Half Yearly Report

28 August 2014

Petropavlovsk PLC

Half-Year Report for the Period Ended 30 June 2014

Petropavlovsk PLC ("Petropavlovsk", the "Company" or, together with its subsidiaries, the "Group") today issues its Half-Year Report for the period from 1 January 2014 to 30 June 2014 ("H1 2014" or the "Period").

Throughout this document, year-on-year ("yoy") comparisons refer to a period versus the comparative period in the previous year.

Introducing the announcement, Peter Hambro, Chairman, said:

"The first half of 2014 was a period in which the Group continued its solid operational performance building on the progress made in 2013 and delivering on its new plan for strategic development.

Production, sales and revenue

In the first half of the year we achieved a record gold production of 306,400oz and increased our gold ounces sold by 5% yoy and, thanks to our selective forward sales activities, improved the price received by US$93/oz. This contributed to the total US$453 million of revenue.

Costs

During the same period, we achieved a 26% yoy decrease in total average cash costs to US$853/oz and a 16% yoy decrease in central administration costs to US$22.9 million.

EBITDA and pre-tax profit

As a result of the foregoing, EBITDA increased 41% to US$139.2 million and the Group produced a profit before tax of US$8 million - a welcome change from the US$615 million loss before tax recorded in H1 2013.

Cash Generation and net debt

The resulting US$104 million net operating cash flow (excluding IRC) together with a 58% reduction in capital expenditure (excluding IRC) enabled the Group to cut its net debt further. As at 30 June 2014, the Group had repaid US$142 million and its net debt totalled US$924 million.

Exploration, Resources and Reserves

At the same time, good progress was made in increasing the amount of the Group's non-refractory reserves and resources. 1.0Moz of new gold Resources were added to the Group's JORC Mineral Resource base (before depletion) and 0.5Moz to its JORC Reserves (before depletion). This more than covers the reserves depleted by production during the period.

From the previously announced 5.7Moz of non-refractory resources under the Russian Classification System, 3.1Moz of non-refractory resources and 0.82Moz of non-refractory reserves have now been converted to JORC. The JORC-based non-refractory reserves now total 4.47Moz.The work on conversion is ongoing.

The exploration success, together with the new discoveries such as those at Malomir's Berezoviy area (5m at 22g/t), gives confidence for the future.

IRC

Notwithstanding the decline in the iron ore price, our iron ore subsidiary, IRC, which is classed as an asset "held for sale", continues to make good progress. The development of its flagship, the new K&S mine, continues well and IRC expects to commence the commissioning of K&S at the end of the year. K&S is expected to quadruple IRC's production capacity with its 3.2mtpa plant and will significantly reduce costs with its forecast mine gate operating cost of US$45 per tonne.

Consolidated loss

In relation to IRC, we have recorded US$78.5 million of losses in the form of a) non-cash fair value adjustment in its carrying value on our books due to the IRC share price drop and b) its losses for the Period. The IRC impairment, together with other items, such as the US$14.8 million impairment of low grade stockpiles and US$3.9 million of impairment of certain exploration and evaluation assets, turned the Group's profit and loss account negative. However, this loss was 87% less than in the first half of 2013.

Refinancing

Our senior lenders have remained steadfast in their commitment to the Group and are willing to consider covenant relaxation as part of any refinancing, as is the Industrial and Commercial Bank of China Limited ("ICBC") which benefits from the guarantee that Petropavlovsk has given over IRC's project debt.

The process of this refinancing has required us to identify and engage with the holders of our 4.00% Guaranteed Convertible Bonds (ISIN: XS0482875811) due 15 February 2015 (the "Convertible Bonds" or "Bonds"). We believe that our efforts have identified the majority of the bondholders. Discussions with these holders have been constructive and are ongoing. The Group expects to be able to update the market more fully on this matter in the near future.

Outlook

For the full year, the Group remains on target to achieve 625,000oz of gold production at the lower end of its cost guidance range (US$900-950/oz) and, excluding the effects of any refinancing, to have its net debt reduced to c.US$850 million by the year end. From 2015, costs are expected to reduce further to c.US$750/oz, due to a major reduction in stripping volumes."

Financial highlights

· Record H1 gold production of 306,400oz

· Group revenue of US$453.0 million, down 10% yoy, mainly due to a 12% yoy decrease in the average realised gold sales price partially offset by a 5% yoy increase in gold sold

· Average realised gold sales price of US$1,386/oz (H1 2013: US$1,579/oz), including a US$93/oz positive effect resulting from contracts to forward sell gold

· A c.25% yoy decrease in TCC/oz for our hard-rock mines to US$847/oz (H1 2013: US$1,136/oz) mainly due to:

· An increase in grades processed at Albyn

· An increase in recovery rates at Pokrovskiy, Albyn and Malomir

· An increase in operational efficiencies

· A 13% depreciation of the Rouble against the US Dollar which mitigated Rouble- denominated cost inflation

· A c.16% yoy decrease in central administration expenses (from US$27.1 million in H1 2013 to US$22.9 million in H1 2014), primarily due to cost-cutting measures

· US$104 million net cash from operating activities from continuing operations, up 53% compared to H1 2013 (US$68.1 million), despite a decrease in the average realised gold price and gold production remaining at a similar level to H1 2013. The increase in net cash from operating activities was mostly due to the lower cost of production and a US$37 million reduction in working capital

· A c.41% yoy increase in underlying EBITDA

· A c.58% decrease in capital expenditure on gold projects (from US$168.8 million in H1 2013 to US$70.2 million in H1 2014), in line with the Group's strategic aim to reduce its indebtedness, focusing mainly on:

· Tailing dams and some infrastructure works at Malomir, Albyn and Pioneer

· On-going exploration of prospective areas adjacent to the main mining operations

· Restricting expenditure on the pressure oxidation ("POX") facilities to fulfilling pre-existing contractual obligations and undertaking essential maintenance work

· A c.87% yoy reduction in the total net loss for the Period (from US$742.2 million in H1 2013 to US$95.3 million in H1 2014) mainly due to the 5% increase in gold sold, a significant decrease in TCC/oz and, compared to H1 2013, much lower impairment charges

· A c.3% decrease in net debt (from US$948.4 million at 31 December 2013 to US$924 million at 30 June 2014), in line with the Group's strategy of net debt reduction and balance sheet optimisation

· Forward contracts to sell 225,446oz of gold at an average price of US$1,326/oz were outstanding as at 30 June 2014. Forward contracts to sell 163,134oz of gold at an average price US$1,314/oz were outstanding at the date of this announcement

Operational highlights

· The success of the Group's exploration programme and conversion of Russian reserves and resources into JORC resulted in the following changes to the Group's gold JORC Reserves and Resources statement during the Period:

· An increase of c.1.00Moz in total JORC Mineral Resources (before depletion)

· This includes an increase of c.0.5Moz in non-refractory Mineral Reserves (before depletion)

· These increases are attributable to the Group's core projects in the Amur region

· Promising drill hole results at Malomir's Berezoviy area - c.22g/t at 5m thickness

· In H1 2014, all mines performed in line with the Group's budget

FY 2014 outlook and update on refinancing

· 625,000oz production target for FY 2014 maintained

· FY2014 TCC/oz expected to be at the lower end of the previous guidance of US$900/oz-US$950/oz. This takes into account an expected overall increase in TCC/oz in H2 2014 compared to H1 2014 due to the forecast increase of seasonal, higher-cost, alluvial gold production in the second half of the year

· FY2014 total capital expenditure programme is unchanged and remains at c.US$100 million

· Continued target for net debt at year-end to fall to c.US$850 million, excluding any effects from the implementation of the refinancing plan

· In line with its refinancing plan, the Company has made contact with the majority of the holders of its Convertible Bonds and carried out preliminary consultations which are expected to form the basis of the Group's final proposal in respect of a refinancing, which the Company is currently developing

· The Company has also made significant progress in discussions with its senior lenders on the relaxation of certain covenants in the Group's banking facilities

· Due to the focus on net debt reduction, no interim dividend is being declared

ENQUIRIES

WEBCAST

There will be a webcast presentation followed by a question and answer session today at 10.00am. Please log onto the Company's website, www.petropavlovsk.net, to view. To ask a question, please dial +44(0)20 3139 4830 and, when prompted, please enter the confirmation number 65157842#.

FINANCIAL RESULTS SUMMARY

Note: Figures may be rounded

(a) 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 loss for the year and underlying EBITDA is set out in note 24 to the financial statements.

(b) Exceptional items are those detailed in notes 5, 6, 7 and 21 to the financial statements.

(c) Net Debt is as set out in note 22 to the financial statements. As at 30 of June 2013, 31 December 2013 and 30 June 2014, net debt excludes IRC.

Chief Executive, Sergey Ermolenko, commented:

"The first six months of 2014 demonstrated the Group's ability to alter its development plan in a short period of time and against the backdrop of a challenging business environment. This was achieved following significant changes in market conditions in the previous year and the necessity to adjust the Group's operational activities to this new situation.

We started this work last year by introducing a new strategic development plan, which outlined the postponement of the implementation of our pressure oxidation ("POX") plant and the deleveraging of the Group. In order to achieve this plan, we needed to maximise our cash flows via significant cost reduction and to optimise the balance sheet. Accordingly, we developed a cost-optimisation plan which was implemented from May 2013.

The benefit of these efforts had already started becoming apparent by the end of last year: a c.20% reduction in H2 2013 average TCC/oz compared to H1 2013 was achieved, alongside a c.25% yoy decrease in central administration costs. These decreases resulted in greater net cash generation and contributed to a reduction in our net debt position at the end of last year.

In line with our targets, H1 2014 saw the continuation of this trend: further optimisation contributed to a c.26% yoy decrease in TCC/oz and c.16% yoy decrease in central administration expenses compared to the same period last year. These factors enabled us to achieve a further c.3% decrease in our net debt position since the year end. It is important to emphasise that the reduction in net debt was notwithstanding a c.12% yoy decrease in our average realised gold sales price, which was also the main driver in a c.10% reduction in Group revenue to US$453.0 million.

The backbone of our performance lies in operational efficiencies, which ultimately resulted in a c.4% yoy increase in total gold production, in spite of a continuing decline in the contribution from the mature Pokrovskiy mine and weaker performance at Pioneer. These factors were offset by the almost doubling of production at the Albyn mine, which is now delivering on its original production targets.

The reduction in the gold price was mitigated by the Group having entered into a series of forward sales contracts. This enabled us to achieve an average realised price of gold of US$1,386/oz; above the prevailing market price for the Period. The result was a contribution of an additional US$28.8 million to cash revenue reflecting an additional US$93/oz in the average realised gold price.

The c.26% reduction in TCC/oz in H1 2014 was largely due to the cost optimisation measures and forecast improvements in recovery rates and grades at some mines. The c.13% Rouble depreciation was also beneficial to our cost-reduction programme and helped to offset some cost inflation over the period.

Though the reduction in TCC/oz and central administration costs were the most important factors aiding the Group's performance, our efforts to optimise the working capital structure and capital expenditure programme were also very important contributors to our net debt reduction.

The combined effect of our efforts resulted in a c.41% yoy increase in underlying EBITDA and a c.87% yoy reduction in net loss for the Period.

It is important to note that capital expenditure was not reduced at the expense of future mining and processing operations, but was achieved through a re-scheduling of the implementation of the POX technology and re-focusing the Group's exploration programme. No cuts were made to our maintenance programme, the main purpose of which is to ensure the stable and efficient operation of plants and equipment at all mines. 

The positive effects of our strategy of expenditure optimisation are evident in the Group's exploration activities when works focusing only on the Group's core assets were carried out resulting in a 33% yoy reduction in the FY 2013 exploration capex and a further c.6% yoy reduction in H1 2014. In spite of this, by the end of 2013 the Group was able to announce 5.7Moz of oxide material in various reserve and resource categories evaluated in accordance with the Russian Classification System. Of this 5.7Moz, during H1 2014 a total of 3.1Moz was converted into JORC-compliant Mineral Resources and 0.82Moz converted into JORC-compliant Ore Reserves of a similar or better quality.

The majority of new additions to our JORC Mineral Reserves and Ore Resources base are of non-refractory material, thus suitable for the Group's production plans for the near- to mid-term period.

The Group continues to work intensively and we are confident in our ability to build on the success of H1 2014; not only by confirming and translating additional reserves and resources from the Russian Classification System into JORC, but also by finding new, non-refractory mineralisation, exemplified by our most recent findings at Malomir's Berezoviy area. This is an area close to a known alluvial deposit, where drilling has recently identified grades of c.22g/t at 5m thickness. We are looking forward to further exploring this field, which is located only 10km from the Malomir plant.

We are not only anticipating success in relation to our exploration programme in H2 2014. Our stronger operational performance in H1 2014 enables us to look ahead with confidence at our full year production target and TCC/oz. We now expect our full-year TCC/oz guidance to be towards the lower level of our initial target, at c.US$900/oz, and we are pleased to reconfirm our production target of 625,000oz.

In H2 2014, we will continue to maintain our focus on cash flow generation and net debt reduction in order to achieve our year-end US$850 million net debt target, excluding any effects from the implementation of the refinancing which the Group is currently developing. This will be supported through a targeted c.50% decrease in total capital expenditure compared to H1 2014 and a continued focus on value-adding projects with a higher return on capital.

The hedging programme that was first implemented in 2013 gives us a stable platform from which to plan our future and, so long as uncertainty and high volatility remain, we may continue to use this sales method, should it continue to be available to us.

Our iron ore subsidiary, IRC, which is accounted for on a "held-for-sale" basis due to the status of the transactions concerning the subscription agreements with General Nice Development Limited ("General Nice") and Minmetals Cheerglory Limited ("Minmetals Cheerglory"), continues to grow and develop. Production rates in H1 2014 were above budget, which, combined with some efficiency gains, enabled IRC to mitigate part of the impact of a weaker iron ore price and the reduced by-product credit from lower ilmenite prices. Construction and development work at the larger mine, K&S, has been progressing.

More than 80% of General Nice's committed investment under the IRC subscription agreement has to date been received. Once General Nice has completed in full its Stage 2 subscription, under the terms of the subscription agreement, Minmetals Cheerglory, will also invest approximately US$30 million. We understand from IRC that it is in discussions with General Nice, Mr Cai Sui Xin (the controlling shareholder and Chairman of General Nice) and Minmetals Cheerglory about final completion."

FINANCIAL REVIEW

Financial highlights

(a) Following presentation of IRC as a discontinued operation.

(b) Reconciliation of loss for the period and underlying EBITDA is set out in note 24 to the condensed consolidated financial statements.

(c) Exceptional items are those detailed in notes 5, 6, 7 and 21 to the condensed consolidated financial statements.

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

Revenue

Physical volumes of gold production and sales

Group revenue during the Period was US$453.0 million, 10% lower than the US$505.1 million achieved in H1 2013.

Revenue from the hard-rock mines and alluvial operations was US$433.1 million, 8% lower than US$469.1 million achieved in H1 of 2013. Gold remains the key commodity produced and sold by the Group, comprising 95% of total revenue generated in H1 2014. The physical volume of gold sold increased by 5% from 297,118oz in H1 2013 to 310,695oz in H1 2014. This was offset by a 12% decrease in the average realised gold price from US$1,579/oz in H1 of 2013 to US$1,386/oz in H1 2014.

The Group sold 127,330oz ounces of silver in H1 of 2014 at an average price of US$21/oz, compared to 1,508 ounces in H1 2013 at an average price of US$32/oz.

Revenue generated as a result of third-party work by the Group's in-house service companies was US$19.9 million in H1 of 2014, a US$16.1 million decrease compared to US$36.0 million achieved in H1 2013.

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 financing contracts to sell gold forward.

Forward contracts to sell an aggregate of 188,807 ounces of gold matured during H1 2014 and contributed US$28.8 million to cash revenue and US$93/oz to the average realised gold price.

Forward contracts to sell an aggregate of 225,446 ounces of gold at an average price of US$1,326 per ounce were outstanding as at 30 June 2014. Forward contracts to sell an aggregate of 163,134 ounces of gold at an average gold price of US$1,314 per ounce are outstanding as at the date of this announcement.

Impairment review

Impairment of mining assets

The Group undertook an impairment review of the tangible assets attributable to the gold mining projects and the supporting in-house service companies and concluded no further impairment was required as at 30 June 2014.

Impairment of exploration and evaluation assets

The Group performed a review of its exploration and evaluation assets and recorded US$3.9 million non-exceptional impairment charges against associated exploration and evaluation costs previously capitalized within intangible assets following the decision to suspend exploration at various licence areas, primarily located in the Amur region.

Impairment of ore stockpiles

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

Exceptional items

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

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

Underlying EBITDA and analysis of operating costs

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

Hard-rock mines and alluvial operations

This Period, hard-rock mines and alluvial operations generated underlying EBITDA before exceptional items of US$165.4 million compared to US$125.9 million underlying EBITDA in H1 2013.

The average total cash costs per ounce for the Group decreased from US$1,157/oz in H1 2013 to US$853/oz in H1 2014. Total cash costs for hard-rock mines decreased from US$1,136/oz in H1 2013 to US$847/oz in H1 2014, primarily reflecting the effect of cost optimisation measures undertaken by the Group in response to the declining gold price environment, improvement in recovery rates at Pokrovskiy, Malomir and Albyn, increase in grades processed at Albyn and Rouble depreciation. The decrease in total cash costs resulted in a net US$94.5 million positive contribution to the underlying EBITDA compared to H1 2013. The decrease in the average realised gold price from US$1,579/oz in H1 2013 to US$1,386/oz in H1 2014, partially offset by the increase in physical ounces sold, reduced the aforementioned positive effect from the improvement of the total cash costs by US$55 million.

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

Compared with H1 2013 there was some inflation of Rouble denominated costs, in particular, electricity costs increased by up to 5%, cost of chemical reagents decreased by up to 15%, cost of diesel increased by up to 11% and consumables prices increased by up to 11%. The impact of Rouble price inflation was mitigated by the 13% average depreciation of the Rouble against the US Dollar, with the average exchange rate for the period going from 31.0 Roubles per US Dollar in H1 2013 to 35.0 Roubles per US Dollar in H1 2014.

Refinery and transportation costs are variable costs dependent on the production volume and comprise about 0.5% of the gold price. Mining tax is also a variable cost dependent on the production volume and the gold price realised. The mining tax rate is 6%.

(a) Excluding deferred stripping

Central administration expenses

The Group has corporate offices in London, Moscow and Blagoveschensk which together represent the central administration function. Central administration expenses decreased by US$4.2 million from US$27.1 million in H1 2013 to US$22.9 million in H1 2014, primarily reflecting cost cutting measures undertaken by the Group.

IRC

The following transactions occurred subsequent to 31 December 2013 until the date of this announcement in connection with investment in IRC by General Nice Development Limited and Minmetals Cheerglory Limited:

· On 26 February 2014, IRC received subscription monies of HK$155.1 million (approximately US$20.0 million) from General Nice and accordingly allotted and issued 165,000,000 new shares to General Nice as a further partial subscription of General Nice Further Subscription Shares; and

· On 30 April 2014, IRC received subscription monies of HK$155.1 million (approximately US$20 million) from General Nice and accordingly allotted and issued 165,000,000 new shares to General Nice as a further partial subscription of General Nice Further Subscription Shares.

IRC are currently working together with General Nice and Minmetals to agree on a timely funding plan for the completion of the remaining HK$529 million (approximately US$68 million) share subscriptions.

As at 30 June 2014, the Group's interest in the share capital of IRC Limited was 45.39% (31 December 2013: 48.7%, 30 June 2013: 51.16%). As at 30 June 2014 and 31 December 2013, the Group is still considered to retain a sufficiently dominant voting interest to exercise de facto control over IRC on the basis of the size of the Group's shareholding and the relative size of the shareholding interests owned by other shareholders.

Assuming General Nice and Minmetals exercise their subscription rights in full, the Group's interest in the share capital of IRC will be diluted to 40.68% and, with another significant shareholder block in place, the Group will lose control over IRC and IRC will cease to be a subsidiary of the Group.

The dilution is expected to be completed within 12 months after the reporting date and, accordingly, IRC continues to be classified as "held for sale" and presented separately in the balance sheet as well as presented as a discontinued operation in the income statement.

This Period, the Group recorded US$25.9 million operating losses before exceptional items in relation to IRC and recognised US$18.1 million impairment against its Kuranakh mining assets.

The Group also recorded a further US$34.5 million write-down to adjust the carrying value of IRC's net assets to fair value less costs to sell based on IRC's share price of HK$0.67 as at 30 June 2014 and reflect the change in the market share price of IRC share.

Interest income and expense

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

Interest expense for the Period was comprised of US$12.6 million effective interest on the Convertible Bonds and US$30.2 million interest on bank facilities. A further US$6.4 million of interest expense was capitalised as part of mine development costs within property, plant and equipment (H1 2013: US$9.7 million).

Taxation

The Group is subject to corporation tax under the UK, Russia and Cyprus tax legislation. The average statutory tax rate for H1 2014 was 22% in the UK and 20% in Russia.

This Period, the Group made corporation tax payments in aggregate of US$19.0 million in Russia (H1 2013: corporation tax payments in aggregate of US$17.8 million in Russia).

Loss per share

Basic loss per share for H1 2014 was US$0.10 compared to US$2.98 basic loss per share for H1 2013. The key factor affecting the basic loss per share was the decrease of net loss for the period attributable to equity holders of Petropavlovsk PLC from US$585.4 million for H1 2013 to US$17.8 million for H1 2014.

The total number of Ordinary Shares in issue as at 30 June 2014 was 197,638,425 (30 June 2013: 187,860,093).

Financial position and cash flows

Key movements in cash and net debt from continuing operations

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

· The partial processing of ore stockpiles and reduction of mining costs at Pioneer and Malomir which contributed US$14.6 million and US$6.8 million, respectively, to the aggregate US$20.3 million decrease in ore stockpiles; and

· A US$17.3 million decrease in stores and spares

As at 30 June 2014 there were no undrawn facilities available to the continuing operations.

Capital expenditure

The Group spent an aggregate of US$70.2 million on its gold projects compared to US$168.8 million invested in H1 2013. The key areas of focus this period were on fulfilling existing contractual commitments in relation to POX, expansion of the tailing dams at Pioneer and Albyn and on-going exploration related to the areas adjacent to the ore bodies of the main mining operations.

Foreign currency exchange differences

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

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

The Group recognised foreign exchange losses of US$5.4 million in H1 2014 (H1 2013: foreign exchange losses of US$7.2 million) arising primarily on Russian Rouble denominated net monetary assets and GB Pounds Sterling denominated net monetary liabilities.

Going concern

Following the significant decline in the gold price in the course of 2013 and subsequent revision of the Group's plans in 2013, in the absence of refinancing the Group will breach covenants in its banking facilities at 31 December 2014. In addition the US$310.5 million outstanding Convertible Bonds are due for repayment in February 2015 and the Group does not currently have sufficient committed facilities or available funds to refinance this debt.

As explained in the Chairman's Statement, the Group has initiated a refinancing plan which includes negotiating with the Group's senior lenders and ICBC (on the relaxation of the covenants in banking facilities) and refinancing its Convertible Bonds. Based on the negotiations conducted to date, the Directors have a reasonable expectation that the Group will receive sufficient relaxation or waivers of the relevant financial covenants in its banking facilities to avoid breaching those and will refinance its Convertible Bonds maturing in February 2015.

The Directors have concluded that the combination of these circumstances represents a material uncertainty that casts significant doubt upon the Group's ability to continue as a going concern and that, therefore, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business. Nevertheless, after making enquiries and considering the uncertainties described above, the Directors have a reasonable expectation that the refinancing will be concluded successfully and the Group will therefore have adequate resources to continue in operational existence for the foreseeable future, being at least the next 12 months from the date of approval of the 2014 Half-Year Report and the condensed consolidated interim financial statements. Accordingly, they continue to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial statements.

OPERATIONS REPORT

Operational highlights:

Production:

· Record H1 gold production of 306,400oz

· The Group remains on track to achieve its full-year production target of 625,000oz

Total cash costs:

· A 26% decrease in total average cash costs to US$853/oz compared to H1 2013 (US$1,157/oz)

· A decrease in total cash costs across all mines compared to H1 2013: Pioneer by 14% to US$793/oz Pokrovskiy by 42% to US$795/oz, Malomir by 33% to US$1,032/oz and Albyn by 35% to US$843/oz

· FY2014 TCC/oz expected to be at the lower end of the previous guidance of US$900/oz-US$950/oz

Summary of gold production and total cash costs

Note: Figures may not add up due to rounding

PIONEER

Pioneer produced approximately 124,300oz in H1 2014, in line with the mine plan. This was less than the comparative period in 2013 primarily due to a scheduled decrease in grades.

Mining and Processing

During H1 2014, the western section of the Andreevskaya pit and pit 6.3 at NE Bakhmut were completed and backfilling of these pits commenced. The pushback of the western wall of Andreevskaya East and the north wall of pit 6.2 at NE Bakhmut commenced and mining continued at pit 6.1 at NE Bakhmut. Mining of soft oxidized ores was intensified in pit 1 and the southwest flank of pit 2 in order to achieve a suitable blend to maintain throughput at the plant, which operated in line with the Group's forecast. Low-grade ore for feed to both the heap leach and the processing plant commenced at pit 7 at the end of Q2 2014.

Costs

Total cash costs for Pioneer for H1 2014 were US$793/oz, a reduction of 14% on the comparative period in 2013 (US$922/oz) as a result of the cost-optimisation programme and lower volumes of high-cost ore from stockpiles being processed through the plant compared to the same period in 2013.

Outlook for H2 2014

The Group's mine plan for Pioneer for H2 2014 provides for a decrease in processed grades (by c.10% compared to H1 2014). This decrease is forecast to be reflected in slightly lower production from this mine in the second half of the year compared to the first half. Production from the mine's heap leach is scheduled to increase in line with the seasonality of this operation.

In H2 2014, ore from existing stockpiles sent to the processing plant is expected to be double that in H1 2014.

The stripping ratio at Pioneer in H2 2014 is budgeted to be at the same level as in H1 2014.

Mining of pit 6.1 at NE Bakhmut is scheduled to be completed in H2 2014. As this pit has a high stripping ratio, the total material moved at Pioneer is scheduled to decrease.

POKROVSKIY

The Group's oldest mine produced approximately 30,300oz of gold in H1 2014. Although less than the amount produced in the comparative period in 2013 (36,600oz), this was in line with the Group's mine plan.

Mining and Processing

The majority of mining undertaken during the Period at Pokrovskiy was at the Pokrovka-2 deposit and the Zeyskoye zone in the northwest part of the Pokrovka-1 pit. The bottom of the Pokrovka-1 pit was completed in Q1. At Burinda, a high-grade satellite deposit, work concentrated on opening the ore body in the Central 1 zone. All of the ores mined at Burinda during the Period were stockpiled on site for delivery to the Pokrovskiy plant.

In H1 2014, the principal sources of feed for the Pokrovskiy RIP plant were the Pokrovka 1 and Pokrovka 2 pits, stockpiles and ore from Burinda which were mined in 2013. In addition, stockpile 5 was a major source of ore for processing through the mine's heap-leaching facility.

Costs

Total cash costs for Pokrovskiy for H1 2014 were US$795/oz, a reduction of 42% on the comparative period in 2013 (US$1,372/oz) due to the success of the Group's cost-optimisation programme, and a 12% increase in recovery rates.

Outlook for H2 2014

Average head grades through the Pokrovskiy plant in H2 2014 are forecast to stay at approximately the same level as in H1 2014. Consequently, the Group is forecasting H2 2014 gold production from Pokrovskiy to be similar to H1 2014 production but with the addition of production from the mine's seasonal heap-leach facility.

During H2 2014, it is expected that the stripping ratio at Pokrovskiy will decrease by c.50% compared to H1 2014.

The principal sources of ore for feed to the plant are scheduled to be the Zeyskoye zone in the northwest part of the Pokrovka-1 pit, stockpiles and ore from Burinda, which are scheduled to be transported to Pokrovskiy in Q4 2014.

MALOMIR

Malomir produced approximately 46,800oz of gold in H1 2014, an increase of c.22% on the amount produced in H1 2013 (38,500oz).

Mining and Processing

During the Period, the Quartzitovoye pit 1 and Quartzitovoye pit 2 were mined, with the former also completed during the Period. In addition, three prospective ore zones were opened at the Magnetitovoye pit and small volumes were extracted from the Ozhidaemoye and Sukhonyr deposits.

Costs

Total cash costs for Malomir for H1 2014 were US$1,032/oz, a reduction of 33% on the comparative period in 2013 (US$1,547/oz) due to implementation of the Group's cost-optimisation programme and a 9% increase in recovery rates.

Outlook for H2 2014

In H2 2014, Malomir head grades are scheduled to be c.25% higher than in H1 2014. However, due to an increase in the stripping ratio, less ore is expected to be mined at Malomir than in H1 2014. Consequently, production at Malomir in H2 2014 is forecast to be similar to that in H1.

ALBYN

In H1 2014, Albyn produced approximately 97,300oz, a 90% increase on the 51,100oz produced in H1 2013.

Mining and Processing

In H1 2014 mining was concentrated on the eastern part of the Central pit. Both overburden stripping and ore extraction were carried out on the lower benches of the pit. On the uppermost two benches, the north pit wall was pushed back on the west and east sides in preparation for mining in H2 2014 and in 2015 respectively.

The ore zones in the east of the Central pit are generally narrower and more difficult to mine. Consequently, the ore mined in H1 had a lower grade than that to be mined in H2 2014.

At present, the west zone of the Central pit is being mined, exposing the wider (40-50m) ore bodies.

The volume of lower grade mined and processed in H1 2014 was partially compensated for by the additional tonnages of ore being processed in the plant. This ore came from low grade ore stockpiles (0.6-0.8g/t).

Costs

Total cash costs for Albyn for H1 2014 were US$843/oz, a reduction of 35% on the comparative period in 2013 (US$1,293/oz) as a result of the Group's cost-optimisation programme and a 55% increase in processed grades.

Outlook for H2 2014

In H2 2014, a slight increase in the stripping ratio at Albyn is forecast. This is expected to be offset by a scheduled c.20% increase in grades to be processed through the mill, resulting in slightly higher production in H2 compared to H1.

The recovery rate of the processing plant is expected to remain high at approximately 93-95%, reflecting the metallurgical properties of the ore at Albyn.

ALLUVIAL OPERATIONS

During the Period, the Group's alluvial operations produced 7,700oz, a decrease of 69% on the comparative period in H1 2013 (24,600oz). This decrease in production was expected due to the sale of Berelekh in Q4 2013.

Alluvial mining, the washing of gold-bearing gravels, can only be conducted during the warmer months of the year, with operations running typically from April to November. Consequently, alluvial production is expected to be significantly higher in H2 than in H1. The Group is targeting to produce approximately 25,000oz from its alluvial operations in H2 2014.

PROJECT DEVELOPMENT

Pressure oxidation (POX) Hub

In line with the Group's plans, in H1 2014 work on the Group's pressure oxidation processing hub ("POX Hub") was conducted solely to fulfil existing contracts and undertake essential maintenance work. This resulted in an approximate 49% reduction in capital expenditure for the POX Hub to US$29.6 million compared to H1 2013 (US$58 million) and the Group is anticipating a further reduction in H2 2014.

A detailed action plan prepared in 2013 was implemented to preserve equipment at completed sections of the plant and to keep facilities on standby so that full scale development can be recommenced in the future.

In H1 2014, the following work was conducted at the POX Hub: acid treatment of autoclave and flash tank inner lining, installation of agitators, work on the framework and cladding to the neutralisation building and filtration building, the construction of the water cooling system, electrical works in the autoclave building and work on the air separation columns.

INTERIM RESERVE AND RESOURCE STATEMENT

Hard rock Reserves and Resources

The successful exploration programme conducted on areas at, close to or adjacent to the Group's operational mines resulted in an increase in both Mineral Resources and Ore Reserves.

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

Note: Figures may not add up due to rounding

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

Note: Figures may not add up due to rounding

A summary of gold resources for the Group's Mineral resources is shown below. .

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

A summary of gold Mineral Resources for the Group's core assets, which comprises Pioneer, Pokrovskiy, Malomir, Albyn and Burinda, is provided in the table below. These resources are included in the table above and are not additional.

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

Asset-by-asset breakdown of Ore Reserves

Notes: 

(1) All Group Ore Reserves are for open pit extraction and are reported within economical pit shells;

(2) Reserve cut off grade for reporting varies from 0.3 to 0.7g/t Au, depending on the asset and processing method;

(3) Figures may not add up due to rounding.

(4) Ore Reserves estimates for Alexandra (Pioneer), Burinda (part of Pokrovskiy), Unglichikanskoye and Elginskoye (Albyn) as well as Magnetitovoye (Malomir) were prepared in 2014 in accordance with JORC Code (2012). Ore Reserve estimates for all other zones were originally prepared in 2010-2012, before the JORC Code (2012) came into force, thus follow the guidelines of the JORC Code (2004). Apart from depletion, resource models for these areas have not changed since their preparation as there has been no material exploration of these areas during 2013 and 2014. Therefore, Ore Reserves for all other zones are reported in accordance with JORC Code (2004). Going forward, the Group intends to follow the JORC Code (2012) guidelines for the preparation of all new estimates and maintain the JORC (2004) estimates for the areas where no additional exploration has occurred, thus leaving Mineral Resources unchanged or changed only as a result of depletion.

Asset-by-asset breakdown of Mineral Resources