POG.L Regulatory News (POG)

17 May 2021

Petropavlovsk PLC

Annual Results for the Year Ended 31 December 2020

Petropavlovsk PLC ("Petropavlovsk", or the "Company" and, together with its subsidiaries, the "Group") today issues its audited Annual Results for the year ended 31 December 2020.

Mr Denis Alexandrov, CEO said: "Petropavlovsk delivered a solid financial performance in 2020 despite numerous challenges, with revenue and EBITDA improving substantially year-on-year on the back of a 6% increase in production and higher gold prices.

Looking ahead, there is much to be addressed to drive improvement across the business in 2021 and beyond. From a cash flow perspective, one of our immediate opportunities is maximising utilisation of the POX Hub using our own refractory gold concentrates to reduce reliance on lower-margin third-party material via the successful on-schedule delivery of two major projects - the Pioneer flotation plant later this year and the Malomir flotation plant expansion next year. In addition, we continue to assess the development of our other assets, with the Albyn hub in particular having great potential that has not previously been fully considered.

The new management team continues to make progress enhancing operational governance and I am confident that the ongoing business review will present further opportunities to deliver greater transparency and efficiencies throughout the organisation."

Financial Highlights

§ Total gold produced: up 6% to 548.1koz, comprising an 18% decline to 385.6koz of own gold produced and a 256% increase to 162.5koz of gold produced from the processing of third-party refractory gold concentrates at the POX Hub

§ Total gold sales: up 6% to 546.5koz driven by the increase in gold production

§ Average realised gold price♦:[2]increased 30% to US$1,748/oz with zero impact from the Company's hedging programme

§ Total cash costs (own material): up 21% to US$852/oz and in-line with guidance, primarily driven by an 18% decline in gold sold, an expected decline in processed grades at Albyn which was depleted in 2020, lower grades of non-refractory ore at Malomir, an increase in mining tax as subsidies expired at Albyn and Malomir and cost inflation. This was partly offset by higher grades and recoveries at Pioneer and the benefit of Rouble depreciation

§ Total cash costs (third parties): increase of 17% to US$1,474/oz reflecting the significant increase in gold prices in 2020

§ Total Cash Costs (TCC)♦ (own material and third parties): increased 38% to US$1,034/oz due to higher TCC for own material and third-party concentrates

§ All-in Sustaining Costs (AISC)♦: up 29% to US$1,312/oz driven by the increase in TCC♦, with total sustaining capital, sustaining lease and capitalised stripping expenditures remaining approximately in-line with total sustaining capital and capitalised stripping expenditures in 2019, where capitalised stripping expenditures refer to stripping costs incurred in prior periods that improved access to ore mined in 2020

§ Group revenue (including non-precious operations): up 33% to US$988.5m, reflecting the increase in gold sales and higher realised gold prices

§ Underlying EBITDA: increased 32% to US$350.7m driven by an increase in revenues which were partly offset by higher costs

§ Profit for the period: decreased to a loss of US$(48.9)m (FY 2019: US$25.7m), primarily due to the impact of the following non-cash items: a US$42.8 million loss on the fair value re-measurement of the conversion option of the convertible bonds (2019: US$31.1m); an impairment of mining and exploration and evaluation assets of US$74.9m driven by an adjustment in the valuation of the Albyn and Elginskoye projects where additional exploration and geological modelling has demonstrated that an earlier than anticipated switch to refractory processing at Elginskoye will be required due to a higher proportion and an uneven distribution of refractory ore as part of the overall deposit; and, following a re-classification of a 29.9% interest in IRC as assets held for sale, a US$55.8m write-down (2019: nil) to adjust the carrying value of net assets of the disposal group to fair value less costs to sell. For illustrative purposes the primary non-cash adjustments to the (Loss)/profit for the period are presented in the table below.

§ Capital expenditure♦: increased 13% to US$117.8m, above guidance of US$90m - US$100m with spending primarily focussed on the construction of flotation plants at Malomir and Pioneer, development activities at Elginskoye and spending to support underground mining at Pioneer and Malomir

§ Cash generated from operations before working capital changes: increased significantly by 31% to US$328.5m reflecting growth in EBITDA

§ Cash generated from operations: increased 64% to US$156.3m, with the primary working capital movement being repayment of interest-bearing gold prepays

§ Net debt♦:[3]reduction to US$500.6m as at 31 December 2020, principally driven by partial conversion of the US$125m Convertible Bonds

§ Gold prepays: the Company continued to settle the interest-bearing gold prepays which stood at US$63.8m as at 31 December 2020 (US$187.4m as at 31 December 2019), a net decrease of US$123.6m over the period

POX Hub

Maximising utilisation of the POX Hub

· Maximising utilisation of the POX Hub remains one of the Company's key priorities to reduce reliance on low-margin third-party concentrates

· As updated on 20 April 2021, commissioning of the Pioneer flotation plant is scheduled for Q2 2021 and will double the Group's capacity to process refractory ore from its own mines to 7.2Mtpa once operational. Construction of a third line at the Malomir flotation plant will add an additional 1.8Mtpa of flotation capacity from Q3 2022, bringing the total combined Group capacity to 9.0Mtpa

· A pre-feasibility study accompanied by a drilling and exploration programme is to be undertaken in 2021 at Albyn and Elginskoye given its significant potential to become a third source of refractory gold to supply the POX Hub which has not previously been fully considered

Corporate and Business Update

Business review and enhancing operational governance

· The ongoing business review being undertaken following the appointment of Denis Alexandrov as CEO and a new management team will present further opportunities to deliver greater transparency and efficiencies throughout the organisation. These opportunities include:

§ Simplifying the corporate structure, improving management systems, standardising processes and reducing G&A costs;

§ A new medium-term corporate development strategy to be delivered by Q3 2021 and followed by the proposal of a dividend policy; and

§ Completion of a full management restructuring by the end of Q2 2021, including addressing management oversight and talent gaps within the existing structure and adding critical core competencies that were missing within the management team

Other

· In its Q1 2021 Trading Update released on 29 April 2021, IRC Limited (31.1% owned by Petropavlovsk) announced that it had paid c.US$8.5m to Gazprombank as principal loan repayment and interest payments during the quarter. This is in accordance with the repayment schedule for the loan facility agreements guaranteed by Petropavlovsk. A US$5m fee was paid during the quarter to Petropavlovsk for guaranteeing the facility agreements

§ On 19 April 2021, the Company announced the appointment of Mr. Mikhail Irzhevsky as an independent non-executive director with effect from 16 April 2021. Following his appointment to the board, he has also become a member of the audit, remuneration and nominations committees and Mr. Maxim Kharin has stepped down from the audit committee.

2021 Guidance

· Production: remains on track to meet full year guidance of 430 - 470koz and comprises 370 - 390koz of own gold production which is in-line with 2020, and 60 - 80koz of gold from third-party concentrate which is lower than in 2020

· Costs: own gold TCC expected to be in the range of US$870 - US$970/oz, excluding third-party concentrate as the pricing of concentrate depends on the highly volatile gold price

· Capital expenditure: US$140m, consisting of sustaining and development capex of US$120m and exploration spend of c.US$20m

2020 Reserves & Resources Update

· At 31 December 2020, the Company's internal estimate of total Group Mineral Resources (including Reserves) decreased 7% to 19.50Moz of gold (end of 2019: 21.03Moz) and total Reserves decreased 15% to 7.16Moz of gold (end of 2019: 8.46Moz)

· The decrease in Mineral Resources is due to mine depletion, a re-evaluation of Mineral Resources at Tokur from JORC Code 2004 to JORC Code 2012 and the adoption of more conservative open pit constraint assumptions for reporting Elginskoye Resources

· The decrease in Ore Reserves is due to mine depletion and a more prudent approach to reporting, including removal low grade stockpiles, Quartzitovoye open pit, Malomir RIP tailings and Tokur Reserves from the statement

· None of the decrease in Ore Reserves resulting from the more prudent approach to reporting were scheduled to be mined and hence the resulting decrease has no material impact on the Group's production plans

· A summary of our Reserves and Resources tables is shown below and a breakdown by each asset may be found on our website at: https://petropavlovskplc.com/development-exploration-reserves-and-resources/reserves-and-resources/

2020 Exploration Update

Exploration in 2020 was focused on extending and defining known mineralisation at or around existing mining operations, as well as regional programs aimed at increasing our understanding of earlier stage deposits close to existing mining centers. This work included drilling, trenching and metallurgical studies to understand the nature of the ore and how its responds to either refractory or non-refractory processing

Highlights at Pioneer include partial conversion of the Pokrovka 2 orebody to reserves which are due to be mined in 2021-2022, and possible extensions to underground mineralisation at NE Bakhmut zones 2 & 3 which are currently being mined. In addition, mineralisation at Alexandra was extended down dip with results indicating there is potential to further expand ore reserves at this zone

At Albyn, significant drilling and metallurgical test work was undertaken to understand the nature of the Elginskoye orebody and the optimal processing route. Initial studies indicate an increasing portion of the orebody appears to respond well to gravity-flotation-POX rather than the RIP processing route. Drilling at Unglichikanskoye confirmed down-dip extensions to the southern group of mineralised zones which is expected to increase mineral resources at the project once the results have been incorporated

At Malomir, work continued to increase confidence in the Tokur, Osipkan and Mariinskoye potential satellite deposits to upgrade these deposits in terms of resources and reserves

Conference Call and Webcast

The Company's CEO Denis Alexandrov and CFO Danila Kotlyarov will host a webcast followed by a Q&A session to present the Company's financial results today at 09:00 BST / 11.00 MSK. The webcast can be accessed via the following link: https://webcasting.brrmedia.co.uk/broadcast/60785e9b0386285386cc9077.

Alternatively, phone users can listen to the webcast and participate in the Q&A session via the following numbers:

When prompted, please use the following confirmation code: 1291065

About Petropavlovsk

Petropavlovsk PLC (LSE: POG. MOEX: POGR) is a major integrated Russian gold producer with JORC Resources of 19.50Moz Au which include Reserves of 7.16Moz Au. Following its IPO on the Alternative Investment Market (AIM) in 2002, Petropavlovsk was promoted to the London Stock Exchange in 2009, where today it is a Premium Listed company and a constituent of the FTSE 250, FTSE 350 and FTSE All Share indices. The Company's shares also trade on the Moscow Exchange and are a constituent of the RTS Index and MOEX Russia Index.

Petropavlovsk's key operating mines (Pioneer, Malomir and Albyn) are in the Amur Region in the Russian Far East. Petropavlovsk has produced a total of c.8.3Moz of gold since operations began in 1994 and has a strong track record of mine development, expansion and asset optimisation.

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

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

For more information

Please visit www.petropavlovskplc.com or contact:

Cautionary note on forward-looking statements

This release may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward looking statements include all matters that are not historical facts. They appear in a number of places throughout this release and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the future price of gold, the Group's results of operations, financial position, liquidity, prospects, growth, estimation of mineral reserves and resources and strategies, and exchange rates and the expectations of the industry. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances outside the control of the Group. Forward-looking statements are not guarantees of future performance and the development of the markets and the industry in which the Group operates may differ materially from those described in, or suggested by, any forward-looking statements contained in this release. In addition, even if the development of the markets and the industry in which the Group operates are consistent with the forward looking statements contained in this release, those developments may not be indicative of developments in subsequent periods. A number of factors could cause results and/or developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, the impact of the current Covid-19 pandemic, general economic and business conditions, demand, supply and prices for gold and other long-term commodity price assumptions (and their effect on the timing and feasibility of future projects and developments), trends in the gold mining industry and conditions of the international gold markets, competition, actions and activities of governmental authorities (including changes in laws, regulations or taxation), currency fluctuations (including as between the US Dollar and Rouble), the Group's ability to recover its reserves or develop new reserves, changes in its business strategy, any litigation, and political and economic uncertainty. Except as required by applicable law, rule or regulation (including the Listing and Disclosure Guidance and Transparency Rules), the Group does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Past performance cannot be relied on as a guide to future performance. The content of websites referred to in this announcement do not form part of this announcement.

Financial Review

Despite the many difficulties related to the COVID-19 pandemic and corporate changes within the Group, 2020 was a further year of strong headline financial performance by Petropavlovsk.

Helped by strong gold prices and increases in production volumes attributable to improved POX capacity utilisation, the company's revenues increased by 33% YoY (2019 YoY: 48% increase), resulting in an increase in EBITDA, which improved by 32% YoY (2019 YoY: 45%). This has enabled the company to continue its trend of significant deleveraging, reaching a Net debt/EBITDA of 1.4x, as at 31 December 2020 (2019: 2.1x), which is the lowest in the company's recent history.

In line with its strategy, the company has also prioritised the repayment of its interest-bearing gold advances, decreasing this amount by US$123.6 million over 2020, with the remaining balance at the end of 2020 being US$63.8 million (2019: US$187.4 million). Together with the partial conversion of the convertible bonds, this helped decrease the total amount of interest paid in 2020 by 14% to US$58.1 million (2019: US$67.2 million).

Cash generated from operations before working capital ("WC") changes increased significantly to US$328.5 million (2019:US$250.5 million) reflecting the growth in EBITDA. In line with the Group's 2020 capital allocation priorities, this cash was used primarily to repay the gold advances and fund capital expenditures aimed at increasing the Group's refractory ore processing capabilities, including: the Pioneer flotation plant, initial spending for a third flotation line at Malomir, POX plant upgrades, as well as development of the Elginskoye deposit in advance of the planned transfer of mining operations from the depleted Albyn deposit to Elginskoye.

Reducing the cost of debt remains a key priority in 2021, with the Group aiming to significantly optimise its debt and portfolio of liquidity sources by converting the gold advances credit limit with Gazprombank into Revolving Credit Facilities ("RCF") at much more favourable terms which reflect the strong fundamentals of the business. This work is already proceeding with the Group entering into a RCF agreement with a c.US$67 million limit with Gazprombank in April 2021, with the aim of increasing this amount substantially by the end of the year.

The significant strengthening of the company's balance sheet will allow the Group to address the refinancing of its US$500 million notes due November 2022 on significantly more favourable terms. That is a key priority for the company and detailed plans are being discussed to be actioned in H2 2021.

Cost control remains a management priority; however, TCC for own gold production increased 21% to US$852/oz, reflecting an 18% decline in the volume of own gold sold, the effect of lower grades of non-refractory ore processed at Albyn and Malomir and lower grades of refractory ore processed at Malomir, the impact of inflation of certain Rouble denominated costs, and the effect of higher mining taxes paid. This effect was partially mitigated by the effect of higher grades and recoveries of non-refractory ore processed at Pioneer and the effect of higher recoveries of refractory ore processed at Malomir, as well as by the effect of Rouble depreciation. 

The company has showed a net loss of US$(48.9) million (2019: net profit of US$25.7 million) that has primarily resulted from the following three non-cash items: a) US$42.8 million loss on the fair value re-measurement of the convertible option of the convertible bonds (2019: US$31.1 million) which resulted primarily from the increase in the share price of the company, as the conversion option of the convertible bonds represents the fair value of the embedded option for the bondholders to convert into the equity of the company. As the company can elect to pay the cash value in lieu of delivering the ordinary shares following exercise of the conversion right, the conversion option is a derivative liability. Accordingly, the conversion option is measured at fair value with the relevant loss included in net other finance (losses) / gains; b) impairment of mining and exploration and evaluation assets of US$74.9 million driven by an adjustment in the valuation of the Albyn and Elginskoye projects, which were historically accounted as a single cash generating unit ("CGU"), with assets being depreciated on the basis of reserves unit-of-production using the combined Albyn and Elginskoye reserve base. The valuation adjustment happened as a result of additional exploration and geological modelling which showed a decrease in average grades, an increase in the proportion of refractory ores as well as uneven distribution of refractory and non-refractory ores. That resulted in an earlier than anticipated switch to processing refractory ore from Elginskoye, which dictated the necessity to allocate part of the POX assets to the Albyn CGU and, combined, these factors led to the impairments being recognised. It is important to note that the Elginskoye deposit is underexplored and currently significant exploration works are planned for 2021, targeting the conversion of resources to reserves, increasing resources as well as clarifying the metallurgical quality of all types of ore. As such, the current production plan for Albyn is intermediate and significant changes are expected by the end of 2021; and c) following a re-classification of a 29.9% interest in IRC as assets held for sale, the Group recognised a US$55.8 million write-down to adjust the carrying value of net assets of disposal group to fair value less costs to sell.

Note: Figures may not add up due to rounding

Financial Highlights

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

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

(c) In the 2020 Annual Report operating profit is now presented from the perspective of Group operations excluding the results of the associate, IRC. This is more representative of how the business is viewed following the classification of IRC as held for sale and this change in classification also been applied to the comparative period.

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

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

Revenue

Group revenue during the period was US$988.5 million, 33% higher than the US$741.6 million achieved in 2019.

Revenue from hard rock mines during the period was US$956.0 million, 38% higher than the US$692.6 million achieved in 2019. Gold remains the key commodity produced and sold by the Group, comprising 97% of total revenue generated in 2020. The physical volume of gold sold from hard rock mines increased by 6% from 514,005 oz in 2019 to 546,458 oz in 2020. The average realised gold price♦ increased by 30% from US$1,346/ oz in 2019 to US$1,748/oz in 2020. The average realised gold price♦ was not affected by hedge arrangements (2019: US$(61)/oz). Hard rock mines sold 23,891 oz of silver in 2020 at an average price of US$27/oz, compared to 56,568 oz in 2019 at an average price of US$15/oz.

Revenue generated as a result of third- party work by the Group's in-house service companies was US$32.5 million in 2020, a US$(16.5) million decrease compared to US$49.0 million in 2019. This revenue is substantially attributable to sales generated by the Group's engineering and research institute, Irgiredmet, primarily through engineering services and the procurement of materials, consumables and equipment for third parties, which comprised US$30.0 million in 2020 compared to US$45.1 million in 2019.

Cash Flow Hedge Arrangements

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

Zero cost collars for the underlying aggregate of US$63 million (US$7 million per month for the period from April to December 2020) with a RUB:USD exercise price of RUB75.00 for put options and a RUB:USD exercise price in the range of between RUB90.65 and RUB100.00 for call options matured during 2020 and resulted in US$1.4 million net cash settlement received by the Group.

Zero cost collars for the underlying aggregate of US$84 million (US$7 million per month until December 2021) with a RUB:USD exercise price of RUB75.00 for put options and a RUB:USD exercise price in the range between RUB90.65 and RUB100.00 for call options were outstanding as at 31 December 2020.

Zero cost collars for the underlying aggregate of 31,500 oz of gold (3,500 oz of gold per month for the period from April to December 2020) with an exercise price of US$1,600/ oz for put options and US$1,832/oz for call options matured during 2020 and resulted in US$(1.5) million net cash settlement

paid by the Group. In 2019 the Group used gold forward contracts as cash flow hedge arrangements which resulted in US$(31.5) million net cash settlement paid by the Group on forward contracts to sell 230,000 oz of gold. Zero cost collars for the underlying aggregate of 42,000 oz of gold (3,500 oz of gold per month until December 2021) with an exercise price of US$1,600/oz for put options and US$1,832/oz for call options were outstanding as at 31 December 2020.

The aforementioned contracts did not qualify for hedge accounting under IFRS 9. Accordingly, there was no adjustment to the average realized gold price in 2020 for the effect of net settlement under these arrangements.

Corresponding fair values for gold and currency option contracts are disclosed in note 18 to the Group's consolidated financial statements for the year ended 31 December 2020.

Underlying EBITDA◆ 

(a) Including US$42.8 million fair value loss from re-measurement of the conversion option of the convertible bonds (2019: US$31.1 million).

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

Underlying EBITDA◆ as contributed by segment and the associate is set out below.

Hard Rock Mines

During the period, hard rock mines generated Underlying EBITDA◆ of US$390.1 million compared to US$306.8 million of Underlying EBITDA◆ in 2019.

Total Cash Costs◆ for hard rock mines increased from US$749/oz in 2019 to US$1,034/oz in 2020.

The increase in Total cash costs from own material from US$703/oz in 2019 to US$852/oz in 2020 primarily reflects the effect of lower grades of non-refractory ore processed at Albyn and Malomir and lower grades of refractory ore processed at Malomir, the impact of inflation of certain Rouble denominated costs, and the effect of mining tax rates as set out below. This effect was partially mitigated by the effect of higher grades and recoveries of non-refractory ore processed at Pioneer and the effect of higher recoveries of refractory ore processed at Malomir, as well as by the effect of Rouble depreciation.

Total cash costs from third parties concentrate increased from US$1,260/oz in 2019 to US$1,474/oz in 2020. Total cash costs from third parties concentrate are directly dependent on gold price which has significantly increased in 2020.

The increase in physical ounces sold from 514,005 oz in 2019 to 546,458 oz in 2020 resulted in US$19.4 million increase in Underlying EBITDA♦. The increase in the average realised gold price♦ from US$1,346/oz in 2019 to US$1,748/oz in 2020 contributed to a further US$220.0 million increase in Underlying EBITDA◆. This effect was partly offset by the increase in TCC with US$(156.1) million effect on Underlying EBITDA◆.

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

The Rouble depreciated against the US Dollar by 12% in 2020 compared to 2019, with the average exchange rate for the period of 72.18 Roubles per US Dollar in 2020 compared to 64.69 Roubles per US Dollar in 2019, somewhat mitigating the effect of Rouble denominated cost 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 which introduced certain amendments to the Russian Tax Code, taxpayers who are participants in Regional Investment Projects ("RIP") have the right to apply the reduced mining tax rate provided certain conditions are met. JSC Pokrovskiy Rudnik and LLC Malomirskiy Rudnik applied a full mining tax rate in 2020, LLC Albynskiy Rudnik applied 1.2% mining tax rate from January till August 2020 and a full mining tax rate from September till December 2020, resulting in US$33.8 million mining tax expense compared to US$15.9 million mining tax expense in 2019 when a 1.2% mining tax rate was applied by both LLC Albynskiy Rudnik and LLC Malomirskiy Rudnik and a full mining tax rate by JSC Pokrovskiy Rudnik.

All-In Sustaining Costs◆ and All-In Costs◆

AISC◆ increased from US$1,020/oz in 2019 to US$1,312/oz in 2020. The increase in AISC◆ primarily reflects increase in TCC◆ explained above. Aggregate of sustaining capital expenditures related to the existing mining operations, underground mining projects at Pioneer and Malomir, POX project, Malomir flotation plant, sustaining lease and capitalized stripping expenditure during the period at Malomir and Pioneer remained at approximately the same level as the aggregate of sustaining capital expenditures and capitalized stripping expenditure in 2019.

AIC◆ increased from US$1,103/oz in 2019 to US$1,451/oz in 2020, reflecting the increase in AISC◆ explained above, development expenditure for Elginskoye infrastructure, Pioneer flotation plant, a 3rd flotation line at Malomir and capitalized stripping expenditure in respect of refractory ore at Pioneer. This was partially offset by a decrease in Capital Expenditure◆ in relation to the POX project,

with the POX Hub commissioned in 2019 and being considered as sustaining in 2020.

Corporate and other

Corporate and other operations contributed US$(64.3) million to Underlying EBITDA in 2020 compared to US$(52.3) million in 2019. Corporate and other operations primarily include central administration function, results of in-house service companies and the Group's share of results of its associate IRC.

The Group has corporate offices in London, Moscow and Blagoveschensk, which together represent the central administration function. Central administration expenses increased by US$8.8 million from US$52.5 million in 2019 to US$61.4 million in 2020.

Results of Associate

The Group's share of profit generated by IRC is US$52.7million, including US$23.6 million effect from partial reversal of impairment at K&S mine and a further US$21.4 million reversal of impairment of investment in IRC (2019: US$(12.0) million share of losses generated by IRC and a further US$23.4 million impairment of investment in IRC). Following re-classification of 29.9% interest in IRC as assets held for sale, the Group recognised a US$55.8 million write-down to adjust the carrying value of net assets of disposal group to fair value less costs to sell. IRC contributed US$25.0 million to the Group's Underlying EBITDA◆ in 2020 (2019:US$10.3 million).

Impairment Review

Impairment of Mining Assets

At 31 December 2020 the Group undertook a review of impairment indicators of the 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 an impairment in relation to Albyn CGU was required. This was primarily driven by latest changes in the geological block model, including decrease in average grade of both non-refractory and refractory ore, essential changes in the proportion of the non-refractory and refractory ore, uneven distribution of non-refractory and refractory ore bodies, which lead to the deficit of non-refractory ore to fill the Albyn RIP Plant after 2024 and the requirement to move the construction of the flotation line from 2027 to 2023 with consequent re-scheduling of the commissioning of the flotation line from January 2028 to January 2024.

All these factors lead to the increase of the operating and capital costs of the Albyn CGU and corresponding decrease of its recoverable amounts, and combined with increased carrying values of the Albyn CGU due to the proportional allocation of the POX Hub facilities, resulted in the corresponding impairment as set out below.

As at 31 December 2020, the Group recognised a pre-tax impairment of an aggregate of US$74.9 million to the extent that recoverable amounts no longer supported the relevant carrying values of assets that are part of Albyn CGU as set out below:

― US$58.8 million (US$47.0 million post- tax) has been recorded against the associated assets within property, plant and equipment; and

― US$16.1 million (US$12.9 million post- tax) has been recorded against the associated exploration and evaluation assets.

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

Impairment of Exploration and Evaluation Assets

As at 31 December 2020, the Group performed a review of its exploration and evaluation assets and concluded no impairment was required, except as referred to above (31 December 2019: the Group performed a review of its exploration and evaluation assets and concluded no impairment was required).

Exploration and evaluation assets in the statement of financial position primarily relate to the areas adjacent to the existing mines.

Financial Income and Expenses

(a) Interest income on bank deposits.

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

Interest Expense

Interest expense for the period comprised of US$42.2 million of effective interest on the Notes, US$9.2 million of effective interest on the Convertible Bonds, US$9.9 million of interest on prepayments on gold sale agreements and US$0.5 million interest on finance lease (2019: US$42.0 million of effective interest on the Notes, US$13.0 million of effective interest on the Convertible Bonds, US$16.0 million of interest on prepayments on gold sale agreements and US$0.6 million interest on finance lease). As the Group continued with construction of Elginskoye infrastructure, Pioneer flotation plant, 3rd flotation line at Malomir, these projects met eligibility criteria for borrowing costs capitalization under IAS 23 "Borrowing Costs" with US$4.1 million of interest expense capitalized within property, plant and equipment (2019: US$12.3 million of interest expense was capitalised within property, plant and equipment).

Net Other Finance Gains/(Losses)

Net other finance losses for the period totalled US$(68.0) million compared to US$(42.2) million of net other finance losses in 2019. Key elements of other finance gains and losses this period include:

― US$(42.8) million fair value non-cash loss from re-measurement of the conversion option of the convertible bonds;

― US$(11.0) million fair value loss on the call option to acquire 25% interest in the Group's subsidiary LLC TEMI from its current shareholder as set out in section "Corporate activities" below;

― US$(9.5) million loss on bonds conversion;

― US$(7.0) million fair value loss on gold option contracts;

― US$4.1 million fair value gain on currency option contracts;

― US$(1.7) million net other losses.

Net Impairment Reversals on Financial Instruments

In 2020, the Group recognised US$0.3 million reversal of impairment of financial assets (2019: US$2.3 million reversal of impairment of financial assets) and net of US$0.7 million reversal of provision for expected credit losses under Gazprombank guarantee arrangements (2019: US$28.5 million reversal of provision for expected credit losses under Gazprombank and ICBC guarantee arrangements).

Taxation

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

The tax charge for the period primarily related to the Group's gold mining operations and is represented by a current tax charge of US$48.7 million (2019: US$29.7 million) and a deferred tax charge, which is a non-cash item, of US$27.4 million (2019: deferred tax credit of US$2.4 million). Included in the deferred tax charge in 2020 is a US$33.1million charge (2019: US$20.4 million credit) from the effect of foreign exchange which primarily arises because the tax base for a significant portion of the future taxable deductions in relation to the Group's property, plant and equipment are denominated in Russian Roubles, whilst the future depreciation charges associated with these assets will be based on their US Dollar carrying value.

The effective tax rate was also affected by expenses that are not deductible for tax purposes which primarily relate to fair value losses on re-measurement of the conversion option of the Convertible Bonds and write-down of investment in IRC to fair value less costs to sell, effect of tax losses for which no deferred income tax asset was recognised which primarily related to interest expense incurred in the UK and Russian withholding tax on intercompany dividends.

During the period, the Group made corporation tax payments in aggregate of US$56.5 million in Russia (2019: corporation tax payments in aggregate of US$32.7 million in Russia).

Earnings per Share

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

The total number of Ordinary Shares in issue as at 31 December 2020 was 3,957,270,254 (31 December 2019: 3,310,210,281).

Financial Position and Cash Flows

(a) US$500 million Guaranteed Notes due on 14 November 2022 at amortised cost.(b) US$125 million convertible bonds due on 03 July 2024 at amortised cost.

(c) Including US$117.8 million Capital Expenditures◆ (2019: US$103.8 million) 

Key Movements in Cash and Net Debt◆ 

(d) Including US$10 million interest paid in relation to advance payments from Gazprombank and Sberbank.

Capital Expenditure

The Group invested an aggregate of US$117.8 million in 2020 compared to US$103.8 million in 2019. The key areas of focus in this period were on Pioneer and Malomir flotation, Elginskoye mine development and development to support the underground mining at Pioneer. The Group capitalised US$4.1 million of interest expense incurred in relation to the Group's debt into the cost of construction of Elginskoye infrastructure, Pioneer flotation plant, 3rd flotation line at Malomir (2019: US$12.3 million of interest expense incurred in relation to the Group's debt into the cost of the POX Hub, Malomir flotation and Pioneer flotation).

(a) Including US$0.2M of exploration in relation to Pioneer Underground project, US$6.9M of development expenditure in relation to underground project to be sustaining capital expenditure for the purposes of calculating AISC◆ and AIC◆.

(b) Including US$23.1M of development expenditure in relation to Pioneer Flotation project (US$17.4M of expenditure in relation to flotation and US$5.7M of expenditure in relation to hydrotechnical storage facilities) to be non-sustaining capital expenditure for the purposes of calculating AISC◆ and AIC◆.

(c) Including US$2.0M of development expenditure in relation to Malomir Underground project to be sustaining capital expenditure for the purposes of calculating AISC◆ and AIC◆.

(d) Including US$7.1M of development expenditure in relation to Malomir flotation (US$2.6M of expenditure in relation to flotation and US$4.5M of expenditure in relation to hydrotechnical storage facilities) which is considered to be sustaining capital expenditure for the purposes of calculating AISC◆ and AIC◆.

(e) Including US$3.5M of development expenditure in relation to Malomir 3rd line flotation which is considered to be non-sustaining capital expenditure for the purposes of calculating AISC◆ and AIC◆.

(f) Including US$5.7M of exploration expenditure in relation to Elginskoye, US$21.5M of development expenditure in relation to road between Elginskoye and Albyn processing facilities, US$9.8M of development expenditure in relation to hydrotechnical storage facilities for Elginskoye project and US$0.9M in relation Albyn processing facilities , which are considered to be non-sustaining capital expenditure for the purposes of calculating AISC◆ and AIC◆.

Foreign Currency Exchange Differences

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

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

The Rouble depreciated by 19% against the US Dollar during 2020, from RUB61.91: US$1 as at 31 December 2019 to RUB73.88: US$1 as at 31 December 2020. The average period-on-period depreciation of the Rouble against the US Dollar was approximately 12%, with the average exchange rate for 2020 being RUB72.18: US$1 compared to RUB64.69 : US$1 for 2019. The Group recognised foreign exchange gains of US$32.6 million in 2020 (2019: US$21.0 million losses) arising primarily on Rouble denominated net monetary liabilities (including advance payments received from Gazprombank and Sberbank under gold sales agreements).

Corporate Activities

Guarantee over IRC's External Borrowings

The Group historically entered into an arrangement to provide a guarantee over its associate's, IRC, external borrowings, the ICBC Facility ('ICBC Guarantee'). Under the terms of the arrangement the Group was entitled to receive an annual fee equal to 1.75% of the outstanding amount.

In March 2019, IRC refinanced the ICBC Facility through entering into a US$240 million new facility with Gazprombank ('Gazprombank Facility'). The facility was fully drawn down during the year ended 31 December 2019. The outstanding loan principal was US$204 million as at 31 December 2020.

A new guarantee was issued by the Group over part of the Gazprombank Facility ('Gazprombank Guarantee'), the guarantee mechanism is implemented through a series of five guarantees that fluctuate in value through the eight-year life of the loan, with the possibility of the initial US$160 million principal amounts guaranteed reducing to US$40 million within two to three years, subject to certain conditions being met. For the final two years of the Gazprombank Facility, the guaranteed amounts will increase to US$120 million to cover the final principal and interest repayments. If certain springing recourse events transpire, including default on a scheduled payment, then full outstanding loan balance is accelerated and subject to the guarantee. Under the Gazprombank Guarantee arrangements, the guarantee fee receivable is determined at each reporting date on an independently determined fair value basis, which for the years ended 31 December 2020 and 2019 was calculated at the annual rate of 3.07% by reference to the average outstanding principal balance under Gazprombank Facility. The guarantee fee charged for the year ended 31 December 2020 was US$6.7 million, with corresponding value of US$6.3 million after provision for expected credit losses (2019: US$$5.6 million, with corresponding value of $5.0 million after provision for expected credit losses).

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

(a) Classified as "held for sale" and presented separately in the statement of financial position as at 31 December 2020.

Potential Disposal of Interest in IRC

On 18 March 2020, the Group signed a preliminary agreement to dispose of its 29.9% out of 31.1.% interest in IRC to Stocken Board AG for a cash consideration of US$10 million, subject to certain conditions precedent being met, including the release of the Group's obligation to guarantee IRC's external debt under the Gazprombank Facility. This was a non-adjusting event and the investment was not considered to be an asset held-for sale under IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" as at 31 December 2019.

Throughout 2020, the Group has continued to explore disposal options for the interest in IRC and further engaged with several parties to dispose of the equity holding and release the Group's obligation to guarantee IRC's external debt under the Gazprombank Facility (note 26). Following negotiations with several interested parties the directors resolved to approve the potential disposal of 29.9% investment in IRC. In the opinion of the directors it is highly probable this disposal to be completed within 12 months after the reporting date and accordingly 29.9% investment in IRC together with the financial guarantee contract were considered to be a disposal group held-for-sale under IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" as at 31 December 2020.

Option to Acquire Non-Controlling 25% Interest in LLC TEMI

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

The Group employed an independent third-party expert to undertake the valuations of the underlying 25% interest in LLC TEMI and the call option. As at 31 December 2020, the fair value of the derivative financial asset was US$nil.

Partial Conversion of US$125 Million Convertible Bonds

The company has received Conversion Notices in respect of the exercise of conversion rights under the US$125 million Convertible Bonds. The principal amount of the Convertible Bonds in respect of which the Conversion Notices have been served amounted to an aggregate of US$87 million, which, at a fixed exchange price of US$0.1350 per ordinary share, resulted in the issue and allotment of an aggregate of 644,444,432 new ordinary shares.

Going Concern

Please refer to the note 2 to the Group's consolidated financial statements for the year ended 31 December 2020.

2021 Outlook

Production outlook is on track to meet the full year target of 430 - 470koz of gold in 2021. The Group expects own metal TCC in 2021 to be in the range of US$870 - US$970/oz, excluding third-party concentrate as the pricing of concentrate depends on highly volatile gold price.

FY 2020 Consolidated Annual Financial Statements

Consolidated Statement of Profit or Loss

For the year ended 31 December 2020

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2020

Consolidated Statement of Financial Position

At 31 December 2020

These consolidated financial statements for Petropavlovsk PLC, registered number 4343841, were approved and authorised for issue by the directors on 16 May 2021 and signed on their behalf by James W. Cameron Jr., Non-Executive Chairman and Denis Alexandrov, Chief Executive Officer

Consolidated Statement of Changes in Equity

For the year ended 31 December 2020

Consolidated Statement of Cash Flows

For the year ended 31 December 2020