POG.L Regulatory News (POG)

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

§ 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

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:

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

(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.

(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

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

(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.

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.

(a) Excluding deferred stripping

(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.

(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:

(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

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.

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

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

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

(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.

(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

(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).

(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.

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

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

PETROPAVLOVSK PLC

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2018

PETROPAVLOVSK PLC

Consolidated Statement of Financial Position

At 31 December 2018

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

(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

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)

Consolidated Statement of Profit or Loss (extract)