Foreign Exchange Rates" defines functional currency as the currency of the primary economic environment in which the entity operates. The Group therefore performs an analysis of the currencies in which each subsidiary primarily generates and expends cash. This involves an assessment of the currency in which sales are generated and operational and capital expenditures are incurred, and currency in which external borrowing costs are denominated. Management makes judgements in defining the functional currency of the Group's subsidiaries based on economic substance of the transactions relevant to these entities.

 

For each of the Group's consolidated entities, management performed analysis of relevant factors that are indicators of functional currency and, based on the analysis performed, determined functional currency, accordingly. The Group concluded that the functional currency for each of the subsidiaries in Russia, except for its research institute Irgiredmet, is the US Dollar. Functional currency for Irgiredment was concluded to be the Russian Rouble.

 

 

Cash generating unit ("CGU") determination and impairment indicators

The Group exercises judgement in determining the Groups individual CGUs based upon an assessment of the whether the cash inflows generated are capable of being separately identifiable and independent. This assessment considered whether there is an active market for the outputs of each significant element of the production process, including gold concentrate. Management also applies judgement in allocating assets that do not generate independent cash inflows to the Group's CGUs. Any changes to CGU determinations would impact the carrying values of the respective CGUs.

 

The Group considers both external and internal sources of information in assessing whether there are any indications that its CGUs are impaired. External sources of information include changes in the market, economic and legal environment in which the Group operates that are not within its control. Internal sources of information include the manner in which mining assets and plant and equipment are being used or are expected to be used and indicators of economic performance of such assets. Judgement is therefore required to determine whether these updates represent significant changes in the recoverable amount of an asset or CGU, and are therefore indicators of impairment or impairment reversal.

 

Advances from customers under gold sales contracts

During the year ended 31 December 2018, the Group has entered into prepaid gold sales arrangements, which are settled solely through physical delivery and are priced based on the spot gold price, prevailing at the date of the respective shipment. The arrangements fall under IFRS 15 'Revenue from Contracts with Customers' and advances received represent contract liabilities included within Trade and other payables as Advances from customers. As of 31 December 2018, the relevant contract liabilities amount to US$163.8 million (31 December 2017: US$nil). 

 

               

3.2.         Key sources of estimation uncertainty

 

Ore reserve estimates

The Group estimates its ore reserves and mineral resources based on the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC Code) and the internally used Russian Classification System, adjusted to conform with the mining activity to be undertaken under the Group mining plan. Both the JORC Code and the Russian Classification System require the use of reasonable investment assumptions when reporting reserves, including future production estimates, expected future commodity prices and production cash costs.

 

Ore reserve estimates are used in the calculation of depreciation of mining assets using a units of production method (note 13), impairment charges (note 6) and for forecasting the timing of the payment of close down and restoration costs (note 22). Also, for the purposes of impairment reviews and the assessment of life of mine for forecasting the timing of the payment of close down and restoration costs, the Group may take into account mineral resources in addition to ore reserves where there is a high degree of confidence that such resources will be extracted. 

 

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

 

-      Asset carrying values due to changes in estimated future cash flows (note 6).

-      Depreciation charged to profit or loss where such charges are determined by using a units of production method or where the useful economic lives of assets are determined with reference to the life of the mine.

-      Provisions for close down and restoration costs where changes in estimated reserves affect expectations about the timing of the payment of such costs (note 22).

-      Carrying value of deferred tax assets and liabilities (note 21) where changes in estimated reserves affect the carrying value of the relevant assets and liabilities. 

 

Impairment and impairment reversals

The Group reviews the carrying values of property, plant and equipment to determine whether there is any indication that those assets are impaired. The recoverable amount of an asset, or cash-generating unit ('CGU'), is measured as the higher of fair value less costs to sell and value in use.

 

The Group necessarily applies judgement in the determining the assumptions to be applied within the value in use calculations. The key assumptions which formed the basis of forecasting future cash flows and the value in use calculation are set out in note 6.

 

Future changes to the key assumptions in the value in use calculation could impact the carrying value of the respective assets. The impairment assessments are sensitive to changes in commodity prices, foreign exchange rates and discount rates. Changes to these assumptions would result in changes to conclusions in relation to impairment, which could have a significant effect on the consolidated financial statements. Details of impairment and/or impairment reversals, together with a sensitivity analysis, in relation to the property, plant and equipment are set out in note 6.

 

Valuation of financial guarantee contracts

The Group has provided a guarantee over IRC's external borrowings from the Industrial and Commercial Bank of China ("ICBC"). IFRS 9 "Financial Instruments" requires that financial guarantee contracts are valued at the higher of:

 

-      the amount of the loss allowance; and

-      the amount initially recognised less the cumulative amount of income recognised in accordance with the principals of IFRS 15 "Revenue from Contracts with Customers"

 

In determining the loss allowance, the Group must make significant judgements in the estimating the expected credit losses. This includes using a probability-based approach to determine a range of possible outcomes, assessing the time value of money and thereby determining an estimate of the payments required to reimburse ICBC in the event of a future default by IRC.

 

Details of the Group's financial guarantee are set out in note 14. The valuation of the financial guarantee contract liability was sensitive to a number of factors including IRC's default risk and the probability of IRC's refinancing completing as at 31 December 2018. Given the successful completion of the refinancing in March 2019 on improved terms, the valuation of the guarantee liability may reduce materially and the fee receivable asset may increase.

 

Valuation of ore stockpiles

Costs are allocated to ore mined based on the cost per tonne of extraction. At 31 December 2018 the group held ore stockpile inventories of US$93.2 million (2017: US$110.2 million). These are tested for impairment at each reporting date based on the expected costs to complete their processing and the realisable gold price. Changes in these assumptions, particularly for ore stockpiles of a lower grade, can give rise to write downs. In the year ended 31 December 18, the Group recognised a charge of US$18 million and as at 31 December 2018 the Group had US$10.1 million ore stockpiles carried at net realisable value. A 10% reduction in the forecast gold price would give rise to an additional write down of approximately US$1.7 million.

 

Taxation

The Group is subject to income tax in the UK, Russian Federation and Cyprus.

 

Deferred tax liabilities are calculated on taxable temporary differences, being the difference between the tax and accounting base.

 

Deferred tax assets, including those arising from unused tax losses carried forward for the future tax periods and deductible temporary differences, are recognised only when it is either probable that the future taxable profits will be available against which the unused tax losses can be utilised or there are sufficient taxable temporary differences.

 

Assumptions about the generation of future taxable profits depend on management's estimates of future cash flows. Judgements are also required about the application of income tax legislation. In addition, the functional currency for the subsidiaries in Russia is the US Dollar which gives rise to foreign exchange movements in relation to temporary differences and deferred tax (note 10).

 

The aforementioned judgements and assumptions are subject to risk and uncertainty and there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax recognised in the statement of financial position and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, the carrying amount of recognised deferred tax assets may require adjustment, resulting in a corresponding charge or credit to profit or loss. In particular, if the Russian Rouble was 10% weaker as at 31 December 2018, this would give rise to an additional US$13.2 million deferred tax liability and corresponding increase to the tax charge for the year ended 31 December 2018.

 

Details of deferred tax disclosures are set out in note 21.

 

Going Concern

Details about the Group's ability to continue as a going concern are set out in note 2.1.

 

               

3.3.         Other sources of estimation uncertainty

 

Exploration and evaluation costs

The Group's accounting policy for exploration and evaluation expenditure results in exploration and evaluation expenditure being capitalised for those projects where such expenditure is considered likely to be recoverable through future extraction activity or sale or where the exploration activities have not reached a stage which permits a reasonable assessment of the existence of reserves. This policy requires management to make certain estimates and assumptions as to future events and circumstances, in particular whether the Group will proceed with development based on existence of reserves or whether an economically viable extraction operation can be established. Such estimates and assumptions may change from period to period as new information becomes available. If, subsequent to the exploration and evaluation expenditure being capitalised, a judgement is made that recovery of the expenditure is unlikely or the project is to be abandoned, the relevant capitalised amount will be written off to profit or loss. Details of exploration and evaluation assets are set out in note 12.

 

Deferred stripping costs

Stripping costs are deferred and capitalised if they relate to gaining improved access to an identified component of an ore body to be mined in future periods. The capitalised amount is determined based on the volume of waste extracted, compared with expected ore volume in the identified component of the ore body. The identification of the components of a mine's ore body is a critical estimate and is made by reference to the respective life of mine plan. Changes to the life of mine plan, including the life and design of a mine, may result in the capitalisation of production stripping costs or adjustments of the carrying value of stripping costs capitalised in previous periods. As a result, there could be significant adjustments to the amounts of deferred stripping costs capitalised and their classification between current and non-current assets. Details of deferred stripping costs capitalised are set out in note 15.

 

Close down and restoration costs

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

 

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

 

Details of provision for close down and restoration costs are set out in note 22.

 

 

4.         Segment information

 

The Group's reportable segments under IFRS 8, which are aligned with its operating locations, were determined to be Pokrovskiy, Pioneer, Malomir and Albyn hard rock gold mines which are engaged in gold and silver production as well as field exploration and mine development.

 

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 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.

 

2018

Pioneer

Pokrovskiy

Malomir

Albyn

Corporate

and other

Consolidated

 

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Revenue

 

 

 

 

 

 

Gold (a)

171,023

8,173

98,343

189,135

-

466,674

Silver

591

29

61

160

-

841

Flotation concentrate

-

-

3,202

-

-

3,202

Other external revenue

-

-

-

-

29,058

29,058

Inter segment revenue

524

-

807

5

170,916

172,252

Intra group eliminations

(524)

-

(807)

(5)

(170,916)

(172,252)

Total Group revenue from external customers

171,614

8,202

101,606

189,295

29,058

499,775

 

 

 

 

 

 

 

Operating expenses and income

 

 

 

 

 

 

Operating cash costs (b)

(108,466)

(8,667)

(63,913)

(112,687)

(31,286)

(325,019)

Depreciation

(36,982)

(681)

(22,701)

(41,427)

(445)

(102,236)

Central administration expenses

-

-

-

-

(39,195)

(39,195)

Reversal of impairment of mining assets

-

-

82,958

-

18,737

101,695

Impairment of exploration and evaluation assets

-

-

(12,192)

-

-

(12,192)

Impairment of ore stockpiles

-

-

(309)

(17,712)

-

(18,021)

Impairment of gold in circuit

(1,415)

(17)

(536)

(157)

-

(2,125)

Total operating expenses (c)

(146,863)

(9,365)

(16,693)

(171,983)

(52,189)

(397,093)

 

 

 

 

 

 

 

Share of results of associates

-

-

-

-

15,480

15,480

Segment result

24,751

(1,163)

84,913

17,312

(7,651)

118,162

 

 

 

 

 

 

 

Foreign exchange gains

 

 

 

 

 

8,450

Operating profit

 

 

 

 

 

126,612

Investment income

 

 

 

 

 

3,775

Interest expense

 

 

 

 

 

(29,520)

Other finance gains

 

 

 

 

 

13,905

Other finance losses

 

 

 

 

 

(32,354)

Taxation

 

 

 

 

 

(56,489)

Profit for the period

 

 

 

 

 

25,929

Segment assets

437,203

-

630,918

319,139

188,516

1,575,776

Segment liabilities

(66,689)

-

(75,876)

(100,569)

(83,202)

(326,336)

Deferred tax - net

 

 

 

 

 

(113,354)

Unallocated cash

 

 

 

 

 

8,473

Loans granted to associate

 

 

 

 

 

50,966

Borrowings

 

 

 

 

 

(594,177)

Net assets

 

 

 

 

 

601,348

Other segment information

 

 

 

 

 

 

Additions to non-current assets:

 

 

 

 

 

 

Exploration and evaluation expenditure

1,092

-

1,090

971

-

3,153

Capital Expenditure

50,277

-

59,879

14,539

2,558

127,253

Other items capitalised (d)

28,789

-

5,130

(115)

-

33,804

Average number of employees

2,711

-

1,138

1,485

3,347

8,681

 

(a)    Net of US$(3.4) million net of cash settlement paid by the Group for realised cash flow hedges.

(b)    Operating cash costs of Malomir include cost of flotation concentrate sold US$2.6 million.

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

(d)    Interest and close down and restoration costs capitalised (note 13).

 

 

 

 

2017

Pioneer

Pokrovskiy

Malomir

Albyn

Corporate

and other

Consolidated (restated)

 

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Revenue

 

 

 

 

 

 

Gold (e)

202,392

40,687

83,098

228,915

-

555,092

Silver

743

121

42

185

-

1,091

Other external revenue

-

-

-

-

31,237

31,237

Inter segment revenue

815

-

1,001

327

154,325

156,468

Intra group eliminations

(815)

-

(1,001)

(327)

(154,325)

(156,468)

Total Group revenue from external customers

203,135

40,808

83,140

229,100

31,237

587,420

 

 

 

 

 

 

 

Operating expenses and income

 

 

 

 

 

 

Operating cash costs

(127,657)

(39,988)

(61,079)

(98,354)

(30,030)

(357,108)

Accrual for additional mining tax (f)

(6,511)

(2,255)

(2,780)

(8,306)

-

(19,852)

Depreciation

(36,168)

(7,112)

(16,959)

(44,346)

(215)

(104,800)

Central administration expenses

-

-

-

-

(39,944)

(39,944)

Reversal of impairment/(impairment) of ore stockpiles

3,589

(175)

(304)

1,592

-

4,702

Impairment of gold in circuit

(2,594)

(733)

(563)

-

-

(3,890)

Impairment of non-trading loans

-

-

-

-

(629)

(629)

Total operating expenses (g)

(169,341)

(50,263)

(81,685)

(149,414)

(70,818)

(521,521)

 

 

 

 

 

 

 

Share of results of associates

-

-

-

-

35,208

35,208

Segment result

33,794

(9,455)

1,455

79,686

(4,373)

101,107

 

 

 

 

 

 

 

Foreign exchange losses

 

 

 

 

 

(746)

Operating profit

 

 

 

 

 

100,361

Investment income

 

 

 

 

 

                 760

Interest expense

 

 

 

 

 

(25,905)

Other finance gains

 

 

 

 

 

2,199

Other finance losses

 

 

 

 

 

(28,470)

Taxation

 

 

 

 

 

(11,804)

Profit for the period

 

 

 

 

 

37,141

Segment assets

383,012

11,117

474,164

379,040

154,281

1,401,614

Segment liabilities

(35,777)

         (7,583)

(14,474)

(35,949)

(74,781)

(168,564)

Deferred tax - net

 

 

 

 

 

(72,380)

Unallocated cash

 

 

 

 

 

2,236

Borrowings

 

 

 

 

 

(596,474)

Net assets

 

 

 

 

 

566,432

Other segment information

 

 

 

 

 

 

Additions to non-current assets:

 

 

 

 

 

 

Exploration and evaluation expenditure

5,592

-

44

127

-

5,763

Capital Expenditure

44,349

37

29,700

10,000

2,070

86,156

Other items capitalised (h)

26,438

355

8,540

1,052

-

36,385

Average number of employees

1,670

990

1,021

1,535

3,303

8,519

 

(e)    Including US$0.8 million contribution from realised cash flow hedges.

(f)     Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavourable court decisions.

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

(h)    Interest and close down and restoration costs capitalised (note 13).

 

 

Entity wide disclosures

 

Revenue by geographical location (a)

 

2018

2017

 

US$'000

US$'000

Russia and CIS

499,716

587,361

Other

59

59

  

499,775

587,420

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

 

Non-current assets by location of asset (b)

 

2018

2017

 

US$'000

US$'000

(restated)

Russia

1,282,672

1,134,630

Other

50

45

  

1,282,722

1,134,675

(b)   Excluding financial instruments and deferred tax assets.

 

 

Information about major customers

During the years ended 31 December 2018 and 2017, the Group generated revenues from the sales of gold to Russian banks for Russian domestic sales of gold. Included in gold sales revenue for the year ended 31 December 2018 are revenues of US$451 million which arose from sales of gold to two banks that individually accounted for more than 10% of the Group's revenue, namely US$368 million to Sberbank of Russia and US$83 million to Gazprombank (2017: US$555 million which arose from sales of gold to two banks that individually accounted for more than 10% of the Group's revenue, namely US$414 million to Sberbank of Russia and US$142 million to VTB). The proportion of Group revenue of each bank may vary from year to year depending on commercial terms agreed with each bank. Management considers there is no major customer concentration risk due to high liquidity inherent to gold as a commodity.

 

 

5.         Revenue

 

2018

2017

 

US$'000

US$'000

Sales of goods:

 

 

Gold

466,674

555,092

Silver

841

1,091

Flotation concentrate

3,202

-

Other goods

14,603

15,483

Sales of services:

 

 

Engineering and construction contracts

11,653

13,952

Other services

2,136

1,093

Rental income

666

709

  

499,775

587,420

Timing of revenue recognition:

 

 

At a point in time

485,320

571,666

Over time

14,455

15,754

 

499,775

587,420

 

 

6.         Operating expenses and income

 

 

2018

2017

(restated)

 

US$'000

US$'000

Net operating expenses (a)

  427,255  

461,908

Accrual for additional mining tax (b)

          -    

19,852

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

(101,695)

-

Impairment of exploration and evaluation assets

    12,192  

-

Impairment/(reversal of impairment) of ore stockpiles (a)

    18,021  

(4,702)

Impairment of gold in circuit

     2,125  

3,890

Central administration expenses (a)

    39,195  

39,944

Foreign exchange (gains)/losses

(8,450)  

746

Impairment of non-trading loans

        -  

629

 

  388,643  

522,267

(a)  As set out below.

(b) Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavourable court decisions.

 

Net operating expenses

 

 

2018

 

2017

(restated)

 

US$'000

 

US$'000

Depreciation

    102,236  

 

104,800

Staff costs

    76,110  

 

80,071

Materials

    95,282  

 

108,201

Fuel

    45,713  

 

43,793

External services

    48,058  

 

38,719

Mining tax credit

 (131)  

 

-

Electricity

    26,563  

 

30,074

Smelting and transportation costs

        607  

 

794

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

(15,853)  

 

7,456

Taxes other than income

     6,418  

 

5,886

Insurance

     7,168  

 

8,214

Operating lease rentals

     2,034  

 

3,352

Provision for impairment of trade and other receivables

        1,435  

 

364

Bank charges

        414  

 

258

Repair and maintenance

6,078

 

6,643

Security services

3,966

 

2,750

Travel expenses

2,955

 

3,369

Goods for resale

    11,200  

 

11,802

Other operating expenses

7,002  

 

5,362

 

  427,255  

 

461,908

 

 

Central administration expenses

 

 

2018

2017

 

US$'000

US$'000

Staff costs

    25,366  

23,556

Professional fees

     5,531  

6,854

Insurance

        616  

928

Operating lease rentals

     1,723  

1,920

Business travel expenses

     1,541  

1,142

Office costs

        589  

533

Other

     3,829  

5,011

 

    39,195  

39,944

 

 

 

Impairment charges

 

Impairment of mining assets

The Group undertook a review of impairment indicators and impairment reversal indicators of the tangible assets attributable to its gold mining projects and supporting in-house service companies. Detailed calculations of recoverable amounts, which are value-in-use calculations based on discounted cash flows, were prepared which concluded no impairment was required as at 31 December 2018 and 2017.

 

Having considered the excess of estimated recoverable amounts over the carrying values of the associated assets on the statement of financial position as at 31 December 2018 and taking into consideration 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 Malomir CGU would be appropriate. Accordingly, a post-tax impairment reversal of US$66.4 million (being US$83.0 million gross impairment reversal net of associated deferred tax liabilities) 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 Malomir.

 

-      A further reversal of impairment previously recorded against the carrying value of the assets of the supporting in-house service companies would be appropriate to the extent of the headroom available at Malomir and Albyn CGUs and relevant carrying values allocated to these CGUs. Accordingly, a post-tax impairment reversal of US$15.2 million (being US$18.7 million gross impairment reversal net of associated deferred tax liabilities) 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 2018

Year ended

31 December 2017

Long-term real gold price

US$1,300/oz

US$1,300/oz

Discount rate (a)

8.5%

8.0%

RUB : US$ exchange rate

RUB67.0 : US$1

RUB60.0 : US$1

(a) Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 12.5% (2017: 11.6%).

 

With all other assumptions being constant, changes to the aforementioned key assumptions could potentially result in impairment of certain mining assets as set out below.

 

 

 

Potential impairment (a)

Long-term real gold price

US$1,150/oz

US$129 million

Discount rate                          

9.5%

US$12 million

RUB : US$ exchange rate

RUB61.0 : US$1

US$42 million

(a)        Primarily in relation to Pioneer CGU.

 

Impairment of exploration and evaluation assets

The Group performed a review of its exploration and evaluation assets and concluded to suspend exploration at the Flanks of Malomir and surrender the relevant licences. An aggregate impairment charge of US$12.2 million was recorded against associated exploration and evaluation assets. No impairment was recorded against exploration and evaluation assets in 2017.

 

As at 31 December 2018, all exploration and evaluation assets in the statement of financial position related to the areas adjacent to the existing mines (note 12).

 

Impairment of ore stockpiles

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

 

Year ended 31 December 2018

 

Year ended 31 December 2017

 

 

 

Pre-tax impairment charge

Taxation

Post-tax impairment charge

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

Pokrovskiy

-

-

-

175

(35)

140

Pioneer

-

-

-

(3,589)

717

(2,872)

Malomir

309

(62)

247

304

(61)

243

Albyn

17,712

(3,011)

14,701

(1,592)

271

(1,321)

 

18,021

(3,073)

14,948

(4,702)

892

(3,810)

                 

 

 

7.             Auditor's remuneration                   

                                                                                                                   

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

 

 

2018

2017

 

US$'000

US$'000

Audit fees and related fees

 

 

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

803

568

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

 

 

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

320

296

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

65

57

 

1,188

921

Non-audit fees

 

 

Other services pursuant to legislation - interim review

273

231

Fees for reporting accountants services (b)

900

202

Tax services

-

12

 

1,173

445

 

(a)   Including the statutory audit of subsidiaries in the UK and Cyprus.

(b)   Fees payable in relation to the ICBC guarantee restructuring process (notes 25 and 30) (2017: Fees payable in relation to the issuance of the US$500 million 8.125 per cent Guaranteed Notes (note 20).

 

 

8.         Staff costs

 

 

 

 

2018

2017

 

 

US$'000

US$'000

Wages and salaries

 

80,090

81,619

Social security costs

 

20,855

21,696

Pension costs

 

115

168

Share-based compensation

 

416

144

 

 

101,476

103,627

 

 

 

 

Average number of employees

 

8,681

8,519

 

 

 

 

 

 

9.         Financial income and expenses

 

 

 

2018

 

2017

 

US$'000

 

US$'000

Investment income

 

 

 

Interest income

3,775

 

760

 

3,775

 

760

Interest expense

 

 

 

Bank loans

(1,083)

 

(42,701)

Notes

(41,886)

 

(5,308)

Convertible bonds

(12,579)

 

(12,221)

Prepayment on gold sale agreements

(7,213)

 

-

 

(62,761)

 

(60,230)

Interest capitalised

33,666

 

34,592

Unwinding of discount on environmental obligation

(425)

 

(267)

 

(29,520)

 

(25,905)

Other finance gains

 

 

 

Fair value gain on listed equity investments

244

 

-

Fair value gain on derivative financial instruments (a)

13,661

 

-

Financial guarantee fee (b)

-

 

2,199

 

13,905

 

2,199

Other finance losses

 

 

 

Financial guarantee contract (b)

(25,471)

 

-

Fair value loss on guarantee receivable (c)

(3,720)

 

-

Impairment of financial assets (d)

(3,163)

 

-

Loss on bank debt refinancing

-

 

(21,577)

Fair value loss on derivative financial instruments (a)

-

 

(6,893)

 

(32,354)

 

(28,470)

 

(a)     Result from re-measurement of the conversion option of the Convertible Bonds to fair value (note 20) and the Call Option over the Company's shares to fair value (note 18).

(b)    Provision for ECL under ICBC guarantee (notes 14 and 25).

(c)    Result of re-measurement of receivable from IRC under ICBC guarantee arrangements to fair value, net of US$4.0 million guarantee fee charges (note 25).

(d)   Including US$2.4 million lifetime ECL recognised on origination of loans granted to IRC and US$0.8 million further impairment charges in relation to loans granted to IRC (note 25).

 

 

10.      Taxation

 

 

 

 

2018

2017

(restated)

 

US$'000

US$'000

Current tax

 

 

Russian current tax

19,861

24,357

 

19,861

24,357

Deferred tax

 

 

Origination/(reversal) of timing differences (a)

36,628

(12,553)

Total tax charge

56,489

11,804

 

(a)   Including effect of foreign exchange movements in respect of deductible temporary differences of US$30.6 million (year ended 31 December 2017: US$(8.6) 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.

 

  

The charge for the year can be reconciled to the profit before tax per the statement of profit or loss as follows:

 

 

2018

2017

(restated)

 

US$'000

US$'000

Profit before tax

82,418

48,945

Less: share of results of associates

(15,480)

(35,208)

Profit before tax (excluding associates)

66,938

13,737

 

 

 

Tax on profit (excluding associates) at the Russian corporation tax rate of 20% (2017: 20%)

13,387

2,747

Effect of the reduced corporation tax rate (a)

(354)

(2,034)

Effect of different tax rates of subsidiaries operating in other jurisdictions

1,161

912

Tax effect of expenses that are not deductible for tax purposes

1,191

3,043

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

17,055

21,385

Utilisation of previously unrecognised tax losses

(442)

(288)

Foreign exchange movements in respect of deductible temporary differences (c)

30,618

(8,602)

Effect of the reduced corporation tax rate on previously recognised deferred tax

-

(4,283)

Income not subject to tax(d)

(2,209)

-

Other adjustments

(3,918)

(1,076)

Tax charge for the period

56,489

11,804

 

(a)   Under the Russian Federal Law 144-FZ dated 23 May 2016 taxpayers who are participants to the Regional Investment Projects ("RIP") have the right to apply the reduced corporation tax rate over the period until 2027, subject to eligibility criteria. In 2018 and 2017, LLC Albynskiy Rudnik has received tax relief as a RIP participant and was entitled to the reduced statutory corporation tax rate of 17%. 

(b)   Primarily relate to interest expense and central administration expenses incurred in the UK and loss on fair value change on financial guarantee fee (note 9) (2017: primarily relate to central administration expenses and interest expense incurred in the UK).

(c)   Foreign exchange movements primarily arise 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.

(d)   Primarily relate to the fair value income on re-measurement of the conversion option of the Convertible Bonds (note 9).

 

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. The Directors do not anticipate that these exposures will have a material adverse effect upon the Group's financial position.

 

 

11.      Earnings per share

 

 

 

 

 

 

2018

US$'000

2017

(restated)

US$'000

Profit for the period attributable to equity holders of Petropavlovsk PLC

24,493

37,006

Interest expense on convertible bonds (a)

-

-

Profit used to determine diluted earnings per share

24,493

37,006

 

 

No of shares

 

No of shares

Weighted average number of Ordinary Shares

3,305,069,755

3,303,768,532

Adjustments for dilutive potential Ordinary Shares (a)

-

-

Weighted average number of Ordinary Shares for diluted earnings per share

3,305,069,755

3,303,768,532

 

US$

US$

Basic profit per share

0.01

0.01

 

 

 

Diluted profit per share

0.01

0.01

 

(a)   Convertible bonds which could potentially dilute basic profit per ordinary share in the future are not included in the calculation of diluted profit per share because they were anti-dilutive for the years ended 31 December 2018 and 2017.

 

 

 

 

12.      Exploration and evaluation assets

 

 

 

Flanks of Pioneer

Flanks of

Albyn

Flanks of

Malomir

 

Other

 

Total

 

 

US$'000

US$'000

US$'000

US$'000

US$'000

At 1 January 2018

 

5,827

34,076

12,192

1,423

53,518

Additions

 

1,092

971

-

1,090

3,153

Impairment (a)

 

-

-

(12,192)

-

(12,192)

Transfer to mining assets (b)

 

-

-

-

(1,364)

(1,364)

At 31 December 2018

 

6,919

35,047

-

1,149

43,115

(a)  Note 6

(b) Amounts capitalised in respect of limestone, an essential reagent the pressure oxidation process, and underground water deposits to be used for the POX Hub operations.        

 

                                                                                                                                                                                                                                                                          

 

 

 

Flanks of Pioneer

Flanks of

Albyn

Flanks of

Malomir

 

Other (c)

 

Total

 

 

US$'000

US$'000

US$'000

US$'000

US$'000

At 1 January 2017

 

1,750

33,949

12,148

1,423

49,270

Additions

 

5,592

127

44

-

5,763

Transfer to mining assets

 

(1,515)

-

-

-

(1,515)

At 31 December 2017

 

5,827

34,076

12,192

1,423

53,518

(c)  Amounts capitalised in respect of limestone, an essential reagent the pressure oxidation process, and underground water deposits to be used for the POX Hub operations.        

                                                                                                                                                                                                                                                                         

 

 

(d)  

13.      Property, plant and equipment

 

 

Mining

assets

Non-mining assets

Capital construction in progress (c)

Total

 

US$'000

US$'000

US$'000

US$'000

Cost

 

 

 

 

At 1 January 2017

1,821,764

174,476

330,394

2,326,634

Additions

34,725

2,048

49,383

86,156

Interest capitalised (a)

-

-

34,592

34,592

Close down and restoration cost capitalised (note 22)

1,793

-

-

1,793

Transfer from exploration and evaluation assets (note 12)

1,515

-

-

1,515

Transfers from capital construction in progress (b)  

22,397

4,042

(26,439)

-

Disposals

(8,856)

(4,731)

(72)

(13,659)

Reallocation and other transfers

1,727

(1,897)

170

-

Foreign exchange differences

-

1,245

4

1,249

At 31 December 2017 (d)

1,875,065

175,183

388,032

2,438,280

Additions

51,709

2,730

72,814

127,253

Interest capitalised (a)

-

-

33,666

33,666

Close down and restoration cost capitalised (note 22)

138

-

-

138

Transfer from exploration and evaluation assets (note 12)

1,364

-

-

1,364

Transfers from capital construction in progress (b) 

108,479

582

(109,061)

-

Disposals (e) 

(53,744)

(4,526)

(3)

(58,273)

Disposals of subsidiaries

(7,400)

-

-

(7,400)

Reallocation and other transfers

(1,325)

(41)

988

(378)

Foreign exchange differences

-

(4,407)

(21)

(4,428)

At 31 December 2018 (d)

1,974,286

169,521

386,415

2,530,222

 

 

 

 

 

Accumulated depreciation and impairment

 

 

 

 

At 1 January 2017 (restated)

1,249,228

154,679

3,916

1,407,823

Charge for the year (restated)

102,446

2,708

-

105,154

Disposals

(8,062)

(5,196)

-

(13,258)

Reallocation and other transfers

192

2,213

(2,405)

-

Foreign exchange differences

-

1,014

-

1,014

At 31 December 2017 (restated)

1,343,804

155,418

1,511

1,500,733

Charge for the year

100,578

2,016

-

102,594

Disposals

(52,818)

(4,410)

-

(57,228)

Disposals of subsidiaries

(7,400)

-

-

(7,400)

Reallocation and other transfers

(352)

(23)

(3)

(378)

Reversal of impairment (note 6)

(82,958)

(18,737)

-

(101,695)

Foreign exchange differences

-

(3,479)

-

(3,479)

At 31 December 2018

1,300,854

130,785

1,508

1,433,147

Net book value

 

 

 

 

At 31 December 2017 (restated)

531,261

19,765

386,521

937,547

At 31 December 2018

673,432

38,736

384,907

1,097,075

 

(a)  Borrowing costs were capitalised at the weighted average rate of the Group's relevant borrowings being 9.3% (2017: 10%).

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

(c)  Including US$345.8 million costs associated with the POX Hub project (31 December 2017: US$277.6 million).

(d)  Including US$400.8 million of fully depreciated property, plant and equipment (31 December 2017: US$215.6 million).

(e)  Including US$18.1 million of fully depreciated mining fleet that is not suitable for future use due to wear and tear, US$5.8 million of fully depreciated infrastructure that is not intended for future use, US$19.1 million disposals associated with closure of Pokrovskiy mine as the site was transformed into a key component of the POX Hub and US$8.1 million mining fleet parts replaced as part of capital repair and maintenance programme.

 

 

 

 

14.      Investment in associate

 

 

 

 

 

2018

2017

 

 

 

US$'000

US$'000

IRC Limited ('IRC')

 

 

85,140

70,890

 

 

 

85,140

70,890

 

 

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

 

 

IRC

IRC

 

 2018

 2017

 

US$'000

US$'000

Non-current assets

 

 

Exploration and evaluation assets

7,607

7,259

Property, plant and equipment

533,446

458,624

Other non-current assets

15,185

5,486

 

556,238

471,369

Current assets

 

 

Cash and cash equivalents

7,637

8,997

Other current assets

34,195

54,026

 

41,832

63,023

Current liabilities

 

 

Borrowings (a), (b)

(111,954)

(61,309)

Other current liabilities

(55,080)

(37,729)

 

(167,034)

(99,038)

Non-current liabilities

 

 

Borrowings (a)

(100,915)

(162,078)

Other non-current liabilities

(22,501)

(33,722)

 

123,416

195,800

Net assets

307,620

239,554

 

(a)   Including US$158.8 million (2017: US$221.6 million) million under ICBC Facility and loans provided by the Group in the equivalent of US$54.0 million (2017: US$nil) (note 25).

 

(b)   On 13 December 2010, K&S entered into a project finance facility agreement with the Industrial and Commercial Bank of China Limited ('ICBC') (the 'ICBC Facility Agreement') pursuant to which ICBC would lend US$340 million to K&S to be used to fund the construction of the IRC's mining operations at K&S. The facility is guaranteed by the Company (note 25) and originally was repayable semi-annually in 16 instalments US$21.25 million each, starting from December 2014 and is fully repayable by June 2022. On 27 February 2017, ICBC agreed to restructure two repayment instalments originally due for payment on 20 June 2017 and 20 December 2017 in an aggregate amount of US$42.5 million evenly into five subsequent semi-annual repayment instalments.  As a result, each of the repayment instalments due on 20 June 2018, 20 December 2018, 20 June 2019, 20 December 2019 and 20 June 2020 increased by US$8.5 million to an amount equal to US$29.75 million. The outstanding loan principal was US$169.6 million as at 31 December 2018 (2017: US$233.75 million).

 

The loan is carried at amortised cost with effective interest rate 6.8% per annum (2017: 6.41%). ICBC Facility Agreement contains certain financial covenants to which ICBC had agreed to grant a waiver until 31 December 2018, inclusive.

 

As at 31 December 2018 and 31 December 2017, the Group's entire 31.1% ownership in the issued capital of IRC was pledged to ICBC as security for the obligations of the Company as guarantor and in consideration for the waiver of financial covenants under the ICBC facility.

 

On 20 March 2019, IRC repaid the outstanding loan principal and interest in full as set out below and terminated the ICBC Facility Agreement.

 

On 18 December 2018, IRC into two facility agreements for a loan in aggregate of US$240 million with Gazprombank (the "Gazprombank Facility"). The Gazprombank Facility will mature in March 2026 and consists of two tranches. The principal under the first tranche amounts to US$160 million with interest being charged at 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.

 

In March 2019, IRC drew down an aggregate of US$228.9 million on the Gazprombank Facility that were used to repay the amounts outstanding under ICBC facility of approximately US$169 million in full and the loans provided by the Group in the equivalent of approximately US$57 million in full, the remaining proceeds were to finance the K&S Project's working capital of approximately US$3 million. In April 2019, IRC has further drawn down US$4.5 million on the Gazprombank Facility.

 

 

  

 

 

 

IRC

 

IRC

 

Year ended

31 December 2018
 

US$'000

Year ended

31 December 2017
 

US$'000

Revenue

151,549

109,265

Net operating (expenses)/ income

(53,876)

25,657

Including:

 

 

Depreciation

(21,208)

(14,618)

Reversal of impairment of mining assets 

90,483

129,614

Foreign exchange gains/(losses)

4,554

(859)

Impairment of financial assets

(7,741)

-

Investment income

82

114

Interest expense

(21,679)

(22,410)

Taxation

(130)

590

Profit for the period 

68,205

113,216

Other comprehensive loss

(1,057)

(1,470)

Total comprehensive profit

67,148

111,746

 

 

 

Group's share %

31.1%

31.1%

Group's share in profit for the period

21,210

35,208

Impairment of investment in associate

(5,730)

-

Share of results of associate

15,480

35,208

 

Impairment of investment in associate

The Group undertook a review of impairment indicators of its investment in IRC. Detailed calculations of recoverable amounts, which are value-in-use calculations based on discounted cash flows, were prepared which concluded a US$5.7 million impairment was required as at 31 December 2018 (2017: US$nil).

 

 

 

 

15.      Inventories

 

 

 

 

2018

2017

 

 

 

US$'000

US$'000

Current

 

 

 

 

Construction materials

 

 

6,267

6,792

Stores and spares

 

 

69,082

57,226

Ore in stockpiles (a), (b)

 

 

36,395

37,496

Gold in circuit

 

 

16,751

24,088

Deferred stripping costs

 

 

46,988

39,767

Bullion in process

 

 

606

391

Flotation concentrate

 

 

25,654

-

Other

 

 

4,101

6,892

 

 

 

205,844

172,652

Non-current

 

 

 

 

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

 

 

56,805

72,720

 

 

 

56,805

72,720

 

(a)   As at 31 December 2018, ore in stockpiles include balances in the aggregate of US$10.1 million carried at net realisable value (2017: US$28.9 million).

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

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

 

  

16.      Trade and other receivables

 

 

 

 

2018

2017

 

 

 

US$'000

US$'000

Current

 

 

 

 

VAT recoverable

 

 

20,474

20,438

Advances to suppliers

 

 

5,919

11,343

Prepayments for property, plant and equipment

 

 

7,233

5,809

Trade receivables (a)

 

 

13,389

9,297

Contract assets

 

 

3,307

-

Guarantee fee receivable (b)

 

 

6,829

4,681

Other debtors (c)

 

 

11,243

24,262

 

 

 

68,394

75,830

Non-current

 

 

 

 

Guarantee fee receivable (b)

 

 

-

8,396

Other

 

 

547

535

 

 

 

547

8,931

 

(a)   Net of provision for impairment of US$0.9 million (2017: US$0.2 million). Trade receivables are generally due for settlement between three and twelve months.

(b)   Please refer to notes 14 and 25 for the details of ICBC guarantee arrangements. Measured at fair value as at 31 December 2019 (note 2.2) and considered Level 3 of the fair value hierarchy which valuation incorporates the following inputs:

-      Assessment of the credit standing of IRC and yield on comparable bonds issued by mining companies of a similar credit standing;

-      Share price and share price volatility of IRC as at 31 Dec 2018;

-      Prospective terms of the proposed refinancing of IRC debt and the likelihood of this being achieved.

(c)   Net of provision for impairment of US$1.7 million (2017: US$1.3 million).

 

Other than receivables from IRC in the aggregate of US$2.1 million (2017: US$1.0 million), there is no significant concentration of credit risk with respect to trade and other receivables. The Group has implemented policies that require appropriate credit checks on potential customers before granting credit. The Group has adopted a policy of only dealing with creditworthy counterparties. The Group's exposure and credit ratings of its counterparties are monitored by the Board of Directors. The maximum credit risk of financial assets is represented by the carrying value of the asset.

 

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

 

 

17.      Cash and cash equivalents

 

 

 

 

2018

2017

 

 

 

US$'000

US$'000

Cash at bank and in hand

 

 

10,682

8,109

Short-term bank deposits

 

 

15,470

3,306

 

 

 

26,152

11,415

 

 

18.      Derivative financial instruments

 

 

31 December 2018

 

 

31 December 2017

 

Assets

Liabilities

 

 

Assets

Liabilities

 

US$'000

US$'000

 

 

US$'000

US$'000

Forward gold contracts - cash flow hedge (a), (b), (c)

-

(8,819)

 

 

-

(32,477)

Call Option over the Company's shares (d)

-

(1,136)

 

 

-

(3,097)

Conversion option (e), (f)

-

(2,411)        

 

 

-

(14,110)

 

-

(12,366)

 

 

-                    

(49,684)

 

(a)   Forward contracts to sell an aggregate of 200,000 ounces of gold at an average price of US$1,252 per ounce are outstanding as at 31 December 2018 (31 December 2017: 400,000 ounces of gold at an average price of US$1,252 per ounce).

 

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

-      gold forward curves observable at quoted intervals; and

-      observable credit spreads.

 

(c)   The hedged forecast transactions are expected to occur at various dates during the period to December 2019.

 

Gain and losses recognised in the hedging reserve in equity as at the reporting date will be recognised in profit or loss in the periods during which the hedged gold sale transactions affect profit or loss.

 

There was no ineffectiveness to be recorded from the cash flow hedge during the years ended 31 December 2018 and 2017.

 

(d)   Cash settled call option issued in relation to 3.6 per cent. of the outstanding aggregate ordinary share capital in the Company exercisable between December 2018 and June 2019 at strike price of £0.068. Measured at fair value and considered as Level 3 of the fair value hierarchy which valuation incorporates the following inputs:

-      historic share price volatility;

-      historic GBP : US$ exchange rate volatility;

-      conversion price;

-      time to maturity; and

-      risk free rate.

 

(e)   Note 20.

 

(f)    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;

-      historic share price volatility;

-      historic GBP : US$ exchange rate volatility;

-      dividend yield;

-      conversion price;

-      time to maturity; and

-      risk free rate.

 

 

19.      Trade and other payables

 

 

 

 

2018

2017

 

 

 

US$'000

US$'000

Current

Trade payables

 

 

50,099

39,902

Payables for property, plant and equipment

 

 

5,242

10,389

Advances from customers (a)

 

 

131,752

826

Advances received on resale contracts (b)

 

 

5,432

1,029

Accruals and other payables

 

 

27,320

36,187

 

 

 

219,845

88,333

Non-current

 

 

 

 

Advances from customers (c)

 

 

33,779

-

 

 

 

33,779

-

 

(a)   The current advances from customers as at 31 December 2018 include US$86.0 million and US$44.0 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 9.

 

(b)   Amounts included in advances received on resale contracts at 31 December 2018 and 31 December 2017 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.

 

(c)   The non-current advances from customers as at 31 December 2018 include US$33.8 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 9.

 

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

 

 

20.      Borrowings

 

 

 

2018

2017

 

 

US$'000

US$'000

Borrowings at amortised cost

 

 

 

Notes (a)

 

499,007

497,747

Convertible bonds (b)

 

95,170

91,590

Bank loans (c)

 

-

7,137

 

 

594,177

596,474

 

 

 

 

Amount due for settlement within 12 months

 

-

7,137

Amount due for settlement after 12 months

 

594,177

589,337

 

 

594,177

596,474

 

(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)   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 liabilities.

 

As at 31 December 2018, the fair value of debt component of the convertible bonds, considered as Level 2 of the fair value hierarchy, amounted to US$86.8 million (31 December 2017: US$102.1 million). Valuation incorporates the following inputs: the Group's credit risk and implied credit spreads, time to maturity and risk free rate.

 

As at 31 December 2018, 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$89.2 million (31 December 2017: US$116.3 million).

 

(c)   The weighted average interest rate during the year ended 31 December 2018 was 15.0% (2017: 9.3%).

 

As at 31 December 2018 and 2017, the carrying value of the bank loans approximated their fair value.

 

As at 31 December 2018 and 2017, there was no security and financial covenants attached to the bank loans.

 

 

21.      Deferred taxation

 

 

2018

2017

(restated)

 

 

US$'000

US$'000

At 1 January

 

72,380

92,396

Deferred tax charged/(credited) to profit or loss (a)

 

36,628

(12,553)

Deferred tax charged/(credited) to equity

 

4,376

(7,505)

Exchange differences

 

(30)

42

At 31 December

 

113,354

72,380

 

 

 

 

Deferred tax liabilities

 

(113,354)

(72,380)

Net deferred tax liability

 

(113,354)

(72,380)

         

 

(a)     Note 10.

 

 

At 1 January
2018

 

Charged/(credited)

to profit or loss

Charged

directly to equity

 

Exchange differences

At 31 December
2018

US$'000

US$'000

US$'000

 

US$'000

US$'000

Property, plant and equipment

79,665

37,846

-

 

(82)

117,429

Inventory

10,711

5,158

-

 

(234)

15,635

Exploration and evaluation assets

8,070

(982)

-

 

-

7,088

Fair value adjustments

6

(6)

-

 

-

-

Other temporary differences

(1,494)

(6,351)

4,376

 

286

(3,183)

Tax losses carried forward (a)

(24,578)

963

-

 

-

(23,615)

 

72,380

36,628

4,376

 

(30)

113,354

(a)   Deferred tax recognised in relation to unused tax losses of LLC Malomirskiy Rudnik and LLC TEMI to the extent that it is either probable that future taxable profit will be available against which the unused tax losses can be utilised or there are sufficient taxable temporary differences.

 

 

 

At 1 January
2017 (restated)

Charged/(credited)

to profit or loss

(restated)

Credited

directly to equity

 

Exchange differences

At 31 December
2017 (restated)

US$'000

US$'000

US$'000

 

US$'000

US$'000

Property, plant and equipment

89,028

(9,422)

-

 

59

79,665

Inventory

10,056

655

-

 

-

10,711

Exploration and evaluation assets

5,008

3,062

-

 

-

8,070

Fair value adjustments

129

(123)

-

 

-

6

Other temporary differences

7,811

(1,783)

(7,505)

 

(17)

(1,494)

Tax losses carried forward (b)

(19,636)

(4,942)

-

 

-