Annual Results FY2017

28 March 2018

Petropavlovsk PLC

Annual Results for the Year Ended 31 December 2017

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 2017.

Chairman Comment

Commenting on the annual results, Ian Ashby, Chairman of Petropavlovsk, said:

"In 2017 Petropavlovsk delivered on its strategy in 2017 of increasing production, generating positive cash flow and optimising our debt profile, whilst making considerable progress operationally both at the POX Hub and with the commencement of our higher grade underground operations at Pioneer and Malomir. We enter 2018 in a strong position to complete the transition to a miner capable of harnessing the significant latent value of our assets, and committed to generating strong returns for all of our stakeholders for many years to come."

Financial Highlights

§ Gold sales up 10% to 439.8koz (2016: 399.9koz).

§ Average realised gold price♦ up 3% to US$1,262/oz (2016: US$1,222/oz) includes US$2/oz positive effect of hedging.

§ Group revenue up 9% to US$587.4m (2016: US$540.7m), primarily reflecting 10% increase in physical volume of gold sold and 3% increase in average realised gold price♦.

§ Underlying EBITDA♦ in line with 2016 at US$196.8m, (2016: US$200.1m) driven by higher gold sales at an increased price, but impacted by higher costs.

§ Group total cash costs♦ (TCC) up 12% to US$741/oz (2016: US$660/oz) due to the effect of RUB appreciation, inflation of certain RUB denominated costs and lower processing recoveries and grades, partly compensated by a 2017 mining tax concession and increased production.

§ Group all in sustaining costs♦ (AISC) increased 19% to US$963/oz (2016: US$807/oz) mainly as a result of the increase in sustaining capital expenditure in relation to Pioneer and Malomir underground projects, expansion of the Pioneer and Albyn tailings dams, ongoing near mine exploration, prospective stripping at Albyn and Malomir and an increase in central administration expenses.

§ Threefold increase in net cash from operating activities to US$124m (2016: US$37m), primarily due to a decrease in working capital.

Note

♦ Throughout this document, when discussing the Group's financial performance, reference is made to a number of financial measures, known as Alternative Performance Measures (APMs), which are not defined or calculated in accordance with IFRS. Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

§ Operating profit♦ up 45% at US$111.9m (2016: US$77m). While underlying EBITDA♦ remained at approximately the same level as in 2016, the Group's operating profit was positively affected by partial reversal of previously recognised impairment losses at the K&S mine recorded by the Group's associate IRC, which contributed US$40.3m to the US$35.2m share of results of associates recognised by the Group.

§ Profit for the period was US$41.5m in 2017 compared to US$31.7m in 2016. This reflects an increase in operating profit and includes a benefit of US$34.6m of capitalised interest (2016: US$nil), partially offset by US$29.2m effect of deferred taxation (including the foreign exchange effect on deferred tax due to appreciation of the Rouble against the US Dollar)

§ Management of the Company and IRC has approached ICBC to request an amendment of the repayment schedule and to obtain waivers in respect of obligations to comply with certain financial covenants. Management is also in advanced discussions regarding the full refinancing of the ICBC facility with an alternative lender. The Group has guaranteed the outstanding US$234 million principal IRC owes to ICBC under the ICBC Facility. The assessment of whether there is any material uncertainty that IRC will be able to repay this facility as it falls due is a key element of the Group's overall going concern assessment.

§ Capital expenditure♦ of US$88.1m (2016: US$29.4m), primarily reflects recommencement of the development of the Pressure Oxidation Hub ("POX Hub") (US$33.2m), exploration activities (US$21.9m), flotation at Malomir (US$8.1m) and exploration and development activities to support underground mining at Pioneer and Malomir (US$15.5m), expansion of tailing dams (US$7.4m)

§ Reduction in year-end Net Debt♦ by US$14m to US$585m (31 Dec 2016: US$599m)

§ Improved debt capital terms, maturity and cost following the successful issuance of US$500m 8.125% guaranteed notes, with net proceeds used to repay loans provided by Sberbank and VTB Bank.

§ A gold sales agreement with Gazprombank, for a total volume of 96koz and for advance payment for up to 12 months signed to allow for greater flexibility in managing working capital of the Group. Advances will be settled using proceeds at the prevailing gold price at the date of the shipment.

Operational Highlights

§ Gold production up 10% at 439.6koz, in line with full year company guidance. This was due to a strong performance at Pioneer and Albyn, as well as implementation of a resin treatment facility to improve operational efficiencies, specifically reducing the amount of gold-in-circuit (GIC) thus adding to a total gold output (2016: 400.2koz)

§ c.6% Increase (before depletion) in the Group's Total Mineral Resources of 1.17Moz across the Group's assets, resulting in Total Group Mineral Resources of 20.86Moz (of which 8.15Moz are Ore Reserves).

Note

♦ Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

(1) From the beginning of 2017, the Company moved to using gold poured as the definition for production. The amount of GIC as at 31/12/2017 was c.22koz (31/12/2016: c.91koz). Comparable 2016 gold production numbers are adjusted accordingly

Development Highlights

§ Pressure Oxidation Hub (POX Hub): full scale POX plant development on schedule for Q4 2018 commissioning and ramp up to commercial production throughout 2019

§ Malomir flotation (stage 1 / 3.6Mtpa): plant is expected to be commissioned in Q2, with first concentrate production shortly thereafter

§ Underground: development substantially completed at Pioneer and Malomir during the year, both underground mines are now fully operational 

2018 Outlook

§ Production: 2018 gold output is forecast between 420-460koz

§ Costs: 

o TCC♦ guidance of US$700-750/oz, based on a RUB:US$ exchange rate of 58

o AISC♦ is expected to be US$800/oz - US$850/oz decrease compare to 2017 primarily due to lower underground sustaining expenditure, lower sustaining exploration cost and slightly lower administrative costs

§ Capex♦: estimated at US$105m, including

o  c.US$62m for POX

o  c.US$6m for Malomir flotation and tailings

o  c.US$10m for underground development

o  c.US$12m for Pioneer and Albyn tailings

o  c.US$15m for exploration activities

§ Malomir flotation: plant expected to be commissioned in Q2 2018, with first concentrate production shortly thereafter

Note

♦ Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

§ Hedging: outstanding forward sales totalling 400Koz of gold at an average price of US$1,252 per ounce were outstanding as at 31 December 2017 and outstanding forward sales totalling 350Koz of gold at an average price of US$1,252 per ounce are outstanding as at 27 March 2018.

Corporate Strategy

Petropavlovsk's strategy is to leverage the Company's substantial refractory gold resource base whilst optimising its non-refractory resources. The focus remains on producing profitable gold ounces, maximising cash generation from operating mines and enhancing open pit production, with a gradual ramp up of higher grade underground operations at Pioneer and Malomir. The POX Hub, which remains the top priority for management in 2018, is at the heart of the Group's growth prospects.

Capital Markets Day

Petropavlovsk is planning an institutional capital markets day in London during Q2 2018. The event will focus on technical aspects of the Company's flagship POX Hub development project and will include presentations from industry experts, both internal and external. A presentation will be made available on the Company's website following the event, full details of which will be circulated in due course.

IRC Limited (IRC)

Petropavlovsk is a shareholder (31.1%) of IRC and is the guarantor of the US$340m project finance facility (US$234m principal outstanding, as at 31 December 2017). IRC is a vertically integrated iron ore producer and developer in the Russian Far East and North Eastern China, listed on the Hong Kong Stock Exchange (Ticker: 1029.HK).

The following selected summary is extracted from IRC Annual Results for the year ended 31 December 2017:

Highlights

§ Financials

- Net profit of US$113.3m (31 December 2016: Net loss of US$18.2m)

- Fivefold increase in revenue to US$109.3m (31 December 2016: US$16.5m)

- Cash cost reduced by 12% to US$48.4 per tonne (31 December 2016: US$55.0 per tonne)

- K&S generated an EBITDA♦ of US$32.9m (31 December 2016: N/A, as K&S was not in commercial production)

- Impairment reversal of US$129.6m following operational status and correction in market

conditions

§ Operations

- K&S' production capacity of c. 50%; currently at about 70% and increasing

- Sales volume increased 6 times to 1,539,146 tonnes (31 December 2016: 219,352 tonnes)

- Average selling price doubled to US$78 per tonne (31 December 2016: US$39 per tonne)

- K&S customer base broadened and diversified

- Care and maintenance process at Kuranakh satisfactory

Note

♦ Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

Conference Call and Webcast

A live conference call and webcast will take place today at 9.00am BST. Participants will be able to listen to the call by dialling one of the following numbers shortly before 9.00am BST:

UK toll free number: 0808 237 0040

UK local number: +44(0) 203 428 1542

Russia toll free number: 810 800 2136 5011

Russia toll number: 0495 646 9304

Participant Password: 80669501#

A presentation will be webcasted and can be accessed via this link, from which a recording of the call will also be made available: http://vm.buchanan.uk.com/2018/Petropavlovsk280318/registration.htm 

Enquiries

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

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

Cautionary note on forward-looking statements

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

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances outside the control of the Group. Forward-looking statements are not guarantees of future performance and the development of the markets and the industry in which the Group operates may differ materially from those described in, or suggested by, any forward- looking statements contained in this release. In addition, even if the development of the markets and the industry in which the Group operates are consistent with the forward looking statements contained in this release, those developments may not be indicative of developments in subsequent periods. A number of factors could cause results and/or developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, demand, supply and prices for gold and other long-term commodity price assumptions (and their effect on the timing and feasibility of future projects and developments), trends in the gold mining industry and conditions of the international gold markets, competition, actions and activities of governmental authorities (including changes in laws, regulations or taxation), currency fluctuations (including as between the US Dollar and Rouble), the Group's ability to recover its reserves or develop new reserves, changes in its business strategy, any litigation, and political and economic uncertainty. Except as required by applicable law, rule or regulation (including the Listing and Disclosure Guidance and Transparency Rules), the Group does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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

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

The financial information set out in this release does not constitute the company's statutory accounts for the years ended 31 December 2017 or 2016, but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies and those for 2017 will be delivered following the company's annual general meeting. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of the Companies Act 2006. 

Chairman's Statement

Tragically, during 2017 three workers lost their lives at our operations. On behalf of the Board, I extend our sincere condolences to the families, friends and work colleagues affected. We have an intractable commitment to ensuring a safe work environment for all people that participate in our business. To this end, we will be launching a program during 2018 that will identify the key fatality risks to our business, around which we will develop actions to either eliminate or definitively control these risks. I will be taking personal interest in this initiative.

Notwithstanding the general uplift in prices for mineral commodities over the last twelve months, the gold price has experienced volatility, starting the year at US$1,151/oz, rising to US$1,346/oz in September and falling back to US$1,291/oz at year end, which was related to the general uncertainty around the overall trajectory of the global economy. The volatility continued into 2018 with gold hitting US$1,350/oz in January 2018. Against this backdrop, Petropavlovsk underwent a year of substantial transformation, focusing on the timely delivery of the Company's stated objectives: the development of the POX Hub, the commissioning of underground mining operations, and the optimisation of the Company's capital structure.

During the year, the Company made good progress with its development plans whilst achieving solid operational results and maintaining continued financial discipline. Group production was almost 440,000oz in 2017, a 10% increase on the previous year and in line with guidance. Both of the Company's flagship mines, Pioneer and Albyn, significantly outperformed the previous year's production. This result is even more impressive considering that in general the team treated lower grade material than in the previous year, and that Pioneer, Pokrovskiy and Malomir had decreased recovery rates due to the more refractory nature of the ores mined. These factors also put upward pressure on our costs.

We continued the transition to underground operations at both Pioneer and Malomir in 2017. These simultaneous developments proved to be challenging and led to some delays with the original commissioning timetable. Initial development delays at Malomir were driven by subcontractor mobilisation being longer than planned but the impact was well mitigated by management and did not have a material impact on total production. By year end, Malomir was producing at full design capacity. Issues at Pioneer were due to unexpected underground water and took longer to manage, however I am pleased to report that due to the high quality work of our engineering team, these problems are now resolved and Pioneer is expected to ramp up to full capacity during 2018.

This year marks the beginning of a new era for Petropavlovsk with the closure of our Pokrovskiy mine, as the site is being transformed into a key component of the POX Hub, our core organic growth development. The POX Hub will enable us to unlock the value otherwise inaccessible in the approximate 4m ounces of refractory gold reserves. Construction progress at the POX Hub is at 80% as of the publishing of these results and remains on schedule for commissioning in the fourth quarter of 2018.

The POX Hub is a unique project. Our scientists and engineers have worked enthusiastically to optimise the POX process technology to match the types of ores we are planning to process. In the course of this work we have patented several of our technological findings, which are being implemented at Petropavlovsk for the first time. Distinctive features of the POX plant are its robust design with four autoclave units in parallel, and flow sheet flexibility, which allows the processing of gold concentrates with different chemical and metallurgical characteristics at the same time. This flexibility was extensively tested at both laboratory and at bench scale in our Company owned test facilities. This gives me confidence that the necessary technical work has been done to de-risk commissioning, and facilitate a timely and smooth ramp up to full capacity.

Petropavlovsk has been successful in its exploration activities for more than 20 years. Our geologists have a long history of exploration success, and in 2017 over one million ounces of gold were added to total Group Resources, including over half a million ounces added to Reserves. It is important to note that 70% of these new Reserves and Resources are non-refractory and can therefore be treated using our current processing facilities. This will assist in further de-risking and smoothing our production profile as we complete the construction and commissioning of the POX Hub. The 2018 production schedule provides for about 120,000oz of newly discovered non-refractory ounces to be treated at our existing resin-in-pulp plants. These additions to the reserve base give us further confidence in our ability to generate positive cash flows during the final period of the current capital expenditure♦ programme.

Note

♦ Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

In the medium term, there remains significant prospectivity at Albyn, Malomir and Pioneer for the discovery of additional non-refractory and refractory gold discoveries, which would add to our existing 20Moz of resources. The exploration program remains focused on brownfield activities as an effective way to maximise the value of Group production facilities for the longer term, and is focused on high grade targets as a means of optimising cash flows, which will assist financial flexibility. The 26% increase in underground resources has helped to bolster the current underground developments. The progress made during the year provides a strong platform for further exploration success in 2018, where we have allocated US$16m to brownfield definition drilling. We will provide regular updates to the market as the drilling programme progresses.

In addition to our gold business, Petropavlovsk also holds a 31.1% equity stake in the Hong Kong listed iron ore miner IRC, which produced its first high grade iron ore concentrate from the K&S deposits during 2017. The K&S project was financed by the Chinese bank ICBC. In 2017, ICBC agreed to restructure the remaining K&S project finance facility repayments of US$234m, of which Petropavlovsk is guarantor. The resulting debt service holiday means that two repayment instalments originally due in 2017 are now be repayable as part of five subsequent instalments.

The Non-Executive Directors (including myself) are still relatively new to their roles within the Company following the Board changes resulting from the 2017 Annual General Meeting. Bruce Buck, Garrett Soden, and I were proposed for appointment by certain shareholders as Independent Non-Executive Directors, following which I was appointed by the Board to act as its Chairman.

Following our appointment the Board's priorities have been to:

· ensure that POX is delivered on time and on budget;

· refinance the Group's bank debt to provide medium term financial stability and flexibility for the business. This has been achieved through the successful issuance, in November 2017, of US$500m 8.125% Guaranteed Notes due 2022;

· ensure the successful ramping up of the Group's underground mining operations, maximising operational efficiency and cashflow potential, whilst ensuring the safety of our employees and contractors; and

· seek new options to resolve the potential liability of the Company's guarantee to ICBC in respect of IRC's loan facility and maximise the value of our equity interest in IRC.

One of the Board's key focus areas during 2017 was de-risking the Company's development plans, which included focusing on securing free cash from the operating business and improving the Company's capital structure. As it was mentioned above in November 2017, we launched a bond issue to refinance the Company's bank debt as a means of improving the maturity profile in line with our development plans. The bond issuance was well-received by the investment community and US$500m was raised, demonstrating the market's confidence in our development projects. This has provided greater stability to the Group and significantly improved our capital profile by optimising our repayment plan, which is now aligned with our development plans. The bonds also provide a lower cost of finance.

During 2018, I have also welcomed Adrian Coates to the Board as an Independent Non-Executive Director, and Bektas Mukazhaov as a Director. These appointments coincided with the resignation of Andrey Maruta who is currently Chief Financial Officer and a member of the Board. Andrey has been an important part of the Petropavlovsk Board and senior management team for a number of years, and will assist in the transition to the new CFO. We wish Andrey all the best in his future endeavours.

The Board looks forward to working together with the augmented team, maintaining a broad perspective and an appropriate range of skills and expertise to provide Petropavlovsk management with the best possible guidance.

I also acknowledge the departure and contribution of CEO Dr Pavel Maslovskiy, who resigned in July 2017. In the interim, group operational activities have been ably led by Sergey Ermolenko, who stepped in as Interim CEO and has provided strong support to the Board during its search for a permanent replacement. Sergey was uniquely positioned to assist the Board in its continued focus on operational performance, and we are grateful to him and his team for delivering on all our operational and development targets in 2017.

At the beginning of 2018, following a comprehensive search, Roman Deniskin was appointed as CEO, commencing 16 April 2018. Roman brings all the necessary experience and leadership skills as we enter a new phase in the Company's history with the completion of the POX Hub and the development of our underground mining operations.

Petropavlovsk has a presence in many communities and remains committed to carrying out all its activities in a sustainable manner. The Group's success to date has been complemented by its commitment to act safely and responsibly and to build its team organically, via internal career development opportunities and educational programmes. In 2017, the Group strengthened its commitment to acting in a responsible manner, protecting the environment, safeguarding the welfare of its employees and maintaining good relationships with the communities in which it operates. We are proud of the leading role we play in the region.

I am pleased to report that during the year our environmental management system was accredited as compliant with GOST R ISO 14001-2016 (ISO 14001:2015), which is a globally recognised international standard. The accreditation applies to each of the Group's mines and is a wonderful acknowledgment for all those involved. Additionally during the year, and as a means to improve our relationship with our local stakeholders, we engaged a third party to undertake a review of Petropavlovsk's relationships with local communities. Whilst there were no material adverse findings from the review we have developed an action plan to better communicate and more effectively implement our safety and sustainability policy. We have also developed a Grievance Procedure, which enables members of the public and other stakeholders to raise complaints or issues concerning Petropavlovsk activities, and that assures these complaints will receive due consideration and a written response. The Grievance Mechanism is currently being discussed with the view to it being implemented in 2018. Once in place, individuals will be able to register complaints online, by post, by phone or in person. During the year, 1,958 people were trained at the Pokrovskiy Mining College, Petropavlovsk's main educational asset, which for nine years has prepared qualified graduates for the Group. Today it is a progressive, multi-level, innovative educational institution, implementing a wide range of educational programs in-house.

Petropavlovsk is the first and so far the only company in Russia that has decided to follow the success of Western countries and provide opportunities for women to work as drivers of 90-ton haul trucks. They are trained at the Pokrovskiy Mining College and last year we had 39 women drivers successfully operating CAT-777 at our mines. This year, as part of our commitment to providing equal opportunities, we reported a 5% increase in female employment.

Although one of our focus areas in 2017 was on controlling our cost base, we aim to do so in a way that reflects our responsibilities to the communities and the environment in which we operate. I am therefore delighted with the demonstrable progress. The Group continued to maintain a strong record in environmental management, reporting zero license violations. There was no air pollution, soil, surface or ground water contamination during 2017.

The safety of our employees and the communities in which we work is Petropavlovsk's number one priority; the Group has a zero fatality target across its operations. As I mentioned previously, we sustained three fatalities during 2017, which is unacceptable. Comprehensive investigations have been conducted and appropriate corrective measures have been taken in attempt to ensure that we are not exposed to these types of events in the future. As a part of our response to the fatalities at our operations, a benchmarking study of safety performance, measured by lost time injury frequency rate, has been conducted by SLR Consulting. We are also developing an incident response plan to support our goal in avoiding all injuries and improving safety performance throughout the Group.

2018 OUTLOOK

As we look ahead into 2018, we see a year in which the strategic elements of past decisions should come to fruition. This is a year in which the Company expects to deliver lower cost ounces from fully developed underground operations, and expects to commence production from sizeable refractory resources. This provides the platform to steadily increase gold output, delivering greater cash flows and providing investors with significant upside, both from the point of view of increased output and a longer mine life.

Some of the cost challenges evident in the Russian gold mining industry recently may persist in 2018 and this is one reason we remain committed to our strategy of reducing costs sustainably, producing profitable ounces and delivering positive free cash flow through the cycle. With this approach we expect to maintain healthy margins and safeguard our financial strength to the benefit of all of our stakeholders.

Our production guidance of 420,000-460,000oz is based on our mining schedules for open pit and underground operations, as well as our estimates of the first production from the POX Hub towards the end of 2018.

This will be the last year of anticipated significant capital expenditure♦ for the Group. Going forward, with a much-reduced capital expenditure♦ profile, Petropavlovsk is strongly placed to take advantage of value-accretive organic and corporate opportunities.

As a final note, I would like to thank all my colleagues on the Board for the time and effort they have devoted to the Company during the year. In addition - and on behalf of the Board, I want to thank the executive management and their teams who have contributed to our success in 2017, and look forward with great positivity to 2018 and beyond.

Interim Chief Executive Officer's Statement

For the operational team on the ground and I, 2017 was the first full year in Petropavlovsk's journey of strategic transformation to turn the Group into a focused, lean and innovative gold mining company that generates meaningful free cash flow and provides investors with superior returns by processing refractory and non-refractory ores at competitive prices. We have made significant progress in this regard, which is critical to our development plans and long-term outlook.

From an operational point of view our 2017 focus was on three main areas of activities:

§ Delivering on our production targets at planned margins to create cash flows to support the Group's development plans

§ Continuing our development plans on schedule to ensure the timely commissioning of the POX Hub in Q4 2018 and preparing our underground operations to run at full capacity in 2018

§ Replenishing depleted ounces of gold with material suitable for production through our current facilities in the near-term to de-risk our ambitious development plans

In working hard to fulfil these plans we were guided by our responsible principles of performance in every area of our operations.

Production and Operations

During 2017 we managed to achieve a 10% increase in year on year production. Our target for the year was a challenge as it did include production from our underground operations at Pioneer and Malomir, which we only started developing at the beginning of the last year. However, due to our conservative approach to budgeting and timely adjustments to the initial mine plan, production for the year fell comfortably within the guided range of 420 to 460koz. We also benefitted from a one-off addition to production due to the successful implementation of a resin treatment facility at our RIP plants improving operational efficiencies, specifically reducing the amount of gold-in-circuit (GIC).

Note

♦ Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

In 2017 our specialists had to manage two key challenges: declining grades and decreasing recovery rates at two of our flagship mines, Pioneer and Albyn. This was due to a larger portion of transitional material in the blend, and due to the more refractory nature of the remaining open pit reserves. In order to manage this we worked to optimise our operations and managed to increase overall RIP throughput by 3%, whilst rock movement was 7% lower than in 2016, meaning less mining expenditure.

The Company's input costs are also heavily reliant on the Rouble/Dollar exchange rate dynamic, which has a significant effect on the Group's operating costs. This resulted in Total Cash Costs♦ of US$741/oz for 2017, higher than the original guidance and due to the 13% appreciation of the Russian rouble against the Dollar, as well as rising domestic prices as a consequence of the global oil price rally, lower recoveries at Pioneer, Pokrovskiy and Malomir and lower grades at Pioneer, Pokrovskiy and Albyn were the main factors negatively affecting our costs this year. In particular, electricity costs and the cost of diesel increased by 31% and 28% respectively in US Dollar terms. Energy prices constitute a significant portion of our costs (c.25%), and the team worked hard to offset the negative effect of this increase. A mining tax concession applied in 2017 was also beneficial to our cash costs, helping us to achieve EBITDA♦ in line with the previous year at US$197m, alongside further optimisation of our operations and our cost cutting programme, and with help from increased gold production volumes and an average realised gold price♦ of US$1,262/oz, offsetting a 12% increase in costs. Management was also able to deliver a more than threefold increase in net cash from operating activities of US$124m, which gives us further confidence in the execution of the development projects that are under way.

In 2017, we completed a total of 6,730m of underground development at Pioneer and Malomir and commenced stope mining; both underground mines are now fully operational. This was achieved in spite of the fact that developing underground operations is new to the executive team. However, we also experienced some initial setbacks. Whilst carrying out excavation of the underground mine at North East Bakhmut, Pioneer, we have encountered challenging geotechnical conditions at the Quartzitovoye underground mine and experienced some problems with the mobilisation of machinery. However I am pleased to report that at Malomir, we achieved the first contribution to our production from underground mining, and a total of 110kt of high grade underground ore was produced during the year. The underground mine at Malomir is now working at full capacity and is expected to contribute a significant amount to Malomir gold output during 2018, whilst we transition to flotation and refractory processing there. As of the beginning of 2018, the NE Bakhmut underground mine at Pioneer has also reached sustainable levels of production and is expected to ramp up slowly to its full planned capacity during the year. It is expected to contribute low cost ounces to Pioneer production over the next six years and beyond. The input from both underground mines is very important for our production plans in 2018, as these areas will be a source of high grade material, improving average grades and recoveries of the total blend and thus decreasing production costs. As such, we are expecting underground areas at Pioneer to contribute c.3.7g/t material and c.6.3g/t material at Malomir.

I would like to take this opportunity to thank Petropavlovsk's operational team for their professionalism and hard work, which led to goals being achieved in spite of geological and engineering challenges.

POX Hub Development

2017 was the year that we fully resumed active construction of the POX plant, which was placed on hold from 2015 to 2016. Construction progressed well in 2017, placing us in a strong position to commence the commissioning of the POX plant in Q4 2018, on time and on budget. First gold production from Malomir concentrate is expected by the end of the year. With earth and civil construction works almost complete, and the autoclave vessels and oxygen plant in place, the development of the POX Hub is now entering its final stages. We are now completing welding work on the high and low pressure pipes, and receiving outstanding equipment to be installed prior to the commissioning of POX.

Stage 1 of the Malomir flotation plant with a capacity of 3.6Mtpa is complete, with first concentrate production expected in Q2 2018. As part of our cash flow optimisation programme, we were able to optimise refractory concentrate production at Malomir, delaying the start of the flotation plant by approximately four months compared to previous plans. This has allowed us to increase Malomir RIP plant utilisation in 2018, improving non-refractory production and also reducing our future concentrate stockpile.

Note

♦ Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

The optimisation of our POX development plan also resulted in an approximate two month extension of the Pokrovskiy RIP plant operations, which were originally scheduled to stop in January 2018. This meant we were able to have additional production from the original Pokrovskiy project in Q1 2018. Operations at the RIP plant have now stopped as the site is refurbished and integrated into the POX Hub.

Exploration, Mineral Resources and Ore Reserves

Our 2017 exploration programme was a strong mark of success for our geological team, resulting in an overall increase in both Mineral Resources and Ore Reserves in spite of depletion.

Nearly 1.2Moz of gold Resources were identified, including nearly 0.7Moz of Reserves. Notably this includes new open pit Reserves at Katrin, a recently discovered, very promising satellite deposit near Pioneer. It is important that Katrin is a non-refractory discovery identified south of Pioneer in late 2016 and as such is expected to contribute to 2018 production. The deposit was further explored during 2017 and it has been proven to a strike length of 1km, and the zone of mineralisation is open in both strike directions. The material from this deposit is planned to be processed through the current facilities in the near to mid-term.

New open pit reserves were also established at Pioneer's NE Bakhmut zone, this ore is also expected to contribute to 2018 production.

Other significant open pit non-refractory Resource and Reserve additions were at Albyn's satellites, where we are planning to commence production in 2019. These discoveries are expected to improve mid and long term production at the Albyn project.

2017 exploration significantly improved the prospects of our underground operations. Mineral Resources for potential underground mining increased by 26% and indicate two more sites for underground mining at Pioneer, which can be brought into production by the end of 2018.

The works carried out in 2017 indicated a number of very exciting prospects, which we are planning to follow up in 2018. This includes the exciting discovery of a new high grade pay shoot at the Nikolaevskaya zone, which was identified in Q4 2017. Some drill intersections showed very impressive gold grades, including 2.0m@258g/t, [email protected]/t and [email protected]/t. Due to these planned developments, exploration CAPEX for 2018 is mostly allocated to Pioneer and Albyn.

Health and Safety

As Interim CEO, the safety of our employees is my highest priority and obligation, and a zero injury and fatality target across all our operations is something we have worked hard on for many years. Sadly, I regret to report that we had three fatalities during 2017. This is discussed in the Chairman's statement and in further detail in our sustainability report.

Our urgent response is of paramount importance as we are actively involved in POX construction works and the development of underground mining operations, which are deemed to be high risk. Health and safety remains our foremost priority. The professionalism and dedication of all employees involved, on whom our health and safety depends, is clear to me and gives me confidence that these tasks will be successfully accomplished in a safe and responsible manner.

The Future Takes Shape

Our solid operational and exploration results, together with the progress made in the construction of the POX Hub during 2017, will support Petropavlovsk in meeting its 2018 production and development targets, creating foundations for production growth from refractory and underground reserves in the mid and long term. Regarding the longer term, we are looking forward to first production from our refractory Reserves at Pioneer, which is currently scheduled for 2023.

We are evaluating potential ways to bring the completion of the Pioneer flotation plant forward, which would improve our production profile. Our mid-term plans also include further expansion of our underground operations at Pioneer by opening the Andreevskaya and Nikolaevskaya mines, and potentially commencing underground mining at Albyn, where we are planning exploration in 2018 and 2019.

We continue to invest in innovative technologies, which should result in further improvements to our processing capabilities. One prospective development in this field is the high temperature pre-treatment of Malomir concentrate, which our research facility RDC Hydrometallurgy has been focusing on. This additional low cost processing stage could increase POX recovery from Malomir concentrate by up to 5% from what is currently budgeted.

With the completion of the POX Hub approaching and our underground mines in operation, Petropavlovsk is close to becoming a truly diversified gold mining company capable of exploiting sustainably and responsibly a range of gold deposits, creating value for all its stakeholders.

Operational Review

2017 production output benefited from the release of gold in circuit due to successful commissioning, in Q1 2017, of a resin treatment facility that released gold in circuit, which is gold remaining in the processing circuit of the plant (primarily in resin sorbent and cyanide solution, in the form of electrolytic product).

Pioneer

Pioneer is one of the Group's most prospective assets, providing near term growth from its underground non-refractory exploration and development potential, and its regional exploration potential (Pioneer flanks). Long term growth includes bringing forward the flotation plant (6.0Mtpa) development, currently scheduled for 2021, and the untapped greenfield exploration potential within its 1,375km2 total license area.

2017 Progress

§ Underground mining has commenced and is ramping up to full capacity

§ Underground Resource and Reserves expanded from 0.36 to 0.63Moz

§ Production levels increased despite lower grades and recoveries, driven by successful measures to release gold in circuit

§ Non-refractory open pit Reserves increased from 0.98 to 1.1Moz despite depletion

2018 Targets

§ Ramp up underground ore production to 200ktpa throughout the year

§ Ongoing underground drilling, expansion of Reserves and Resources

§ Maintain open pit mining and operating excellence

Operational Performance

In 2017, Pioneer produced 161.8koz, 37% of total Group production, and a 21% increase from 2016 (133.2koz). The increase is mainly attributable to a significant reduction of gold in circuit, which is gold remaining in the processing circuit of the plant (primarily in resin sorbent and cyanide solution, in the form of electrolytic product). The release of gold in circuit was primarily achieved through the successful commissioning, in Q1 2017, of a resin treatment facility that releases gold 'trapped' in used resin.

The main sources of ore at Pioneer were pits of the Alexandra, Yuzhnaya, Promezhutochnaya and Andreevskaya-West zones. This ore was blended with lower grade material from stockpiles to achieve a 0.68g/t ore feed through the mill. RIP processing recoveries were lower than in2016 due to head grades being lower and the ore processed being more refractory than in the previous year. Heap leach operations commenced on schedule in April 2017 and operated as normal through the warmer season until the end of October, producing 6.1koz of gold.

During 2017, a total of 3,646m (50,268m3) of underground development was completed. The first underground ore was produced in June. In total, 35.1kt of underground ore with an average gold content of 2.78g/t was mined in 2017. This was a by-product of underground developments. By the end of 2018, when underground mining at Pioneer is ramped up to full capacity, Pioneer is expected to produce ore at an average of 4-5g/t.

Total cash costs♦ were US$791/oz, a 25% increase from 2016 (US$631/oz). All in sustaining costs♦ were US$1,164/oz, a 36% increase from 2016. Both total cash costs♦ and all in sustaining costs♦ are affected by rouble appreciation against the US dollar and by inflation of certain Rouble denominated costs. Higher total cash costs♦ also reflect the impact of the lower grades processed and lower metallurgical recoveries. The increase in all in sustaining costs♦ is also attributable to the development of the NE Bakhmut underground project and tailings dam expansion.

2018 Outlook

In 2018, Pioneer production is expected to be at the same level as in 2017. The production plan for Pioneer is based on continued production from non-refractory open pit and underground reserves. Open pit mining and production is expected to be in line with 2017, whilst we expect to see the NE Bakhmut underground mine ramping up to its full planned capacity by the end of the year. Underground reserves at Pioneer are 263koz at present, and there is significant potential for these to increase in the course of further exploration works planned for 2018. The release of gold in circuit is no longer expected to contribute materially to Pioneer production, though gold output will be maintained by increasing underground production from 2017 levels.

Note

♦ Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

Albyn

Albyn is currently the Company's largest producing mine with a 100% non-refractory defined resource base. The highly prospective 1,053.1km2 license area is largely under explored, presenting potential near term upside from high grade, non-refractory resources to be discovered. The main orebodies at Albyn are open in a down dip direction beyond the feasible depth of open pit mining, offering longer term growth potential to establish mineral resource and ore reserves for underground mining.

2017 Progress

§ Production up by 4% vs. 2016

§ Elginskoye and Unglichikan R&R expanded, extending Albyn mine life

2018 Targets

§ Sustain Albyn open pit production at similar levels to 2017

§ Drill deeper, below Albyn pit, to model and assess underground potential

§ Continue exploration programme at Unglichikan and Afanasevskoye to further expand Albyn's non-refractory R&R base and subsequent life of mine

Operational Performance

In 2017, Albyn produced 181.6koz, 41% of total Group production and a 4% increase on 2016 (173.9koz). The main sources of ore were the Central and Eastern zones of the Albyn main pit, with a small amount of ore supplied from stockpiles. Throughout the year the processing plant had consistently high recoveries of over 90%.

2018 Outlook

In 2018, Albyn production is expected to be marginally higher than in 2017, due to slightly higher grades in both ore mined and processed during the year. Production will continue from open pit operations. Albyn's current open pit is now entering its final stages and scheduled to be completed in 2019, when production from Elginskoye and Unglichican is expected to start. As the Albyn orebody remains open at depth well below the open pit, the Group is also exploring the potential for underground mining there. This may become an additional source of production in the future, should planned exploration confirm sufficient underground Reserves.

Total cash costs♦ were US$541/oz, a 7% decrease from 2016 (US$581/oz). All in sustaining costs♦ were US$718/oz with no material change compared to 2016. Total cash costs♦ and all in sustaining costs♦ are affected by rouble appreciation against the US dollar, and by inflation of certain Rouble denominated costs. The increase in gold produced mitigated the negative effect of these factors.

Malomir

Malomir is the Group's largest asset by Reserve and Resource with c.90% of the reserve base categorised as refractory. Completing the POX Hub, which is scheduled for the end of 2018, will unlock material value embedded with the existing defined asset base and extend the expected life of mine to greater than 16 years, with untapped resource potential within the 821.3km2 license area.

2017 Progress

§ 80% increase in ore mined and 13% increase in volume of ore processed helped to drive production

§ Quartzitovoye underground mine development completed, with the mine at full production by year end

§ Stage 1 flotation plant completed and awaiting commissioning in Q2 2018

2018 Targets

§ Commence refractory concentrate production

§ Maintain underground mining at a steady state output of c.200ktpa

§ Sustain open pit and underground mining and operational excellence

Operational Performance

In 2017 Malomir produced 65.6koz, 15% of total Group production and a 20% increase from 2016 (54.9koz). The increase is mostly attributable to the processing of high grade underground ore and to an overall increase in plant throughput.

Note

♦ Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

The main sources of ore were pits of the Quartzitovoye and Magnetitovoye zones, blended with high grade ore mined from underground and low grade ore from stockpiles. The volumes of ore treated through the plant increased by 13% compared to 2016, which was in line with the mining plan.

The Quartzitovoye 2 pit was completed in H1, though recovery rates from the pit were lower than planned due to its ore being more refractory than expected.

The construction of an underground mine at Quartzitovoye 1 began in January 2017, and 3,084m (47,157m3) of underground development was completed during the year.

Delays experienced in Q1 2017 were largely rectified by the end of Q3. Full scale stope mining commenced in December, resulting in strong production towards the year end. During 2017, a total of 73.6kt of ore was mined from underground, with an average gold content of 8.03g/t. The Quartzitovoye underground mine is expected to be in full production throughout 2018.

Total cash costs♦ were US$929/oz, a 13% increase from 2016 (US$824/oz). All in sustaining costs♦ were US$1,278/oz, a 27% increase from 2016. Both total cash costs♦ and all in sustaining costs♦ are affected by rouble appreciation against the US dollar, and by inflation of certain Rouble denominated costs. Higher total cash costs♦ also reflect the impact of the higher strip ratio and lower metallurgical recoveries. The increase in all in sustaining costs♦ is also attributable to the development of the Quartzitovoye underground project.

2018 Outlook

Malomir production is expected to increase in 2018 due to addition of gold produced from refractory ores. Non-refractory production will be at the same level as in 2017 supported by the high grade ore mined from underground in spite of the transition to flotation and refractory processing planned for Q2 2018 which will reduce the capacity of the RIP plant from the present value of 3.0Mtpa to c.0.65Mtpa. It is expected that flotation concentrate from Malomir will be initially stockpiled to create a reliable feed for autoclave treatment when POX Hub operations at Pokrovskiy commence in Q4 2018. The first production from Malomir's refractory reserves, expected in Q4 2018, is set to contribute to the overall production increase at Malomir.

Pokrovskiy

Pokrovskiy was the license and subsequently the mine which the Group's early success was built upon. Having produced more than c.2.0Moz since 1999.Pokrovskiy has now reached the end of its life as an open pit mine. Mining and processing ceased earlier in Q1 2018 and the mine is in the process of being converted into the POX Hub, an integral part of the Group's future plans. Pokrovskiy provides the ideal strategic location, not only due to the excellent onsite and regional infrastructure, but also its close proximity to Pioneer's limestone deposit, lime being a key ingredient for the pressure oxidation process.

2017 Progress

§ Gold production as per budget

§ RIP production to stop in Q1 2018

§ Site prepared for RIP plant decommissioning and integration into POX

Note

♦ Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

Operational Performance

In 2017 Pokrovskiy produced 30.6koz, 7% of total Group production, and a 20% decrease from 2016 (38.2koz) due to the mine's closure.

The Zeyskaya and Vodorazdelnaya zones were the main sources of low grade ore, which was blended with ore from stockpiles. This contributed to a year-on-year decrease in H1 processing recovery at the plant.

Leading up to the transition of the RIP plant into a key POX Hub component, both RIP and heap leach plants operated as planned. Heap leaching commenced in April and ended with the arrival of cold weather in October.

Total cash costs♦ were US$1,236/oz, a 41% increase on 2016 (US$878/oz). All in sustaining costs♦ were US$1,367/oz, a 38% increase from 2016. Costs were high due to the processing of remaining marginal Reserves. The Pokrovskiy mine is now closed and in the process of being converted into the POX Hub.

2018 Outlook

In 2018, production from Pokrovskiy is expected to be significantly below its 2017 levels as the mine is in the process of being converted into a key POX Hub site. The existing RIP plant and site infrastructure is being integrated into the POX Hub, which is expected to start production towards the end of 2018, producing c.30koz from Malomir concentrate.

Note

♦ Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

Financial Review

Note: Figures may not add up due to rounding

Financial Highlights

(a) Calculation of total cash costs ("TCC") is set out in the section Hard-rock mines below.

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

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

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

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

Revenue

Group revenue during the period was US$587.4 million, 9% higher than the US$540.7 million achieved in 2016.

Revenue from hard-rock mines was US$556.2 million, 14% higher than the US$490.0 million achieved in 2016. Gold remains the key commodity produced and sold by the Group, comprising 95% of total revenue generated in 2017. The physical volume of gold sold from hard-rock mines increased by 10% from 399,858oz in 2016 to 439,834oz in 2017. The average realised gold priceu increased by 3% from US$1,222/oz in 2016 to US$1,262/oz in 2017. The average realised gold priceu includes a US$2/oz effect from hedge arrangements (2016: US$(21)/oz).

Hard-rock mines sold 65,503oz of silver in 2017 at an average price of US$17/oz, compared to 98,231oz in 2016 at an average price of US$16/oz.

Revenue generated as a result of third-party work by the Group's in-house service companies was US$31.2 million in 2017, a US$19.5 million decrease compared to US$50.7 million in 2016. This revenue is substantially attributable to sales generated by the Group's engineering and research institute, Irgiredmet, primarily through engineering services and the procurement of materials, consumables and equipment for third parties, which comprised US$29.0 million in 2017 compared to US$44.8 million in 2016.

Cash flow hedge arrangements

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

Forward contracts to sell an aggregate of 212,501oz of gold matured during 2017 and contributed US$0.8 million to cash revenue (2016: US$(8.5) million net cash settlement paid by the Group from forward contracts to sell an aggregate of 134,545oz of gold).

The Group constantly monitors the gold price and hedges some portion of production as considered appropriate. Forward contracts to sell an aggregate of 400Koz of gold at an average price of US$1,252/oz were outstanding as at 31 December 2017. Forward contracts to sell an aggregate of 350Koz of gold at an average price of US$1,252/oz re outstanding as at 27 March 2018.

Underlying EBITDA¨ and analysis of operating costs

(a) Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavorable court decisions.

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

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

Hard-rock mines

During this period, hard-rock mines generated underlying EBITDAu of US$229.1 million compared to US$224.7 million underlying EBITDAu in 2016.

Total cash costs¨ for hard-rock mines increased from US$660/oz in 2016 to US$741/oz in 2017. The increase in TCC primarily reflects the effect of Rouble appreciation, inflation of certain Rouble denominated costs, lower recoveries at Pioneer, Pokrovskiy and Malomir and lower grades at Pioneer, Pokrovskiy and Albyn, which was partly compensated by a mining tax relief applied by the Group in 2017. The increase in the average realised gold priceu from US$1,222/oz in 2016 to US$1,262/oz in 2017 and the increase in physical ounces sold had a US$40.3 million positive contribution to underlying EBITDAu in 2017. This effect was offset by the increase in total cash costsu, which had a US$35.9 million impact on the underlying EBITDA¨.

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

Compared with 2016 there was ongoing inflation of certain Rouble denominated costs, in particular, electricity costs increased by up to 14% in Rouble terms (increased by up to 31% in US Dollar terms) and the cost of diesel increased by up to 11% in Rouble terms (increased by up to 28% in US Dollar terms). A 13% strengthening of the Rouble against the US Dollar has occurred during 2017 compared to 2016, with the average exchange rate for the period going from 67.18 Roubles per US Dollar in 2016 to 58.32 Roubles per US Dollar in 2017.

Refinery and transportation costs are variable costs dependent on production volume. Mining tax is also a variable cost dependent on production volume and the gold price realised. The Russian statutory mining tax rate is 6%. Under the Russian Federal Law 144-FZ dated 23 May 2016 that introduced certain amendments to the Russian Tax Code, taxpayers who are participants to the Regional Investment Projects ("RIP") have the right to apply the reduced mining tax rate provided certain conditions are met. The Group's mining entities (JSC Pokrovskiy Rudnik, LLC Malomirskiy Rudnik and LLC Albynskiy Rudnik) met eligibility criteria and applied 0% mining tax rate in 2017. The Group also expects to apply 0% mining tax rate in 2018. Subsequently, the mining tax rate will increase incrementally by 1.2% every two years, reaching 6% in 2027.

The Group initially applied a reduced rate of mining tax since 1 July 2016 in its capacity of a participant to the RIP. The position of the Russian tax authorities was that the effective date for the aforementioned concession should be 1 January 2017 and, accordingly, the Group should be liable for the mining tax of for the six month period to 31 December 2016. Following unfavorable court decisions, the Group has settled an aggregate equivalent of US$19.9 million of mining tax for the six month period to 31 December 2016, interest and penalties, which amounts were recognized as an expense in 2017.

(a) Excluding deferred stripping

(a) Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavorable court decisions.

All-in sustaining costs¨  and all-in costsu

AISCu  increased from US$807/oz in 2016 to US$963/oz in 2017. The increase in AISCu  reflects the sustaining capital expenditure, primarily in relation to Pioneer and Malomir underground projects and expansion of tailing dams at Pioneer and Albyn, ongoing exploration focused on near mine resource expansion, prospective stripping at Albyn and Malomir in advance of the mining in 2018 and the increase in central administration expenses.

AICu  increased from US$838/oz in 2016 to US$1,065/oz in 2017, primarily reflecting the increase in AISCu  explained above and capital expenditure in relation to the POX project.

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

Corporate and other

Corporate and other operations contributed US$(32.3) million to underlying EBITDA in 2017 compared to US$(24.6) million in 2016. Corporate and other operations primarily include central administration function, result of in-house service companies and the Group's share of results of its associate IRC.

The Group has corporate offices in London, Moscow and Blagoveschensk, which together represent the central administration function. Central administration expenses increased by US$7.3 million from US$32.6 million in 2016 to US$39.9 million in 2017. The increase in central administration expenses is primarily attributed to a US$6.5 million increase in staff costs, mainly as a result of the of payments and accruals key management bonuses, an increase in Russian staff costs due to the appreciation of RUB against US Dollar and general increase in Russian salaries to align with the market.

The Group's share of profit generated by IRC is US$35.2 million (2016: US$(3.6) million share of losses generated by IRC), including US$40.3 million effect from partial reversal of impairment at K&S mine. IRC contributed US$6.5 million to the Group's underlying EBITDA in 2017.

Impairment review

The Group undertook an impairment review of the tangible assets attributable to its gold mining projects, exploration assets adjacent to the existing mines and supporting in-house service companies and concluded no impairment was required as at 31 December 2017. As at 31 December 2017, all exploration and evaluation assets on the balance sheet related to the areas adjacent to the existing mines.

The forecast future cash flows are based on the Group's current mining plan that assumes POX Hub completion in the year 2018. The other key assumptions which formed the basis of forecasting future cash flows and the value in use calculation are set out below:

(a) Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 11.6% (2016: 10.1%)

Interest income and expense

The Group earned US$0.8 million interest income on its cash deposits with banks.

Interest expense for the period was comprised of US$5.3 million effective interest on the Notes, US$12.2 million effective interest on the Convertible Bonds and US$42.7 million interest on bank facilities (2016: US$11.9 million and US$48.9 million, respectively).

As the Group resumed active construction of the POX Hub and flotation at Malomir and proceeded with underground development at Pioneer and Malomir, these projects met eligibility criteria for borrowing costs capitalization under IAS 23 "Borrowing Costs". US$34.6 million of interest expense was capitalised within property, plant and equipment in 2017, accordingly.

Other finance gains and losses

-

Other finance gains for the period comprised US$2.2 million compared to US$11.9 million in 2016. Included in other finance gains is a financial guarantee fee of US$2.2 million (2016: US$4.5 million) charged in connection with the ICBC facility.

Other finance losses for the period comprised US$28.5 million compared to US$1.5 million in 2016. Included in other finance losses are US$6.9 million (2016: US$nil) fair value losses on the revaluation of the embedded option for the bondholders to convert into the equity of the Company and a US$21.6 million (2016: US$1.5 million) loss on bank debt refinancing. 

Taxation

The Group is subject to corporation tax under the UK, Russia and Cyprus tax legislation. The statutory tax rate for 2017 was 19.25% in the UK and 20% in Russia. Under the Russian Federal Law 144-FZ dated 23 May 2016 taxpayers who are participants to the Regional Investment Projects ("RIP") have the right to apply the reduced corporation tax rate if certain conditions are met. In 2017, LLC Albynskiy Rudnik has received tax relief as a RIP participant and is entitled to the reduced statutory corporation tax rate of 17% for the period of 10 years, subject to eligibility criteria.

The tax charge for the period arises primarily in relation to the Group's gold mining operations and is represented by a current tax charge of US$24.4 million (2016: US$29.8 million) and a deferred tax credit, which is a non-cash item, of US$5.3 million (2016: deferred tax credit of US$34.5 million). Included in the deferred tax credit in 2017 is a US$7.5 million credit (2016: US$26.0 million credit) foreign exchange effect which primarily arises because the tax base for a significant portion of the future taxable deductions in relation to the Group's property, plant and equipment are denominated in Russian Roubles, whilst the future depreciation charges associated with these assets will be based on their US Dollar carrying value.

During the period, the Group made corporation tax payments in aggregate of US$31.1 million in Russia (2016: corporation tax payments in aggregate of US$35.3 million in Russia).

Earnings per share

Basic profit per share for 2017 was US$0.01, which is approximately at the same level as in 2016. The total number of Ordinary Shares in issue as at 31 December 2017 was 3,303,768,532

(31 December 2016: 3,303,768,532).

Financial position and cash flows

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

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

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

(d) Including US$88.1 million cash CAPEX.

Issue of US$500 million Notes

In November 2017, the Group issued US$500 million Guaranteed Notes due for repayment on 14 November 2022. The Notes were issued by the Group's wholly owned subsidiary Petropavlovsk 2016 Limited and are guaranteed by the Company and its subsidiaries JSC Pokrovskiy Rudnik, LLC Albynskiy Rudnik and LLC Malomirskiy Rudnik. The Notes have been admitted to the official list of the Irish Stock Exchange and to trading on the Global Exchange Market of the Irish Stock Exchange on 14 November 2017. The Notes carry a coupon of 8.125% payable semi-annually in arrears. Net proceeds from the issue of the Notes were used to refinance substantially all of the loans provided pursuant to the banking facilities by Sberbank and VTB Bank.

Key movements in cash and net debt

As at 31 December 2017, there were no undrawn facilities available to the Group.

Capital expenditure¨ 

The Group invested an aggregate of US$88.1 million in 2017 compared to US$29.4 million in 2016. The key areas of focus this year were on the POX project, for which active development was recommenced ahead of scheduled commissioning in 2018, exploration and development to support the underground mining at Pioneer and Malomir, expansion of tailing dams at Pioneer and Albyn and ongoing exploration related to the areas adjacent to the ore bodies of the Group's main mining operations.

Following the recommencement of active development of the POX project and the development of Pioneer and Malomir underground mining operations, the Group capitalised US$34.6 million of interest expense incurred in relation to the Group's debt into the cost of the aforementioned assets.

(a) Including US$33.2 million of development expenditure in relation to the POX Hub which is considered to be non-sustaining capital expenditure for the purposes of calculating all-in sustaining costs and all-in costs.

(b) Including US$12.0 million of expenditure in relation to the underground mining project at Pioneer to be sustaining capital expenditure for the purposes of calculating the all-in sustaining costs and all-in costs.

(c) Including US$3.5 million of expenditure in relation to the underground mining project at Malomir to be sustaining capital expenditure for the purposes of calculating the all-in sustaining costs and all-in costs.

(d) Including US$8.1 million of expenditure in relation to Malomir flotation (including tailing dams), which is considered to be non-sustaining capital expenditure for the purposes of calculating all-in sustaining costs and all-in costs.

Foreign currency exchange differences

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

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

The Rouble recovered by 5% against the US Dollar during 2017, from RUB60.66: US$1 as at 31 December 2016 to RUB57.60: US$1 as at 31 December 2017. The average year-on-year appreciation of the Rouble against the US Dollar was approximately 13%, with the average exchange rate for 2017 being RUB58.32: US$1 compared to RUB67.18: US$1 for 2016. The Group recognised foreign exchange losses of US$0.7 million in 2017 (2016: US$5.2 million) arising primarily on Rouble denominated net monetary assets.

- Going concern

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

The Group performed an assessment of the forecast cash flows for the period of 12 months from the date of approval of the 2017 Annual Report and Accounts. As at 31 December 2017, the Group had sufficient liquidity headroom. Following the successful issue of the US$500 million Guaranteed Notes (note 20), the Group is also satisfied that it has sufficient headroom under a base case scenario for the period to April 2019. In the meantime, the Group's projections under a layered stressed case that is based on the gold price, which is 10% lower than the average of the market consensus forecasts, indicate that unless mitigating actions can be taken, there will be insufficient liquidity under a layered stressed case for the relevant period to April 2019. These mitigating actions include items within the control of the management, such as accessing deposits not currently in the Group's mining plan, cost cutting and reduction of exploration expenditure.

The Group has guaranteed the outstanding amounts IRC owes to ICBC. The outstanding loan principal was US$234 million as at 31 December 2017. The assessment of whether there is any material uncertainty that IRC will be able to repay this facility as it falls due is another key element of the Group's overall going concern assessment. In 2017, IRC has agreed with ICBC to reschedule repayments under the ICBC Facility Agreement and obtained waivers from ICBC in respect of obligations to maintain certain cash deposits with ICBC until 30 June 2018 and obligations to comply with certain financial covenants until 31 December 2017 (inclusive). The next repayment instalment under the ICBC Facility Agreement is now due on 20 June 2018 and semi-annually thereafter until June 2022. IRC projections demonstrate that although IRC expects to have sufficient working capital liquidity over the next 12 months, these projections indicate that, unless mitigating actions can be taken, there will be insufficient liquidity to meet its debt repayment schedule and non-compliance with certain financial covenants for the relevant period to April 2019. Management of Company and IRC has approached ICBC to request an amendment of the repayment schedule and obtain waivers in respect of obligations to comply with certain financial covenants. Management is also in active discussions regarding the full refinancing of the ICBC facility with an alternative lender. However, if ICBC refinancing is not completed, IRC's financial liquidity may be adversely impacted. IRC and/or the Company would then need to carry out contingency plans including entering into negotiations with banks or other investors for additional debt and/or equity financing.

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

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

Nevertheless, having taken into account the aforementioned factors, and after making enquiries and considering the uncertainties described above, the Directors have a reasonable expectation that the Group will have adequate resources to continue in operational existence for the foreseeable future, being at least the next 12 months from the date of approval of the 2017 Annual Report and Accounts. Accordingly, they continue to adopt the going concern basis of accounting in preparing consolidated financial statements.

2018 Outlook

The Group is currently aiming to achieve 2018 production guidance in the range of 420 - 460 Koz. The Group's operating cash expenses are substantially Rouble denominated. The Group expects its TCC¨ in 2018 to be in the range of c.U

Development of Group Refractory Reserves and POX Hub

Of Petropavlovsk's 20.86Moz of Resources and Reserves, 9.63Moz is classified as refractory. In order to unlock the value embedded in these ounces one of the most efficient, reliable and environmentally friendly methods, which is considered an industry standard was chosen - is pressure oxidation ('POX').

Today, the Group is nearing completion of an onsite pressure oxidation facility ('POX Hub'), which is scheduled for commissioning in Q4 2018. Petropavlovsk has been developing the POX Hub's main structures at Pokrovskiy, the site of its first producing mine, which has now reached the end of its operational life.

After being placed in 2013, to care and maintenance the POX Hub's full scale development works were resumed from the beginning of 2017, with the aim to commission the hub in Q4 2018.

The Group's expertise in pressure oxidation is principally represented by RDC Hydrometallurgy, a scientific research centre based in St. Petersburg and a POX pilot plant located in Blagoveshensk. During 2017 significant research and metallurgical tests took place, alongside ongoing support of the Pokrovskiy POX Hub engineering, procurement and construction. Test work and research included:

§ Further tests to reconfirm and refine operational parameters

§ Developing recommendations regarding the continuous maintenance of the pilot plant, including research on the durability of the various high pressure valves used at the test autoclave

§ Research including metallurgical tests to further improve and optimise the processing of refractory concentrates of different mineralogical compositions

§ Developing recommendations regarding optimal metallurgical testing for new refractory deposits and ore bodies

§ Successful conclusion of test work and study, which focused on the thermal pre-treatment of refractory concentrate ahead of POX, indicates potential to increase recovery from Malomir concentrate from 92% (as budgeted) to 97%. This is yet to be incorporated in the POX design and yet to be reflected in the Group's production and financial projections.

Construction Progress

Malomir Flotation Plant (Design Capacity 5.4Mtpa)

The Malomir flotation plant is a staged build with the following two stages:

Stage 1 capacity is 3.6Mtpa across two parallel 1.8Mtpa lines. Construction of Stage 1 is complete with only some work outstanding, primarily on the flotation tailings facility. Flotation concentrate production is scheduled for the second quarter of 2018. Initially the concentrate will be stockpiled before being transported to the POX Hub site ahead of the staged autoclave commissioning, which is expected to start in Q4 2018.

Stage 2 will expand the flotation plant to 5.4Mtpa by adding a third 1.8Mtpa line. This will fully calibrate the combined flotation and RIP plant capacity with the existing 6.0Mtpa crushing and grinding capacity. Stage 2 expansion is currently scheduled to be completed and commissioned in 2019.

Pokrovskiy POX Hub

During 2016, the Company renewed key contracts with Outotec, which is responsible for the design and development of the plant. All assembling, installation and commissioning works are being carried out under Outotec installation and technical supervision. As part of recommencing the POX Hub development, Outotec and the Company completed in-situ checks on all major equipment and commenced work on the automation and control systems.

In January 2017, a contract was awarded to commence all the piping, welding and assembly works, which continued throughout the year.

A large amount of construction and installation work was carried out during 2017. The thickeners have been fully completed, which required skilled welding work. The tank equipment for the filter building has been welded, and about 60% of work on the Duplex and Super Duplex steel pipelines has been completed. During the year, most concrete and metal structure work has also been completed. In addition, the electric substation at Pokrovskiy which supplies electricity to the oxygen plant has been launched.

Key Construction Milestones

As of the end of 2017, designs for all main facilities are largely completed - the oxygen plant, principal POX Hub infrastructure, high pressure piping, welding and assembly works. This leaves the following major outstanding items to be completed during 2018 ahead of the scheduled POX plant commissioning in Q4 2018:

§ Pokrovskiy RIP refurbishment and integration into the POX hub

- To be completed by the end of September 2018

§ Low pressure POX facilities

- To be completed by mid-November 2018

§ POX control and automation systems

- To be completed by mid-September 2018

§ Other site infrastructure and auxiliary facilities

- To be completed by the end of July 2017

§ POX tailings facility

- To be completed by the end of February 2019

- There will be temporary tailings storage available for the commissioning and early ramp up stage

In Q3/4 2018, the POX Hub is scheduled to commence a staged dry and wet commissioning, one autoclave at a time. The commissioning of the oxygen plant is scheduled for Q2 2018 ahead of the autoclave commissioning. The ramp up to commercial production is due to occur throughout 2019.

Capital Costs

As at 31 December 2017, the total project cash capital spent on the POX Hub was approximately US$233.4m. The total outstanding estimated capex♦ as at that date was approximately US$62m for the POX Hub. The total outstanding estimated capital expenditure♦ as at 31 December 2017 was approximately US$24m for Stages 1 and 2 of the Malomir flotation plant and approximately US$5m for tailings related to Malomir flotation. The capital expenditure♦ associated with the construction of the Pioneer flotation facility is currently estimated at US$40m.

Selling Concentrate

Market analysis is being carried out to explore the possible economic benefit of selling concentrate to generate a near term revenue stream ahead of the POX Hub's commissioning.

Outlook

Pioneer Flotation Plant (design capacity 6.0Mtpa)

Construction of the Pioneer flotation plant is scheduled to start in 2021, ahead of concentrate production from 2023. The Group is evaluating the possibility of moving the completion of Pioneer's flotation plant forward to the end of 2019. This would improve the Group's gold production profile and allow for better utilisation of the POX Hub capacity.

Note

♦ Go to "The Use and Application of Alternative Performance Measures (APMs)" section for further information on our APMs.

Underground Mines

In line with its strategy of organic growth, in 2016 the Group commenced development of its underground operations to access high grade non-refractory ores, allowing for improvements in and for the de-risking of production output until refractory ore processing is ramped up to full capacity. In 2017 first production was achieved from the first two underground operations at Pioneer (NE Bakhmut) and at Malomir (Quartzitovoye). Both underground sites are trackless with decline access, and ore is mined using a sublevel open stope method with primarily unconsolidated rock back fill.

Successful exploration and the completion of technical studies in 2017 has enabled the preparation of mine designs and Ore Reserve estimates for two further sites at Pioneer, Andreevskaya and Nikolaevskaya. Andreevskaya's Reserves are located under depleted pits at Andreevskaya West and Andreevskaya East, where underground access can be gained easily from the open pit floor. The new Nikolaevskaya Reserves are estimated within a high grade pay shoot discovered in H2 2017, 120m below the surface, beneath the refractory open pit reserves.

Total Ore Reserves across Pioneer and Malomir now amount to 0.43Moz of gold at an average grade of 5.32g/t, a 16% increase compared to last year. It is estimated that these initial Reserves support a mine life of at least 6 years for Quartzitovoye and NE Bakhmut. The new Andreevskaya Reserves are non-refractory and are expected to contribute to Pioneer production from 2019; at present Andreevskaya's mine life is estimated at approximately two years. Preliminary metallurgical tests suggest Nikolaevskaya's underground Reserves are suitable for either RIP or POX processing. As POX is expected to result in better gold recovery, this material is currently conservatively classified as refractory, and as such mining is not scheduled until 2024, when refractory production at Pioneer is expected to reach full capacity. Group specialists continue metallurgical tests to improve Nikolaevskaya's RIP gold recovery. Should this work be successful, production from Nikolaevskaya may be brought forward. It is expected that Nikolaevskaya's current Reserves should support at least four years of production.

All ore bodies scheduled for underground mining are open in a down dip direction. Further exploration is expected to increase Reserves and extend mine life.

The simultaneous development of both NE Bakhmut and Quartzitovoye mines has proved to be challenging, and the Group faced some frustrating setbacks, particularly at NE Bakhmut. However, due to a conservative budgeting approach these delays did not have a material impact on the Group's overall production results and financial position.

Construction of the NE Bakhmut mine began in Q3 2016 and continued throughout 2017. The first development ore was produced in June 2017, and underground mining is now ramping up to full capacity.

Despite the delays, a total of 3,646m of underground developments were completed during 2017 at NE Bakhmut. A total of 35.1kt of ore at a grade of 2.78g/t was produced from NE Bakhmut in 2017. All necessary ventilation, dewatering and mine services are now in place and the construction of Pioneer's NE Bakhmut mine has been completed.

Development of the Malomir underground mine began in January 2017 with a delay of approximately one month due to slow contractor mobilisation. This delay was largely rectified by the end of Q3 2017 and the first development ore was produced in June from a new, previously unknown payshoot in Zone 49. In Q3 2017, underground development reached Zone 55, the main high grade production area at Quartzitovoye 1. By the end of the year, a total of 73.6kt of ore with an average grade of 8.03g/t was produced. The grade mined was 17% higher than estimated due to the unexpectedly high grade of the stopes.

A total of 3,084m of underground development was completed at Quartzitovoye 1 during 2017. Ventilation and pumping facilities were also completed and Quartzitovoye is now a fully functioning, modern underground mine.

Reserve, Resources and Exploration Results

In line with best industry practices, Petropavlovsk reports its Mineral Resources and Ore Reserves in accordance with the JORC Code. These Group Mineral Resource and Ore Reserve estimates are an update on the estimates prepared in April 2017 by Wardell Armstrong International (WAI), a UK based independent technical consultancy firm. The updated estimates incorporate all material exploration completed during 2017 and take into account 2017 mining.

Total Mineral Resource ounces (including Reserves) as of 31 December 2017 amounted to 20.86Moz, compared to 20.16Moz in 2016, with a total Reserve of 8.15Moz compared to 7.95Moz in the previous year. The increase in Mineral Resources is attributable to discoveries at Pioneer and Albyn, including Resource expansions at the NE Bakhmut 2 and Nikolaevskaya Zones (Pioneer) and at Unglichikan (Albyn), and also the discovery of the non-refractory satellite deposit Katrin (Pioneer).

The increase in Ore Reserves is attributable to open pit Reserve expansion at Elginskoye and Unglichikan, to an increase in underground Reserves at Pioneer, and to new open pit Reserves discovered via exploration at North East Bakhmut, Katrin as well as at the Otvalnaya Zone.

The main highlights of the latest Mineral Resource, Ore Reserve and Exploration update published on 5 of March 2018 include:

§ 0.67Moz Au (c.8%) increase (before depletion)in Reserves and 1.17Moz Au (c.6%) increase (before depletion) in Resources across the Group's assets, of which c.70% is non-refractory

§ 1.17Moz increase in JORC Resources (before depletion), mainly due to successful exploration of underground and open pit targets at Pioneer and Albyn

§ 0.66Moz increase in JORC non-refractory Reserves (before depletion), mainly due to new reserves at our two flagship mines: - Pioneer (Nikolaevskaya, Katrin) - Albyn (Elginskoye and Unglichikan)

§ 16% increase in total Reserves for underground mining from 0.37Moz to 0.43Moz and a 26% increase in underlying Mineral Resources from 0.74Moz to 0.93Moz, mainly at Pioneer's North-East Bakhmut, Andreevskaya and Nikolaevskaya Zones

§ Identification of further down dip potential for underground resource and reserve expansion at Pioneer and Albyn

§ First JORC Reserves and Resources identified at the recently discovered, highly promising non-refractory deposit Katrin, within the Pioneer license area

§ Katrin ore body remains open in down-dip and western directions where exploration drilling continues; a further resource increase is expected in 2018

§ Promising early stage exploration and prospecting results at Ulgen and Sukholozhskiy, Albyn - 3km long zone of mineralisation bearing similarities with the Group's c.2.8Moz Resource Elginskoye deposit proved at Ulgen

§ High grade Sukholozhskiy Zone proved close to the Albyn pit with significant drill intersections as follows:

-

- [email protected]/t

- [email protected]/t

- [email protected]/t

- [email protected]/t

- [email protected]/t

- [email protected]/t

§ Sukholozhskiy Zone yet to be further explored and included in the Resource estimate

The tables below provide a summary and an asset-by-asset breakdown of Group Mineral Resources and Ore Reserves. Further details on Group Mineral Resources and Ore Reserve estimates and on the exploration update can be found in the 6 of March press release and Group web site.

IRC

On 27.03.2018 IRC has published its 2017 Annual Results stating the following:

"The Group has initiated the process of refinancing and obtaining an amendment and extension of its credit facilities. The amendment includes changes to the financial covenants and the repayment terms. The execution of the amendment is subject to the finalisation of required approval by the banks and documentation.

However, if the Group is unable to successfully refinance its loan facilities or the market conditions turn out to be significantly less favourable to the Group than predicted, the Group may not have sufficient working capital to finance its operations and loan repayments, resulting in its financial liquidity being adversely impacted. The Group would need to carry out contingency plans including entering into new negotiations with banks or other investors for additional debt or equity financing.

The directors of the Company consider that after taking into account the above, the Group will have sufficient working capital to finance its operations and to pay its financial obligations as and when they fall due in the foreseeable future. Accordingly, these consolidated financial statements have been prepared on a going concern basis."