POG.L Regulatory News (POG)

27 September 2018

Petropavlovsk PLC (the "Company")

Half Year Report for the Period Ended 30 June 2018

Petropavlovsk PLC ("Petropavlovsk", or the "Company" and, together with its subsidiaries, the "Group") today issues its Half Year Report for the period from 1 January 2018 to 30 June 2018 ("H1 2018" or the "Period") and a positive update on guidance for production and total cash costsu for H2 2018.

Comment from Sir Roderic Lyne, Non-Executive Chairman

After the election of the new Board at the Annual General Meeting on 29 June, we committed ourselves to restore stability and momentum to Petropavlovsk and, in the immediate future, to focus on three critical tasks: taking the Pressure Oxidation ("POX") project towards commissioning and production; working towards a resolution of the IRC loan guarantee; and rebuilding the Board and the senior management team.

13 weeks is a short period in the quarter-century history of Petropavlovsk, but we can already report significant progress towards all three of these key objectives. As set out below, we have been able to lift our production guidance for 2018 to between 420,000 and 450,000 oz. (from 400,000 to 410,000 oz.), including sellable gold in concentrate, while reducing costs; and we are targeting an increase to 500,000 oz. in 2019, when Pressure Oxidation will add to our production. It will take time and effort to bring Petropavlovsk back up to cruising altitude (and then higher) after a period of turbulence and inertia, but the Company is now climbing again.

Self-evidently, this has been a period of intensive activity within the Company, and I would like to pay tribute, in particular, to the hard work and dedication of Dr. Pavel Maslovskiy and his executive team (within which Mr Alexey Dubynin has been appointed as Chief Financial Officer and Dr. Alya Samokhvalova as Deputy Chief Executive). Pavel Maslovskiy has thrown himself back into the task of providing effective and energetic leadership to the Company and is making a vital difference. He is restoring the confidence of middle management and the workforce and, with their support, has instituted remediation measures and an operational optimisation programme. We expect to see the results in improved performance in the second half of 2018 and beyond, and are already reporting a 10% reduction in Total Cash Costs thanks to optimisation and assisted also by a beneficial movement in the Rouble/Dollar exchange rate.

POX is the corner stone of our strategy. By enabling us to process refractory ores, it will have a very significant effect on our future production and should position Petropavlovsk as a technological and operational leader within the Russian gold-mining industry. We are reporting today that the POX Hub has entered dry commissioning and is progressing well towards maiden production in Q1 2019. The gold concentrate which I have mentioned above will come from the first stage of the POX project - the flotation circuit at Malomir. Dr Maslovskiy reports on this in more detail, but I would highlight the significant technical achievement of improving the grade of concentrate at Malomir by over 50%. This reduces the physical amount of material that has to be transported to the POX Hub at Pokrovskiy and then processed through the autoclaves and cyanidation plants, thereby saving costs. Having achieved this improvement consistently since commissioning in July, we have the confidence to include sellable gold concentrate in our forecast production numbers for H2 2018. As soon as we have established a stable operating regime at the autoclave plant, we shall be able to treat concentrate in-house.

With regard to IRC, shareholders will have seen the announcement on 24 September of a proposed refinancing of IRC's project finance facility. This is an important step towards our objective of de-risking Petropavlovsk's guarantee of IRC's debt. Under the new facility proposed for IRC by a leading Russian bank, IRC will repay to Petropavlovsk by December, with interest, the $30 million bridge loan advanced by Petropavlovsk in June 2018; and Petropavlovsk's obligations as a guarantor of IRC's borrowings will be reduced in a three stage process. As the granting of the guarantee will constitute a Class 1 transaction under the Listing Rules, completion of the transaction will be conditional on the approval of Petropavlovsk's shareholders in a general meeting.

The third key objective is to restore stability and implement the highest standards of corporate governance at Board level. With the help and advice of a skilled recruitment agency, the Nominations Committee has been meeting candidates to become independent directors of the Company. This process is well advanced, and I hope to be in a position soon to make an announcement on the future composition of the Board. As we are announcing today, Mr Peter Hambro, who co-founded the Company with Pavel Maslovskiy, has been appointed to the non-Board position of President of the Company, and has agreed to act as Senior Adviser to the Board. We are already benefiting greatly from his four decades of invaluable experience in the gold industry.

To sum up, the progress made in the past 13 weeks has been encouraging. I do not underestimate the challenges ahead, the work still to be done to achieve our objectives for the coming year, and the complexity of the global environment; but momentum has returned and we are determined to deliver our plans on time and on budget. I have focused today on our immediate objectives, but we are a company with ambition - the ambition to build on and reinforce the foundation of our assets and skills; to deliver value for all of our stakeholders by realising the Company's undoubted potential; and to lead Petropavlovsk into a new era and a bright future.

The full results for the six months' ended 30 June 2018 including information on the Group's operations and details of our production and costs are provided below.

Key Highlights

■ Improvement in production guidance for FY 2018 from 400,000oz - 410,000oz to 420,000oz - 450,000oz due to the inclusion of high-grade sellable flotation concentrate

■ Total cash cost 2018 full year guidance reduced by 10% to $750 - $800/oz from the previous guidance included in the 2018 Half Year Trading Update on 30 July 2018

■ The POX Hub has entered dry commissioning with maiden production expected in Q1 2019

■ Significant improvements have been made to the Malomir flotation plant flowsheet resulting in:

- c.50% increase in grades of gold concentrate making it sellable, if required to provide additional liquidity during the POX Hub's ramp up

- Significant improvements to 2019 cash flows and project economics due to a decrease in the amount of concentrate which needs to be transported and treated through the autoclaves, reducing costs

- This frees up capacity at the POX Hub allowing for the possible treatment of additional material

■ In August, the Quartzitovoye underground mine at Malomir produced ore at an average grade of c.5.4g/t.

■ Pioneer underground mine operations are being steadily ramped up, with full capacity expected to be reached during Q4 2018

■ Based on the current mineral reserves base and without taking into account geological exploration potential, the Group expects to reach a c.500,000oz of annual production in 2019 and 500,000 - 550,000oz in 2020 -2022

■ IRC recorded an improvement in the underlying operational and financial results compared to H1 2017.

■ Progress has been made with the renegotiation of IRC's ICBC loan guarantee with the introduction of a leading Russian bank which has informed Petropavlovsk and IRC, post period end that credit committee approval has been given for a new US$240 million facility. On completion of the proposed refinancing, the new facility will be used in part to repay the US$30 million bridge loan advanced by Petropavlovsk to IRC in June 2018 and the c.US$6 million guarantee fee due to Petropavlovsk in connection with the ICBC Facility.

■ Petropavlovsk's obligations as a guarantor of IRC's new US$240 million facility with a leading Russian bank will be reduced under a three staged process.

¨Throughout this document, when discussing the Group's financial performance, reference is made to a number of financial measures, known as Alternative Performance Measures (APM), which are not defined or calculated in accordance with IFRS. Please refer to Section "The Use and Application of APMs" of this report for further information on APMs, their definition, how they are calculated and their relevance to Petropavlovsk.

Financial Highlights

■ Gold sales of c.201,400oz (H1 2017: c.231,800 oz)

■ Group revenue of US$270 million (compared to US$304 million in H1 2017) due to lower quantity of gold sold

■ Underlying EBITDAu of US$61 million (H1 2017: US$114 million)

■ Operating Loss of US$17 million (compared to Operating Profit◆ of US$65 million in H1 2017)

■ Loss for the period of US$24.8 million (compared to profit of US$24.5 million in H1 2017)

■ Increase in Average Realised Gold Priceu to US$1,285/oz (H1 2017: US$1,255/oz)

■ Total Cash Costs ("TCC") increased to US$899/oz in H1 2018 (H1 2017: US$675/oz), primarily due to inflation of certain Rouble denominated costs, higher volumes of stripping and suboptimal organisation of mining works in H1 2018

■ All-in sustaining costs ("AISC")u increased to US$1,138/oz in H1 2018 (H1 2017: US$965/oz), reflecting increased sustaining exploration expenditure and impairment of non-refractory ore stockpiles

■ Capital expenditure◆ of US$67.2 million reflecting the focus on the POX project as well as exploration and development to support underground mining at Pioneer and Malomir (H1 2017: US$41.8 million)

■ Net Debtu of US$566 million (31 December 2017: US$585 million),

■ Forward contracts to sell an aggregate of c.300,000oz of gold at an average price of US$1,252/oz were outstanding as at 30 June 2018. Forward contracts to sell an aggregate of c.250,000oz of gold at an average price of US$1,252/oz were outstanding as at 26 September 2018

H1 Production

■ Total gold production fell to 201,400oz mainly due to a decrease in the contribution from gold in circuit ("GIC") compared with H1 2017, closure of the Pokrovskiy mine and failure to bring underground mines to full production capacity and sub-optimal organisation of the mining operations at Albyn.

2018 Outlook

FY 2018 guidance improved following an internal review and measures introduced to enhance performance during the last three months

· Total gold production for the full year is expected to be within the range of c.420,000 - 450,000oz, including sellable gold in concentrate, which is higher than management's initial assessment of 400,000 - 410,000oz, as given in the H1 2018 trading update announced 30 July 2018 ("Trading Update")

■ 2018 full year TCC is now expected to be within US$750 - 800/oz, representing a significant improvement on the US$899/oz result reported for H1 2018. This is 10% lower than guidance given during the Trading Update (both based on a RUB:US$ exchange rate of 58) mainly due to the cost optimisation program launched in July 2018, as well as the effect of Rouble depreciation

■ AISCu for the full year of 2018 expected to be c.US$1,050 - 1,100/oz (a decrease compared to H1 2018 of US$1,138/oz) mainly due to a decrease in production costs through operational optimisation being undertaken during H2 2018

■ Capexu for the year is expected to be c.US$107 million in line with previous guidance, of which c.US$70 million relates to the POX Hub, including the flotation plant at Malomir

2019 - 2022 Outlook

■ Significant reductions in production costs in 2019 due to advanced stage technical improvements in the Malomir flotation flowsheet, resulting in the Malomir flotation concentrate grades increasing by c.50% from c.24g/t to c.36-40g/t and a corresponding c.40% decrease in concentrate yields

■ 2019 gold production guidance of approximately 500,000oz

■ 2019 Full Year Total Cash Costsu expected to be within the range of US$650-700/oz

■ 2020-2022 production outlook is currently expected to be within the range of 500,000 - 550,000oz per annum, based on the current mineral reserves base and not taking into account geological exploration potential

Development Update

■ The POX Hub has entered the dry commissioning stage, following commissioning of the oxygen plant in August

■ Site Acceptance Tests are being carried out at the POX plant. Wet commissioning of the plant is expected by the middle of October, with hot commissioning on schedule for December 2018 with production in Q1 2019

■ The first flotation line at Malomir was commissioned successfully in July and has now reached full capacity producing c.36-40g/t concentrate - a significant improvement on its original c.24g/t design assumption. The second flotation line is ready for commissioning in October

■ This high grade concentrate has already been stockpiled at the POX Hub site in advance of the commissioning of the POX plant and is ready for processing

■ Malomir and Pioneer underground mines operations are steadily ramping up after the delays in H1 and both are expected to operate at full capacity from Q4 2018.

Exploration Update

Pioneer

- H1 2018 exploration resulted in encouraging results at Nikolaevskaya, Aprelsky and Ulagach, with a new zone of refractory mineralisation, Ulunginskaya, defined south-east of the Pioneer plant

Albyn

- Deep drilling resulted in several high grade intersections, confirming the potential for underground mining: the best intersections include 1.4m @ 55.51g/t, 10.0m @ 4.41g/t, 1.7m @ 12.1g/t and 2.5m @ 7.84g/t

Malomir

- Underground exploration identified low grade stockwork on the south side of Quartzitovoye 1, which should increase the project's open pit non-refractory resources

Board Update

■ As advised in the H1 Trading Update issued on 30 July 2018, the Company has commenced a formal process with professional recruitment consultants to appoint new independent non-executive Directors with relevant experience in order to constitute a Board in full compliance with corporate governance requirements. This process, which is being led by the Company's Nominations Committee, is well advanced and the Company expects to be in a position to announce the appointment of new independent non-executive Directors in the near future

■ Mr Peter Hambro who was appointed on 26 July 2018 as Petropavlovsk PLC's nominee director on the Board of IRC Ltd., has been appointed as President of the Company, and as Senior Adviser to the Board of Petropavlovsk

IRC Update

IRC Limited is a producer and developer of industrial commodities with its shares quoted on the Hong Kong Stock Exchange (Stock Code 1029). Petropavlovsk is a major shareholder in IRC, with a holding of 31.1%. IRC released its interim results for the six months ended 30 June 2018 on 31 August 2018. The IRC results are available to view on the IRC website at http://www.ircgroup.com.hk

Key highlights from this report are as follows:

Financials

■ Half year revenue increased 37% to US$70.2 million (30 June 2017: US$51.2 million)

■ Half year Underlying EBITDA increased 43% to US$11.8 million (30 June 2017: US$8.2 million)

■ Net loss, including a one-off, non-cash provision of US$7.5 million, amounted to US$15.6 million (30 June 2017: US$9.7 million)

■ ICBC waivers granted; bridge loan of an equivalent of US$29.75 million provided by Petropavlovsk on 13 June 2018

■ As announced on 24 September 2018, a leading Russian bank informed IRC and the Company that its credit committee has granted approval, subject to the entry into legally binding agreements, for a new US$240 million facility (the "New Facility") to be provided to LLC KS GOK, a wholly owned subsidiary of IRC. If progressed, the New Facility would be utilised to repay the Industrial and Commercial Bank of China facility (the "ICBC Facility") in full of c.US$204 million, to repay the bridge loan advanced by Petropavlovsk to IRC in June 2018 in the amount of US$30 million, and to repay the guarantee fee of c.US$6 million owed by IRC to Petropavlovsk in respect of the ICBC Facility.

Operations

■ Production and sales volumes at K&S increased

- Production volume up 56% to 1,084,602 tonnes (30 June 2017: 697,431 tonnes)

- Sales volume up 50% to 1,046,649 tonnes (30 June 2017: 698,632 tonnes)

■ K&S operating capacity up

- Operating at 78% capacity as at the end of June, entering final phase of ramp up

- Successfully operated at 105% of design capacity

CEO Comments

Commenting on the announcement, Pavel Maslovskiy, Chief Executive Officer said:

"Improved Operating Performance

After the period of instability in H1 2018, I am delighted to be leading Petropavlovsk's operations once again during this crucial phase and in doing so to be supported by the Company's original development team. Whilst the results today show the effect of the disruptions to the operations caused by the management hiatus in H1, we believe we have already turned a corner. Hence I am confidently presenting today the improvement on our original guidance for the full year bringing the business back into sustainable operations and increasing profitability.

Having spent the last three months working closely with the operational teams at all of our assets, I have been considerably heartened by the dedication and skills of our workforce, and how employees at every level have responded to the rectification programme which we launched together and which is now yielding initial results. This programme is already bearing fruit, with updated 2018 full year guidance announced today for higher gold equivalent production and lower cash costs than previously expected. We will continue to focus on our operational optimisation and cost reduction to improve our margins. We have arrived at an inflection point following our many years work on the development of the POX Hub, which lies at the heart of our growth strategy.

Completion of POX Hub

The successful commissioning of the POX Hub scheduled in December this year relies on several integral parts:

1. Commissioning of the Malomir flotation plant and achieving stable gold concentrate output

2. Development of a reliable and efficient logistical system for the delivery of flotation concentrate to the POX Hub site

3. Refurbishment of the Pokrovskiy Resin-In-Pulp ("RIP") plant 

4. Commissioning of the POX Hub autoclave plant

Our robust start of the first line of the flotation plant at Malomir exceeded our expectations as not only was the team successful in achieving full production capacity on time but also the improvements made by our technicians to the flowsheet have resulted in more than a 50% increase in concentrate grade and accordingly a decrease in the amount of concentrate which needs to be transported and treated through the autoclaves. This should improve the economics of our Malomir project significantly and increase its profitability. We have already produced 15,000t of concentrate at c.40g/t and we expect that the commissioning of the second flotation circuit at the end of this month will allow us to build a substantial stockpile of concentrate by the end of the year which could be sold without further processing if required, providing the Company with financial flexibility, at the time of the POX Hub's ramp up.

We are also very pleased with the smooth work of our logistics system which has allowed us to build a concentrate stockpile at the POX Hub's site ahead of its commissioning.

The active works on the refurbishment of the existing Pokrovskiy infrastructure were well coordinated with the completion of the construction phase of the autoclaves and supporting facilities. This resulted in earlier than anticipated commissioning of the oxygen plant and we expect the first production of oxygen in the middle of October, well ahead of our original plan. This will allow us to create a storage facility of liquid oxygen to ensure the smooth operation of the autoclave processing lines once commissioned.

The dry commissioning stage of the autoclaves and Site Acceptance Tests are already well advanced and with our current rate of progress we should be in a position to move to hot commissioning potentially ahead of what was previously anticipated.

Underground Mining

Over the last three months to the end of September our team has undertaken significant work to catch up on the delays in the development of our underground mines during the first half of the year. I was very pleased by the progress we managed to achieve during that time both at Malomir and Pioneer, and both assets are operating with stability. Our team has succeeded in bringing Malomir's Quartzitovoye mine to full capacity already in August and is working to achieve full capacity at Pioneer's underground mine towards the end of this year, which remains on schedule. This production will provide strong support during the transitional period when these mines will be converting to large bulk tonnage operations to produce flotation concentrate for feed to the POX Hub. Our underground production profile for 2019-2020 at Pioneer has been significantly enhanced through the discovery by our geologists of two high grade areas at the Andreevskaya pit for underground development, with average grades of 18g/t containing about 30,000oz.

Encouraging underground exploration results at Albyn and further exploration for non-refractory material around the edges of the existing pits allows us to confidently sustain current production levels through processing non-refractory material should there be a delay in the POX Hub ramp up.

Accelerated Concentrate Production for POX Hub Ramp Up

In addition to our hard work to deliver on our current operational targets, the Board and management have been actively considering further improvements to our strategic plans. We are working hard on the potential accelerated construction of a third flotation line at Malomir. Bringing the development forward will accelerate the utilisation ramp up of our POX Hub and boost the Group's results in the mid to long-term.

IRC Debt Refinancing and Renegotiation of Petropavlovsk Guarantee

During the period in question and following the re-appointment of the current board, attempts to renegotiate the loan guarantee for IRC with ICBC progressed with the introduction of a leading Russian bank. Petropavlovsk extended a bridge loan of c.US$30 million to IRC in June 2018, repayment of which, together with a US$6 million guarantee fee, is expected before the year end. The leading bank has informed Petropavlovsk that credit committee approval has been given to refinance the ICBC Facility subject to the agreement and execution of legal binding finance documents and other conditions typical for a transaction of this nature, as well as the approval of Petropavlovsk's shareholders, as required under the Listing Rules. Following completion of the refinancing transaction, repayment of Petropavlovsk's US$30 million loan, and a c.US$6 million guarantee fee, is expected before the year end.

Although the Board currently expects that this refinancing will be successfully completed, there is a risk that it may not be, and that the Company will be unable to implement alternative contingency plans. Consequently, the going concern statement for the period to October 2019 contains a material uncertainty relating to the Company's ability to apply the going concern basis of accounting. Further information is provided in the Financial Review and the Going Concern sections of this announcement.

Petropavlovsk retains a 31.1% equity interest in IRC, which produces a high quality 65% Fe content iron ore concentrate, and has seen its revenues and EBITDAu grown substantially as it ramps up its production from the K&S mine. As an improved set of H1 results published by IRC on 31 August 2018 demonstrated, we are expecting an uplift in the value of our investment."

The resolution of the IRC loan guarantee along with our significant progress towards commissioning of the POX Hub will allow us to stabilise the Company in the nearest future and to provide returns to shareholders through a sustainable and progressive dividend stream in the long term.

Conference Call

There will be a conference call with management today at 9.00am, with the opportunity for callers to ask questions. A results presentation will be available on the Petropavlovsk website.

Please use the following numbers to dial in to the call, quoting the word 'Petropavlovsk' to the operator:

UK toll: 02034281542

UK toll-free: 08082370040

Russia toll: 04956469304

Russia toll-free: 81080021365011

PIN: 95053541#

About Petropavlovsk

Petropavlovsk is one of Russia's leading gold mining companies. As at 30 June 2018, the Company had produced approximately c.6.9Moz of gold.

At this time, Petropavlovsk is in the construction phase of a state of the art pressure oxidation facility to process the Company's substantial refractory resource base. The Company's combined 3,430km2 license holding has untapped resource potential. The Company is a leading employer and contributor to the development of the local economy in the Amur region, Russian Far East, where it has operated since 1994.

Petropavlovsk is a shareholder (31.1%) of IRC Limited and is the guarantor of IRC's US$340 million project finance facility, of which US$204 million was outstanding as at 30 June 2018. IRC is a vertically integrated iron ore producer and developer in the Russian Far East and North-eastern China. IRC is listed on the Hong Kong Stock Exchange (ticker: 1029.HK).

Petropavlovsk is listed on the Main Market of the London Stock Exchange (ticker POG:LN).

Enquiries

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

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

Financial Review

Note: Figures may not add up due to rounding

Financial Highlights

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

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

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

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

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

Revenue

Group revenue during the period was US$270.5 million, 11% lower than the US$304.0 million achieved in H1 2017.

Revenue from hard rock mines was US$259.3 million, 11% lower than the US$291.7 million achieved in H1 2017. Gold remains the key commodity produced and sold by the Group, comprising 96% of total revenue generated in H1 2018. The physical volume of gold sold from hard rock mines decreased by 13% from c.231,800 oz in H1 2017 to c.201,400 oz in H1 2018. The average realised gold priceu increased by 2% from US$1,255/oz in H1 2017 to US$1,285/oz in H1 2018. The average realised gold price includes a US$(32)/oz effect from hedge arrangements (H1 2017: US$12/oz).

The Group sold 37,385 oz of silver in H1 2018 at an average price of US$16/oz, compared to 48,182 ounces in H1 2017 at an average price of US$17/oz.

Revenue generated as a result of third-party work by the Group's in-house service companies was US$11.2 million in H1 2018, a US$1.2 million decrease compared to US$12.4 million in H1 2017. This revenue is substantially attributable to sales generated by the Group's engineering and research institute, Irgiredmet, primarily through engineering services and the procurement of materials, consumables and equipment for third parties, which comprised US$9.1 million in H1 2018 compared to US$11.4 million in H1 2017.

Cash flow hedge arrangements

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

Forward contracts to sell an aggregate of 99,984oz of gold matured during the H1 2018 period and resulted in US$(6.5) million net cash settlement paid by the Group (H1 2017: US$2.8 million contribution to cash revenue from forward contracts to sell an aggregate of 99,998oz of gold).

The Group constantly monitors the gold price and hedges some portion of production as considered appropriate. Forward contracts to sell an aggregate of c.300,000oz of gold at an average price of US$1,252/oz were outstanding as at 30 June 2018. Forward contracts to sell an aggregate of c.250,000oz of gold at an average price of US$1,252/oz are outstanding as at 26 September 2018.

Underlying EBITDA and analysis of operating costs

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

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

Hard rock mines

During this period, hard rock mines generated Underlying EBITDAu of US$77.6 million compared to US$134.5 million Underlying EBITDA in H1 2017.

Total Cash Costs¨ for hard rock mines increased from US$675/oz in H1 2017 to US$899/oz in H1 2018. The increase in TCCu primarily reflects the effect of inflation of certain Rouble denominated costs, higher volumes of stripping and suboptimal organisation of mining works in H1 2018. The increase in TCC¨ and the decrease in physical ounces sold from c.231,800oz in H1 2017 to c.201,400oz in H1 2018 resulted in US$62.8 million decrease in the Underlying EBITDA. This effect was partially mitigated by the increase in the average realised gold priceu from US$1,255/oz in H1 2017 to US$1,285/oz in H1 2018 which had a US$6.0 million positive contribution to the 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 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 H1 2017 there was ongoing inflation of certain Rouble denominated costs, in particular, electricity costs increased by c.5% in Rouble terms (increased by c.3% in US Dollar terms) and the cost of diesel increased by c.25% in Rouble terms (increased by c.22% in US Dollar terms). The Rouble depreciated against the US Dollar by 2% in H1 2018 compared to H1 2017, with the average exchange rate for the period of 59.33 Roubles per US Dollar in H1 2018 compared to 57.93 Roubles per US Dollar in H1 2017, somewhat mitigating the effect of Rouble denominated costs inflation.

Refinery and transportation costs are variable costs dependent on production volume. Mining tax is also a variable cost dependent on production volume and the gold price realised. The Russian statutory mining tax rate is 6%. Under the Russian Federal Law 144-FZ dated 23 May 2016 that introduced certain amendments to the Russian Tax Code, taxpayers who are participants to the Regional Investment Projects ("RIP") have the right to apply the reduced mining tax rate provided certain conditions are met. The Group's mining entities (JSC Pokrovskiy Rudnik, LLC Malomirskiy Rudnik and LLC Albynskiy Rudnik) met eligibility criteria and continued applying 0% mining tax rate in H1 2018. The Group also expects to apply 0% mining tax rate in H2 2018. Subsequently, the mining tax rate will increase incrementally by 1.2% every two years, reaching 6% in 2027.

(a) Excluding deferred stripping

All-in Sustaining Costs  and All-in Costs

AISC  increased from US$965/oz in H1 2017 to US$1,138/oz in H1 2018. The increase in AISCu  reflects the sustaining exploration expenditures, primarily in relation to Pioneer and Malomir underground projects and expansion of tailing dams at Pioneer and Albyn, ongoing exploration focused on near mine resource expansion and impairment of non-refractory ore stockpile at Albyn due to suboptimal organisation of mining works in H1 2018 and decrease in forecast gold price.

AICu  increased from US$1,044/oz in H1 2017 to US$1,353/oz in H1 2018, primarily reflecting the increase in AISCu  explained above and Capital Expenditureu in relation to the POX and Malomir flotation plant projects.

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

Corporate and other

Corporate and other operations contributed US$(16.9) million to Underlying EBITDA in H1 2018 compared to US$(20.3) million in H1 2017. Corporate and other operations primarily include central administration function, result 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 decreased by US$3.3 million from US$23.1 million in H1 2017 to US$19.8 million in H1 2018.

The Group's share of loss generated by IRC is US$(4.9) million (H1 2017: US$(3.0) million share of losses generated by IRC). IRC contributed US$3.3 million to the Group's Underlying EBITDAu in H1 2018.

Impairment review

The Group undertook an impairment review of the tangible assets attributable to its gold mining projects and supporting in-house service companies and concluded no impairment was required as at 30 June 2018.

The forecast future cash flows are based on the Group's current mining plan that assumes POX Hub completion in the year 2018. 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, equivalent to a nominal pre-tax discount rate of 12.3% (2017: 11.6%)

Impairment of exploration and evaluation assets

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

As at 30 June 2018, all exploration and evaluation assets on the balance sheet related to the areas adjacent to the existing mines.

Interest income and expense

Interest expense for the period was comprised of US$20.8 million effective interest on the Notes, US$6.1 million effective interest on the Convertible Bonds, US$0.5 million interest on Sberbank facility and US$1.8 million interest on prepayments for gold supply agreements (H1 2017: US$6.0 million interest on the Convertible Bonds and US$24.3 million on the bank facilities).

As the Group continued with active construction of the POX Hub and flotation at Malomir, these projects met eligibility criteria for borrowing costs capitalization under IAS 23 "Borrowing Costs". US$17.5 million of interest expense was capitalised within property, plant and equipment (H1 2017: US$16.0 million interest capitalized in relation to the POX Hub, Malomir flotation and underground projects at Pioneer and Malomir).

Other finance gains and losses

Net other finance gains for the period comprised US$12.3 million compared to US$(4.0) million net losses in H1 2017. Included in net other finance gains is a financial guarantee fee of US$2.0 million (H1 2017: US$2.0 million) charged in connection with the ICBC facility and US$10.3 million fair value gain on revaluation of the embedded option for the bondholders to convert into the equity of the Company (H1 2017: US$(5.8) million fair value loss).

Taxation

The Group is subject to corporation tax under UK, Russia and Cyprus tax legislation. The statutory tax rate for H1 2018 was 19% in the UK and 20% in Russia. Under the Russian Federal Law 144-FZ dated 23 May 2016 taxpayers who are participants to the Regional Investment Projects ("RIP") have the right to apply the reduced corporation tax rate if certain conditions are met. In 2017, LLC Albynskiy Rudnik has received tax relief as a RIP participant and is entitled to the reduced statutory corporation tax rate of 17% for the period of 10 years, subject to eligibility criteria.

The tax charge for the period arises primarily in relation to the Group's gold mining operations and is represented by a current tax charge of US$9.9 million (H1 2017: US$19.9 million) and a deferred tax credit, which is a non-cash item, of US$1.3 million (H1 2017: deferred tax charge of US$2.4 million).

During the period, the Group made corporation tax payments which were offset by refunds of excessive advance payments made in prior periods and comprised a net of US$0.1 million in Russia (H1 2017: corporation tax payments in aggregate of US$14.4 million in Russia).

Earnings per share

Basic loss per share for H1 2018 was US$0.01 compared to US$0.01 basic profit per share for H1 2017. The key factor affecting the basic profit per share was the decrease of net profit for the period attributable to equity holders of Petropavlovsk PLC from the net profit of US$23.3 million for H1 2017 to US$25.0 million net loss for H1 2018.

The total number of Ordinary Shares in issue as at 30 June 2018 was 3,303,768,532 (30 June 2017: 3,303,768,532).

Financial position and cash flows

(d) Including US$67.2 million cash CAPEXu.

Key movements in cash and Net Debtu

(e) Including an aggregate of US$102.5 million advance payments from Gazprombank and Sberbank outstanding as at 30 June 2018. Advance payments are to be set off against physical delivery of gold produced by the Group in regular intervals over the period of up to twelve months from the reporting date.

(f) Including loan to IRC in an equivalent of US$29.75 million.

Capital Expenditure 

The Group invested an aggregate of US$67.2 million in H1 2018 compared to US$41.8 million in H1 2017. The key areas of focus this period were on the POX project, for which active development continued ahead of scheduled commissioning in 2018, exploration and development to support the underground mining at Pioneer and Malomir, expansion of tailing dams at Pioneer and Albyn and ongoing exploration related to the areas adjacent to the ore bodies of the Group's main mining operations.

The Group capitalised US$17.5 million of interest expense incurred in relation to the Group's debt into the cost of the POX hub and Malomir flotation.

(a) Including US$34.0 million of development expenditure in relation to the POX Hub which is considered to be non-sustaining Capital Expenditure for the purposes of calculating AISC and AIC.

(b) Including US$4.0 million of expenditure in relation to the underground mining project at Pioneer to be sustaining Capital Expenditure for the purposes of calculating the AISC and AIC.

(c) Including US$4.7 million of expenditure in relation to the underground mining project at Malomir to be sustaining Capital Expenditure for the purposes of calculating the AISC and AIC.

(d) Including US$8.5 million of expenditure in relation to Malomir flotation (including tailing dams), which is 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 9% against the US Dollar during H1 2018, from RUB57.60 : US$1 as at 31 December 2017 to RUB62.76 : US$1 as at 30 June 2018. The average period-on-period depreciation of the Rouble against the US Dollar was approximately 2%, with the average exchange rate for H1 2018 being RUB59.33 : US$1 compared to RUB57.93 : US$1 for H1 2017. The Group recognised foreign exchange gains of US$0.1 million in H1 2018 (H1 2017: US$0.5 million losses) arising primarily on Rouble denominated net monetary assets.

- Going concern

The Group monitors and manages its liquidity risk on an ongoing basis to ensure that it has access to sufficient funds to meet its obligations. Cash forecasts are produced regularly based on a number of inputs including, but not limited to, forecast commodity prices and impact of hedging arrangements, Group mining plan, forecast expenditure and debt repayment schedules. Sensitivities are run for different scenarios including, but not limited to, changes in commodity prices, foreign exchange rates, different production rates from the Group's producing assets and the timing of expenditure on development projects. This is done to identify risks to liquidity and covenant compliance and enable management to develop appropriate and timely mitigation strategies. The Group meets its capital requirements through a combination of sources including cash generated from operations and external debt.

The Group performed an assessment of the forecast cash flows for the period of 12 months from the date of approval of the Half Year Report for the period ended 30 June 2018. As at 30 June 2018, the Group had sufficient liquidity headroom. The Group is also satisfied that it has sufficient headroom under a base case scenario for the period to October 2019. The Group has also performed projections under a layered stressed case that is based on a gold price, which is approximately 10% to 15% lower than the average of the market consensus forecasts, production forecasts that are approximately 8% lower than budgeted, and Russian Rouble to US Dollar exchange rate that is approximately 7% stronger than the average of the market consensus forecasts. This layered stressed case indicates that unless mitigating actions can be taken, there will be insufficient liquidity for the relevant period to October 2019. These mitigating actions include items within the control of the management, such as cost cutting, reduction of capital expenditure and working capital management.

The Group has guaranteed the outstanding amounts its associate IRC Limited ("IRC") owes to ICBC. The outstanding loan principal was US$204 million as at 30 June 2018. The assessment of whether there is any material uncertainty that IRC will be able to repay this facility as it falls due is another key element of the Group's overall going concern assessment. The next repayment instalment under the ICBC Facility Agreement of US$29.75 million is due on 20 December 2018 and semi-annually thereafter until June 2022. ICBC Facility also contains certain financial covenants, compliance with which has been waived by ICBC until 31 December 2018 (inclusive). The next covenant testing date is expected to be 30 June 2019 which is within the going concern testing period. IRC's base case projections demonstrate that although IRC expects to have sufficient working capital liquidity over the next 12 months, unless mitigating actions can be taken, there will be insufficient liquidity to meet its debt repayment schedule and non-compliance with certain financial covenants for the relevant period to October 2019. Management of the Group and IRC have reached an agreement with an alternative lender regarding the full refinancing of the ICBC facility which is expected to be completed before the next repayment instalment on the ICBC facility is due on 20 December 2018. However, if this refinancing is not completed, IRC's financial liquidity will be adversely impacted. IRC and/or the Group would then need to carry out contingency plans including entering into negotiations with banks or other investors for additional debt and/or equity financing.

If a missed repayment under debt or guarantee obligations occurs or financial covenant requirements are not met, this would result in events of default which, through cross-defaults and cross-accelerations, could cause all other Group's debt arrangements to become repayable on demand.

The risk that ICBC refinancing is not completed or alternative contingency plans are not realised represents a material uncertainty which may cast significant doubt upon the Group's ability to continue to apply the going concern basis of accounting.

Nevertheless, having taken into account the aforementioned factors and after making enquiries and considering the uncertainties described above, the Directors have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future, being at least the next 12 months from the date of approval of the Half Year Report for the period ended 30 June 2018. Accordingly, they continue to adopt the going concern basis of accounting in preparing these consolidated financial statements.

Operations Report

Pioneer

Mining took place at six open pits of Yuzhnaya, NE Bakhmut, Alexandra and Kulisnaya, as well as at Katrin in the Sosnovy area south of Pioneer, and Alexandra to the north. In addition, some ore was blended in from existing stockpiles.

Underground mining development has been carried out at North East Bakhmut 3 (beneath open pit 6.3), ahead of ramping up production from the underground operations. Capital development, pre-production development and mine preparation works including sublevel ore development were implemented during the six month period. In addition, development continued at the two lower grade ore bodies located south-west of the main ore body. Total underground development in H1 comprised 2,167m, and 48kt of development ore was mined with an average grade of 2.3g/t. Ore was predominantly mined as a byproduct of development works and therefore gold grades were significantly lower compared to the average reserve grade of 4.65g/t. Grades are expected to increase in the second half of the year when the mine should be working at full capacity. Both the process plant and the heap leach operations functioned as planned.

In H2 it is expected that mining at Alexandra pit 10 and at the southern side of the Yuzhny pit will be completed, and the team expects to reach and extract high-grade ores with grades of up to 4.0g/t from North East Bakhmut open pit 6.4. Regarding underground development, in H2 it is envisaged that stope mining will commence at the main ore body between -5m and +40m levels. Development is expected to reach the -50m level, providing access to areas where production is planned for 2019.

Pokrovskiy

Mining at ore bodies accessed in 2017 (Zeyskoye pit 1 and Vodorazdelnoye) stopped in Q1 2018 as scheduled. All ore extracted was processed at the RIP (resin-in-pulp) plant in Q1 2018, together with ore from stockpiles.

All mining works at the deposit are now complete and the process plant is undergoing reconstruction as part of the POX project.

Malomir

Non-refractory mining focused on the Quartzitovoye 1 and Dorozhny pits. Pit expansion continued at Magnetitovoye 2 with the view to commence ore mining in H2 2018, and continue mining throughout 2019. In Q2, the mining of refractory ores for the flotation plant began at the Central pit. In addition, minor non-refractory ore residuals were extracted for further cyanidation.

Underground mining development continued at Quartzitovoye 1, whilst capital development, pre-production development and mine preparation works including sublevel ore development continued between +375m and +300m levels. Total underground development in H1 comprised 3,760m, and 158kt of ore was mined with an average grade of 5.4g/t.

All development ore extracted from underground, together with non-refractory ore mined from the open pits, was processed at the RIP plant using cyanidation technology. The process plant operated as scheduled.

Commissioning began at the flotation plant in July. Major refractory ore mining works to feed the flotation plant will focus on the Central open pit, where high grade ores with average grades of up to 2g/t are expected, alongside low grade ore with an average grade of 0.8-1.0g/t. Significant volumes of refractory ore are also available from existing stockpiles.

Albyn

Overburden removal and mining works continued at the eastern, central and southern areas of the Central pit. The process plant operated as planned with a high recovery rate.

In H2 it is expected that the access and extraction of ore in the central area will be completed down to the planned elevation of 520m. In addition, the development of the eastern and western areas of the ore zone is scheduled to be completed.

Development Projects

During the last three months, the POX Hub development advanced at an increasing pace towards hot commissioning scheduled for December 2018. The oxygen plant is complete, including the liquid storage and oxygen distribution sections, whilst electrical and mechanical commissioning has commenced as planned.

Significant progress has been made with the construction of the autoclave section and all areas are completed. This section is currently undergoing Site Acceptance Tests in preparation for wet commissioning in the middle of October.

Solid progress has been made at the Central Control Room Building, as well as the Concentrate Receiving & Handling and Concentrate Re-grind sections, including the refurbishment of the existing Pokrovskiy RIP plant.

Construction has also progressed rapidly at the auxiliary facilities and services, completion of which is expected as planned. These include the flotation concentrate storage building, POX heat utilisation and distribution systems, POX and RIP tailings facilities, and the limestone quarry as well as an access and haulage road.

The recruitment of operational POX Hub personnel is largely completed, with autoclave operators undergoing training using plant control software and simulator systems.

The first line of the Malomir flotation plant became operational in July 2018 and now works at full capacity, producing flotation concentrate with average gold grades of c.36-40g/t. The second flotation line is scheduled to become operational by the end of September. Stage 1 of the Malomir flotation plant full capacity is 3.6Mtpa. It is expected that c.40kt of flotation concentrate will be produced by the end of the year with an average grade of c.40g/t (c.52koz of contained gold).

The first flotation results are very encouraging with the current concentrate grade more than 50% higher than originally projected (c.24g/t vs c.36-40g/t) and c.38% higher than planned for FY 2018. This was possible due to recent improvements in the flotation flowsheet, which involved the introduction of a more efficient flotation reagent to suppress carbon; this has only recently become available, allowing the elimination of the carbon flotation stage, thereby reducing the associated gold losses. In addition to the improved grade, concentrate yield has now improved from 5.5% to approximately 3%, reducing significantly the amount of material for downstream POX processing. This is expected to result in significant savings associated with concentrate transportation and the cost of POX. The impact of these improvements on production and cash flow projections is currently being evaluated.

Exploration

Pioneer

The most significant H1 2018 exploration results were achieved at Katrin, Nikolaevskaya and at the Perspektivnaya Zones. Some early stage exploration also took place at Aprelskiy and Ulagach.

During 2018, most drilling at Katrin was intended to in-fill the existing drill grid, with only a few holes targeting orebody extensions. The most significant intersections include:

- 16.8m @ 1.75g/t (C-516-25, interval 167.6m-184.4m)

- 18.0m @ 1.41g/t (C-516-23, interval 146.0m-164.0m)

- 11.0m @ 1.90g/t (C-515-23, interval 117.4m-128.4m)

- 4.3m @ 1.21g/t (C-507-38, interval 62.5m-66.8m)

- 13.4m @ 1.01g/t (C-507-44, interval 132.6m-146.0m)

These intersections are yet to be included in the Katrin resource estimate. However, as most of the results are from in-fill drilling, they are expected to convert some of the Inferred resources into both the Indicated category and into Ore Reserves.

34 drill holes were completed at Nikolaevskaya during H1 2018. These targeted open pit resources principally with a particular emphasis on in-filling the existing drill grid and increasing confidence in the resource estimate. Out of the five drill holes drilled 150-200m north from Nikolaevskaya outside the known mineralisation, No C-2297 intersected a high-grade interval (23.2m @ 3.33, including 6.3m @ 8.54g/t) at a depth of c.75m from the surface. This is a new, previously unknown zone of mineralization, which may become an attractive open pit and/or underground mining target; as such, it warrants further exploration.

Exploration at the Shirokaya Zone (Alexandra area north from Pioneer) focused on in-fill drilling, with the aim of improving confidence in the resource estimate. The results are in line with the existing resource model and we expect to convert some of the Inferred resources into the Indicated category, which should in turn allow for an increase in Shirokaya Ore Reserves. As most of the Shirokaya mineralisation is refractory and relatively low grade, this area is not a high priority for further exploration.

During H1 2018, Ulunginskaya, a new 270m zone of refractory mineralisation, was delineated south-east of the Pioneer plant. The zone has a north to south strike with a steep dip. It was proven by drilling on 40m to 80m spaced drill profiles to a depth of 100 to 120m from the surface, and remains open at depth. Significant intersections include:

- 45.5m @ 1.69g/t (C-2452, interval 93.3m-138.8m)

- 20.7m @ 1.38g/t (C-2481, interval 100.5m-121.2m)

- 15.1m @ 0.62g/t (C-2486A, interval 92.1m-107.2m)

- 27.0m @ 0.86g/t (C-2499, interval 97.6m-124.6m)

Formal resource estimates for Ulunginskaya are yet to be completed, and as the mineralisation has been proven to be refractory, Ulunginskaya is not a high priority exploration target.

Early stage exploration was carried out at the Aprelskiy exploration target, an area of extensive historical alluvial production located c.15km west from the Pioneer processing plant. Thirteen drill holes were completed there in H1 2018. The best intersections include:

- 0.8m @ 2.69g/t (86-32)

- 2.2m @ 1.89g/t (C-88-6)

- 1.6m @ 1.38g/t (C-90-4)

- 4.6m @ 0.85g/t (C-94-6)

- 2.2m @ 1.21g/t (C-98-30)

The gold grades at Aprelskiy are associated with quartz veins and veinlets containing arsenopyrite-pyrite sulphide mineralisation. Although the mineralisation discovered so far is unlikely to represent an immediate development interest due to its narrow thickness and relatively low grade, the presence of significant alluvial gold deposits known historically at Aprelskiy suggests that further exploration may identify more attractive mining targets.

Early stage exploration continued at Ulagach, which is an exploration target c.20km east from Pokrovskiy and c.10km south from Katrin. Geochemical anomalies were identified after evaluating 2017 field work results, and the following three intersections were discovered in trenches:

- 7.2m @ 1.74g/t

- 1.5m @ 0.74 g/t

- 2.0m @ 0.79g/t

The gold mineralisation discovered at Ulagach is associated with disseminated sulphides, which are hosted within Jurassic sandstone close to a contact with Cretaceous granitoids. As Ulagach's geology has certain similarities with the geology of Pioneer and Pokrovskiy, Group specialists believe it offers potential for the discovery of gold mineralisation of a significant scale.

Exploration completed at the North East Bakhmut underground mine during H1 2018 was production-related and as such has not resulted in any significant resource expansion.

Albyn

In H1 2018, exploration at Albyn targeted deeper extensions of both the Sukholozhskiy Zone and the main ore body at Albyn. A total of 52 drill holes were drilled, including 49 resource definition holes on a nominal 40m by 40m drill grid at Suchlozhskiy, as well as three prospecting holes to prove deeper extensions of the main Albyn ore body. The results received to date are very encouraging - the prospecting hole C-225-28-313 completed at Albyn intersected two intervals of gold mineralisation potentially suitable for underground mining: 417.7m-427.7m (10.0m @ 4.41g/t) and 439.6m-443.6m (4.0m @ 3.76g/t). These intersections are situated 150m and 180m below the final Albyn pit respectively, and mineralisation still remains open in a down-dip direction. Resource definition and resource expansion drilling at Sukholozhskiy intersected further down-dip extensions, and the best intersections include:

- 1.7m @ 12.1g/t (C-139-5, interval 156.5-158.2m)

- 2.5m @ 7.84g/t (C-139-5A, interval 185.3m-187.8m)

- 1.4m @ 55.51g/t (C-143-4, interval 214.6m-216.0m)

- 1.9m @ 7.86g/t (C-133-4, interval 193.0m-194.9m)

- 1.0m @ 18.1g/t (C-129-3, interval 184.2m-184.9m)

- 0.8 @ 13.8g/t (C-191-031, interval 80.2m-81.0m)

These intersections are yet to be included in the resource estimate.

Company specialists believe an exploration target for potential underground mining at Albyn and Suchlozhskiy ought to be at least equivalent in size to Albyn production to date (c.1Moz). All metallurgical tests completed thus far suggest that both Sukholozhskiy and deeper extensions of Albyn are non-refractory and suitable for processing through the existing Albyn processing plant.

A small amount of exploration including trenches has been completed at Yasnoye and some other smaller exploration targets near Albyn. This work has identified new low grade gold mineralisation. These targets remain a low priority and no further work is planned here in H2 2018.

Malomir

Most of the exploration completed at Malomir related to underground mining at Quartzitovoye and involved reserve definition drilling and sampling. As such, no new mineralisation or resource expansion was targeted by H1 2018 exploration work. Nevertheless, a new small area potentially suitable for underground extraction was identified within the south extensions of zone No 49, west from the main production area of zone No 55. It was explored between 300m and 345m elevations by underground workings and remains open in a down dip direction. This is a low priority mining target due to its proximity to the haulage decline, which makes extraction unsafe while the decline is in use, and its relatively low grade (2 to 4g/t). This zone can be extracted at a mine closure stage.

In addition, underground workings intersected a low grade stockwork between Quartzitovoye areas 1 and 2, which potentially may become suitable for open pit mining after the Quartzitovoye 1 underground mine is completed.

IRC

IRC Ltd. ("IRC") is a producer and developer of industrial commodities with its shares quoted on the Hong Kong Stock Exchange (Stock Code 1029). Petropavlovsk is a major shareholder in IRC, with a holding of 31.1%. IRC released its interim results for the six months ended 30 June 2018 on 31 August 2018. The results are available to view on the IRC website at http://www.ircgroup.com.hk 

K&S

During the first half of 2018, K&S continued to increase production capacity as part of its ramp up programme. High production and sales volumes resulted in growth of 37% in the Group's revenue to US$70 million and growth of 43% in EBITDA to US$12 million. As a result, the Group's underlying loss reduced by 17% to US$8 million.

K&S achieved a number of milestones in the first half of 2018, including historically high records of monthly production and sales volumes. In addition, the plant managed to operate at 105% of its design capacity during a 24 hour production run, and also managed to produce at over 90% of its design capacity continuously for 72 hours, demonstrating K&S' ability to run at load for a prolonged period.

During the first half of 2018, iron ore concentrate production increased 56% to 1,084,602 tonnes (30 June 2017: 697,431 tonnes), while sales rose by 50% to 1,046,649 tonnes (30 June 2017: 698,632 tonnes).

In view of the fact that K&S has not yet reached full production capacity, the unit cash cost per tonne in the first half of 2018 of US$51.7 per tonne has not yet reached its optimal level.

The price premium spread for 65% Fe over and above the 62% Fe benchmark price has widened to c.US$27/t as at 30 June 2018. K&S produces 65% iron ore concentrate, thus benefiting from the price premium. In terms of FX, the continued Rouble weakness has had a positive impact on IRC's operating margins, since the Group's operating costs are mainly denominated in Rouble terms and revenues mainly in US dollars.

Kuranakh

During the first half of 2018, there was no production or sales from Kuranakh, with the asset having been moved to care and maintenance in 2016 due to the softening of the market iron ore price. While the subsidiary that holds Kuranakh has applied for liquidation to save ongoing costs, IRC retains the option of re-opening the mine or pursuing other development alternatives if the iron ore market upside prevails.

IRC Corporate Update

In June 2018, Petropavlovsk, the major shareholder of IRC and the guarantor of the ICBC Facility, provided IRC with a c.US$30 million bridge loan in order to help IRC repay its June instalment under the ICBC Facility. ICBC also showed their support to IRC by granting covenant waivers and waiving the need to maintain a deposit account.

In September 2018, IRC and Petropavlovsk were advised by a leading Russian bank (the "Bank") that its credit committee has granted approval for a new US$240 million facility (the "New Facility") to be provided to LLC K&S GOK, a wholly owned subsidiary of IRC (the "Borrower"). The New Facility will be used to repay the ICBC Facility in full and thereafter to repay to Petropavlovsk by December 2018 the Rouble equivalent of c.US$30 million as full repayment inclusive of interest for the bridge loan advanced by Petropavlovsk to IRC in June 2018 (the "Bridge Loan"), as well as the payment of a c.US$6 million guarantee fee (the "Guarantee Fee") owing to the Company in relation to the guarantee provided by it to the Borrower under the ICBC Facility. Therefore, the total amount borrowed by IRC from the Bank will amount to c.US$240 million, being the aggregate total of US$204 million to repay ICBC, the US$30 million repayment of the bridge finance and the c.US$6 million guarantee fee.

Under the proposed arrangements, the full release of Petropavlovsk's obligations as a guarantor of IRC's borrowings will happen in stages, thereby reducing Petropavlovsk's balance sheet exposure down to zero. Immediately upon repayment by IRC to the Company of the Bridge Loan amount and the Guarantee Fee, as expected before the end of 2018, Petropavlovsk will effectively guarantee 75% of the amount outstanding under the New Facility (US$180 million of US$240 million), with further staged decreases to 0%, upon the satisfaction of various conditions and achievement of milestones by the Borrower. It is currently expected that part of the conditions and milestones to bring the guarantee down to 50% will be achieved during 2019, whilst full decrease to 0% will be achieved before the end of 2020.

In parallel, Petropavlovsk's obligations will decrease in line with amounts outstanding under the New Facility from time to time under a repayment schedule until a final maturity date of June 2025.

The implementation of the refinancing transaction described herein remains subject to the agreement and execution of legally binding finance documentation, the perfection of security and other conditions precedent typical for a transaction of this nature. The provision of the new guarantee pursuant to the New Facility will constitute a Class 1 transaction for Petropavlovsk under the Listing Rules and, as such, completion of the transaction will be conditional upon the approval of Petropavlovsk's shareholders in a general meeting.

It is expected that finance documentation will be completed before the end of November 2018 and a circular to convene the general meeting and setting out full details of the transaction will be distributed to shareholders at that time

The full report of IRC's 2018 interim results and the announcements published by IRC are available to view on the IRC website at http://www.ircgroup.com.hk

Principal Risks and Uncertainties

The Group is exposed to a variety of risks and uncertainties which could significantly affect its business and financial results. A detailed review of the key risks facing the Group is set out in the Risks to Our Performance section on pages 18 to 31 of the 2017 Annual Report, which is available on the Group's website, www.petropavlovsk.net. This also includes a description of the potential impact of such risks on the Group together with measures in place to manage or mitigate against each specific risk where this is within the Group's control.

The Board's view of the principal risks that could impact the Group for the remainder of the current financial year remain largely unchanged from those set out in the 2017 Annual Report, with the exception of the matter detailed below under 'Funding and liquidity' and the additional legal and regulatory risk in respect of any complaints made in respect of the actions of shareholders of the Company.

The principal risks relate to the following:

Operational risks

■ Production

■ Exploration

■ Projects, specifically in relation to the POX Hub and underground mining projects

Financial risks

■ Funding and liquidity: The Group is satisfied that it has access to sufficient headroom under a base case scenario for the period to October 2019. However, under a layered stress case the Group's projections indicate that unless mitigating actions can be taken, there will be insufficient liquidity for the relevant period to October 2019. The Company also guarantees the debt of its associate, IRC Ltd with ICBC and is therefore exposed to the risk of IRC's default on scheduled repayments and covenant compliance. IRC and the Company have been advised by a leading Russian bank that its credit committee has granted approval for a new US$240 million facility to be provided to LLC KS GOK, a wholly owned subsidiary of IRC. The new facility will be utilised to repay the ICBC Facility in full and thereafter to repay to the Company by December 2018 the Rouble equivalent of c.US$30 million as full repayment inclusive of interest for the bridge loan advanced by the Company to IRC in June 2018, as well as the payment of a c.$6 million fee in relation to the guarantee provided by the Company in support of LLC K&S GOK's obligations under the ICBC Facility. However, the new facility is subject to the completion of legal documentation and Petropavlovsk's Shareholders' approval. Further details are provided in the 'Financial Review' and 'going concern' sections of this interim announcement.

■ Gold price

■ Foreign exchange

■ IRC

Health, safety and environmental risks

■ Safety of our employees and third parties

Legal and regulatory risks

■ The Group requires various licences and permits in order to operate within Russia

■ The Group is subject to risks associated with operating in Russia

■ The Company is subject to the review of regulators in respect of any complaints made in respect of the actions of shareholders in the Company

Directors' Responsibilities Statement

We confirm that to the best of our knowledge:

■ The condensed set of financial statements, which has been prepared in accordance with IAS34 "Interim Financial Reporting" as endorsed and adopted by the European Union, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the company, or the undertakings included in the consolidation as a whole as required by DTR4.2.4R

■ The interim management report includes a fair review of the information required by DTR4.2.7R (indication of important events and their impact, and description of principal risks and uncertainties for the remaining six months of the financial year); and

■ The interim management report includes a fair review of the information required on related party transactions as required by DTR4.2.8R

Independent Review Report (Auditors)

INDEPENDENT REVIEW REPORT TO PETROPAVLOVSK PLC

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 which comprises the income statement, the balance sheet, the statement of changes in equity, the cash flow statement and related notes 1 to 23. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Emphasis of matter - Material uncertainty related to going concern

We draw attention to note 2 in the financial statements, which indicates that certain events or conditions have been identified during the course of the review that may cast significant doubt on the Group's ability to continue as a going concern as explained below.

The Company guarantees the debt of its associate, IRC Limited, with ICBC (30 June 2018: US$204 million) and is therefore exposed to the risk of IRC's default on scheduled repayments and covenant compliance. Negotiations are ongoing with an alternative lender regarding a refinancing of IRC's ICBC facility. However as the refinancing remains subject to shareholder approval and the loan documentation has not been finalised and signed, these conditions, along with the other matters disclosed in note 2 to the financial statements, indicate that a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern. Our conclusion is not modified in respect of this matter.

Deloitte LLP

Statutory Auditor

London, United Kingdom

26 September 2018