POG.L Regulatory News (POG)

29 April 2014

Annual Results for the Year Ended 31 December 2013 and Production Update for Q1 2014

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 2013 (the "Period") and a production update for the period from 1 January to 31 March 2014.

Peter Hambro, Chairman of Petropavlovsk, said: 

"2013 was the year in which we repositioned Petropavlovsk to become a significantly lower cost, cash generative gold producer in order to reflect the lower gold price environment. As a result of our actions, we were able to reduce our net debt by US$115 million year-on-year ("yoy"), with the rate of debt reduction accelerating towards year end (and subsequently to the end of Q1 2014) due to an increase in production levels. Our current operational plans estimate that we will achieve a similar significant debt reduction in 2014 that should bring net debt to below US$850 million by year end.

The Board and our auditor place emphasis on two matters in Petropavlovsk's annual accounts for 2013 that, if unresolved, would affect the Company's status as a going concern. These are forecast breaches in December 2014 of certain covenants, contained in our current senior debt facilities, which are under review with our lenders, and the need to repay the Group's 4% guaranteed convertible bonds due 2015 ("Convertible Bonds"), which mature in February 2015 and of which there are US$310.5 million outstanding. The Board and the Executive Committee, supported by our advisers, have for some time treated the need for a refinancing plan to resolve these issues as one of paramount importance. A plan to execute the refinancing is well advanced and the Board looks forward to announcing this in due course. Petropavlovsk's consolidated financial statements for 2013 are unqualified."

2013 Financial Highlights

· Group revenue maintained at c.US$1.2 billion (2012: US$1.24 billion), despite a decrease in the realised gold price

· Record gold sales of 736,300oz (2012: 703,200oz)

· Average realised gold sales price of US$1,519/oz (2012: US$1,670/oz)

· Positive contribution of US$107.7 million to revenue and US$146/oz to the average realised gold price from forward contracts of 444,292oz which matured during the year

· H2 2013 total average cash costs per ounce ("TCC/oz") of US$920/oz reduced from TCC/oz of US$1,157/oz in H1, with resulting TCC/oz for the year of US$1,016/oz (2012: US$875/oz)

· Central administration costs reduced to US$45.8 million (2012: US$60.7 million)

· Underlying EBITDA of US$325 million (2012: US$499 million)

· Loss from discontinued operations of US$199 million, including US$180 million of exceptional items, (2012: US$245 million)

· Net loss of US$713 million (2012: US$244 million loss), largely attributable to an aggregate of US$679 million of post-tax impairment charges and write-downs

· Net cash from operating activities of US$282 million (2012: US$272 million)

· Net debt reduction of US$115 million to US$948 million as at 31 December 2013

Operational and Exploration Highlights

· Total attributable gold production up 4% to a record 741,200oz (2012: 710,400oz), despite extensive flooding and in line with the Company's revised guidance

· A c.50% reduction in the volume of low-grade stockpiles at Pioneer resulting in a US$58.3 million improvement in working capital

· The identification of an additional 5.7 million ounces ("Moz") of gold in non-refractory ore resources in accordance with the Russian Classification System, of which 2.1Moz have been converted into JORC and included in the JORC statement as at 31 December 2013

· Since the announcement in December and during Q1 2014 a 740 thousand ounces ("Koz") increase in Group resources from 25.06Moz to 25.8Moz after 815Koz depletion and a 542Koz reduction due to disposals of non-core assets

Corporate Highlights

· In line with its strategy of focusing exploration and development on areas at or near to its current hard-rock mines, the Group disposed of OJSC Berelekh ("Berelekh") and its controlling interest in CJSC Verkhnetisskaya Ore Mining Company ("Verkhnetisskaya"), which hold licences for non-core assets

· As part of the Group's debt reduction strategy, US$69.5 million in principal amount of the Convertible Bonds were re-purchased and cancelled by the Group in Q4 2013, resulting in a US$19.4 million gain on re-purchase. US$310.5 million of Convertible Bonds remaining outstanding

· IRC Limited ("IRC"), the Group's listed iron ore mining subsidiary, announced a two-stage transaction in January 2013 for a US$238 million subscription for new shares by General Nice Development Limited ("General Nice") and Minmetals Cheerglory Limited ("Minmetals Cheerglory") to fund its continued development. Stage 1, which completed in April 2013, involved the subscription by General Nice for 851,600,000 new shares (including the deferred issue of 34,064,000 new shares) for US$103.1 million. Stage 2, involves a further subscription of an additional 863,600,000 new shares for a consideration of approximately US$104.7 million by General Nice and subsequently a subscription by Minmetals Cheerglory for 247,300,000 new shares for approximately US$30 million. As previously announced by IRC and the Company, to date, Stage 2 has been partially completed by General Nice (with c.US$47 million of General Nice's commitment invested) and once General Nice has completed in full its Stage 2 subscription, under the terms of the subscription agreement, Minmetals Cheerglory, will also invest c.US$30 million. General Nice was unable to fulfil the subscription agreement by 22 April 2014 as most recently scheduled, but IRC has been informed that it intends to make a payment of at least c.US$20 million as a further partial subscription by the end of April 2014 and remains committed to completing the full subscription

· Following the subscription of new shares in IRC by General Nice in 2013, the Company's shareholding in IRC reduced from approximately 63.13% as at 31 December 2012 to approximately 48.70% as at 31 December 2013. Following a further subscription by General Nice in February 2014, this shareholding was reduced to 46.98%. It will reduce to 40.49% on completion of the full subscription by General Nice assuming the subscription by Minmetals Cheerglory is completed as well

· Petropavlovsk remains a controlling shareholder in IRC (until completion of the subscription of new shares by General Nice and Minmetals Cheerglory) and IRC continues to be treated as a subsidiary "held for sale" in the Group's consolidated financial statements

Dividend

· In July 2013, each eligible shareholder received a final dividend for 2012, comprising a cash payment of £0.02 per Ordinary Share and 1 new Ordinary Share for every 19.21 Ordinary Shares held as at 28 June 2013

· The Directors consider it prudent not to recommend a dividend in respect of the year ended 31 December 2013, in the context of the Board's strategy for strengthening the Group's financial position. Future decisions regarding dividends will be based on a number of factors, including market conditions, balance sheet strength and liquidity, operational performance and the impact of the on-going cost reduction programme

Q1 2014 Highlights

· Group gold production of 159,100oz, 16% higher than in the comparative period (Q1 2013: 136,800oz) due to the processing of higher grades at every operating mine except Pioneer compared to the same period in 2013

· Gold sales of 161,200oz, 10% higher than in the comparative period (2013: 146,400oz)

· Average realised gold sales price US$1,403/oz, 14% lower than in the comparative period (2013: US$1,639/oz),including US$108/oz contributed by the hedging position of the Group

· Encouraging additional exploration results have been received from the Pioneer, Albyn and Malomir areas where known mineralisations were extended

· Estimated consolidated net debt as at 1 April 2014 US$911 million, US$37 million lower than 31 December 2013 and in line with the Group's expectations and reflecting the Group's continued focus on cost reduction and operational efficiency

2014 Outlook

· Production target of 625,000oz of gold in 2014, with reduction against the previous year reflecting principally the sale of some high-cost alluvial operations and the planned processing of lower grade ore at the Pioneer and Pokrovskiy mines

· Forward sales contracts for a total of 279,138oz at an average gold price of US$1,429/oz were outstanding as at 31 December 2013. The Group has subsequently contracted to sell a further 85,115oz in 2014 at an average price of US$1,250/oz

· The Group expects to maintain in 2014 TCC/oz for hard rock ore at the level achieved in the second half of 2013 (US$900/oz - US$950/oz)

· A further significant reduction in total capital expenditure for 2014 to US$94 million (2013: c.US$237 million) mainly due to:

- An expected 68% reduction in development and maintenance expenditure to US$60 million. Spending to be predominantly focused on expansion of the tailing dams at Pioneer and Albyn and the fulfilling of existing contractual commitments for the pressure oxidation ("POX") project

- A budgeted 28% reduction in exploration expenditure to US$34 million, with efforts focused primarily on areas supporting production at the Group's existing mines

· In line with the Group's strategy of debt reduction, net debt is expected to decrease below US$850 million by the end of 2014 assuming a US$1,250/oz-US$1,300/oz gold price

· Following the reduction in the gold price in Q2 2013, the Group took the decision to slow down the pace of development of the POX Hub. The schedule for further development of the project is under review

2015-2019 Outlook

· The Group's production plan for 2015-2019 projects annual average production in the order of 600,000oz, with some yoy variations

· Assuming 2013 price levels and foreign exchange rates, the Group is estimating TCC/oz for hard rock mines to be below US$750/oz for this period due to the effects of the cost cutting programme, scheduled high grades and lower stripping ratios when compared with the current mining operations

· This production schedule is based exclusively on gold production from the Group's existing mines and their satellite deposits and does not include production from the POX Hub and the related flotation plant at Malomir

· The Company's current funding plan assumes capital expenditure limited to exploration and maintenance and no commissioning of the Group's POX facilities during this 5 year period

Financial Results 2013 Summary

NOTES

Figures may be rounded.

Underlying EBITDA is the profit for the Period before financial income, financial expenses, foreign exchange gains and losses, fair value changes, taxation, depreciation, amortisation and impairment charges. A reconciliation of profit for the year and underlying EBITDA is set out in note 35 to the consolidated financial statements.

Exceptional items are those detailed in notes 6, 9 and 27 to the consolidated financial statements.

Basic (loss)/earnings per share before exceptional items is the profit or loss for the Period attributable to equity holders of Petropavlovsk PLC before exceptional items divided by the weighted average number of ordinary shares during the Period.

Net debt is as set out in note 30 to the consolidated financial statements. As at 31 December 2012 and 31 December 2013, net debt excludes IRC.

n/m - not meaningful

* in addition to this cash payment, 1 new Ordinary Share was issued for every 19.21 Ordinary Shares held as at 28 June 2013.

Chairman's overview

Operationally, the Group performed well in 2013. We increased attributable gold production and the number of ounces sold, notwithstanding significant operational flooding in our region of Russia in 2013. At the same time, we successfully protected the Group from the steep fall in the gold price, which decreased to a low of US$1,196/oz during H2 2013, by selling forward some of our production for future delivery. These two achievements meant that, in spite of the gold price reduction, Group revenue at US$1.2 billion was unchanged from the previous year.

Our TCC/oz including alluvials, at US$1,016/oz, was in line with our guidance and resulted from the planned mining of relatively lower grades and the amortisation of previously deferred stripping costs. I am pleased to say that cost cutting measures in the second half of the year were successful and these measures, together with a 25% reduction in central administration costs, helped us generate net cash from operating activities of US$282 million, a 4% increase on the previous year, and to achieve underlying EBITDA of US$325 million.

We also made considerable headway in reducing our net debt. Thanks to the net cash from operating activities (including a US$126 million reduction in working capital excluding IRC), reductions in capital expenditure, proceeds of asset sales and repurchase of Convertible Bonds net debt was reduced by US$115 million to US$948 million at the year end. This remains a key focus in 2014 and we expect to be able to reduce our net debt position to less than US$850 million by the end of this year.

The Group regularly tests its assets for impairment and, as I explained at the time of our half-year report, we took impairment charges against the value of our investments, reflecting the lower gold price environment in which we found ourselves. There were no material impairments during the second half of the year but an aggregate of US$679 million post-tax impairment charges and write-downs together with other non-cash items, such as depreciation and amortisation, were reflected in a substantial loss for the year.

Since the year end, the gold price and the USD:RUB exchange rate have moved in our favour and the impairments themselves will reduce the future depreciation charge. This means that, with our reduced level of debt and a continuing concentration on cost control, we started 2014 on a better footing. I am pleased to say that Q1 2014 production figures show a 16% yoy improvement over Q1 2013.

The Group's 2014 gold production target is 625,000oz. This lower production target compared to the previous year is due, in part, to the lower grades scheduled to be processed at the Pioneer and Pokrovskiy mines, to the disposal of alluvial assets and also the adjustment of mine plans in response to the lower gold price environment and recent exploration discoveries by the Group.

Pioneer is expected to contribute roughly a third of the Group's production target for the year, Albyn is expected to be the next largest producer, with the balance coming mainly from Malomir's Quartzitovoye zone and the newly discovered Magnetitovoye zone. Overall average cash costs for the hard-rock mines, now representing 95% of our 2014 target production, are expected to fall to US$900-950 per ounce.

Total capital expenditure will remain focused on value-adding projects with a superior return on capital and we expect to reduce this to less than US$100 million in 2014, of which an estimated US$34 million will be spent on exploration.

Cash generation and a reduction in capital expenditure will continue to have a positive effect on net debt.

The great work carried out by our operational team during 2013 has been successfully continued in the first quarter of this year, putting us on track to achieve our production target with production output for the quarter 16% higher than in the previous year. This was achieved due to an almost doubling of gold production at Malomir and Albyn.

The focus for 2014 is to continue building on the success of the cost cutting programme launched in 2013, to conserve cash by restricting discretionary capital and exploration expenditure whilst redoubling our efforts to move newly identified, non-refractory resources at Pioneer and Albyn into mineable reserves.

Looking further forward one must remember that, with the postponement of the POX Hub, our production remains entirely dependent on resources of non-refractory ore until POX comes on line. We are fortunate to have sufficient non-refractory material to support our estimated average gold production of 600Koz per year from 2015 to 2019 and we expect that somewhat higher grades and considerably lower stripping ratios will enable us to achieve average TCC/oz of c.US$750/oz (using 2013 price levels and foreign exchange rates) during that period. Since this production will come from areas adjacent to our current processing facilities, additional capital expenditure should be minimal.

Successful exploration has always been the key to our future and 2013 was no exception. Following the decision to postpone the POX project and in order to give clarity to our Resource and Reserve statistics, in this report we break them down into non-refractory and refractory categories.

In 2013, our focus on exploration for non-refractory ore delivered an increase in non-refractory resources of c.1.5Moz. to 13.8Moz at the year end (after c.0.8Moz of depletion). Our non-refractory reserves declined by 0.4Moz to 4.39Moz, mostly due to depletion. Our focus on adding non-refractory resources and reserves will continue in 2014, and in particular will focus on converting newly established non-refractory resources into reserves at, and near, the Group's ore processing facilities.

At the same time refractory resources remained the same as at the end of last year and refractory reserves decreased by 0.34Moz to 4.82Moz, mainly due to the reclassification of some material at Pioneer and Malomir into non-refractory reserves. These refractory ounces will be utilised if the POX plant becomes operational in the future.

I was delighted to welcome Mr. Dmitry Chekashkin as an Executive Director and as Chief Operating Officer of the Company and wish every good fortune to Ms. Rachel English, who stepped down as a Non-Executive Director in order to take up a directorship of African Barrick Gold plc as well as to Mr Doug King who retires as our Audit Partner.

Our iron ore subsidiary, IRC, which is accounted for on a "held-for-sale" basis because of the status of the transactions which are the subject of the subscription agreements with General Nice and Minmetals Cheerglory, continues to grow and develop in the way I hoped it would. In 2013, it exceeded its production targets for the third consecutive year at Kuranakh and increased its Kuranakh segmental EBITDA by 40% to US$22.8 million. At the same time construction and development work at K&S remains on track for first commercial production in the second half of 2014.

Over 70% of General Nice's commitment under the IRC subscription agreement has been received,although a further US$88 million of additional funding which was due to be received by 22 April 2014 has been further delayed. We understand from IRC that General Nice has indicated that it intends to make a further payment of c.US$20 million by the end of April 2014. Once General Nice has completed in full its Stage 2 subscription, under the terms of the subscription agreement, Minmetals Cheerglory, will also invest c.US$30 million. At the end of the year IRC had US$92 million in cash.

The recent sharp decline in the gold price and the Group's extensive programme of capital expenditure during the last several years resulted in an increase in the Group's indebtedness and reduction of our forecast underlying EBITDA. Although we have successfully executed a deliberate programme to reduce net debt to less than US$1 billion at the end of 2013, it is clear that the Group requires the successful completion of a refinancing process to strengthen its balance sheet in 2014. In the absence of such refinancing, our forecasts show breaches of certain covenants in our banking facilities at 31 December 2014, including the facility with ICBC to fund the development of the K&S mine which is guaranteed by the Company. In addition, the US$310.5 million outstanding Convertible Bonds fall due for repayment in February 2015 and the Group does not currently have sufficient committed funding to refinance this debt.

In recognition of this, the Group has developed a refinancing plan which includes negotiations with the Group's senior lenders including ICBC (on relaxation of certain covenants in the Group's banking facilities) and the refinancing of the Convertible Bonds. The Directors will seek shareholder approvals for these actions if necessary in due course.

Finally, it is particularly worth noting that by the time of the AGM the Group will have reached the 20th Anniversary of its foundation.

Peter Hambro

Chairman

Webcast

There will be a webcast presentation followed by a question and answer session today at 09:30am.

Please log onto the Company's website, www.petropavlovsk.net, to view.

To ask a question, please dial +44 (0) 20 3139 4830.

When prompted, please enter the confirmation number 17154126#.

Chief Financial Officer's Statement

- FINANCIAL HIGHLIGHTS

(a) Following presentation of IRC as a discontinued operation as detailed further in note 27 to the consolidated financial statements.

(b) Reconciliation of profit/(loss) for the year and underlying EBITDA is set out in note 35 to the consolidated financial statement.

(c) Exceptional items are those detailed in notes 6, 9 and 27 to the consolidated financial statements.

(d) The liability component of US$310.5million (2012: US$380million) convertible bonds due 18 February 2015 is measured at amortised cost.

REVENUE

PHYSICAL VOLUMES OF GOLD PRODUCTION AND SALES

Group revenue during the period was US$1,199.8 million, 3% lower than the US$1,235.5 million achieved in 2012.

Revenue from hard-rock mines and alluvial operations was US$1,122.5 million, 5% lower than the US$1,181.6 million achieved in 2012. Gold remains the key commodity produced and sold by the Group, comprising 94% of total revenue generated in 2013. The physical volume of gold sold increased by 5% from 703,189 ounces in 2012 to 736,344 ounces in 2013 which was offset by a 9% decrease in the average realised gold price from US$1,670/oz in 2012 to US$1,519/oz in 2013.

The Group sold 176,638 ounces of silver in 2013 at an average price of US$21/oz, compared to 260,290 ounces in 2012 at an average price of US$30/oz.

Cash flow hedge arrangements

In order to increase certainty in respect of a significant proportion of its cash flows, the Group has entered into financing contracts to sell an aggregate of 723,430 ounces of gold over a period ending 31 December 2014 at an average price of US$1,527 per ounce. Financing contracts to sell a total of 444,292 ounces of gold matured during the year and contributed US$107.7 million to cash revenue and US$146/oz to the average realised gold price.

Financing contracts to sell an aggregate of 279,138 ounces of gold at an average price of US$1,429 per ounce are outstanding as at 31 December 2013. In January 2014, the Group has entered into financing contracts to sell a further total of 85,115oz of gold during the year 2014 at an average price of US$1,250/oz.

Revenue generated as a result of third-party work by the Group's in-house service companies contributed to a US$23.4 million increase in revenue from US$53.9 million in 2012 to US$77.3 million in 2013. This was primarily attributable to sales generated by the Group's engineering and research institute, Irgiredmet, of US$68.4 million in 2013 compared to US$47.8 million in 2012, primarily through engineering services and the procurement of materials, consumables and equipment for third parties.

IMPAIRMENT REVIEW

Impairment of mining assets and goodwill

During 2013, the gold price declined significantly and remained at those lower levels which also resulted in a revised long-term gold price outlook. In response to the declining gold price environment, the Group undertook an impairment review of the tangible assets and goodwill attributable to the gold mining projects and the supporting in-house service companies.

As a result, in first half of 2013 the Group recorded impairment charges to the extent that recoverable amounts did not support the relevant carrying values of assets on the balance sheet as at 30 June 2013.

In the second half of 2013, the Group undertook certain cost optimisation measures in response to the declining gold price environment and increased its non-refractory mineable reserves. As a result of the aforementioned measures no further impairment was required as at 31 December 2013.

Impairment charges recognised against the tangible assets and goodwill attributable to the gold mining projects and the supporting in-house service companies during 2013 are set out below:

The forecast future cash flows are based on the Group's current mining plan and reflect certain cost optimisation measures implemented in response to the declining gold price environment. The other 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

Impairment of exploration and evaluation assets

The Group performed a review of its exploration and evaluation assets and recorded the following impairment charges in the first half of 2013:

- An exceptional US$62.2 million post-tax impairment charge (being US$63.6 million gross impairment charge net of reversal of associated deferred tax liabilities) was recorded against the Tokur assets which are awaiting development of a full-scale mining operation and which has been put on hold to minimize Group's CAPEX in the current gold price environment; and

- Further non-exceptional US$31.4 million impairment charges were recorded against associated exploration and evaluation costs previously capitalized within intangible assets following the decision to suspend exploration at various licence areas, primarily located in the Amur region.

No further impairment of exploration and evaluation assets was recognised in the second half of 2013.

Impairment of ore stockpiles

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

The US$44.3 million pre-tax impairment of stockpiles recognised during the first half of 2013 was considered by the Directors to be exceptional as it resulted from the significant decline in the gold price and related to ore stockpiles which were substantially mined in prior periods. A further US$11.3 million pre-tax impairment of stockpiles recognised in the second half of 2013 primarily related to this year's mining activity and therefore was considered by the Directors to be non-exceptional.

EXCEPTIONAL ITEMS

The Group has separately disclosed exceptional items, being significant items of income and expense, which due to their nature or the expected infrequency of the events that give rise to these items should, in the opinion of the Directors, be disclosed separately to enable a better understanding of the financial performance of the Group.

This period, the following items were considered as exceptional:

- US$411.3 million impairment of tangible assets and goodwill;

- US$63.6 million impairment of Tokur exploration and evaluation assets;

- US$44.3 million impairment or ore stockpiles;

- US$4.2 million loss on disposal of the Group's entire investment (76.62% holding) in the alluvial operations of Berelekh; and

- US$19.4 million gain on buy-back of convertible bonds

The effect of exceptional items on profit for the period is set out in the table below.

UNDERLYING EBITDA AND ANALYSIS OF OPERATING COSTS

(a) Gain on re-measuring of equity interest in Omchak on acquisition in 2010 associated with Omchak assets disposed during the year ended 31 December 2012.

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

Hard-rock mines and alluvial operations

This period, hard-rock mines and alluvial operations generated underlying EBITDA before exceptional items of US$370.9 million compared to US$560.8 million underlying EBITDA in 2012. The average total cash costs per ounce for the Group increased from US$875/oz in 2012 to US$1,016/oz in 2013. Total cash costs for hard-rock mines increased from US$805/oz in 2012 to US$976/oz in 2013, primarily reflecting the scheduled decrease in grades processed at Pioneer, Malomir and Albyn, decrease in recovery rates at Pioneer and Pokrovskiy, effects of flooding and industry-specific cost inflation, resulting in a net US$106.0 million decrease in underlying EBITDA. The decrease in the average realised gold price from US$1,670/oz in 2012 to US$1,519/oz in 2013, partially offset by the increase in physical ounces sold, contributed to a further US$83.9 million decrease in underlying EBITDA compared to 2012.

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 2012 there was some inflation of Rouble denominated costs, in particular, electricity costs increased by 7%, cost of chemical reagents increased by 15%, cost of diesel increased by 3% and consumables prices increased by up to 10%. The impact of Rouble price inflation was partially mitigated by the 3% average depreciation of the Rouble against the US Dollar, with the average exchange rate for the period going from 31.1 Roubles per US Dollar in 2012 to 31.9 Roubles per US Dollar in 2013.

Refinery and transportation costs are variable costs dependent on the production volume and comprise about 0.5% of the gold price. Mining tax, comprising 6% of the gold price, are also variable costs dependent on the production volume and the gold price realised.

(a) Excluding deferred stripping

As announced in December 2013, recent exploration activities resulted in a significant increase in the Group's mineral resources. This increase, estimated in accordance with the internally-used Russian classification system, was approximately 5.7Moz of non-refractory and 7.2Moz of refractory resources.

The Group's accounting policy is to depreciate mining assets using units of production ("UOP") method based on the volume of ore reserves. In December 2013, a significant portion of the newly discovered reserves and resources have been scheduled for processing in the Group's latest life of mine production plans as these resources are expected to be classified as JORC reserves or resources before they are processed. Following this inclusion, going forward, the Group intends to amend its methodology for determining ore reserve estimates for calculating UOP depreciation to include, in addition to JORC reserves, resources estimated in accordance with both JORC and the internally used Russian Classification System, but only to the extent these are scheduled to be mined under the Group's life of mine plans. As a consequence of the above and significant impairments recorded in 2013, the Group expects the depreciation charges to significantly reduce going forward.

Central administration expenses

The Group has corporate offices in London, Moscow and Blagoveschensk which together represent the central administration function. Central administration expenses decreased by US$14.9 million from US$60.7 million in 2012 to US$45.8 million in 2013, primarily reflecting cost cutting measures undertaken by the Group.

IRC

On 17 January 2013, IRC entered into conditional subscription agreements with each of General Nice Development Limited ("General Nice") and Minmetals Cheerglory Limited ("Minmetals") for an investment by General Nice and Minmetals in new shares of IRC for up to approximately HK$1,845 million (approximately US$238 million) in aggregate.

During the Period, IRC allotted and issued 1,035,876,000 new shares to General Nice for approximately an aggregate of HK$1,005.7 million (equivalent to approximately, US$129.6 million). The Group's interest in the share capital of IRC was diluted from 63.13% as at 31 December 2012 to 48.7% as at 31 December 2013.

Subsequent to 31 December 2013, IRC allotted and issued a further 165,000,000 new shares to General Nice for HK$155.1 million (approximately US$20.0 million). Further details are set out in note 27 to the consolidated financial statements.

Assuming total investment completion occurs, the Group's interest in the share capital of IRC Limited would be diluted from 48.7% as at 31 December 2013 (31 December 2012: 63.13%) to 40.49%. A pro-rata indemnity from General Nice in relation to the Company's guarantee under the ICBC Facility Agreement will be then implemented.

IRC continues to be classified as "held for sale" and is presented as a discontinued operation.

This year IRC generated US$18.9 million of operating losses and recognised a US$28.9 million exceptional impairment, in aggregate, against its Kuranakh mining assets and Molybdenum exploration project.

The Group recorded a further US$151.6 million exceptional write-down to adjust the carrying value of IRC's net assets to fair value less costs to sell based on IRC's share price of HK$0.78 as at 31 December 2013 which reflects the change in the market share price of IRC share.

INTEREST INCOME AND EXPENSE

The Group earned US$0.9 million interest income on the cash deposits with banks.

The interest expense increased by US$2.1 million from US$73.2 million in 2012 to US$75.3 million in 2013. Interest expense for the period was comprised of US$29.4 million effective interest on the convertible bonds and US$64.8 million interest on bank facilities. US$19.3 million of this interest expense was capitalised as part of mine development costs within property, plant and equipment (2012: US$10.9 million).

OTHER FINANCE GAINS/ (LOSSES)

(a) Including US$12.4 million fair value loss on gold option contracts traded by the Group in 2012.

TAXATION

The Group is subject to corporation tax under the UK, Russia and Cyprus tax legislation. The average statutory tax rate for 2013 was 23.25% in the UK and 20% in Russia.

This period tax credit arises primarily in relation to the Group's precious metals operations and is predominantly represented by deferred tax driven by the impact of impairment charges.

This period, the Group made corporation tax payments in aggregate of US$39.7 million in Russia (2012: corporation tax payments in aggregate of US$66.4 million in Russia).

EARNINGS PER SHARE

Basic loss per share for 2013 was US$2.59 compared to US$0.00 per share for 2012. The key factor affecting the basic loss per share was the increase of net loss for the period attributable to equity holders of Petropavlovsk PLC from US$0.6 million for 2012 to US$509.0 million for 2013.

The total number of Ordinary Shares in issue as at 31December 2013 was 197,638,425 (31 December 2012: 187,860,093).

On 26 July 2013, the Company issued 9,778,332 ordinary shares to eligible shareholders in respect of their entitlement to receive 1 new Ordinary Share for every 19.21 Ordinary Shares held on the Register at the close of business on 28 June 2013.

FINANCIAL POSITION AND CASH FLOWS

Key movements in cash and net debt from continuing operations

The decrease in working capital reflects the efforts undertaken by the Group to optimise the working capital structure, including

- partial processing of low-grade ore stockpiles at Pioneer which contributed US$58.3 million to the aggregate US$53.3 million decrease in ore stockpiles;

- US$12.5 million decrease in capitalised deferred stripping costs primarily due to amortisation of prospective stripping undertaken at Pokrovskiy in prior periods in line with this Period's mining activity which was partially offset by the increase in capitalised prospective stripping at Pioneer and Albyn in the current period; and

- US$8.6 million decrease in stores and spares.

As at 31 December 2013 there were no undrawn facilities.

CAPITAL EXPENDITURE

The Group spent an aggregate of US$236.9 million on its gold projects compared to US$478.7 million invested in 2012. The key areas of focus this year were on the further development of POX, completion of Malomir (including flotation line), Albyn and Pioneer and on-going exploration related to the areas adjacent to the ore bodies of the main mining operations.

FOREIGN CURRENCY EXCHANGE DIFFERENCES

The principal subsidiaries have a US Dollar functional currency. Foreign exchange differences arise on translation of monetary assets and liabilities denominated in foreign currencies, which for the principal subsidiaries of the Group are 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 Group recognised foreign exchange losses of US$5.8 million in 2013 (2012: foreign exchange gains of US$6.4 million) arising primarily on Russian Rouble denominated net monetary assets and GB Pounds Sterling denominated net monetary liabilities.

GOING CONCERN

As described in the Chairman's overview, following the significant decline in the gold price over the year and notwithstanding subsequent revision of the Group's plans, in the absence of refinancing the Group's forecasts show breaches of certain covenants in its banking facilities at 31 December 2014. In addition the US$310.5 million outstanding convertible bonds are due for repayment in February 2015 and the Group does not currently have sufficient committed facilities or available funds to refinance this debt.

As explained in the Chairman's overview, the Group has developed a refinancing plan which includes negotiating with the Group's senior lenders and ICBC (on relaxation of the covenants in its banking facilities) and refinancing its convertible bonds. Based on negotiations conducted to date, the Directors have a reasonable expectation that the Group will receive sufficient relaxation of covenants in its banking facilities and refinance its Convertible Bonds maturing in February 2015.

The Directors have concluded that the combination of these circumstances represents a material uncertainty that casts significant doubt upon the Group's ability to continue as a going concern and that, therefore, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business. Nevertheless, after making enquiries and considering the uncertainties described above, the Directors have a reasonable expectation that the refinancing will be concluded successfully and the Group will therefore 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 2013 Annual Report and Accounts. Accordingly, they continue to adopt the going concern basis of accounting in preparing these consolidated financial statements.

Detailed Operations Report

· Total attributable gold production in 2013 of 741,200oz

· Production within the Group's guidance despite severe weather which resulted in difficult mining conditions, predominantly due to extensive flooding, in Q3

Pioneer

Performance in 2013

Pioneer produced approximately 314,850oz of gold in 2013. Production for the year was hampered due to the excessive rainfall in Q3 which flooded the pits and prevented access to high-grade material. As previously announced, this resulted in a c.10,000oz decrease in production relative to the planned production for the year. This material is scheduled to be processed in 2014.

In accordance with the mine plan, the higher grade material mined during the year was blended with lower grade material from stockpiles resulting in their significant decrease and a substantial release of working capital.

In Q1 2013, the expansion of the absorption circuit at the resin-in-pulp plant ("RIP") processing plant was completed and during the year the plant processed 25% more ore compared to 2012. Economies of scale allowed for the profitable processing of ore at a lower head grade.

The plant's expansion allowed for a record 6.6 million tonnes of ore to be processed during the year with an average grade of 1.8g/t. The decrease in recovery rates from 86% to 82% was due to the more metallurgically complex nature of ore treated through the plant during the year.

Approximately 3% of Pioneer's gold output in 2013 was produced via heap-leach operations.

During the year, high grade ore was mined predominantly at the pits in the NE Bakhmut zone. This area, together with the extension of the high-grade Andreevskaya pit, is scheduled to be the main source of high quality ore for the plant in 2014. The extension to the Andreevskaya pit commenced in Q2 and was completed in Q1 2014.

Costs

2013 TCC/oz for Pioneer were US$887/oz (2012: US$734/oz). The increase in TCC/oz was primarily due to a 21% decrease in processed grades (due to the inclusion of low grade stockpiles) and a 57% increase in the stripping ratio compared to 2012. The negative effect of processing lower quality ore was mitigated by a comprehensive cost-cutting programme implemented at the mine and optimisation of operational activities.

Pokrovskiy

Performance in 2013

During 2013, Pokrovskiy produced approximately 91,200oz of gold.

As at Pioneer, 2013 operations at Pokrovskiy were significantly affected by the heavy rains in August and September. This adverse weather resulted in temporary flooding of the Pokrovka-1 pit. Furthermore, a large amount of silt and clay was washed into the pit, covering areas of high-grade material at the bottom of the pit. This was removed only in October and November and resulted in a c.4,000oz decrease in production.

Throughout the year, a scheduled push back of the south wall of Pokrovka-1 was carried out in order to reach the high-grade ore at the bottom of the pit while lower-grade ore was mined at Pokrovka- 2 and other satellite pits.

Access to high-grade ore was gained in H2 2013 resulting in an improvement to the head grade at the plant compared to H1 2013 although the blend for the plant also included lower grade stockpiles from previous years.

During 2013, the processing of high-grade bulk samples from the Burinda deposit through the Pokrovskiy plant was also carried out. Burinda is a gold deposit situated within the Taldan licence area, c.115km north-west (or c.150km by road) from Pokrovskiy. The ore bodies are elongated in the N-S and NE-SW directions, hosted by a surrounding zone of metasomatism and characterised by pinch-and-swell structures. Their lateral extent ranges from a few tens of metres to 1,000m (Tsentralnoye ore body), and thickness from a few metres to 18m (Yuzhnoye ore body). It is planned that the material from the Burinda deposit will be treated at the Pokrovskiy plant.

Due to the continued operation of the plant, 1.8 million tonnes of ore were processed during the year with an average grade of 1.8g/t. The decrease in RIP recovery rates to c.77% from 83% in 2012 was due to the high clay content in the ore treated through the plant during the year.

The Pokrovka-1 pit is expected to be exhausted in 2014 following which all ore processed during the year will come from Pokrovka-2, small satellite pits and stockpiles.

Costs

2013 TCC/oz for Pokrovskiy were US$1,180/oz (2012: US$782/oz). Although the processed grades were almost in line year-on-year, TCC/oz for the mine increased significantly compared to 2012 due to a substantial amortisation of deferred stripping from the previous periods. TCC/oz was also negatively affected by a 7% decrease in RIP recovery rates.

Malomir

Performance in 2013

Malomir produced approximately 115,520oz of gold in 2013. The ore came predominantly from the Quartzitovoye oxide pit and the transitional zone of the refractory ore body at the Central pit.

During the year, the plant processed 2.7 million tonnes of ore with an average grade of 1.8g/t. The recovery rate increased compared with the previous year to 72.6%, but was still low due to the inclusion in the blend of transitional ore with a high sulphides content, which adversely affects the processing plant recovery.

The flotation plant at Malomir was 90% completed during the year but work has been suspended pending the commissioning of the POX plant at Pokrovskiy.

Costs

2013 TCC/oz for Malomir were US$1,027/oz (2012: US$911/oz) following a c.10% decrease in grades and a 14% increase in the stripping ratio compared to 2012.

Albyn

Performance in 2013

Albyn produced approximately 134,810oz of gold during 2013, an increase of 51% compared to 2012 as the processing plant worked to its full capacity throughout the year, following its ramp up in 2012.

During H1 2013, mining at Albyn focused on advanced stripping of the central part of the deposit to prepare the ore for delivery to the plant in H2. The processed ore in H1 came from the eastern part of the deposit which has a number of thin ore bodies interspersed with waste bands. This caused a high level of dilution and delays in the mining schedule, resulting in a c.8,000oz shortfall relative to planned gold production. In the central area, the ore bodies are higher grade, wider and easier to mine selectively.

During H2 2013, production at Albyn was negatively affected by flooding of the River Selemja. This made the river crossing impassable in October, thus hindering the supplies of fuel and spare parts to the mine. Consequently, the higher-grade ores, which were scheduled for processing in Q4, were not accessed.

Costs

2013 TCC/oz for Albyn were US$1,006/oz (2012 - US$980/oz), in line with the previous year in spite of a 23% decrease in processed grades and a 29% increase in the stripping ratio due to the continued operation of the plant and the doubling of its capacity.

Alluvial Operations

Performance in 2013

During 2013, gold produced from the Group's alluvial operations totalled approximately 84,800oz (compared to 92,100oz in 2012). Due to the seasonal nature of the alluvial operations, the disposal in Q4 2013 of the high-cost alluvial assets held by Berelekh did not affect the production profile of the Group's alluvial assets for the year.

Costs

2013 TCC/oz for the Group's alluvial operations were US$1,319/oz, in line with the previous year. Although alluvial mining is less capital-intensive than hard-rock mining, following the drop in the gold price in 2013, the Group took steps to scale back production from high-cost assets with the sale of the alluvial operations held by Berelekh.

Project Development

Development of the POX Hub

Strategy for development

Following the drop in the gold price in Q2 2013, the Group reviewed its development plans and took the decision to slow down the pace of development of the POX Hub, thereby relieving pressure on the Group's capital expenditure requirements. In Q4 2013, a decision was taken to postpone further the commissioning of the POX facilities as new exploration results established that a steady, annual production of c.600,000oz for 2015-2019 could be achieved through the processing of non-refractory ore from the Group's existing facilities.

Progress in 2013

During Q1 2013, the four autoclaves were installed on their foundations and work was undertaken constructing the autoclave building around them.

Following the review of the Group's development work at the POX Hub has focused mainly on honouring existing contracts and preservation of the site.

During H2 2013, the interior works on the four autoclaves, including lining with acid-resistant bricks and installation of baffle walls, was completed. In line with the Group's strict and comprehensive approach to quality assurance, work was conducted by specialist contractors, DSB Säurebau GmbH (Germany), who are considered by the Group to be global leaders in the field.

Work on the foundations and erection of the steel framework for the neutralisation building commenced during Q4.

By the end of 2013, the oxygen plant was 90% completed.

Outlook

Following the decision to postpone the commissioning of the POX Hub, work scheduled to be undertaken in 2014 will continue to be restricted to fulfilling existing contractual commitments.

Flotation Plant at Malomir

During H1 2013 the flotation plant at Malomir was mostly completed except for some piping and the electrical layout. The flotation cells and agitators as well as the filtration system were all installed but work at the plant was subsequently suspended in Q3 2013 pending the commissioning of the POX plant at Pokrovskiy.

Other development projects

Visokoe

During 2013, the Group conducted permitting work at Visokoe, including the preparation of a feasibility study for the Russian authorities - FBU State Commission on Mineral Resources ("GKZ").

Visokoe is a significant non-refractory deposit that contains 1.2Moz of JORC gold Reserves and a further c.1.3Moz of Mineral Resources. Visokoe reserves are suitable for heap leach and/or RIP recovery and therefore the Group is considers Visokoe to be a valuable asset for development in mid-term.

However, the Group has not allocated significant capital expenditure for this project in 2014 as it is awaiting the construction of the state power lines and an assessment of the economic viability of heap leaching which is expected to result in further improvements to the economic feasibility of the project. This project is planned to be the subject of a strategic review in August 2014.

Tokur

Although Tokur was mined extensively during the Soviet era, the deposit still contains significant JORC-compliant Mineral Resources and Ore Reserves suitable for processing in an RIP plant, or by gravitational separation. However, this asset has been fully impaired as there are currently no plans to develop it in the 2015-2019 period following the decline in the gold price and the consequential cutting of capital expenditure.

Yamal

Following optimisation of the Group's capital expenditure as well as a sharp decline in the gold price, the Group put on hold its existing development plans for the Yamal assets. Therefore, in 2012 Yamal's assets were impaired and in 2013 their JORC gold reserves written off and removed from the Group's Reserves statement. The Group still quotes JORC Mineral Resources for its Yamal assets.

Guyana

In Guyana, the Group holds a number of exploration licences covering an area of c.510km2. Exploration completed to date includes geochemical and geophysical surveys and trenching allowing preliminary evaluation of an exploration target of c.100t of gold. During 2013, a small amount of field work was completed. The results are regarded as positive but are still being evaluated and interpreted. The Group's management believes that the exploration potential of the Guyana assets is high and further exploration work is justified but, in the short term, these assets are a low priority with no significant work planned for 2014. 

Reserves and Resources

2013 Summary Highlights:

· Total Group JORC Resources increased by 740Koz from 25.06Moz to 25.8Moz, in spite of 815Koz of depletion, 542Kozof sales and 14Koz of write offs during 2013.

- Approximately 2.1Moz were added in total JORC Mineral Resources at the Group's main mines as a result of successful exploration activities

- Average grade of total resources stayed virtually unchanged at 0.9g/t in spite of 2013 depletion grade being 60% higher than the average grade of the Mineral Resources

· Total JORC Ore Reserves decreased by c.800Koz from c.10Moz to c.9.2Moz, due to depletion and write offs

- The increase in Ore Reserves at Pioneer, Albyn, Malomir and Burinda in part offsets the depletion and write-offs.

- All new discoveries are non-refractory

· Non-refractory JORC Mineral Resources increased by c.1.5Moz from 12.3Moz to 13.8Moz, after 815Koz depletion during 2013

- 2.3Moz were added in total

- Average grade of the non-refractory resources unchanged

· Non-refractory JORC Ore Reserves decreased by 440Koz from 4.83Moz to 4.39Moz due to depletion,write offs and disposals

- Increase in non-refractory reserves before depletion and write-offs of c.745Koz

- The average grade improved from 1.19g/t to 1.21g/t

- Depletion and write-offs of non-refractory Ore Reserves were off-set by additions and also by re-classification of refractory material at NE-Bakhmut (Pioneer) and Quartzitovoye (Malomir)

- All new non-refractory Ore Reserves are at or near the Group's operational mines and should be suitable for processing at the existing facilities

· Refractory JORC Ore Reserves decreased by 354Koz from 5.17Moz to 4.82Moz mainly due to the reclassification of some material at Pioneer and Malomir into non-refractory reserves

· 2014 work is focusing on converting newly established non-refractory resources into reserves as well as in expanding the non-refractory mineral resource base at and near the Group's operational mines

· The Company's Ore Reserve estimate is based on a long term gold price assumption of US$1,200/oz for Albyn and Visokoe

· Ore Reserve estimates for the new ore bodies prepared during 2013 and 2014 for Alexandra (Pioneer), Unglichikanskoye and Elginskoye (Albyn) as well as Magnetitovoye and Quartzitovoye (Malomir) use a long term gold price assumption of US$1,250/oz

· The US$1,000/oz gold price assumption continues to be used for all other projects, together with related factors, such as operating costs and metallurgical recoveries, as reviewed previously by advisors, Wardell Armstrong International ("WAI") in 2011/12

· All Ore Reserves are for open pit extraction and are reported within economic open pit shells

· The Company has previously announced the identification of 5.7Moz of reserves and resources defined in accordance with the Russian GKZ Classification system, of which 2.1Moz (including depletion and disposals) were converted into current JORC reserves and resources

The Mineral Resource and Ore Reserve statements were prepared internally by the Group following the methodology advised by WAI. The updated estimates for the Group's hard-rock assets have been prepared in accordance with the guidelines of the JORC Code by the Group's technical experts. An extensive exploration programme, metallurgical laboratory testing and technical work conducted by the Group formed the basis of these estimates.

A summary of the Group's Ore Reserves is tabulated below:

Note: Figures may not add up due to rounding

A summary of Ore Reserves for the Group's core currently producing assets, which includes Pioneer, Pokrovskiy, Malomir, Albyn and Burinda, is provided in a separate table below. These reserves are included in the table above and are not additional.

Note: Figures may not add up due to rounding

A summary of the Group's Mineral Resources is tabulated below.

Note: Mineral Resources are reported inclusive of Ore Reserves. Figures may not add up due to rounding

A summary of Mineral Resources for the Group's core assets, which includes Pioneer, Pokrovskiy, Malomir, Albyn and Burinda, is provided in a separate table below. These Mineral Resources are reported inclusive of Ore Reserves.

Note: Mineral Resources are reported inclusive of Ore Reserves. Figures may not add up due to rounding

In addition to the Ore Reserves and Mineral Resources estimated in accordance with the JORC Code, the Group holds significant alluvial gold reserves and resources estimated in accordance with the Russian Classification System. A summary of the alluvial resources and reserves is presented below:

Notes:

(1) Alluvial resources are reported inclusive of alluvial ore reserves and in compliance with the audited Russian GKZ System;

(2) Ore reserves include only On-Balance material (defined as per the Russian GKZ Classification System) for open-cut and dredge extraction. Resources include the ore reserves, Off-Balance material (defined as per the Russian GKZ Classification System) for open-pit and dredge extraction as well as On-Balance and Off-Balance material considered for potential underground mining;

(3) As per the Russian GKZ Classification System, ore reserves are reported at in-situ grade and tonnage, however it has been demonstrated at the time of the estimate that the material remains economically viable after application of the reasonably assumed or estimated modifying factors such as mining dilution and recovery.

Asset-by-asset breakdown of Ore Reserves is provided in the table below.