2012 Annual Results

28 March 2013

Annual Results for the year ended 31 December 2012

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 2012 (the "Period"). 

Highlights

2012 Results

n Total attributable gold production of 710,400oz, up 13% year-on-year and exceeding the target of 700,000oz;

n Total gold sales of 703,200oz up 4% year-on-year;

n Average realised gold price increased by 3%;

n Group revenue of c.US$1.4 billion - a c.9% increase on 2011;

n Unit costs per cubic metre of material moved and per tonne processed for 2012 were essentially unchanged across the Group;

n EBITDA US$487.7 million (US$597.1 million in 2011);

n Development and maintenance capital expenditure for the precious metals operations of US$408.2 million;

n EPS before exceptional items was US$0.54 (US$1.23 in 2011);

n Net debt at Period-end of US$1,063.3 million is in line with H1 2012 (US$1,056.1 million excluding IRC Limited, ("IRC")) compared to US$787.3 million as at 31 December 2011;

n Cash and cash equivalents at Period-end of US$159.2 million;

n At Period-end the Group had committed but undrawn loan facilities of US$153.2 million (excluding IRC);

n Exceptional items in the Period of $336.4m largely reflecting the write-down of IRC to fair value and other impairment charges; and

n Loss per share after exceptional items of US$0.85 (profit per share in 2011 of US$1.24).

2013 Outlook

n The Group's gold production target for 2013 is 760,000oz to 780,000oz, up 7% to 10% on 2012 production;

n Hedging arrangements undertaken in February 2013 in relation to c.400,000oz of gold guarantee a minimum revenue stream of c.US$664 million for the period ending March 2014;

n Group gold production for the first two months of 2013 in line with budget;

n The Group expects 2013 unit cash costs for all hard rock operations to remain approximately in line with 2012 levels;

n Development and maintenance capital expenditure for 2013 US$369 million;

n At a US$1,600/oz gold price, the Group expects net debt (excluding IRC ) for 2013 to remain broadly in line with the net debt position at the end of 2012 but decrease in 2014 in line with projected decrease in capital expenditure;

n Potential US$238 million investment in IRC by new shareholders announced in January 2013, IRC now treated as held-for-sale and expected to become an associate in 2013; and

n Final dividend of £0.07 per share proposed, comprising a £0.02 per share cash dividend and a £0.05 per share scrip dividend.

Financial Results 2012 Summary

NOTES

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 36 to the financial statements.

Exceptional items are those detailed in note 6 to the financial statements.

Basic earnings per share before exceptional items is the profit 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 and committed, but undrawn, debt facilities for the Group are not comparable to prior periods because of a change in accounting basis.

Net Debt is as set out in note 31 to the financial statements. As at 31 December 2012 and in respect of H1 2012, net debt excludes IRC (31 December 2011 net debt includes IRC unless stated otherwise).

Chairman's Statement

Petropavlovsk produced 710,400oz of gold in 2012 and generated almost half a billion dollars in EBITDA for the year, a combination of production growth and cost control in the key areas of mining and processing and the strong gold price.

At the time of the First Half Results, I highlighted operating successes measured by the volume of material mined and processed, the number of ounces of gold sold, our operating costs and the resulting EBITDA but went on to highlight the negative effect on our bottom line of higher interest charges and increased depreciation that resulted from commissioning of new production facilities.

For the full year we are again pleased by a US$112.7 million increase in revenue to US$1.4 billion resulting from a US$53 per ounce increase in the received gold price to US$1,670/oz and a 26,900oz increase in volume of gold sold to a record of 703,200oz.

Significant increases in input costs have been an industry-wide phenomenon in 2012 and for us the effect was compounded by scheduled lower grades, increased stripping costs and temporarily reduced recoveries related to processing transitional ore types. We are pleased to report however that we managed to offset some of these cost increases by containing mining and processing costs, which on average were slightly better than in the previous year. Nonetheless total cash costs for the Group on a dollar per ounce basis increased from US$740/oz in the first half of 2012 to US$855/oz in the second half of 2012, an increase of 16% (excluding alluvial operations).

2012 was a year in which the mining industry generally experienced a number of extremely large non-cash fair-value impairments and we were not spared these problems. Net loss on disposals of a number of non-core assets of US$26.9 million, US$197.9 million fair value write-down of IRC's net assets and US$21.0 million of other impairments in IRC and US$109.5 million impairment of Yamal and other non-core assets took their toll and, when added to continuing interest expense and depreciation charges, the welcome US$487.7 million EBITDA number is transformed into a disappointing loss of US$243.9 million. It should be noted that non-core assets impairments are part of a policy of disposal and we will continue to work towards realising value from these written-down assets. The carrying value of IRC will be at the prevailing market price until it becomes an associate and any change reflected in the profit and loss account.

Operations

In 2012, Petropavlovsk achieved its tenth consecutive annual increase in gold production and exceeded its production target in spite of some one-off operational challenges.

Over the past 16 months, the Group also brought into production Albyn, its fourth new mine, where commissioning of a second milling line began just seven months after commissioning the first processing line, thereby effectively doubling Albyn's processing capacity within the first year of operation. In addition, we also commissioned a fourth milling line at Pioneer and these successes helped mitigate the negative effect of processing "transitional" ore at the Malomir mine.

At Malomir, the first stage of development focussed on processing of non-refractory ores through a conventional resin-in-pulp plant and this stage is now drawing to an end. The flotation concentration plant will be available for processing refractory ores, from Q3 2013.

In the meantime, treatment of the transitional material, so called because it is neither fully-oxidised nor fully-refractory, is the reason for the temporary reduction in recovery rates at Malomir and this did affect Group production and cash costs.

IRC

Petropavlovsk continues to be a major investor in IRC as it goes through its successful development programme enabling the Company to share in the upside of IRC's growth potential. During the year IRC exceeded production targets for the second consecutive year and continued to develop its K&S mine towards production in the first half of 2014.

I am delighted to report on the significant potential investment in IRC by General Nice and Minmetals Cheerglory, a transaction which sees IRC realise its ambition of becoming a Sino-Russian champion, the first stage of which is expected to complete shortly after this report is published.

This transaction provides IRC with additional financing for its flagship K&S project and Garinskoye. It also de-risks cash flow from these projects by providing take or pay off-take and marketing arrangements. Following completion of this transaction I believe IRC will be on a strong footing to fund and deliver its growth plans.

Finance

Hedging commodity prices is always a difficult decision for mining companies and one that is often seen by the financial community as controversial so I thought it might be appropriate to share with you some of the background to our recent decision in this regard.

To obtain its shareholders' approval for the IRC transaction, which it did on a 99.98% vote in favour by about 60% of holders of its shares eligible to vote, the Company was required to issue a Class 1 Circular. This in turn meant that the Directors had to issue a working capital opinion and for this purpose we adopted conservative assumptions on costs and the gold price. It was in connection with this exercise and in order to protect cash flows from the volatility in the gold market that the Board decided to hedge up to 50% of production and accordingly the Company sold c.400,000 ounces of gold for fortnightly forward delivery to be cash settled at US$1,663 per ounce.

This hedging, IRC's proposed new capital and the proposed pro-rata indemnity from General Nice in respect of the Company's contingent liabilities for IRC bank debt to ICBC - all support the Group's strong financial position.

However, like many of you, I read the analysts' comments about the Group and the reports in the press of market sentiment and there are two recurrent topics on which I would comment. First, I am happy to confirm, based on the most recent forecasts from our financial and operations team that the Group presently has reasonable headroom in respect of its banking covenants in the light of the expected deconsolidation of IRC. Second, these forecasts also indicate that together with its undrawn bank facilities and, having made net debt repayments of c.US$75 million, the Group is currently not in need of additional equity capital with which to fulfil its current plans.

Reserves and Resources

This is the sixth consecutive year in which Petropavlovsk has increased its total JORC Mineral Resource. This is particularly good news given that it was also a year of record annual production of more than 710,000oz of gold.

It is also gratifying to note that the total JORC Resource identified in the year amounted to almost 2 million ounces which more than offset ounces removed from the inventory on the sale of non-core assets and as a result of production.

Our ability to not only replenish, but also add to the resource base of the Company is one of the great strengths of this Group and has been key in our success to date.

It was encouraging to see in 2012 that we produced c.20% more gold at Pioneer than was predicted from the JORC resource models, thus confirming what we have believed for some time that even JORC reserve estimate methodologies do not always account fully for the nugget-effect of gold mineralisation at Pioneer.

It is also important to note that in calculating our Reserves we have continued to use the same price and cost assumptions that were used in the Wardell Armstrong report of 2010/11 - a gold price of US$1,200/oz for Visokoe and Albyn and gold price of US$1,000/oz for all other projects.

Exploration

This year we have focussed our exploration programme on areas at or close to our operating mines and in particular, on finding new, non-refractory resources. As a result, the majority of the c.2Moz of new resources we have found are within non-refractory ore and located at or close to our processing plants, thus requiring minimal capital expenditure for development.

The progress we have made at Elginskoye, a licence area some 15km from the resin-in-pulp ("RIP") plant at Albyn, is of particular interest. In just over two years the area has been transformed from a prospective greenfield site to one with an estimated JORC compliant 1.3Moz in non-refractory ore - a great testament to the strength of our geological team. Analysts should note that this licence area is not yet fully explored and a number of prospective targets have been identified that are not included in the stated resource estimates. Accordingly we expect Elginskoye to provide additional reserves to the Albyn RIP plant in due course.

We have also identified a number of prospective targets at the Pioneer and Malomir licence areas that are yet to be fully explored and thus not included in today's statement but which, if proven, will further boost gold production from non-refractory ore of better grades in the short term and dilute the contribution from refractory ore.

The acquisitions of Afanasevskaya, a licence north-west of Albyn, Ivanovskaya, a licence close to and within the same geological trend as Pioneer and two new licences at Malomir, all look very promising and one of these licences already has established Russian Category Resources. Work is currently being conducted to upgrade these into JORC estimates.

Outlook

We expect 2013 to be a transformational year for the Group and I am confident in the team's ability to manage the goals we have set in an efficient and timely manner. Our announced production target of 760,000-780,000oz represents a base case scenario based on current reserves and excludes any potential upside from the new discoveries.

During 2013, we are planning to finalise the construction of our Pressure Oxidation Hub with commissioning planned for the beginning of 2014. We believe this processing Hub will transform the Group into one of the leaders in the sector, using tried and tested modern technology to recover gold from refractory ore.

Much has been written about the complex nature of gold production using high pressure, high temperature oxidation of refractory ores. No responsible mining company embarking on this process would claim certainty of commissioning without some teething troubles. But I believe our decision to adopt a multi-autoclave process, which enables higher temperatures and pressures for a more complete oxidisation of the ore, and our early identification of the issues caused by the chlorinated process-water, will be seen to have removed at least some of the problems encountered elsewhere in the industry.

In addition, extensive advice from international specialists on vessel lining, our insistence on extra high quality metals for piping and associated welding will, I believe, further assist in reducing commissioning problems. Indeed I have great faith in our internal team and in our external consultants who have successfully brought Pressure Oxidation facilities into production elsewhere in the world. And if we get this right the rewards are significant since it will open the door to the 80% of Russia's gold resources which are believed to be contained in refractory ores.

Interest charges and depreciation are, I am afraid, here to stay and indeed depreciation will increase again once the investment in our Pressure Oxidation facilities bears fruit in 2014 and gold production climbs once again. In 2013 the Group is planning to process some of the lower grade stock piles which we built up over the course of past years. Though these are more expensive to treat on a per ounce basis than higher grade ore, processing of these stockpiles will release working capital and boost operating cash flow. We also expect a 10% reduction in 2013 in capital expenditure (excluding IRC and exploration) when compared to 2012.

In general our costs are likely to remain under pressure and efforts are being made to minimise both direct and administrative expenses. As part of the latter, members of the management team have volunteered to cancel their bonus payments for 2013.

In keeping with the Board's insistence on minimising cash outflows during the period of maximum investment, the Board decided to maintain the final dividend but to do this by way of a £0.02 per share cash dividend and a £0.05 per share scrip dividend.

In summary, your company started a long journey when it was formed almost 19 years ago to mine and process gold in the Amur Region and it has achieved many milestones along the way. Its immediate way-point is the transformational process of gold extraction from successful Pressure Oxidation of refractory ore.

To achieve this we have incurred substantial debt and the market is concerned about this. This concern is currently being played out in our poor share price. I believe that management will deliver on their objectives and the result will be a significant decrease in capital expenditure in 2014 and steady cash flows from its gold mining operations. By then IRC's flagship iron ore operations at K&S will also be in production. All this should enable the substantial repayment of the debt by 2019.

Gold price

During the weekend of 16th / 17th March 2013 we saw the first attempt by a European Union country to expropriate funds from customers of its nation's banking system as a means of restoring its viability. Though portrayed in the media as some sort of super-tax on wealthy savers, it is, as well, a most damaging attack on the "normal course of business" treasury functions of a large number of corporations. Cyprus is, after all, the country where double-tax treaties between Russia and the rest of the world meet.

Happily the Group had minimal funds in these banks and the effect on us is de minimis but the draconian measures only serve to confirm my belief that the financial system as we know it is under great pressure. We know that this is not caused by bankers but rather it is caused by deficit spending by governments and the world population is becoming daily more aware of the hidden taxation caused by the inflation needed to balance the governments' books. For this reason individuals and countries alike continue to divest themselves of monetary assets and turn to real assets instead. Amongst these gold is the leader.

Thanks

I should like to thank all the Group's employees for their hard work and devotion, for our bankers and brokers for their continuing support and for the owners of our shares for the faith with which they entrust us.

Presentation

There will be a presentation of the Petropavlovsk 2012 FY results followed by a question and answer session on 28 March 2013 at 11.00 (GMT) *

To watch a webcast of presentation, please log onto www.petropavlovsk.net.

To ask a question, please dial + 44 (0) 20 3139 48 30

Participant PIN Code: 36127071#

*NOTE The conference call may include information relating to the shares and convertible bonds.

Enquiries

2012 Financial Results Comments

Group revenue of US$1.4 billion - a c.9% increase on 2011 Group revenue (US$1.3 billion), due to a c.4% increase in gold sold, a c.3% increase in the average realised gold sale price and a 14% increase in IRC's revenue.

Group total cash costs for hard-rock assets of US$805/oz represent a 37% increase compared to 2011. This was due to a 26% scheduled decrease in processed grades at the RIP and heap-leach operations at the Group's hard-rock projects, an increase in stripping ratios at Pioneer, Malomir and Pokrovskiy, a decrease in recovery rates at Malomir due to the processing of transitional ore types and strong inflationary pressures.

The unit costs* for mining per cubic metre and processing per tonne were essentially unchanged from 2011 levels or have improved at some sites in spite of inflation, due to increased efficiencies implemented at operations, economies of scale and cost control measures.

Total cash costs for alluvial production totalled US$1,314/oz; 2012 alluvial production amounted to 13% of the Group's total gold output, in line with 2011.

The Group's average realised gold price increased by 3%, from US$1,617/oz in 2011 to US$1,670/oz in 2012.

Underlying EBITDA for the Period was US$487.7 million, an 18% decrease on 2011 primarily due to an increase in the total average cash costs per ounce.

Loss per share of US$0.85 was principally due to impairment of IRC and certain non-core exploration projects.

Net write-down of US$197.9 million as a result of IRC's net assets being adjusted to fair value less estimated transaction costs, based on IRC's share price of HK$1.17 as at 31 December 2012. In addition, IRC recognised a US$21.0 million impairment charge against the thermal coal deposits associated with the K&S project.

During 2012, the Group reviewed its existing precious metals projects and recognised an impairment charge of US$109.5 million in aggregate against certain non-core mineral properties which are currently not in the Group's long-term production plan. In addition, the Group also recognised a US$29.7 million impairment of ore stockpiles.

Net debt as at 31 December 2012 (excluding IRC which is now held for sale) was US$1,063.3 million, reflecting the exploration and development capital expenditure during the year and was in line with the Group's net debt position as at 30 June 2012, despite its capital expenditure during the second half of the year.

As at 31 December 2012, the Group (excluding IRC) had committed but undrawn loan facilities of US$153.2 million in aggregate.

On 27 March 2013, the Board of Directors resolved to recommend a final dividend of £0.07 per share, comprising £0.02 per share cash dividend and a £0.05 per share scrip dividend.

*Unit costs are the costs incurred by the Group to mine one m3 of rock and/or process one tonne of ore

2012 Cash Costs

During 2012, unit costs of mining benefited from mine optimisation, cost control measures and foreign exchange rate movement. The Group reduced unit costs of mining at Pokrovskiy (by c.7%) and Malomir (by c.18%). At Pioneer, the unit cost of mining increased by c.7%.

Processing costs per tonne of ore also declined in 2012 despite a background of increasing prices for consumables: processing costs per tonne of ore at the Pioneer and Malomir plants decreased by c.8% and c.34% respectively, whilst processing costs at the Pokrovskiy plant were unchanged on the previous year. This was due to improved efficiencies from an expansion of the sorption line at Malomir and an expansion of the Pioneer RIP plant.

Unit costs per cubic metre of material moved and tonnes processed for 2012 were essentially unchanged across the Group in spite of strong inflationary pressures, which were driven by the cost of chemical reagents increasing by 45%, the cost of diesel up by 16% and consumables prices increasing by up to 6%.

2012 costs on a per ounce basis were affected by higher stripping volumes (up c.33% at Pioneer and up c.78% at Malomir) and lower grades processed (down c.20% at Pioneer and down c.46% at Malomir).

At Pokrovskiy, head grades remained at similar levels compared to 2011. This resulted in total cash costs per ounce at Pokrovskiy being in line with the previous year.

During 2012, the planned ramp-up schedule for the Albyn mine was hampered by unusually severe weather and a number of infrastructural challenges. The resultant extended ramp-up period resulted in a delay in mining works and grades 17% lower than budgeted being processed through the Albyn RIP plant, hence higher than budgeted operating costs. The infrastructural challenges however were overcome and the Albyn plant reached design capacity in the second half of the year.

Alluvial operations, which are heavily reliant on diesel (c.20% of total alluvial cash costs), saw total cash costs per ounce at US$1,314/oz in 2012 compared to US$1,167/oz in 2011, up 13% in line with inflation.

The impact of Rouble-based price inflation was partly offset by a 6% depreciation of the Rouble against the US Dollar, with the average exchange rate for the Period rising from 29.4 Roubles per US Dollar in 2011 to 31.1 Roubles per US Dollar in 2012.

2012 Capital Expenditure

In line with previous guidance, capital expenditure for the development of the Group's gold operations decreased in 2012. The Group re-iterates previous guidance that 2011 was the peak year for capital expenditure, with further decreases in spending projected for 2013 and 2014.

During 2012, the Group spent a total of US$408.2 million on development and maintenance capital expenditure (excluding IRC's capital expenditure), a decrease of 25% compared to 2011 (US$543.7 million).

2012 development capital expenditure was slightly lower than the Group's previous guidance in August 2012, as payments on some contracts relating to the POX Hub (c.US$21 million) were made in January and February 2013 instead of Q4 2012 as it was budgeted.

The majority of 2012 capital expenditure was spent on the expansion of Pioneer, Malomir (including the flotation plant) and Albyn projects and payments on POX contracts.

Capital expenditure for gold exploration was US$70.5 million in 2012, a decrease of 29% compared to 2011, reflecting in part the concentration of capital expenditure on areas adjacent to the Pioneer, Pokrovskiy, Malomir and Albyn mines.

During 2012, IRC spent US$142.2 million in capital expenditure, the majority of which was spent on the ongoing development of the K&S project ahead of its commissioning in mid-2014.

IRC capital expenditure was 10% lower than in 2011 (US$157.6 million), reflecting the concentration of the Group on the development of K&S.

2012 Net Debt

Net debt as at 31 December 2012 was US$1,063.3 million, reflecting the exploration and development capital expenditure during the year and in line with 1H 2012 (US$1,056.1 million (excluding IRC)).

2012 Operations and Development

n Total attributable gold production was 710,400oz, a 13% increase compared to 630,100oz in 2011 and exceeding the target of 700,000oz;

n Processing capacity at the Pioneer RIP plant expanded to 6.0Mtpa-6.6Mtpa, up 40%;

n RIP plant capacity at Albyn doubled to 3.6Mtpa-4.0Mtpa;

n Plant capacity at Malomir increased up to 180,000tpm due to expansion in Q1 2012;

n Construction of autoclave facilities and the oxygen plant at Pokrovskiy remains on schedule for commissioning in H1 2014.

Pokrovskiy

During 2012, Pokrovskiy produced 92,100oz (91,800oz in 2011), exceeding the Group's forecast for the year by 35% due to new, good quality reserves identified and mined at the mine and its flanks as a result of exploration conducted during 2011 and 2012.

The majority of the ore processed in 2012 came from the Pokrovka-2 deposit together with ore from the Zheltunak satellite deposit as the Group was pushing back the south wall of the main pit at the Pokrovka 1 deposit.

2012 total cash costs at the Pokrovskiy mine were US$782/oz representing a 3% increase compared to 2011 (US$759/oz).

Pioneer

During 2012, Pioneer produced 333,600oz of gold. This was 17% higher than the 286,000oz target set at the start of the year due to an increase in the quantity of ore mined and the introduction of new mining machinery (a new Hitachi 15m3 excavator and four Belaz 140-tonne capacity dump trucks). Production also benefited from the inclusion of new exploration results into the mine plan, and the earlier than planned commissioning of the plant's fourth 1.8Mtpa milling line (increasing the Pioneer plant's design throughput capacity by 40% to c.6.0Mtpa - 6.6Mtpa). The most significant impact on increase in production was the higher grades mined compared to JORC reserve assessments.

In addition, the heap-leach facility was expanded during the year and processed 946,000 tonnes of ore, an increase of 134% over the amount processed in 2011.

2012 total cash costs at Pioneer were US$734/oz representing 38% increase compared to 2011(US$530/oz).

Albyn

During 2012, Albyn produced 89,300oz of gold following the commissioning of the mine in November 2011.

The mine went through a prolonged ramp-up period during H1 2012 and reached its design throughput capacity of c.3.6Mtpa-4.0Mtpa in August 2012. This period was complicated by challenging infrastructure, adverse weather conditions, and in particular, problems with the water and electricity supply. The team successfully overcame these challenges and, by Q3 2012, the plant was working to its design capacity of 3.6Mtpa-4.0Mtpa of ore, following the commissioning of the second processing line in June 2012.

Total cash costs at Albyn were US$980/oz, hampered by the mine's prolonged ramp up period.

Malomir

Malomir produced 103,300oz of gold in 2012. This was an increase of 17% on the amount produced in 2011 (88,500oz) despite lower recoveries due to the treatment of the transitional ore. This was achieved due to expansion of sorption circuit carried out at the plant in Q1 2012.

The majority of ore processed in 2012 came from the non-refractory Quartzitovoye ore body with some additions from the oxidised and transitional upper levels of the refractory ore body in the Central pit. Malomir has relatively small reserves of the transitional ore situated in contact with the refractory ore body which is difficult to model, estimate and mine selectively due to its complex morphology. For the majority of the year, Malomir was mining and processing large quantities of such transitional ore, which resulted in a lower recovery rate compared to 2011.

The expansion of the sorption/desorption circuit in February 2012, which increased the plant's processing capacity to 180,000 tonnes per month, offset the effect of the lower recoveries resulting from the transitional ore.

During the year, the Group also continued to mine high-grade, oxide ore reserves from the Quartzitovoye open pit, which are suitable for processing in the RIP plant, with higher recovery rates. This required the removal of large volumes of waste. The resulting high stripping coefficient, together with the lower recoveries from the transitional ore, adversely affected cash costs.

Total cash costs at Malomir were US$911/oz, an increase of 48% on 2011 (US$615/oz).

POX Hub Development

The Group is turning its Pokrovskiy mine into a regional "hub" which will use POX technology to extract gold from refractory material, which constitutes approximately half of the Group's current gold reserves. Approximately 70% of the Group's refractory reserves are located at the Malomir mine and the remaining 30% at the Pioneer mine. Flotation concentrate of refractory ore from the Malomir and Pioneer mines is scheduled to be processed at the Pokrovskiy POX Hub starting from H1 2014 and H1 2015 respectively. Ore will be converted at these mines into a high-grade flotation concentrate (4-5% of original volumes of ore) then trucked by existing roads to Pokrovskiy for processing in high-pressure autoclaves, which are currently being installed. After the autoclave treatment, gold will be leached and smelted into doré bars utilising the Pokrovskiy mine's current facilities.

Once commissioned, the Group's POX plant will be the largest and most technologically advanced POX facility for processing gold in Russia, able to extract gold from a wide range of refractory ores. This will support long-term, sustainable gold production from the Malomir and Pioneer mines. Given the scale of the POX Hub and the abundance of undeveloped refractory gold deposits in Russia, particularly in the Russian Far East, the POX Hub also potentially opens a new dimension for the Group's future growth.

During 2012, all the major equipment for the POX plant was manufactured and delivered to the Pokrovskiy site. The installation of equipment is now well under way. The four autoclave vessels were placed on their foundations and work is now progressing on completing the autoclave building around them.

The oxygen plant building has been completed and all principal equipment has been installed and assembled. Work is currently progressing on completing internal pipework and equipment interconnections. Work has also started on the filtration section of the POX, where the pulp discharged from the autoclave will be treated prior to RIP leaching.

During 2012, the Group continued to conduct test work and staff training, reducing the technical risks associated with the POX project at its pilot POX plant. The most significant test work included:

n The identification of measures to increase the resistance of equipment to the effects of corrosive materials;

n A reduction in the negative effect of chlorine ions on the extraction of gold by using fresh water and perfecting the technique of using recycled water with constant control of the chlorine content. Using these results, the Group is making provisions for all the necessary equipment to measure and control chlorine and other potential contaminants;

n The treatment of POX flotation concentrate with low, less than 0.6%, organic carbon content;

n Perfecting a filtering technique for testing conditioned autoclave slurry, confirming the design capacity and the required number of press-filters using a model percolator.

During the installation stage in 2013, all critical operations will be performed only by fully qualified, reputable contractors. In particular, this applies to the high pressure vessels internal lining and to the high pressure pipe welds. For the lining the Group employs DSB Säurebau GmbH (Germany) which is a world leader in this field and for the welding works, the Group is in advanced-stage negotiations with certified and reputable third parties who have extensive experience of similar works. The Group is budgeting radiographic inspection for 100% of high pressure welds. This will check the quality and will instantly identify any defects. In addition, where practicable, the suitability of the materials selected for the autoclave inner gear were tested in real operational conditions using the Group`s test autoclave.

Construction work is being conducted by the Group's specialist mine construction subsidiary, Kapstroi, and specialised subcontractors.

The Group's partners in the establishment of the Hub, Outotec (Finland) Oy, will supervise and advise during the commissioning stage of the POX Hub.

During 2013, the Group is intending to conduct additional test work in order to fine tune the technical parameters during the POX process (such as the distribution of oxygen in sections of the autoclave) for various blends of Pioneer and Malomir concentrate and for the support operations (re-grinding, acid treatment, cleaning of chlorides, conditioning, dewatering and neutralisation).

Once the POX Hub is commissioned, the Group is intending to continue to use the pilot test plant to simulate various operating scenarios, such as establishing optimal temperatures and input of reagents with different mixtures of concentrates. In addition, the Group is intending to continue to use the pilot test plant for staff training.

Currently, the Group is installing a flotation plant at the Malomir mine scheduled for commissioning in Q3 2013 and a flotation plant at Pioneer is scheduled for commissioning in 2015.

2012 OTHER DEVELOPMENT AND ADVANCED EXPLORATION PROJECTS

Tokur

A simple, small-scale operation involving the mining and repossessing of historical waste dumps at Tokur has been in operation since 2009. The material is washed through a sluice then put through a sorting machine, which uses an XRF analyser to separate ore from the waste. This produces a pre-concentrate of c.4g/t Au, which is suitable for processing through an RIP plant. In 2012, Tokur pre-concentrate was stockpiled for later processing at either Malomir or Albyn. A small amount of free gold is also recovered during the washing stage.

Industrial-scale production at the mine is not scheduled until 2015, with the Group's current focus in the area being on the Malomir and Albyn mines.

Visokoe

The Group is preparing a full feasibility study on the project which will evaluate the best options for the project's development. Extensive exploration and test work have indicated ore at Visokoe to be non-refractory and suitable for economic processing in an RIP plant or through heap leaching.

The further development of Visokoe is not planned until after 2014, once the POX Plant has been commissioned and ramped up.

In addition to Visokoe, the Group holds two further exploration licences in the Krasnoyarsk region with 540koz of JORC refractory gold Resources. Limited work is currently being undertaken on these licences areas as the Group is concentrating on development of its core projects in the Amur region.

Yamal

The Group's interest in the Yamal region is centred on the development of two adjacent gold ore bodies: Petropavlovskoye and Novogodnee Monto.

Further development of these projects is pending as the Directors continue to evaluate the available options for unlocking the value of these assets.

In addition to the gold mineralisation Novogodnee Monto also holds substantial reserves of construction stone within non-mineralised overburden rock. Since late 2011, quarrying began at the site, with material processed through a mobile crushing and screening plant, producing saleable aggregate. Sales of aggregate commenced in 2012 and the Group is in negotiations with interested parties regarding further sales of aggregates.

During 2012, the Group continued a review of its existing exploration and evaluation projects and recognised a non-cash impairment charge of c.US$109.5 million against certain non-core assets, which includes the Yamal assets.

2012 ALLUVIAL OPERATIONS

During 2012, the Group produced 92,100oz of gold from its alluvial operations, an increase of 3% on the amount produced in 2011 (89,600oz).

2012 total cash costs for the Group's alluvial operations were US$1,314/oz. This figure was broadly in line with expectations as alluvial mining processes lower-grade material than hard-rock mining and is heavily reliant on diesel, the price of which increased by 16% in 2012 versus 2011. In spite of the higher cost of production, alluvial deposits are less capital intensive than hard-rock mining and generate healthy margins in the current gold price environment.

In December 2012, the Group disposed of Uduma, a small operation in Yakutia which is a remote region where Petropavlovsk has no other assets or interests. The disposal resulted in US$2.4 million profit and should not have a material impact on the Group`s production profile.

2012 RESERVES AND RESOURCES

In February 2013, the Group reported Mineral Resources and Ore Reserves in accordance with the JORC Code 2004 and calculated as at 1 January 2013.

1.95Moz of gold were added to the Group's mineral resource base before depletion based on the success of the Group's 2012 exploration programme.

A net increase in JORC Mineral Resources of 0.45Moz to 25.1Moz after depletion and disposal of a non-core asset during the year totaled 1.5Moz. Of the 25.1Mozs, 10.0Mozs are in Proven and Probable Ore Reserve category.

All added gold resources are located within existing mining operations and c.90% of the gold is contained in non-refractory ore, potentially suitable for processing through existing RIP facilities or the Group's heap-leach facilities.

The ore reserve grade of these recent discoveries was similar to the 2012 processing grade and considerably higher than the average for the Group reserves. The Group's reserve grade was sustained in spite depletion of the higher grade ore during the year.

Total Mineral Resources increased by 2%, from 24.6Moz of gold at an average grade of 0.97g/t Au in 790Mt of mineralised material as at 31 December 2011, to an estimated 25.05Moz of gold at an average grade of 0.92g/t Au in 848Mt of mineralised material as at 31 December 2012.

Measured and Indicated Mineral Resources at 14.2Moz are in line with estimates reported in February 2012, despite the depletion of 760,000oz. Inferred Resources are up 6% to 10.85Moz.

This Mineral Resource and Ore Reserves update is based as in the previous year, on a US$1,000/oz, long-term gold price, with the exception of Albyn and Visokoe, where current estimates use a gold price of US$1,200/oz.

The Group holds additional Reserves and Resources at its alluvial projects, which are classified in accordance with the Russian Classification System for Reserves and Resources.

The Group continues to report its Mineral Resources and Ore Reserves in accordance with the JORC Code (2004) which is one of the internationally recognised and widely accepted reporting codes. The estimates were prepared following an extensive exploration programme, metallurgical tests and other technical work completed by the Group. The estimates were made internally by the Group's specialist following the methodology advised by independent minerals' specialists Wardell Armstrong International.

A summary of the Group's gold Ore Reserves and Mineral Resources as of 1 of January 2013 is shown below.

NOTE: Figures may not add up due to rounding

In line with previous estimates, the Company's Ore Reserve estimate continues to be based on gold price assumptions of US$1,200/oz for Albyn and Visokoe and US$1,000/oz for all other projects, together with the related modifying factors, such as operating costs and metallurgical recoveries as recommended previously by independent advisors, Wardell Armstrong International in 2011/12. The two different gold price assumptions are as at the date of the last general feasibility assessment for each project. All Ore Reserves are for open pit extraction and reported within economic open pit shells. 

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

Details of this estimate were published on 28 February 2013 and are available on the Company's website.

The Russian Resource Classification System remains in use within the Russian legal environment, forming the basis of the Group's accountability to the Russian State. However, the Group considers the JORC Code to be more suitable for reporting resources and reserves to investors.

In addition to the hard rock gold Mineral Resources and Ore Reserves, the Group holds a number of alluvial gold operations. Due to the size of the individual operations and the nature of the mineralisation, the Group considers the preparation of JORC reports for the alluvials to be unpractical. Therefore, the Group reports the alluvial Resources and Reserves following the Russian classification system. Total alluvial gold Reserves amount to c.570,000oz at an average grade of 0.36g/m3 whilst resources (including Reserves) are c.1 million oz at an average grade of 0.37g/m3.

2012 Exploration Report and Licence Acquisitions

Following a c.US$70 million exploration programme during 2012, mainly at the Pioneer and Albyn projects, the Group was able to add 1.95Moz to its total Resources base.

Pioneer area

n Several new zones of mineralisation identified

n Further high grade non-refractory and refractory mineralisation within the NE Bakhmut trend;

n A new zone of mineralisation discovered and evaluated south of Nikolaevskaya.

During 2012, exploration continued on the extensions of two high-grade zones (NE Bakhmut and Nikolaevskaya) and Alkagan-Adamovskaya, a large licence area surrounding the Pioneer mine which the Group acquired in 2010. At NE Bakhmut, mineralisation discovered in 2011 was explored and further extended along the strike. An additional high-grade pay shoot containing both refractory and non-refractory mineralisation was identified and explored and included in the Group's Mineral Resource and Ore Reserve statement. An extension of Nikolaevskaya, including a new high-grade pay shoot (predominantly refractory) was identified and explored. Both of these new high-grade zones are open in depth thus could be extended by deep exploration drilling. At Alkagan-Adamovskaya, exploration identified several new zones of mineralisation. Inferred Mineral Resources for the Perspectivnaya Zone was included in the current Pioneer Mineral Resource statement. Preliminary metallurgical tests indicate that it is an oxide zone to a depth of between 10m and 21m.

The most exciting discoveries at Pioneer were made north of the NE Bakhmut zone with the discovery of three new mineralised zones: Otvalnaya, Shirokaya and Alexandra. The zones appear to follow a trend of high-grade mineralisation, as they strike parallel to the known high-grade Nikolaevskaya, Andreevskaya and NE Bakhmut in a south-north orientated trend. Because of this, the Group's geologists believe the new zones could be further sequential high-grade ore bodies; however this is yet to be fully confirmed. Exploration at these new discoveries is at an early stage and they are intersected by widely-spaced drill holes and trenches. Selected samples showed grades in excess of 10g/t, confirming possibility of finding substantial high grade pay shoots. Interpretation of 2012 exploration results also allowed Group geologists to identify a significant, new,13km-long potential gold-bearing structure running across the Alkagan-Adamovskaya from north-west to south east through Alexandra and Shirokaya zones.

The further exploration of these new, promising discoveries will continue in 2013. Considering their structural position within the Andreevskaya and NE Bakhmut high-grade trends and their similarities in mineralogy, once fully explored these zones may significantly contribute to Pioneer's resources and future production.

At the end of 2011 the Group completed the acquisition of Ivanovskaya, a 205km2 licence area situated 65km north of Pioneer. The licence area is situated on an extended regional trend which holds the Pokrovskiy and Pioneer deposits. The area is known for its gold placer deposits, thus it is highly prospective for the discovery of hard rock gold resources. The total resource potential of the licence area has been estimated as c.3Moz (Russian Category P3 estimate).

Malomir

n Several zones of mineralisation, discovered, contributing to an increase in Mineral Resources and Ore Reserves at Quartzitovoye.

During 2012, significant exploration results from Malomir were received from areas around the Quartzitovoye deposit. Several new zones of mineralisation to the west and east of the Quartzitovoye open pit were identified during the year and explored in Q4 2012. These zones contained both refractory and non-refractory material.

In addition, improved confidence in Quartzitovoye Resources also enabled a portion of high-grade Inferred Resources to be upgraded to the Indicated category. Subsequently, 270koz were added to Malomir's Ore Reserves, of which 150koz where depleted during 2012.

In Q4 2012, the Group acquired two green field exploration licences near the Malomir mine through auctions. Their geological settings, including their proximity to historically-mined alluvial gold deposits, have indicated the possibility of identifying additional non-refractory, as well as refractory, resources which could potentially be processed at Malomir. The Group intends to explore these areas in 2013 and 2014.

Pokrovskiy and Satellites

n New mineralised zones discovered at Zheltunak:

n Exploration resumed at the Burinda deposit, a high grade core of the mineralisation may be processed at the Pokrovskiy plant;

n Promising exploration results at the Borovaya area north-west of the Pokrovka 1 pit.

During 2012, exploration continued at and near the Pokrovskiy mine.

During 2012, successful exploration continued at the Zheltunak deposit. As a result, c.40koz were added to Zheltunak JORC Reserves during 2012, of which 20koz was mined and depleted during the Period.

A new mineralised zone, Yuzhnaya, holding non-refractory gold Resources and Reserves, was identified and explored south of the Cross zone. The zone is shallow dipping and suitable for open-pit mining. It is planned that exploration of the potential extensions of the mineralisation will continue in 2013.

Further positive results were also received from the Sukhoi area to the east of Yuzhnaya and Cross, where grades up to 19.5g/t Au were identified in selected samples. Updated Sukhoi resource estimates added c.55koz of non-refractory gold Resources at an average grade of 1.1g/t Au. Of this amount, 20koz at an average grade of 2.94g/t was classified as a Probable Reserve within an economical pit shell.

At the Borovaya area, which lies 8km north from Pokrovskiy, an 800m-long mineralised zone was identified and explored in Q4 2012. The gold grades identified to date are relatively low, however mineralisation is shallow so this area may be suitable for processing through Pokrovskiy's current heap-leach facility. Further promising exploration results include an intersection at the Daktuy prospect (2.13g/t at 5m thickness).

Taldan

The Taldan licence area is situated 150km north-west by road from Pokrovskiy. As a result of the exploration work conducted in previous years, the Group has already identified c.340,000oz of Inferred resources at the Burinda deposit within the licence area. During Q4 2012, exploration of this area resumed. A pre-strip was developed in order to facilitate the detailed exploration of the high-grade portion of the deposit. The results received to date have been very encouraging and c.50,000oz at an average grade of 3g/t to 5g/t Au have been identified on the surface potentially suitable for shipment to Pokrovskiy mine during 2013. The Group is currently examining this possibility.

Albyn area

§ A new gold deposit discovered and evaluated within the Elginskoe licence.

The Elginskoye exploration and production licence covers the Elginskoye Grozovoye, Ulgen and several other gold prospects. The area is well known locally for its placer gold deposits, with hard rock gold resources only previously postulated on the basis of favourable geology and few historical samples.

During 2011 and 2012, the Group commenced exploration at Elginskoye. Although only c.4km out of the 28km strike length of the main structure has been explored to date, work resulted in the discovery of c.1.3 Moz of JORC gold resources at Elginskoye and Grozovoye (1,280koz of Inferred and 55koz of Indicated JORC Resources). The mineralised zones are shallow dipping and potentially suitable for a low cost open pit mining. Preliminary metallurgical tests show the gold is non-refractory and should be suitable for recovery at existing RIP plant or at a heap leach.

During 2012, exploration also commenced on the known Ulgen prospect. Seven trenches, were dug, some of which are still in progress. The first results from here are promising, with intersections of 1.8m to 16m at average grade of 0.56g/t to 2.87g/t Au identified.

Exploration at Elginskoye will continue into 2013 with the aim of identifying higher grade areas which will be priority targets for conversion into JORC Ore Reserves.

In 2012, the Group acquired Afanasevskaya: a large (688km2) licence area which covers an area north, north-west and west of the Albyn deposit, joining the Albyn and Elginskoye licences into a continuous exploration area.

The area is known for its several substantial placer gold deposits (now largely depleted and excluded from the licence) and also for the Afanasevskaya and Uglichikanskoye hard-rock gold deposits and several further gold prospects.

Afanasevskaya and Uglichikanskoye were explored during the Soviet era as narrow-vein, high-grade underground mining targets. A historical (1991) resource estimate for Uglichikanskoye indicates a Russian Category C2 resource of c.600koz (of which c.300koz are high grade, at an average of 6.5g/t, and c.300koz lower grade, at an average of 2.0 g/t Au) and further c.300koz of Russian Category P1 prognostic resources. The Group intends to undertake further drilling and trenching within all three known targets with a view to re-evaluating them for open-pit extraction with the ore processed at the Albyn processing plant. The Group also intends to conduct general prospecting over the Afanasevskaya licence area as Group geologists believe further gold targets may be discovered. Exploration is anticipated to start in H2 2013 with the first results expected in 2014.

The Group anticipates that Afanasevskaya will add further reserves suitable for processing in the Albyn RIP plant in the medium and long term.

Nimanskaya

During 2012, the first drilling was completed at Nimanskaya, a licence area acquired in 2011 and situated c.90km south of Albyn. Exploration was concentrated on an area of historical mining operations where steeply dipping, high-grade narrow veins were mined. During 2012, drilling conducted by the Group revealed a previously unknown halo of low-grade mineralisation around high grade veins with a thickness of 7.5 to 32m and grades of 0.8 to 1.2g/t.

New licences

The Group acquired several new licences near its existing operational sites:

n The Ivanovskaya licence, 65km north of the Pioneer mine, is situated at the extension of the regional geological trend hosting Pokrovskiy and Pioneer as well as a number of other mineral occurrences on both the Russian and Chinese side of the border;

n Two new exploration licences surrounding the Malomir mine.

A large (688km2) highly prospective licence called Afanasevskaya near Albyn. The licence area borders the original Albyn licence area as well as the Elginskoye licence area, and covers all known hard rock gold prospects north, north-west and west of the Albyn mine within a 20km to 30km radius. 

During 2012, the Group's exploration programme was aimed at continuing to develop the Reserves and Resources base at, or close to, the Pokrovskiy, Pioneer, Malomir and Albyn mines. As a result of this programme, the Group was able to add just under 2Moz of JORC Mineral Reserves (before depletion) during 2012.

In addition, Group geologists received some very encouraging exploration results yet to be fully reflected in the Group's JORC Reserves and Resources statement in 2013 and 2014.

OUTLOOK FOR 2013

2013 Production Plan and Operations Outlook

The Group's gold production target for 2013 is 760,000oz to 780,000oz, an increase of between 7% and 10% on gold produced in 2012;

This target for 2013 does nOt take into account:

n gold flotation concentrate from the Malomir flotation plant scheduled for commissioning in Q3 2013. The Group intends to stockpile the concentrate for later processing through its POX plant at Pokrovskiy but may market this product temporarily if conditions are suitable;

n any potential upside from recent discoveries of oxide resources at Malomir, Pioneer and Albyn.

As with previous years, production will be weighted to the second half of the year, reflecting the contribution of heap-leach and alluvial operations, which operate only during the warmer months of the year.

Pokrovskiy

It is expected that the RIP plant will continue processing the high-grade oxide reserves during the first half of 2013. During the second half of the year, two of the three existing milling lines will be converted for the POX Hub, with the remaining capacity of c.600ktpa available for processing non-refractory ore from H2 2014 to 2017.

The Group plans to continue the heap-leach operations at Pokrovskiy until full depletion of the economically viable reserves.

In 2013 the Pokrovskiy mine is expected to contribute c.8% of the Group's total production.

The Pokrovskiy RIP plant is expected to continue processing the remaining high-grade oxide reserves during the first half of 2013 before the integration of two of the three existing milling lines into the POX Hub, with the remaining capacity of c.600ktpa available for processing non-refractory ore from H2 2014 to 2017.

Pioneer

The increased capacity of the processing plant will enable the cost-efficient treatment of the low- grade stockpiles accumulated on site, which stood at approximately 5.3Mt as at 1 January 2013. It is expected that a significant proportion of the stockpile reserves will be processed during 2013. The high stripping volumes, required in 2012 to access high-grade oxide material for the plant, are expected to decrease significantly when the mine starts treating refractory ore in 2015, thus reducing the cost of mining operations. The Group plans to increase volumes of heap leach operations up to 1.4 million tonnes during 2013.

In 2013, the Pioneer mine is expected to contribute c.40% of the Group's total production.

Albyn

During 2013, the Group plans to make further improvements to the operational performance of Albyn. These include measures designed to improve the efficiency of waste rock stripping as well as to reduce dilution. Thanks to these improvements, the Group anticipates gaining access to higher grade reserves towards H2 2013 allowing process grades to increase to 1.3g/t-1.8g/t. It is planned that during the first half of the year whilst scheduled stripping works are carried out the head grades of ore through the plant will be lower than in 2012 but that should be compensated by higher grades in the second half of the year thus resulting in an increase in average grades for the year compared to 2012.

The current base-case mining schedule is expected to significantly improve in the mid- to long-term due to good exploration results in 2012.

In 2013 the Albyn mine is expected to contribute c.20% of the Group's total production.

Malomir

The results of Malomir's 2012 exploration program identified c.240,000oz of additional oxide resources in an ore body parallel to the Quartzitovoye pit (internal preliminary estimate) allowing the processing of non-refractory ore to continue at the mine throughout 2013 and Q1 2014. Work is currently being undertaken to outline new reserves for inclusion in the 2013 mine plan. This may significantly improve the current production and cash-cost forecast for the mine for 2013.

During 2012, construction continued on the mine's 4Mtpa flotation plant, which is currently scheduled to be commissioned in Q3 2013. As Malomir refractory ore bodies are shallow and of a bulk nature, they will be mined with a low strip ratio. Therefore, mining costs are expected to significantly decrease when the mine moves to producing from its refractory reserves.

Since the beginning of 2013, the Malomir plant worked at throughputs of more than 200kt per month due to the softness of ore. This is expected to continue throughout the remainder of 2013.

In 2013 the Malomir mine is expected to contribute c.15% of the Group's total production.

Operations Update for Q1 2013

During the first two months of 2013, good performance across the Group's operations saw overall gold production slightly ahead of the Group's budget to date.

Pioneer production is 22% ahead of budget and up 18% on the same period last year due to higher processing grade at 2.20g/t compared to 2.10g/t last year.

Malomir production was slightly behind budget; plant throughput was 79% higher compared to the same period last year after the plant's expansion and gold production is 39% lower than in the comparable period of 2012 due to the planned decrease in the head grade and a lower metallurgical recovery.

The Albyn processing plant achieved expected capacity with throughput in January and February 2013 four times higher than during January and February of 2012. The head grades were lower than in the previous year but it is expected that the grades will increase significantly in H2 2013 once planned stripping works is accomplished providing access to high grade ore.

At Pokrovskiy, the push back of the south wall of the main pit continued. The head grade was c.10% higher than the same period last year resulting in a 6% increase in gold produced.

Management expects total production for Q1 to be on budget.

Financial outlook for 2013

Cash Costs

The Group expects 2013 unit cash costs for all hard rock operations to remain approximately in line with 2012 levels in spite of inflationary pressures. This is due to:

n a comprehensive programme of cost cutting and improving operating efficiencies;

n across all Group operations, the current schedule for 2013 provides for the average grade of ore to be processed in 2013 to be in line with the average grade processed in 2012 (apart from Albyn where 2013 average grade is higher than 2012); and

n a decrease in volumes of stripping at Pioneer and Pokrovskiy by c.18% and c.56% respectively.

In February 2013, the Group announced that it had entered into financing contracts to sell a total of 399,000oz of gold over a period of 14 months, ending in March 2014, at an average price of US$1,663 per ounce. This represents approximately 50% of the Group's forecast production for this period and guarantees a minimum revenue stream of c.US$664 million;

In 2013, the Group expects the impact of inflation on mining costs per cubic metre and processing costs per tonne of ore to be offset in part by economies of scale at Albyn and Malomir, which, unlike in 2012, is expected to be working at full capacity for the full year.

Total accounting costs will have an additional non-cash element arising from the planned processing of large volumes of stock piled ore with historical input costs (mainly at Pioneer). Correspondingly, the Group expects a positive effect on cash flows from the release of c.US$90 million of working capital.

The current forecast total cash costs are based on conservative estimates from current reserves, however, management sees some potential to improve these 2013 production schedules with the potential addition of some of the recently-discovered resources, which are of a higher grade, to the base case production profile. The Group will update the market with progress on this during the course of the year.

Total cash costs for alluvial operations in 2013 will depend on fuel price inflation. The Company will update the market with developments of alluvial total cash costs in its half-year results in August 2013.

As usual, the total cash costs for the Group will be dependent on the strength/weakness of the Rouble against the US Dollar during the year.

Capital Expenditure

Capital expenditure for the development and maintenance of gold projects in 2013 is expected to be US$369 million, representing a decrease of approximately 10% on 2012 and 31% on 2011, and is expected to be allocated as follows:

n c.60% is POX Hub expenditure;

n c.15% tailing dam and infrastructure for Albyn;

n c.10% Malomir flotation;

n c.10% tailings for Pioneer and Malomir

n c.5% other projects (mainly Visokoe feasibility study).

Exploration capital expenditure for 2013 is expected to be approximately US$50 million.

Net Debt

At a US$1,600/oz spot gold price and taking into account the Group's hedging programme, net operating cash flows in 2013 are expected to be sufficient to cover the Group's projected capital expenditure, maintenance and exploration programmes. Hence, the Group's net debt position at year-end 2013 is forecast to be unchanged compared to its position as at 31 December 2012(excluding IRC).

2014 to 2018 Outlook

The Group is in the process of updating its base-case production plan for the years 2014-2018 to reflect recent additions to its reserves and resources base, particularly the non-refractory additions which affect the Group's near to mid-term production schedules.

Following commissioning of the POX Hub in Q1 2014, the Group is projecting a steady ramp up of the facility such that c.20% of gold production in 2014 will be via pressure oxidation of refractory ore, rising to approximately 30 -35% in 2015 and 35-40% in 2016.

The current production profile represents a base-case scenario based on the Group's current reserve estimates and excludes any potential upside from recent discoveries of non-refractory material and the exploration potential of newly acquired licences at Albyn, Pioneer and Malomir.

Pioneer

Pioneer is scheduled to produce gold from non-refractory ore for the next 3 years, with production gradually moving into refractory ore treatment from 2015 when the first flotation line is scheduled for commissioning.

The RIP plant is scheduled for a full upgrade to production of flotation concentrate in 2017. The mine's heap-leach facility will continue gold recovery from the remaining oxide reserves beyond 2020.

The Group's geologists consider Pioneer to have strong exploration potential, with many geological indications underexplored. Accordingly, the Group is continuing its extensive exploration program at Pioneer with a view of extending production from non-refractory ore.

Malomir

Malomir is scheduled to continue production from non-refractory reserves at least until the end of 2013. The plant's two flotation lines are to be commissioned in Q3 2013.

The Group is intending to continue exploration at and around the Malomir mine, including the newly-acquired licence area, which may result in a discovery of further non-refractory reserves.

A RIP plant with a capacity of 0.7Mtpa will remain available after commissioning of the flotation circuit to process any further non-refractory reserves.

Albyn

Albyn is expected to contribute an average of 210,000oz of gold production per annum during the period from 2013 to 2018;

The Group is exploring several promising licence areas around Albyn, which are expected to significantly improve production at Albyn and prolong the life of the mine;

Pokrovskiy

Gold production from non-refractory ore at Pokrovskiy in 2013 is scheduled at approximately 57,000oz, declining further in subsequent years;

From 2014, two out of the three existing milling lines will be utilised for the POX Hub, with the remaining capacity of c.600ktpa available for processing non-refractory ore from H2 2014 to full depletion;

Heap leach operations will continue, treating low grade ore as normal, until non-refractory reserves are exhausted;

The Group continues exploration at the Pokrovskiy satellite deposits and surrounding areas, including Zheltunak and Taldan, for additional non-refractory ores.

Other projects

The Group is reviewing its plans for the development of the other assets during 2013.

Cash costs

The Group reconfirms its previous estimates for cash costs at the POX Hub being at the same level as current Group cash costs, given a significant reduction in the stripping ratios required to recover the refractory ore and the high-grade of the flotation concentrate to be processed.

Capital Expenditure

For 2014, capital expenditure for the development and maintenance of gold projects is expected to fall further to approximately US$100 - US$150 million, reflecting the final stage of expansion of the POX Hub and the construction of the flotation plant at Pioneer, ahead of the scheduled first processing of refractory ore from Pioneer in 2015.

Net Debt

The Directors believe that the significant decrease in the Group's capital expenditure for 2014 and the steady cash flows from its mining operations will result in a decrease in the Group's net debt position as at 31 December 2014.

IRC Highlights

Petropavlovsk currently holds a majority stake in IRC, a company which produces industrial commodities in the Far East of Russia and north-eastern China. IRC is quoted on the Stock Exchange of Hong Kong Limited.

In January 2013, IRC announced a potential US$238 million investment in IRC by new Chinese strategic shareholders. Details of the agreement include:

n The entry into conditional agreements with General Nice (a member of a group of companies which collectively is one of the largest Chinese iron ore importers), and Minmetals Cheerglory (a wholly-owned subsidiary of China Minmetals Corporation, one of China's largest state-owned international metals and mining corporations) (collectively, the "Investors"), for the Investors to subscribe up to US$238 million in IRC through subscription for new IRC shares to fund production growth in addition to an agreement to enter into long-term off-take arrangements;

n A pro-rata indemnity from General Nice in relation to the Company's existing ICBC guarantee will be implemented on full completion of the transaction, reducing the Company's present exposure under the guarantee;

If the transaction is fully implemented and assuming no additional IRC shares are issued, the Company will hold c.40% of IRC's expanded share capital. Thus, IRC would cease being a subsidiary of the Group and would no longer be consolidated in the Group's financial statements. As this dilution is expected to be completed within 12 months after the reporting date, IRC has been classified as "held for sale" and presented separately in the Balance Sheet as at 31 December 2012;

n The transaction provides IRC with a strategic partnership that aligns its production growth in Russia with the trading experience of General Nice and Minmetals Cheerglory in China, reinforcing IRC's position as a Sino-Russian champion;

n Once completed, the transaction will benefit Petropavlovsk by reducing its potential financial requirements in relation to IRC, whilst enabling the Company to share in the upside from IRC's strong growth potential; and

n Further information on the transaction is set out in the announcement dated 17 January 2013 issued by the Company.

The transaction was approved by Petropavlovsk shareholders at a general meeting on 7 March 2013 and by IRC shareholders at a general meeting on 11 March 2013. The Directors expect that the General Nice initial subscription will complete in April 2013 and further, expect the subscription in relation to the General Nice further subscription shares and Minmetals subscription to take place within six months from the General Nice initial subscription completion date in April 2013.

IRC reported the following key 2012 highlights:

n Production targets at Kuranakh exceeded for a second consecutive year;

n Production cash cost at Kuranakh on a unit basis fell 15%, generating a segmental EBITDA of US$16.3 million;

n K&S construction on track for first production in early 2014;

n Garinskoye scoping study completed suggesting low cost and fast build DSO operation;

n Exploration portfolio boosted with the acquisition of Bolshoi Seym Ilmenite Deposit and Molybdenum Exploration Portfolio; and

n IRC recognised a US$21.0 million impairment charge against the thermal coal deposits associated with the K&S project, situated in the EAO.

Further information on IRC, including IRC's 2012 Annual Report, may be found on the website www.ircgroup.com.hk.

CORPORATE UPDATE

Dividends

As the business of the Company develops, and subject to the availability of distributable reserves, the Directors intend to pursue a dividend policy which reflects the Company's cash flow and earnings, while maintaining an appropriate level of dividend cover and having regard to further funding the development of the Company's activities.

The Directors recommend a final dividend for 2012 comprising a cash payment of £0.02 per Ordinary Share together with an entitlement to new shares with an attributable value of £0.05. Each eligible shareholder will accordingly be entitled to receive, in addition to the cash dividend, such number (rounded down to the nearest whole number) of Ordinary Shares as shall have an aggregate value at the Relevant Price (as defined below) equal to £0.05 multiplied by the number of Ordinary Shares in respect of which they are entitled to receive a dividend. The Relevant Price is expected to be the average of the middle market quotations of an Ordinary Share, as derived from the London Stock Exchange Daily Official List, for the five consecutive dealing days commencing on the day on which the Ordinary Shares are first quoted "ex" the dividend entitlement. The dividend package is subject to approval by shareholders at the 2013 Annual General Meeting to be held on 11 June 2013. If approved by Shareholders, the cash dividend is expected to be paid, and the new Ordinary Shares are expected to be issued, on 26 July 2013 to Shareholders on the register as at 28 June 2013. The associated ex-dividend date will be 26 June 2013. Further information will be provided to Shareholders together with the notice of the Annual General Meeting.

Sale of Non-core Assets

In Q4 2012, the Company signed a Share Purchase Agreement relating to the transfer of 65% of the issued shares in Omchak to OJSC Susumanzoloto ("Susumanzoloto"). The total consideration for the sale is US$21,650,000, payable in four equal tranches in the course of 2013.

The Group increased its holding to 90% of the issued shares in Omchak in 2010. Prior to this, Omchak was a joint venture with Susumanzoloto and OJSC Shkolnoe, with the Group originally holding 50%. As a joint venture, Omchak produced gold from alluvial operations. In 2011, ownership of all the alluvial licences was transferred to another subsidiary of the Group. Omchak now holds five licences to explore and develop hard-rock gold deposits and prospects: Bukhtinskaya, Kulinskoye and Verkhne-Aliinskoye in the Chita region of Russia and Birysinskiy and Mirichun in the Irkutsk region, as well as Verkhne-Kaurchakskaya in the Altay region, which is held indirectly via Omchak's wholly owned subsidiary. None of these assets are producing. As at 1 January 2012, Verkhne-Aliinskoye held 0.24Moz of Measured + Indicated and a further 0.47Moz of Inferred Mineral Resources. The remaining five assets are green field projects at an early stage of exploration.

The prior approval of the Federal Antimonopoly Service of Russia had been obtained for the transaction and the shares were transferred. Petropavlovsk remains a 25% shareholder in Omchak.

The transaction has resulted in a non-cash accounting loss of approximately US$30.7 million being recognised in the results for the year ended 31 December 2012, reversing the gain of approximately US$25.5 million which arose in 2010.

In February 2012, the Group disposed of its interest in the wholly-owned subsidiary CJSC SeverChrome for total cash consideration of US$7.8 million and recognised a gain on disposal of US$ 1.3 million.

In December 2012, the Group disposed of its interest in the wholly-owned subsidiary LLC Uduma for total cash consideration in the equivalent of US$4.8 million and recognised a gain on disposal of US$ 2.4 million.

Assets review

During 2012, the Group reviewed its existing precious metals projects and recognised an impairment charge of US$109.5 million in aggregate against certain non-core mineral properties which are currently not in the Group's long-term production plan.

IRC

During the year, as a result of the potential investment in IRC by the new shareholders, the Group took a decision to support new investment into IRC and to accept the resulting dilution of its holding in IRC to a non-controlling interest and accordingly the Group's investment in IRC is treated for accounting purposes as "held for sale" as at 31 December 2012. As a result, the carrying value of the entire IRC net assets has been adjusted to fair value less estimated transaction costs. Based on IRC's share price of HK$1.17 as at close on 31 December 2012, the net adjustment is a US$197.9 million non-cash impairment, shown in the financial results for the year ended 31 December 2012, with US$127.2 million allocated to equity holders of Petropavlovsk and US$70.7 million to non-controlling interests.

Board changes

As previously announced, there were two changes to the Group's Board of Directors in 2012.

In March 2012, Ms Rachel English joined the Board as a Non-Executive Director. Ms English has over 25 years' international experience in blue-chip companies, with responsibilities spanning finance, strategy, planning, business development, and mergers and acquisitions. 

At the Group's Annual General meeting held on 31 May 2012, Mr Andrey Maruta was formally appointed Chief Financial Officer, replacing Mr Brian Egan who stepped down from the Board for personal reasons. Mr Maruta was previously a member of the Board as Finance Director, Russia.

Post-year Events

Notice of Hedging Agreements

In February 2013, the Company announced that the Group had entered into financing contracts to sell a total of 399,000oz of gold over a period of 14 months ending in March 2014 at an average price of US$1,663/oz. This represents approximately 50% of the Group's forecast production for that period and guarantees a minimum revenue stream of c. US$664 million. These financing arrangements increase the certainty of a significant proportion of the Group's cash flow whilst the Group continues its capital investment in the POX Hub.

Past performance cannot be relied on as a guide to future performance.

Some figures may be rounded.

The content of websites referred to in this document does not form part of this document.

Forward-looking statements

This release may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "targets", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts and speak only as at the date of this announcement. They appear in a number of places throughout this release and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the Group's results of operations, financial position, liquidity, prospects, growth, strategies and expectations of the industry.

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the development of the markets and the industry in which the Group operates may differ materially from those described in, or suggested by, any forward-looking statements contained in this release. In addition, even if the development of the markets and the industry in which the Group operates are consistent with the forward-looking statements contained in this release, those developments may not be indicative of developments in subsequent periods. A number of factors could cause developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in law or regulation, currency fluctuations (including the US dollar and Russian rouble), the Group's ability to recover its reserves or develop new reserves and to implement its expansion plans and achieve cost reductions and efficiency measures, changes in its business strategy or development, political and economic uncertainty. Save as required by the Listing and Disclosure and Transparency Rules, the Company is under no obligation to update the information contained in this release.

Nothing in this announcement should be considered to be a profit forecast and no statement in this document should be interpreted to mean that earnings per share for the current or future financial years would necessarily match or exceed the historical published earnings per share. This document does not constitute or form part of an invitation to sell or issue, or any solicitation of any offer or invitation to purchase or subscribe for, any securities.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2012 or 2011, but is derived from those accounts. Statutory accounts for 2011 have been delivered to the Registrar of Companies and those for 2012 will be delivered following the company's annual general meeting. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498 (2) or (3) of the Companies Act 2006.

Basis of reporting reserves and resources

Mineral Resource and Ore Reserve estimates for the Group's hard rock deposits included within this announcement are reported in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves as prepared by the Joint Ore Reserves Committee of the Australian Institute of Mining and Metallurgy, Australian Institute of Geosciences and Minerals Council of Australia ("JORC Code (2004)")

The basis for reporting reserves and resources for the Group's alluvial deposits is in accordance with the Russian Classification System, approved by the State Committee on Reserves ("GKZ") in 1965 (amended in 1981 and 2008). The Russian Classification System is based principally on the degree of geological knowledge and the technical ability to extract a mineral reserve. Although economic considerations form a part of the justification for A, B, C1, and C2 category reserves, the system does not take into account the economic viability of extraction in the same manner as the JORC Code (2004), or other internationally recognised mineral reserves classification codes.

The Russian Classification System also classifies reserves as "on-balance" if they are economically viable at the time of the estimate and "off-balance" if the economic viability is yet to be demonstrated. Licence holders must register A, B, C1, and C2 category reserves with the GKZ to be able to extract them (depending upon the structural complexity class of the deposit. Gold deposits are usually in complexity class 2, 3 or 4 which require categories C1 and/or C2 only; categories A and B are rarely recorded for such deposits).

PETROPAVLOVSK PLC

Consolidated Income Statement

For the year ended 31 December 2012

PETROPAVLOVSK PLC

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2012

PETROPAVLOVSK PLC

Consolidated Balance Sheet

At 31 December 2012

These consolidated financial statements for Petropavlovsk PLC, registered number 4343841, were approved by the Directors on 27 March 2013 and signed on their behalf by

Peter Hambro Andrey Maruta

Director Director

PETROPAVLOVSK PLC

Consolidated Statement of Changes in Equity

For the year ended 31 December 2012

(a) Arises from an adjustment to the book value of the investment in the Company financial statements to reflect changes in the value of the Group's investment in IRC Limited (note 28).

PETROPAVLOVSK PLC

Consolidated Cash Flow Statement

For the year ended 31 December 2012

PETROPAVLOVSK PLC

Notes to the Consolidated Financial Statements

For the year ended 31 December 2012

1. General information

Petropavlovsk PLC (the "Company") is a company incorporated and registered in England and Wales. The address of the registered office is 11 Grosvenor Place, London SW1X 7HH.

2. Significant accounting policies

2.1. Basis of preparation and presentation

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

Going concern

The Group monitors and manages its liquidity risk on an ongoing basis. Cash forecasts are regularly produced and sensitivities run for different scenarios including, but not limited to, changes in commodity prices, different production rates from the Group's producing assets and the timing of expenditure on development projects. The Group meets its capital requirements through a combination of sources including cash generated from operations and external debt.

In a declining gold price environment, the Group may be exposed to breaches of certain financial covenants. As part of a number of alternatives to proactively address this risk, the Group has entered into financing contracts to secure the average realised gold price for a total of 399,000 ounces of gold over the period of 14 months ending in March 2014 at the level of US$1,663/oz (note 35) and negotiated the investment in IRC Limited (note 35) which will have the impact of deconsolidating IRC Limited and its subsidiaries ('IRC') and its debt.

Taking into the account of the aforementioned and further mitigating actions that the Group could take in the event of adverse changes, the Group expects to be able to operate within the level of its secured facilities for the subsequent 12 months from the date of approval of the 2012 Annual Report and Accounts.

Accordingly, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing these consolidated financial statements.

Exceptional items

Exceptional items are those 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 better understanding of the financial performance of the Group.

2.2. Adoption of new and revised standards and interpretations

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

There are no IFRSs or IFRIC interpretations that are effective for the first time in the current reporting period that had a significant impact on the amounts reported in these consolidated financial statements.

New standards, amendments and interpretations that are applicable to the Group, issued but not yet effective for the reporting period beginning 1 January 2013 and not early adopted

The directors do not expect that the adoption of the standards, amendments and interpretations listed above will have a material impact on the Group's financial statements, except as set out below:

§ IFRS 9 introduces new requirements for classifying and measuring financial assets and will impact both measurement and disclosure of financial instruments

§ IFRS 12 will impact the disclosure of Group's interests in other entities

§ IFRS 13 will impact the measurement of fair value for certain assets and liabilities as well as the associated disclosures

§ IFRIC 20 will impact asset recognition criteria and classification of costs from a stripping activity which provide improved access to the ore body as well as amortisation period

The Directors are assessing the impact of the standards above.

2.3. Basis of consolidation

These consolidated financial statements consist of the financial statements of the Company and the entities controlled by the Company (its subsidiaries) as at the balance sheet date.

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases.

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

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

2.4. Business combinations

The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for each acquisition is measured at the aggregate of the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. Where applicable, the consideration transferred includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition-related costs are recognised in profit or loss as incurred.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

The Group recognises any non-controlling interest in the acquiree at fair value or at the non-controlling interest's proportionate share of the acquiree's net assets, on an acquisition-by-acquisition basis.

The excess of the consideration transferred the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group's share of the identifiable net assets acquired are recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of recognised income and expenses.

2.5. Non-controlling interests

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

2.6. Acquisition of assets

Frequently, the acquisition of mining licences is effected through a non-operating corporate structure. As these structures do not represent a business, it is considered that the transactions do not meet the definition of a business combination. Accordingly the transaction is accounted for as the acquisition of an asset. The net assets acquired are recognised at cost.

Where the Group has full control but does not own 100% of the assets, then non-controlling interests are recognised at an equivalent amount based on the Group's cost, the assets continue to be carried at cost and changes in those values are recognised in equity.

2.7. Interests in joint ventures

A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control (i.e. when the strategic financial and operating policy decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control). Joint venture arrangements that involve the establishment of a separate entity in which each venturer has an interest are referred to as jointly controlled entities.

The Group's interests in jointly controlled entities are accounted for by using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Interests in joint ventures are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments.

Any excess of the cost of acquisition over the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the jointly controlled entity recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any excess of the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

The Group's share of its joint ventures' post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment in joint ventures.

2.8. Investments in associates

An associate is an entity over which the Group is in a position to exercise significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

Investments in associates are accounted for using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group's interest in that associate (which includes any long-term interests that, in substance, form part of the Group's net investment in the associate) are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

Any excess of the cost of acquisition over the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any excess of the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

When a Group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group's interest in the relevant associate. Losses may provide evidence of an impairment of the asset transferred in which case appropriate provision is made for the impairment.

2.9 Non-current assets held for sale

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale.

2.10. Foreign currency translation

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

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

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

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

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

2.11. Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of a subsidiary, associate or joint venture at the date of acquisition. Goodwill on acquisition of a subsidiary is included in non-current assets as a separate line item. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill on acquisition of an associate or a joint venture is included in the carrying amount of investment and is tested for impairment as part of the overall balance.

Goodwill is allocated to those cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the business combination in which the goodwill arose.

The excess of the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired over cost is recognised immediately in the income statement.

2.12. Intangible assets

Exploration and evaluation expenditure and mineral rights acquired

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

Exploration and evaluation expenditure comprise costs directly attributable to:

§ Researching and analysing existing exploration data;

§ Conducting geological studies, exploratory drilling and sampling;

§ Examining and testing extraction and treatment methods;

§ Compiling pre-feasibility and feasibility studies; and

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

Mineral rights acquired through a business combination or an asset acquisition are capitalised separately from goodwill if the asset is separable or arises from contractual or legal rights and the fair value can be measured reliably on initial recognition.

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

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

2.13. Property, plant and equipment

Land and buildings, plant and equipment

On initial recognition, land, property, plant and equipment are valued at cost, being the purchase price and the directly attributable cost of acquisition or construction required to bring the asset to the location and condition necessary for the asset to be capable of operating in the manner intended by the Group.

Assets in the course of construction are capitalised in the capital construction in progress account. On completion, the cost of construction is transferred to the appropriate category of property, plant and equipment.

Development expenditure

Development expenditure incurred by or on behalf of the Group is accumulated separately for each area of interest in which economically recoverable resources have been identified. Such expenditure includes costs directly attributable to the construction of a mine and the related infrastructure. Once a development decision has been taken, the carrying amount of the exploration and evaluation expenditure in respect of the area of interest is aggregated with the development expenditure and classified under non-current assets as "mine development costs". Mine development costs are reclassified as "mining assets" at the end of the commissioning phase, when the mine is capable of operating in the manner intended by management. No depreciation is recognised in respect of mine development costs until they are reclassified as mining assets. Mine development costs are tested for impairment in accordance with the policy in note 2.14.

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Depreciation

Property, plant and equipment are depreciated using a units of production method or on a straight-line basis as set out below.

Mining assets, except for those related to alluvial gold operations, where economic benefits from the asset are consumed in a pattern which is linked to the production level, are depreciated using a units of production method based on the volume of ore reserves, which results in a depreciation charge proportional to the depletion of reserves. The basis for determining ore reserve estimates is set out in note 3.1. Where the mining plan anticipates future capital expenditure to support the mining activity over the life of the mine, the depreciable amount is adjusted for such estimated future expenditure.

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

Mining assets related to alluvial gold operations are depreciated on a straight-line basis based on estimated useful lives.

Non-mining assets are depreciated on a straight-line basis based on estimated useful lives.

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

Estimated useful lives normally vary as set out below.

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

2.14. Impairment of non-financial assets

Property, plant and equipment and finite life intangible assets are reviewed by management for impairment if there is any indication that the carrying amount may not be recoverable. This applies to the Group's share of the assets held by the joint ventures as well as the assets held by the Group itself.

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

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

§ future production levels;

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

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

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

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

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

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

2.15. Deferred stripping costs

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

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

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

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

In gold alluvial operations, stripping activity is sometimes undertaken in preparation for the next season. Stripping costs are then deferred as part of cost of inventory and are written off to the income statement in the following year to match related production.

2.16. Provisions for close down and restoration costs

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

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

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

2.17. Financial instruments

Financial instruments recognised in the balance sheet include cash and cash equivalents, other investments, trade and other receivables, borrowings, derivatives, and trade and other payables.

Financial instruments are initially measured at fair value when the Group becomes a party to their contractual arrangements. Transaction costs are included in the initial measurement of financial instruments, except financial instruments classified as at fair value through profit or loss. The subsequent measurement of financial instruments is dealt with below.

Financial assets

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

Financial assets at fair value through profit or loss

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

Available-for-sale financial assets

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

Loans and receivables

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

Effective interest method

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

Cash and cash equivalents

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

Trade receivables

Trade receivables are measured on initial recognition at fair value and are subsequently measured at amortised cost using the effective interest rate method. Impairment of trade receivables is established when there is objective evidence as a result of a loss event that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The impairment is recognised in the income statement.

Other investments

Listed investments and unlisted equity investments, other than investments in subsidiaries, joint ventures and associates, are classified as available-for-sale financial assets and subsequently measured at fair value. Fair values for unlisted equity investments are estimated using methods reflecting the economic circumstances of the investee. Equity investments for which fair value cannot be measured reliably are recognised at cost less impairment. Changes in the carrying amount of available-for-sale financial assets are recognised in other comprehensive income and accumulated under the heading of investments revaluation reserve in equity. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to the income statement as "gains and losses from investment securities".

Financial liabilities

Financial liabilities, other than derivatives, are measured on initial recognition at fair value and are subsequently measured at amortised cost, using the effective interest rate method.

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

The fair value of the liability portion of a convertible bond is determined using a market interest rate for an equivalent non-convertible bond. This amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity of the bonds. The remainder of the proceeds is allocated to the conversion option. This is recognised and included in shareholders' equity, net of income tax effects.

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

Derivative financial instruments

In accordance with IAS 39 the fair value of all derivatives is separately recorded on the balance sheet. Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the balance sheet date. The resulting gain or loss is recognised in the income statement immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in the income statement depends on the nature of the hedge relationship.

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

The fair value of embedded derivatives is determined by using market prices where available. In other cases, fair value will be calculated using quotations from independent financial institutions, or by using appropriate valuation techniques.

Trade payables

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

Equity instruments

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

Impairment of financial assets

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

2.18. Provisions

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

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

2.19. Inventories

Inventories include the following major categories:

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

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

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

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

§ Deferred stripping costs are included in inventories where appropriate, as set out in note 2.15.

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

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

2.20. Leases

Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease's inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in borrowings. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

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

2.21. Revenue recognition

Revenue is recognised at the fair value of the consideration received or receivable to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue derived from goods and services comprises the fair value of the sale of goods and services to third parties, net of value added tax, rebates and discounts. The following criteria must also be present:

§ The sale of mining products is recognised when the significant risks and rewards of ownership of the products are transferred to the buyer;

§ Revenue derived from services is recognised in the accounting period in which the services are rendered;

§ Revenue from bulk sample sales made during the exploration or development phases of operations is recognised as a sale in the income statement;

§ Dividends are recognised when the right to receive payment is established; and

§ Interest is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group.

2.22. Borrowing costs

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

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

2.23. Taxation

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

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

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

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

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

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

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

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

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

2.24. Share-based payments

The Group has a number of equity-settled share-based payment arrangements in place, details of which are set out in note 30.

Equity-settled share-based payment awards are measured at fair value at the grant date. The fair values determined at the grant date are recognised as an expense on a straight-line basis over the expected vesting period with a corresponding adjustment to the share-based payments reserve within equity.

The fair values of equity-settled share-based payment awards are determined at the dates of grant using a Black Scholes model for those awards vesting based on operating performance conditions and a Monte Carlo model for those awards vesting based on market related performance conditions.

The estimate of the number of the awards likely to vest is reviewed at each balance sheet date up to the vesting date, at which point the estimate is adjusted to reflect the actual awards issued. The impact of the revision of the original estimates, if any, is recognised in the income statement so that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the share-based payments reserve within equity.

2.25. Employee Benefit Trust

Certain Ordinary Shares underlying the share-based payment awards granted are held by the Employee Benefit Trust (the 'EBT'). Details of employee benefit trust arrangements are set out in note 30. The carrying value of shares held by the employee benefit trust are recorded as treasury shares, shown as a deduction to shareholders' equity.

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

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

Areas of judgement that have the most significant effect on the amounts recognised in the financial statements are set out below.

3.1. Ore reserve estimates

The Group estimates its ore reserves and mineral resources based on the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves of December 2004 (the JORC Code), adjusted to conform with the mining activity to be undertaken under the Group mining plan The JORC Code requires the use of reasonable investment assumptions when reporting reserves, including future production estimates, expected future commodity prices and production cash costs.

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

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

§ Asset carrying values due to changes in estimated future cash flows;

§ Depreciation charged in the income statement where such charges are determined by using a units of production method or where the useful economic lives of assets are determined with reference to the life of the mine;

§ Provisions for close down and restoration costs where changes in estimated reserves affect expectations about the timing of the payment of such costs; and

§ Carrying value of deferred tax assets and liabilities where changes in estimated reserves affect the carrying value of the relevant assets and liabilities.

3.2. Exploration and evaluation costs

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

3.3. Impairment

The Group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets are impaired and tests goodwill for impairment annually.

The recoverable amount of an asset, or CGU, is measured as the higher of fair value less costs to sell and value in use.

Management necessarily apply their judgement in allocating assets to CGUs as well as in making assumptions to be applied within the value in use calculation. The key assumptions which formed the basis of forecasting future cash flows and the value in use calculation are:

§ The successful extraction and processing of the reserves in accordance with the available ore reserves and mineral resources and sale of the commodity produced;

§ Commodity prices are internal forecasts by management based on the forecasts of industry market researchers, being US$1,680/oz for the long-term gold price;

§ A long term exchange rate of 31.5 RUR:US$;

§ Costs, which are internal forecasts prepared by management, adjusted for future inflation rates in countries of operation; and

§ Discount rate to be applied to the future cash flows, being the pre-tax weighted average nominal cost of capital, calculated by management, being 10.8% for precious metals mining projects.

Subsequent changes to CGU allocation or estimates and assumptions in the value in use calculation could impact the carrying value of the respective assets. The impairment assessments are sensitive to changes in commodity prices and discount rates. Changes to these assumptions would result in changes to impairment conclusions, which could have a significant effect on the consolidated financial statements. In particular, with all other assumptions being constant, a reduction in the estimated long-term gold price would result in impairment of certain mining assets within precious metals segment as set out below.

3.4 Deferred stripping costs

The calculation of deferred stripping costs requires the use of estimates to assess the improved access to the ore to be mined in future periods. Changes to the Group's mining plan and pit design may result in changes to the timing of realisation of the stripping activity. As a result, there could be significant adjustments to the amounts of deferred stripping costs capitalised and their classification between current and non-current assets.

3.5. Close down and restoration costs

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

The initial provision for close down and restoration costs together with other movements in the provision, including those resulting from updated cost estimates, changes to the estimated lives of the mines, and revisions to discount rates are capitalised within "mine development costs" or "mining assets" of property, plant and equipment. Capitalised costs are depreciated over the life of the mine they relate to and the provision is increased each period via unwinding the discount on the provision. Changes to the estimated future costs are recognised in the balance sheet by adjusting both the asset and the provision.

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

3.6. Tax provisions and tax legislation

The Group is subject to income tax in the UK, Russian Federation and Cyprus. Assessing the outcome of uncertain tax positions requires judgements to be made. The Group recognises liabilities for anticipated tax issues based on estimates of whether additional taxes will be due, such estimates are based on the status of ongoing discussions with the relevant tax authorities and advice from independent tax advisers.

3.7. Recognition of deferred tax assets

Deferred tax assets, including those arising from tax losses carried forward for the future tax periods, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered. The likelihood of such recoverability is dependent on the generation of sufficient future taxable profits which relevant deferred tax asset can be utilised to offset.

Assumptions about the generation of future taxable profits depend on management's estimates of future cash flows. Judgements are also required about the application of income tax legislation. These judgements and assumptions are subject to risk and uncertainty and there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets recognised on the balance sheet and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, the carrying amount of recognised deferred tax assets may require adjustment, resulting in a corresponding charge or credit to the income statement.

3.8 Measurement of assets held for sale at fair value less costs to sell

IRC has been classified as "held for sale" and presented separately in the consolidated balance sheet as at 31 December 2012 (notes 28 and 35). The carrying value of IRC's net assets has been adjusted to fair value less estimated transaction costs, based on IRC's share price of HK$1.17 as at 31 December 2012 which the Directors consider to be the best measure of fair value. Subsequent to 31 December 2012, the IRC share price has traded between HK$0.87 and HK$1.45. Assuming total investment completion occurs, the Group's interest in the share capital of IRC Limited would be diluted from 63.13% held at 31 December 2012 (note 37) to 40.43% and IRC would become an associate to the Group. The carrying value of IRC will be adjusted based on its market share price on that date which will be the basis for valuation of the Group's share in IRC. Subsequent to that, IRC will be accounted for using the equity method of accounting taking into consideration the Group's share in IRC's results and subject to any impairment.

4. Segmental information

Business segments

The Group has three reportable segments under IFRS 8 which reflect the way the Group's businesses are managed and reported:

§ Precious metals segment, comprising gold operations at different stages, from field exploration through to mine development and gold production. The precious metals segment includes the Group's principal mines (Pokrovskiy, Pioneer, Malomir and Albyn), the Group's alluvial operations and the Group's operations under gold joint venture arrangements as well as various gold projects at the exploration and development stages.

§ IRC segment, comprising IRC Limited and its subsidiaries. IRC segment includes iron ore projects (Kuranakh, K&S, Garinskoye, BolshoySeim, Kostenginskoye and Garinskoye Flanks projects), engineering and scientific operations represented by Giproduda, project for design and development of a titanium sponge production plant in China, project for production of vanadium pentoxides and related products in China as well as various other projects.

§ The Other segment, comprising the in-house geological exploration expertise performed by the Group's exploration companies Regis and Dalgeologiya, the in-house construction and engineering expertise performed by the Group's specialist construction company Kapstroi, the engineering and scientific operations represented by PHM Engineering and Irgiredmet and other supporting in-house functions as well as procurement of materials such as reagents and consumables and equipment for third parties undertaken by Irgiredmet.

Segment information

(a) See note 6.

(b) Including US$26 million central administration expenses of IRC.

(c) In making the assessment for impairment, goodwill is allocated to the group of cash generating units likely to benefit from acquisition-related synergies (note 13).