Petropavlovsk PLC 2019 Annual Results and Q1 2020 Production Update

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Petropavlovsk PLC 2019 Annual Results and Q1 2020 Production Update

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RNS Number : 0475O

Petropavlovsk PLC

27 May 2020

27 May 2020

Petropavlovsk PLC

Annual Results for the Year Ended 31 December 2019 and Q1 2020 Production Update

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 2019, as well as its Q1 2020 production / sales update and guidance for 2020.

The financial and operational highlights of both trading periods are as follows:

2019 Financial Highlights

 
                                           31-Dec-19   31-Dec-18   % Change 
--------------------------------  ------  ----------  ----------  --------- 
 Total gold produced                koz      517.3       422.3       +22% 
 Total gold sold                    koz      514.0       369.6       +39% 
 Total Cash Costs (..) 
  [1]                              $/oz       749         678        +10% 
 All-in Sustaining Costs 
  (..)                             $/oz      1,020       1,079       (5%) 
 Avg. realised gold price 
  (..)                             $/oz      1,346       1,263       +7% 
--------------------------------  ------  ----------  ----------  --------- 
 Group revenue (including 
  non-precious operations)          $m       741.6       499.8       +48% 
 Underlying EBITDA (..)             $m       264.8       182.7       +45% 
 Operating profit                   $m       115.4       126.6       (9%) 
 Profit for the year                $m        25.7        25.9      (0.8%) 
 Capital expenditure (..)           $m       103.8       134.4      (23%) 
 Cash generated from operations 
  before working capital 
  changes                           $m      25 0.5       162.3       +54% 
 Cash generated from operations     $m       189.3       329.8      (43%) 
 (Net debt (..) ) / cash            $m      (561.3)     (568.0)      (1%) 
 

-- Total gold production increased 22%: full year guidance met, with 517.3koz of gold produced (2018: 422.3koz), including 45.7koz produced from third-party concentrates (2018: none)

-- Total gold sales increased 39%: 514.0koz (2018: 369.6koz)

-- Average realised gold price (..) increased 7%: $1,346/oz (2018: $1,263/oz) for the year, including a $61/oz loss from hedging (2018: $9/oz hedging loss)

-- Cash generated from operations before changes in working capital increased 54% : reflecting the increase in physical sales and higher gold price

-- Group revenue (including non-precious operations) increased 48%: $741.6m (2018: $499.8m) reflecting higher production volumes and a higher average gold sales price

-- Underlying EBITDA (..) increased 45%: $264.8m (2018: $182.7m)

-- Profit for the year marginally decreased by 0.8%: to $25.7m (2018: $25.9m) reflecting higher impairment reversals in 2018 and reduced interest capitalisation in 2019 following POX completion as well as the impairment of the Company's holding in IRC Ltd. ("IRC") amounting to $23.4m, as a consequence of the potential disposal of the investment

-- Total Cash Costs (TCC (..) ) were at the lowest end of downward revised guidance: $749/oz (2018: $678/oz) following cost containment and the smooth ramp-up of the POX Hub despite being higher year-on-year due to the costs associated with the ramp-up of the POX Hub and Malomir flotation and cost inflation, partially mitigated by higher grades and recoveries and Rouble depreciation

-- All-in Sustaining Costs (AISC (..) ) declined 5%: $1,020/oz (2018: $1,079/oz) assisted by an impairment reversal of ore stockpiles and increase in physical ounces sold

-- Cash generated from operations decreased 43%: $189.3m (2018: $329.8m) primarily reflecting changes in working capital, including an increase in inventory of third-party flotation concentrate purchases for processing and reduced gold prepay finance of $ 23.6 m (2018: $ 163. 8m)

-- Net debt reduction (..) : $561.3m (2018: $568.0m), the small reduction reflects an improvement in liquidity, offset by an increase in issued debt following convertible bond refinancing

-- Capital expenditure (..) decreased 23%: $103.8m (2018: $134.4m) with expenditure associated with the construction of the POX Hub largely completed

COVID-19 Response and Update

Health and safety update

-- There have been very few cases registered in the Amur region which is a sparsely populated area roughly equivalent to half the size of France

-- Petropavlovsk's mining operations and POX Hub are naturally isolated away from population centres, and the Group has implemented measures in each operating jurisdiction to meet Government guidelines which are appropriate to the specific needs of each location, including its head offices

-- High-level management actions taken include:

- An emergency response team has been formed to limit the spread COVID-19 at the Group's Companies. Members of the response team are working in co-operation with local authorities, when and if, required;

- The response team includes representatives from each of the Group's businesses in Russia, and coordinators have been appointed at each location who are responsible for preventative and counteractive measures; and

- Group business travel has been restricted and the Company's Moscow and London offices have been closed until further notice, with written permission required to enter buildings

-- Employee and community actions taken include:

   -    Mine shift patterns have been adjusted to lower the frequency of new teams arriving onsite; 

- Before commencing each shift, employees and contractors are required to undertake 14 days quarantine in four purpose-built camps, with virus testing on arrival and before moving to the sites;

   -    Medical infra-red thermometers are used daily to take the temperature of employees; 

- Designated isolation zones have been set up to house any individuals showing flu-like symptoms;

- In addition to the recommended hygiene measures, a comprehensive site awareness campaign is being carried out; and

- Awareness programmes targeting the local community have also been put in place, and the Company is supporting local businesses and the community through the distribution of masks and hand sanitisers

-- As a result, there have been no cases of COVID-19 amongst Petropavlovsk employees

Legislative update

-- In response to the COVID-19 outbreak, the Russian Government has been introducing a wide range of measures including non-work period (from which Petropavlovsk is exempt as a continuous process organisation). It has also expanded the authority of regional heads to set further specific measures relevant for their regions;

-- While the non-work period was officially lifted by the Federal government, most regional authorities are maintaining the restrictions;

-- Other measures include certain tax, credit and reporting holidays which are of benefit to certain suppliers to the Group's business; and

-- Petropavlovsk has been included in the most recently revised Federal list of Russia's systemically important companies. Additionally, the JSC Pokrovskiy Mine (including Pioneer), LLC Albynskiy Rudnik (Albyn) and LLC Malomirskiy Rudnik (Malomir) companies have been identified as being strategically important to the Amur Region. This entails more stringent oversight by the Federal authorities and local Ministry of Economic Development as well as the executive branch of local government, and the Company believes this reduces the risk of business interruption

Logistics and sales update

-- The Company continues to monitor its supply chain and is putting in place all necessary precautions to ensure business continuity;

-- While the Central Bank of Russia has temporarily suspended gold purchases, commercial banks in Russia continue to buy gold bullion and the Company continues to sell gold through Russian commercial banks; and

-- The Company also can export gold bullion and confirms that it has the necessary licences in place required to export gold for sale outside of Russia, and that it has shipped gold to the UK and Switzerland from 2020

Corporate Developments

Debt refinancing

-- As at 31 December 2019, the Company's debt amounted to $609m, comprising of $500m of guaranteed notes (8.125% coupon, maturing November 2022) and $125m of convertible bonds ($109m at amortised cost, 8.25% coupon, maturing July 2024)

-- The Board is actively considering a number of liability management options with the aim of reducing the Company's leverage and cost of debt

Hedging and price protection (gold and FX)

-- The previous Gold hedging programme was entered into at the bank's request at a low level of gold prices using gold forwards contracts, which did not allow for participation in higher prices and which expired 31 Dec 2019

-- Commencing April 2020, the Company entered into the following arrangements (maturing in Dec 2021):

o Zero cost collar with a RUB:USD price floor of RUB75.0 and a cap of RUB96.2 on average for US$7m a month to secure the preferred exchange rate of RUR/USD for funding of Group's RUB operating expenses

o Zero cost collar with a gold price floor of $1,600/oz and a cap of $1,832/oz for 3.5koz a month to secure the preferred level of the gold price while leaving the upside for the gold price increase

-- The Company's hedging policy is being reviewed, taking into account current gold price increase trend and Group's Viability analysis

Gazprombank gold sales and liquidity agreement

-- Gazprombank has approved a gold prepays limit of c.392koz, valid through to the end of May 2024, allowing it to receive cash prepay for 70% of the price of the gold for a period up to 24 months

-- This will allow the Company to receive gold prepays not exceeding in total 33.9bn RUR (c.US$470m)

-- Advances to be settled using proceeds at the prevailing gold price at the date of shipment

Capital allocation and dividend policy

-- Building on the Company's recent strong operational and financial performance, the Company aims to update its capital allocation policy in line with the Company's goal to balance between deleveraging, capital investment and return to shareholders

-- This policy is currently under review and a further statement will be made in due course

Development Highlights

Construction of a new flotation facility at Pioneer

-- Construction of a new two-line flotation facility at Pioneer commenced in 2019 to double the Group's refractory ore processing capacity from 3.6Mtpa to 7.2Mtpa

-- All key equipment items required to complete construction of the facility have arrived in Russia notwithstanding the COVID-19 related lockdown measures, and completion remains on schedule for Q4 2020 commissioning

Albyn Elginskoye mine development

-- Pre-production work undertaken in 2019 included extensive in-fill drilling to increase the accuracy of near and medium-term mining plans and the completion of construction of a c.30km all season road between Albyn and Elginskoye

-- Waste stripping activity remains on schedule for first production in H2 2020 to coincide with the cessation of mining at the Albyn open pit

2019 Reserves & Resources Update

-- As at 31 December 2019, the Company's internal estimate of total Group Mineral Resources (including Reserves) amounted to 21.03Moz of gold, compared to 20.52Moz at the end of 2018, with total Reserves also increasing from 8.21Moz to 8.46Moz net of depletion

-- An estimated c.0.5Moz was depleted through mining activities in 2019 which were more than replaced through the conversion of Resources to Reserves predominantly at the Albyn Elginskoye and Malomir Quartzitovoye deposits as a result of successful exploration completed during 2019

-- An independently audited estimate is expected to be published during Q3 2020

Corporate Matters

Refinancing of IRC's project finance facility with Gazprombank

-- In March 2019, Petropavlovsk shareholders approved the Company's proposal to guarantee $240m of debt facilities with Gazprombank, on behalf of IRC Limited ("IRC")

-- The new Gazprombank facilities enabled IRC to fully repay an outstanding project finance facility with the Industrial and Commercial Bank of China Limited ("ICBC"), together with repayment to Petropavlovsk of a bridge loan and guarantee fee

-- The guarantee structure of the new facility is on more favourable terms than the ICBC facility, providing IRC with a more manageable repayment schedule in line with the ramp up of its K&S mining operations

New $125m convertible bond offering and redemption of $100m convertible bonds due 2020

-- In June 2019, the Company announced the redemption of its $100m convertible bonds maturing 2020 and successful placement of new 5-year $125m convertible bonds maturing 2024

-- The new convertible bonds carry a lower coupon of 8.25% and provide for a longer maturity profile

Credit agencies rating upgrades

-- In August 2019, Fitch Ratings upgraded its Long-Term Issuer Default Rating and senior unsecured rating to 'B-' from 'CCC' with a Positive Outlook

-- In October 2019, S&P Global Ratings upgraded Petropavlovsk's Outlook to Positive, affirming its B- rating and highlighting the progress which the Company has made over the past 12 months

Subsequent Events

Appointment of new Chief Financial Officer

-- Danila Kotlyarov was appointed as Chief Financial Officer on 1 February 2020, replacing Alexey Dubynin. He was subsequently appointed to the Board as an Executive Director on 21 April 2020

-- Mr Kotlyarov holds a BA in Management from Moscow State University and a MA in International Economics from the Moscow State Institute of International Relations (MGIMO)

-- He is a fellow member of the Association of Chartered Certified Accountants (ACCA), Chartered Financial Analyst (CFA) and a member of Hong Kong and Russia Associations of Financial Analysts

New major shareholder and appointment of Non-Executive Director

-- Following its purchase of Aeon Mining Ltd's shareholding, announced on 5 February 2020, Uzhuralzoloto Group of Companies ("UGC") became Petropavlovsk's largest shareholder

-- UGC is a leading privately-owned Russian gold producer with established mining operations and development assets located in Chelyabinsk Region, Krasnoyarsk Territory and the Republic of Khakassia

-- Mr Maxim Kharin, Chief Financial Officer and Chairman of the Board at UGC was nominated to the Board of Petropavlovsk, with his appointment reviewed by the Nominations Committee and approved by the Board, and became a Non-Executive Director on 21 April 2020

Preliminary Agreement with Stocken Board AG for the proposed termination of the IRC guarantees with disposal of 29.9% IRC shareholding

-- On 18 March 2020, Petropavlovsk entered into a preliminary agreement with Stocken Board AG, that may lead to the Company's disposal of a 29.9% shareholding in IRC for $10m, contingent on the termination and release of Petropavlovsk from all loan guarantees given to Gazprombank in relation to IRC

Promotion to the FTSE 250 Index

-- On 23 March 2020, the Company joined the FTSE 250 Index, which is expected to increase its stock market profile and share trading liquidity

Option to acquire outstanding 25% interest in TEMI LLC

-- In May 2019, Petropavlovsk entered into an option agreement with Agestinia Trading Limited, exercisable up to 21 May 2021, to acquire 25% of TEMI LLC (TEMI) and to increase the Company's ownership to 100%

-- TEMI holds licences (c.1,000km(2) ) relating to substantial non-refractory as well as refractory reserves and resources located near to the Albyn mine and processing plant, one of the Company's principal mining operations

-- Non-refractory reserves are expected to be suitable for processing through Albyn's processing plant and are scheduled to become the main feed source once mining operations at Albyn are exhausted during 2020. First production from Elginskoye is planned in H2 2020

-- The Company will review the possibility of exercising its option over the year ahead

Change of external auditor

-- Following a competitive tender process overseen by the Board's Audit Committee, PricewaterhouseCoopers LLP ("PwC") has been invited to become the Company's statutory external auditor commencing the year ending 31 December 2020

-- PwC's appointment is subject to shareholder approval at the forthcoming Annual General Meeting, due to be held on 30 June 2020

-- Deloitte LLP, having been the Company's auditors since 2009, will resign following completion of the audit for the year ended 31 December 2019

2020 Guidance

-- Production: on track to meet the full year target of 620 - 720koz Au in 2020 based on Q1 2020 production

-- Costs: TCC .. guidance of $700 - $800/oz excluding third parties concentrate as the pricing of concentrate depends on highly volatile gold price

-- Capital expenditure: expected to range from $70m to $80m in 2020 which includes completion of the Pioneer flotation plant, sustaining capital expenditure (..) and exploration costs

Q1 2020 Operational Highlights

Gold production

-- 73% increase in gold produced to 186.2koz (Q1 2019: 107.7koz), of which 115.4koz (62%) came from processing refractory gold at the POX Hub

 
 Production by Asset (koz)           Q1 2020   Q1 2019 
----------------------------------  --------  -------- 
 JSC Pokrovskiy Mine                  110.7     21.9 
   Pioneer                            26.4      21.9 
   Third party concentrate            84.2        - 
    (POX Hub) 
 LLC Malomirskiy Rudnik (Malomir)     35.2      44.5 
 LLC Albynskiy Rudnik (Albyn)         40.4      41.3 
----------------------------------  --------  -------- 
 Total Group                          186.2     107.7 
----------------------------------  --------  -------- 
 

Responsible Business in Q1 2020

-- Zero fatal accidents during the quarter among Group's employees and contractors

-- 25% improvement in the Group's Lost Time Injury Frequency Rate ("LTIFR") to 0.98 (Q1 2019: 1.31)

-- As a result of the Group's increased emphasis on ESG practices, there was a significant improvement in environmental performance metrics

-- On a per ounce gold produced basis, a measure of intensity, improvements included:

   -    49% decline in greenhouse gas ("GHG") emissions; 
   -    52% reduction in energy consumption; and 
   -    11% improvement in water consumption 
 
 Metric                           Units         Q1 2020   Q1 2019 
-------------------------  ------------------  --------  -------- 
 LTIFR (1)                          -            0.98      1.31 
 GHG emissions              Tonne CO(2) e/oz     0.57      1.14 
 Water consumption              m(3) /oz         45.5      51.4 
 Energy consumption               GJ/oz           6.7      13.9 
 Environmental incidents 
  (2)                            Number            0         0 
-------------------------  ------------------  --------  -------- 
 
   (1)   LTIFR excludes contractors 

(2) Environmental incidents denotes Category 2 (moderate) and Category 3 (serious) environmental incidents

-- During the quarter, fire safety audits were held across the Group's operations in preparation for the high alert season

-- Anti-Bribery and Speak-up policies were approved and adopted as part of the Company's strengthened approach to Business Ethics and Human Rights

-- In March 2020, a public consultation on the Environmental Impact Assessment of the Katrin pit at Pioneer was held and was attended by representatives of local communities, an NGO and local administration staff

IRC Update

IRC is a vertically integrated iron ore concentrate producer in the Russian Far East, listed on the Hong Kong Stock Exchange (ticker: 1029.HK). Petropavlovsk is a major IRC shareholder (31.1%) and acts as guarantor for IRC's $240m loan facility with Gazprombank. In accordance with IAS 28, IRC is treated as an investment in associate.

The following selected summary is based on the IRC Annual Results for the year ended 31 December 2019.

FY 2019 Financial Highlights

-- Revenue (after hedging) increased 17% to $177.2m (2018: $151.5m)

-- EBITDA (excluding currency movements) increased 39% to $33.3m (2018: $23.9m)

-- Net loss of $38.7m (2018: Profit of $68.2m)

-- During 2019, a total of $30.9m was paid to Gazprombank as principal and interest in relation to the $240m loan facilities, of which c. $225m was outstanding at the end of 2019

FY 2019 Operations Highlights

-- K&S operated at 81% capacity in 2019, producing a record 2,576kt of iron ore concentrate (2018: 2,235kt)

-- Sales increased 11% to 2,464kt (2018: 2,224kt)

-- Refinancing of ICBC loan completed, with new Gazprombank facilities, providing longer repayment terms in line with the ramp up of its K&S mining operations

In addition to the full year 2019 results, the following selected summary is based on IRC's Q1 2020 trading update for the three months ended 31 March 2020.

Q1 2020 Operations Highlights

-- K&S operated at c.86% of designed capacity, producing a record 671kt of iron ore concentrate (Q1 2019: 523kt)

-- Sales increased 26% to 663kt (Q1 2019: 527kt)

-- Q1 2020 iron ore prices remained stable with the 65% Fe averaging $103 per tonne, $5 per tonne higher than Q4 2019, with the price spread between high-grade and low-grade iron ores widening at the time of the announcement

-- Weakness in the Russian Rouble has had a positive impact on IRC's operating margins

Balance Sheet

-- During Q1 2020, $9.8m was paid to Gazprombank as principal and interest in accordance with the repayment schedule

-- As at 31 March 2020, IRC's total debt outstanding was $219.4m

COVID-19

-- No material impact on IRC's operations from COVID-19 outbreak, with measures taken to support prevention of COVID-19 at its operations

For further details of both announcements, please refer to http://www.ircgroup.com.hk/en/index.php

CEO's Statement

"In 2019 Petropavlovsk made significant steps towards its strategic goals of becoming one of the leading gold producers in Russia and creating shareholder value through modern proven technologies based on our industry-leading research and development capabilities. The smooth and efficient ramp up of the POX Hub resulted in a substantial increase in gold production and cash flow from our assets. This significantly strengthened our balance sheet alongside the refinancing of our convertible bonds and IRC loan facilities.

This transformative year demonstrated that our POX technology can produce profitable ounces from some of the most challenging ores in Russia. The Company's significant investment in this area is now bearing fruit and our POX Hub (which is one of only two pressure oxidation facilities in Russia) has accounted for c.35% of our total production last year. Our POX Hub successfully produced ounces not only from Malomir concentrates, but also from high-grade third-party refractory concentrates from other parts of Russia and Kazakhstan demonstrating the capability to efficiently process the country's abundant refractory ores, placing the Company in a very competitive position.

The foundation for our future organic growth will come from the significant investment in and development of our producing assets. During 2019, Pioneer saw the commencement of construction of its flotation circuit which will transform the mine as it moves to mining the significant refractory ores on this licence area. Optimisation of the Malomir flotation plant has improved the scale of our production as well as the quality and grade of our concentrates, while Albyn has seen significant investment in accessing the Elginskoye deposit, which comes on stream as the current open pit reaches the end of its life.

Beyond the operational upturn from our assets, Petropavlovsk has also substantially strengthened its Board with the appointment of Charlotte Philipps and Katia Ray as independent non-executive directors, ensuring the composition of our Board fully complies with the strictest codes of UK and international Governance.

These positive developments in 2019 have assisted Petropavlovsk's intention to deliver value to all of its stakeholders, which saw the start of the re-rating process of its equity and debt during the second half of 2019 and into 2020, which has seen your Company re-established as a constituent of the FTSE 250 index.

Despite our many successes in 2019, there are still a number of challenges ahead. Maintaining the health and safety of all our employees in the face of the COVID-19 global pandemic is of critical importance. By harnessing the dedication and skills of our employees, the careful management of our reserve and resource base of over 21Moz of gold, and maintaining the momentum of relieving the pressure of our debt liabilities on our balance sheet through delivering strong growth in cash flows and profitability, I and the Board remain confident that Petropavlovsk will continue to build a growing and sustainable business for many years to come."

Sustainability Day

Petropavlovsk is planning a Sustainability Workshop to be held in London during Q3 2020. The event will focus on the Company's long track record of sustainability reporting, current initiatives and future targets.

Results Webcast

A presentation will be webcasted today at 08:30am BST and can be accessed via this URL, from which a recording will also be made available: https://www.lsegissuerservices.com/spark/Petropavlovsk/events/32b4a71b-2d68-4be5-ad8b-557a374c11d8

Enquiries

Please visit www.petropavlovsk.net or contact:

 
 Petropavlovsk PLC                               +44 (0) 20 7201 8900 
  Patrick Pittaway / Max Zaltsman / Viktoriya     TeamIR@petropavlovsk.net 
  Kim 
 Peel Hunt LLP 
  Ross Allister / David McKeown / Alexander 
  Allen                                          +44 (0) 20 7418 8900 
 Canaccord Genuity Limited 
  Henry Fitzgerald-O'Connor / James Asensio      +44 (0) 20 7523 8000 
 Buchanan                                        +44 (0) 20 7466 5000 
  Bobby Morse / Kelsey Traynor / Ariadna          POG@buchanan.uk.com 
  Peretz 
 

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 2019 or 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 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.

FY 2019 CFO Statement

Note: Figures may not add up due to rounding

Financial Highlights

 
                                                              2019   2018(c) 
------------------------------------------  -------------  -------  -------- 
 Gold produced                                  '000oz       517.3     422.3 
 Gold sold                                      '000oz       514.0     369.6 
 Group revenue                               US$ million     741.6     499.8 
 Average realised gold price 
  (u)                                           US$/oz      1 ,346     1,263 
 Average LBMA gold price afternoon 
  fixing                                        US$/oz       1,393     1,269 
 Total Cash Costs (u) (a), (c)                  US$/oz         749       678 
 All-in Sustaining Costs (u) 
  (b), (c)                                      US$/oz      1,0 20    1, 079 
 All-in Costs (u) (b)                           US$/oz      1, 103     1,332 
 Underlying EBITDA (u) (c)                   US$ million     264.8     182.7 
 Operating profit                            US$ million     115.4    126 .6 
 Profit before tax                           US$ million      52.9      82.4 
 Profit for the year                         US$ million      25.7      25.9 
 Profit for the year attributable 
  to equity shareholders of Petropavlovsk 
  PLC                                        US$ million      26.9      24.5 
 Basic profit per share                          US$         0.0 1      0.01 
 Cash generated from operations 
  before working capital changes             US$ million     250.5     162.3 
 Net cash from operating activities          US$ million     95 .4    264 .2 
------------------------------------------  -------------  -------  -------- 
 
   (a)   Calculation of Total Cash Costs (u) ("TCC") is set out in the section Hard rock mines below. 

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

(c) Following a review of the nature of the deferred stripping costs the Group has made a reclassification of deferred stripping costs balance from the Inventory balance into the Mining assets within Property, plant and equipment. Comparative information on TCC, AISC and EBITDA for 2018 have been re-calculated accordingly to reflect the effect of the aforementioned re-classification.

 
                               31 December   31 December 
                                      2019          2018 
                               US$ million   US$ million 
---------------------------   ------------  ------------ 
 Cash and cash equivalents            48.2          26.2 
 Notes (c)                         (500.4)       (499.0) 
 Convertible bonds (d)             (109.1)        (95.2) 
 Net Debt (u)                      (561.3)       (568.0) 
----------------------------  ------------  ------------ 
 
   (d)   US$500 million Guaranteed Notes due on 14 November 2022 at amortised cost. 
   (e)   US$125 million convertible bonds due on 03 July 2024 at amortised cost. 

Revenue

 
                                        2019         2018 
                                 US$ million  US$ million 
------------------------------   -----------  ----------- 
Revenue from hard rock mines           692.6        470.7 
Revenue from other operations           49.0         29.1 
-------------------------------  -----------  ----------- 
                                       741.6        499.8 
 ------------------------------  -----------  ----------- 
 

Group revenue during the period was US$741.6 million, 48% higher than the US$499.8 million achieved in 2018.

Revenue from hard rock mines during the period was US$692.6 million, 47% higher than the US$470.7 million achieved in 2018. Gold remains the key commodity produced and sold by the Group, comprising 93% of total revenue generated in 2019. The physical volume of gold sold from hard rock mines increased by 39% from 369,611oz in 2018 to 514,005 oz in 2019. The average realised gold price (u) increased by 7% from US$1,263/oz in 2018 to US$1,346/oz in 2019. The average realised gold price (u) includes a US$(61)/oz effect from hedge arrangements (2018: US$(9)/oz).

Hard rock mines sold 56,568oz of silver in 2019 at an average price of US$15/oz, compared to 54,746oz in 2018 at an average price of US$15/oz.

Revenue generated as a result of third-party work by the Group's in-house service companies was US$49.0 million in 2019, a US$19.9 million increase compared to US$29.1 million in 2018. 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$45.1 million in 2019 compared to US$25.1 million in 2018.

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 230,000oz of gold matured during the 2019 and resulted in a US$(31.5) million net cash settlement by the Group (2018: US$(3.4) million net cash settlement paid by the Group on forward contracts to sell an aggregate of 200,000oz of gold).

The Group constantly monitors the gold price and hedges some portion of production as considered appropriate. All forward contracts were realized in 2019 and the Group had no open hedge positions as at 31 December 2019.

Underlying EBITDA (u) and analysis of operating costs

 
 
                                                    2019          2018 
                                             US$ million   US$ million 
------------------------------------------  ------------  ------------ 
 Profit for the year                                25.7          25.9 
 Add/(less): 
 Net (impairment reversals )/ impairment 
  losses on financial instruments                 (30.8)          28.6 
 Investment and other finance income               (8.8)         (3.8) 
 Interest expense                                   59.9          29.5 
 Net other finance losses/(gains)                   42.2        (10.2) 
 Foreign exchange losses/(gains)                    20.8         (8.5) 
 Taxation                                           27.2        56 . 5 
 Depreciation                                      137.8       14 2. 0 
 Impairment of exploration and evaluation 
  assets                                               -          12.2 
 (Reversal of impairment)/impairment of 
  ore stockpiles                                   (2.8)          18.0 
 Impairment of gold in circuit                       0.1           2.1 
 Reversal of impairment of mining assets 
  and in-house service                            (52.2)       (101.7) 
 Share of results of associate (c)                  45.7         (8.1) 
 Underlying EBITDA (u)                             264.8         182.7 
------------------------------------------  ------------  ------------ 
 
 

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

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

 
 
                                 2019          2018 
                          US$ million   US$ million 
-----------------------  ------------  ------------ 
 Pioneer                       53 . 3       6 4 . 0 
 Pokrovskiy                         -         (0.5) 
 Malomir                      104 . 2        48 . 3 
 Albyn                       1 49 . 3       104 . 8 
-----------------------  ------------  ------------ 
 Total Hard rock mines        306 . 8       216 . 8 
                             ( 41 . 9      (3 4 . 0 
 Corporate and other                )             ) 
 Underlying EBITDA (u)       2 64 . 8      1 82 . 7 
-----------------------  ------------  ------------ 
 
 

Hard rock mines

During this period, the hard rock mines generated Underlying EBITDA (u) of US$306.8 million compared to US$216.8 million Underlying EBITDA (u) in 2018.

Total Cash Costs (u) for hard rock mines increased from US$678/oz in 2018 to US$749/oz in 2019. The increase in TCC (u) primarily reflects the effect of inflation of certain Rouble denominated costs, costs associated with the ramp-up of the POX Hub and Malomir flotation, application of the full 6% mining tax rate at Pioneer and progressive increase in mining tax rate to 1.2% at Albyn and Malomir. This effect was partially mitigated by higher grades of non-refractory ore processed at Pioneer, Albyn and Malomir and higher recoveries achieved at Pioneer and Malomir as well as by the effect of Rouble depreciation. The increase in physical ounces sold from 369,611oz in 2018 to 514,005oz in 2019 resulted in US$84.4 million increase in the Underlying EBITDA (u) . The increase in the average realized gold price (u) from US$1,263/oz in 2018 to US$1,346/oz in 2019 contributed to a further US$42.7 million increase in the Underlying EBITDA (u) . This effect was partly mitigated by the increase in TCC (u) with US$(36.5) million effect on the Underlying EBITDA (u) .

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 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 2018 there was ongoing inflation of certain Rouble denominated costs, in particular, electricity costs increased by 3% in Rouble terms (no changes in US Dollar terms) and the cost of diesel increased by 12% in Rouble terms (increased by 8% in US Dollar terms). The Rouble depreciated against the US Dollar by 3% in 2019 compared to 2018, with the average exchange rate for the year of RUB64.69 : US$1 in 2019 compared to RUB62.68 : US$1 in 2018, somewhat mitigating the effect of Rouble denominated costs inflation.

Refinery and transportation costs are variable costs dependent on production volume. Mining tax is also a variable cost dependent on production volume and the gold price realised. The Russian statutory mining tax rate is 6%. Under the Russian Federal Law 144-FZ dated 23 May 2016 that introduced certain amendments to the Russian Tax Code, taxpayers who are participants in Regional Investment Projects ("RIP") have the right to apply the reduced mining tax rate provided certain conditions are met. LLC Malomirskiy Rudnik and LLC Albynskiy Rudnik met eligibility criteria and applied 1.2% mining tax rate in 2019 while JSC Pokrovskiy Rudnik applied full mining tax rate in 2019, resulting in US$15.9 million mining tax expense compared to nil in 2018 when 0% mining tax rate was applied by the Group.

 
                                                  2019                2018 
                                           ------------------ 
                                            US$ million     %   US$ million     % 
----------------------------------------   ------------  ----  ------------  ---- 
 Staff cost                                     8 3 . 2    21          62.8    24 
                                                            2 
 Materials                                      8 6 . 6     2          87.4    34 
                                                            1 
 Flotation concentrate purchased                   74.0     9             -     - 
 Fuel                                           4 3 . 3    11          39.9    16 
 Electricity                                      34. 0     8          25.9    10 
                                                            1 
 Other external services                         42 . 3     1          17.9     7 
 Other operating expenses                         32. 0     8          21.8     9 
                                                395 . 5   100         255.7   100 
 ----------------------------------------  ------------  ----  ------------  ---- 
 Movement in ore stockpiles, gold 
  in circuit , bullion in process 
  , limestone and flotation concentrate          ( 34 . 
  attributable to gold production                   2 )               (8.6) 
-----------------------------------------  ------------  ----  ------------  ---- 
                                                 3 61 . 
 Total operating cash expenses                        4               247.1 
-----------------------------------------  ------------  ----  ------------  ---- 
 
 
                                                  Hard rock mines                         2019      2018 
                                     ------------------------------------------ 
                                            Pioneer       Malomir         Albyn          Total     Total 
                                                US$           US$           US$            US$       US$ 
                                            million       million       million        million   million 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
Revenue 
Gold                                          223.2         239.4         229.1          691.7     466.7 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
Including: 
Gold from 3d parties concentrate               62.9             -             -           62.9         - 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
Silver                                          0.5           0.3           0.1            0.9       0.8 
Flotation concentrate                             -             -             -              -       3.2 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
                                              223.7         239.6         229.3          692.6     470.7 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
Expenses 
                                                                          7 5 .           3 61 
Operating cash expenses                     15 8 .2       12 8 .1             0            . 4     247.1 
Refinery and transportation                     0.3           0.3           0.3            0.9       0.6 
Other taxes                                     1.5           4.2           1.9            7.6       6.2 
Mining tax                                     10.3           2.8           2.9           15.9         - 
                                                                           48 .           1 35 
Depreciation                                 41 . 2        46 . 5             1            . 9     141.6 
R eversal of impairment                                                                  (42.8 
 of mining assets                            (42.8)             -             -              )    (83.0) 
Impairment of exploration 
 and evaluation assets                            -             -             -              -      12.2 
Impairment/(reversal of 
 impairment) of ore stockpiles 
 and gold in circuit                            0.6           0.7         (4.0)          (2.7)      20.1 
                                                           18 2 .          12 4          476 . 
Operating expenses                          16 9. 4             7           . 2              3     344.9 
Result of precious metals                                   5 6 .          105.          216 . 
 operations                                  54 . 3             9             1              3     125.8 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
 
Add/(less): 
                                                                           48 .           1 35 
Depreciation                                 41 . 2        46 . 5             1            . 9     141.6 
R eversal of impairment                                                                  (42.8 
 of mining assets                            (42.8)             -             -              )    (83.0) 
Impairment of exploration 
 and evaluation assets                            -             -             -              -      12.2 
Impairment/(reversal of 
 impairment) of ore stockpiles 
 and gold in circuit                            0.6           0.7         (4.0)          (2.7)      20.1 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
                                                            104 .          1 49          306 .     216 . 
Segment EBITDA (u) (..)                      53 . 3             2           . 3              8         8 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
 
Physical volume of gold 
 sold, oz                                   163,398       179,791       170,817        514,005   369,611 
Including: 
Physical volume of g old 
 sold from 3d parties concentrate, 
 oz                                          42,442             -             -         42,442         - 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
 
Cash costs 
                                                                          7 5 .           3 61 
Operating cash expenses                     15 8 .2       12 8 .1             0            . 4     247.1 
Refinery and transportation                     0.3           0.3           0.3            0.9       0.6 
Other taxes                                     1.5           4.2           1.9            7.6       6.2 
Mining tax                                     10.3           2.8           2.9           15.9         - 
                                             17 0 .        1 3 5.          80 .          38 5.     2 5 4 
Operating cash costs                              3             4             0              8        .0 
Deduct: co-product revenue                    (0.5)         (0.3)         (0.1)          (0.9)     (0.8) 
Deduct: cost of flotation 
 concentrate                                      -             -             -              -     (2.6) 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
                                             1 69 .        1 35 .          79 .          384 . 
Total Cash Costs (u)                              9             2             9              9   2 5 0.6 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
Including: 
Total cash costs from 3d 
 parties concentrate                           53.4             -             -           53.4         - 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
 
TCC (u) , US$/oz                             1,0 40           752           468            749       678 
-----------------------------------  --------------  ------------  ------------  -------------  -------- 
 
 
 
   All-in Sustaining Costs (u)   and All-in Costs (u) 

AISC (u) (..) decreased from US$1,079/oz in 2018 to US$1,020/oz in 2019. The decrease in AISC (u) primarily reflects reversal of impairment of non-refractory ore stockpiles at Albyn as well as increase in physical ounces sold in 2019 with an aggregate of sustaining exploration and capital expenditures related to the existing mining operations and underground mining projects at Pioneer and Malomir, Malomir flotation plant, and capitalized stripping expenditure during the period remaining at approximately the same level as in 2018. This effect was partially offset by the increase in TCC.

AIC (u) decreased from US$1,332/oz in 2018 to US$1,103/oz in 2019, reflecting the decrease in AISC (u) explained above, decrease in Capital Expenditure (u) in relation to the POX project, with POX Hub commissioned during the period and Pioneer flotation plant in development, as well as no perspective stripping expenditure capitalized in the period.

 
                                             Hard rock mines                      2019      2018 
                                  -------------------------------------- 
                                      Pioneer      Malomir         Albyn         Total     Total 
                                          US$          US$           US$           US$       US$ 
                                      million      million       million       million   million 
--------------------------------  -----------  -----------  ------------  ------------  -------- 
 
Physical volume of gold 
 sold, oz                             163,398      179,791       170,817       514,005   369,611 
                                  -----------  -----------  ------------  ------------ 
 
                                       1 69 .         1 35          79 .         384 . 
Total Cash Costs (u)                        9          . 2             9             9   2 5 0.6 
 
TCC (u) , US$/oz                       1,0 40          752           468           749       678 
--------------------------------  -----------  -----------  ------------  ------------  -------- 
 
Impairment/(reversal of 
 impairment) of ore stockpiles 
 and gold in circuit                      0.6          0.7         (4.0)         (2.7)      20.1 
--------------------------------  -----------  -----------  ------------  ------------  -------- 
Adjusted operating costs                170.4        135.9          75.9         382.3    270 .7 
 
Central administration 
 expenses                                16.7         18.4          17.5          52.5      39.2 
Capitalised stripping                    14.5         12.7             -          27.1      33.0 
Close down and site restoration           0.2          0.2           0.6           1.1       1.2 
Sustaining exploration 
 expenditures                             4.0          0.1           0.0           4.1      18.5 
Sustaining Capital Expenditure 
 (u)                                     16.9         16.5          23.9          57.2      36.1 
--------------------------------  -----------  -----------  ------------  ------------  -------- 
All-in Sustaining Costs 
 (u)                                    222.7        183.7         117.9         524.3    398 .7 
--------------------------------  -----------  -----------  ------------  ------------  -------- 
 
All-in Sustaining Costs 
 (u) , US$/oz                           1,363        1,022           690         1,020    1, 079 
--------------------------------  -----------  -----------  ------------  ------------  -------- 
 
Exploration expenditure 
 (u)                                      0.7          1.1           8.4          10.1       3.1 
Capital Expenditure (u)                  22.2         10.2             -          32.4      76.7 
Capitalised stripping                       -            -             -             -      14.0 
All-in Costs (u)                        245.5        195.0         126.3         566.8     492.5 
--------------------------------  -----------  -----------  ------------  ------------  -------- 
 
All-in Costs (u) , US$/oz               1,503        1,085           739         1,103     1,332 
--------------------------------  -----------  -----------  ------------  ------------  -------- 
 
 
 

Corporate and other

Corporate and other operations contributed US$(41.9) million to Underlying EBITDA (u) (..) in 2019 compared to US$(34.0) million in 2018. Corporate and other operations primarily include central administration function, the results of in-house service companies and related charges, and the Group's share of results of its associate IRC.

The Group has corporate offices in London, Moscow and Blagoveshchensk, which together represent the central administration function. Central administration expenses increased by US$13.3 million from US$39.2 million in 2018 to US$52.5 million in 2019.

The Group recognised US$12.0 million share of IRC losses and a further US$23.4 million impairment of investment in IRC (2018: US$15.5 million share of profit generated by IRC, including US$28.1 million effect from partial reversal of impairment at K&S mine and US$(5.7) million impairment of investment in IRC). IRC contributed US$10.3 million to the Group's Underlying EBITDA (u) in 2019.

Impairment review

Impairment of mining assets

The Group undertook a review of impairment indicators and impairment reversal indicators of the tangible assets attributable to its gold mining projects and supporting in-house service companies. Detailed calculations of recoverable amounts, which are value-in-use calculations based on discounted cash flows, were prepared which concluded no impairment was required as at 31 December 2019 and 2018.

Having considered the excess of estimated recoverable amounts over the carrying values of the associated assets on the statement of financial position as at 31 December 2019 and taking into consideration removed uncertainty connected with the timing of the final construction and performance of the POX hub, the Directors concluded on the following:

- A reversal of impairment previously recorded against the carrying value of the assets that are part of the Pioneer CGU would be appropriate. Accordingly, a pre-tax impairment reversal of US$43.5 million (being a post-tax impairment reversal of US$34.8 million) has been recorded against the associated assets within property, plant and equipment. The aforementioned impairment reversal takes into consideration the effect of depreciation attributable to relevant mining assets and intra-group transfers of previously impaired assets to Pioneer.

- A further reversal of impairment previously recorded against the carrying value of the assets of the supporting in-house service companies would be appropriate. Accordingly, a pre-tax impairment reversal of US$9.4 million (being a post-tax impairment reversal of US$7.8 million) has been recorded against the associated assets within property, plant and equipment. The aforementioned impairment reversal takes into consideration the effect of depreciation attributable to relevant assets and intra-group transfers of previously impaired assets.

As at 31 December 2018, the Group recognised impairment reversals at the Malomir and Albyn CGUs of US$83.0 million (US$66.4 million post-tax) and US$18.7 million (US$15.2 million post-tax), respectively.

The key assumptions which formed the basis of forecasting future cash flows and the value in use calculation are set out below:

 
                                      2019           2018 
---------------------------  -------------  ------------- 
 Long-term real gold price     US$1,400/oz    US$1,300/oz 
 Discount rate (a)                    7.0%           8.5% 
 RUB : US$ exchange rate      RUB66 : US$1   RUB67 : US$1 
---------------------------  -------------  ------------- 
 

(a) Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 8.7% (2018: 12.5%)

Impairment of exploration and evaluation assets

As at 31 December 2019, the Group performed a review of its exploration and evaluation assets and concluded no impairment was required (31 December 2018: the Group performed a review of its exploration and evaluation assets and concluded to suspend exploration at the Flanks of Malomir and surrender the relevant licences. An aggregate impairment charge of US$12.2 million was recorded against associated exploration and evaluation assets).

As at 31 December 2019, all exploration and evaluation assets in the statement of financial position related to the areas adjacent to the existing mines with ongoing drilling and technical studies being performed.

Investment and other finance income

 
                                     2019         2018 
                              US$ million  US$ million 
---------------------------   -----------  ----------- 
  Investment income                   3.2          3.8 
  Guarantee fee income (a)            5.6            - 
---------------------------   -----------  ----------- 
                                    8 . 8          3.8 
 ---------------------------  -----------  ----------- 
 

(a) Guarantee fee income under Gazprombank Guarantee arrangements, as set out in section "Corporate activities" below .

The Group recognised US$1.8 million interest income on loans granted and US$1.4 million interest income on cash deposits with banks.

 
                                 2019         2018 
                          US$ million  US$ million 
-----------------------   -----------  ----------- 
  Interest expense               71.6         62.8 
  Interest capitalised         (12.3)       (33.7) 
  Other                           0.6          0.4 
------------------------  -----------  ----------- 
                                 59.9         29.5 
 -----------------------  -----------  ----------- 
 

Interest expense for the year comprised US$42.0 million of effective interest on the Notes, US$ 13.0 million of effective interest on the Convertible Bonds, US$16.0 million of interest on prepayments on gold sale agreements and US$0.6 million interest on finance lease (2018: US$41.9 million of effective interest on the Notes, US$12.6 million of effective interest on the Convertible Bonds, US$1.1 million of effective interest on bank facilities and US$7.2 million of interest on prepayments on gold sale agreements).

As the Group continued with completion of the POX Hub, this project met eligibility criteria for borrowing costs capitalisation under IAS 23 "Borrowing Costs". US$12.3 million of interest expense was capitalised within property, plant and equipment (2018: US$33.7 million interest capitalised within property, plant and equipment ). With all four autoclaves of the POX Hub now fully functional, interest capitalisation in relation to POX Hub ceased in December 2019, with increase in net interest expense from December 2019 onwards. Construction of the flotation line at Pioneer met eligibility criteria for borrowing costs capitalization with relevant interest to be capitalized going forward.

Net other finance gains/ ( losses )

Net other finance losses for the year totalled US$(42.2) million compared to US$10. 2 million of net other finance gains in 2018. Key elements of other finance gains and losses this period include:

- US$ (31.1) million fair value loss from re-measurement of the conversion option of the convertible bonds;

- US$(11.2) million loss on repurchase of the Existing Bonds as set out in section "Corporate activities" below;

- US$3.6 million gain from re-measurement of receivable from IRC under ICBC Guarantee arrangements to fair value as set out in section "Corporate activities" below;

- US$(2.0) million fair value loss on the call option to acquire 25% interest in the Group's subsidiary LLC TEMI from its current shareholder as set out in section "Corporate activities" below;

   -      US$(1.5) million net loss on other items. 

Net impairment reversals/(impairment losses) on financial instruments

In 2019, the Group recognised US$2.3 million revesal of impairment of financial assets (2018: US$3.2 million impairment losses of financial assets) and net of US$28.5 million reversal of provision for expected credit losses under Gazprombank and ICBC guarantee arrangements (2018: US$25.5 million provision for expected credit losses under ICBC guarantee arrangements), as set out in section "Corporate activities" below.

Taxation

 
 
                       2019         2018 
                US$ million  US$ million 
 -------------  -----------  ----------- 
  Tax charge           27.2         56.5 
--------------  -----------  ----------- 
 

The Group is subject to corporation tax under the UK, Russia and Cyprus tax legislation. The statutory tax rate for 2019 was 19.0% in the UK and 20% in Russia. Under the Russian Federal Law 144-FZ dated 23 May 2016 taxpayers who are participants in Regional Investment Projects ("RIP") have the right to apply the reduced corporation tax rate over the period until 2027, subject to eligibility criteria. In 2019 and 2018, LLC Albynskiy Rudnik has received tax relief as a RIP participant and was entitled to the reduced statutory corporation tax rate of 17%. In 2019 LLC Malomirskiy Rudnik has received tax relief as a RIP participant and was entitled to the reduced statutory corporation tax rate of 17%.

The tax charge for the year arises primarily related to the Group's gold mining operations and is represented by a current tax charge of US$29.7 million (2018: US$19.9 million) and a deferred tax credit, which is a non-cash item, of US$2.4 million (2018: deferred tax charge of US$36.6 million). Included in the deferred tax credit in 2019 is a US$20.4 million credit (2018: US$30.6 million charge) 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$32.7 million in Russia (2018: corporation tax payments in aggregate of US$5.0 million in Russia).

Earnings per share

 
                                                     2019             2018 
---------------------------------------  ----------------  --------------- 
  Profit for the year attributable to 
   equity holders of Petropavlovsk PLC   US$ 26.9 million  US$24.5 million 
  Weighted average number of Ordinary 
   Shares                                   3,309,193,559    3,305,069,755 
  Basic profit per ordinary share                US$0.0 1         US$0.0 1 
---------------------------------------  ----------------  --------------- 
 

Basic profit per share for 2019 was US$0.01 (2018: basic profit per share was US$0.01). The total number of Ordinary Shares in issue as at 31 December 2019 was 3,310,210,281 (31 December 2018: 3,307,151,712).

Financial position and cash flows

 
                             31 December  31 December 
                                    2019         2018 
                             US$ million  US$ million 
---------------------------  -----------  ----------- 
 Cash and cash equivalents          48.2         26.2 
 Notes (a)                       (500.4)      (499.0) 
 Convertible bonds (b)           (109.1)       (95.2) 
 Net Debt (..)                   (561.3)      (568.0) 
---------------------------  -----------  ----------- 
 
   (a)   US$500 million Guaranteed Notes due on 14 November 2022 at amortised cost. 
   (b)   US$125 million convertible bonds due on 03 July 2024 at amortised cost. 
 
                                                      2019         2018 
                                               US$ million  US$ million 
---------------------------------------------  -----------  ----------- 
Net cash from operating activities                   95 .4        264.2 
Net cash used in investing activities (c)         ( 84 .7)    ( 233 .5) 
Net cash from/(used in) financing activities           8.9       (13.0) 
---------------------------------------------  -----------  ----------- 
 
   (c)   Including US$103.8 million Capital Expenditure (u) (2018: US$134.4 million). 

Key movements in cash and Net Debt (u)

 
                                                                             Net Debt 
                                                     Cash         Debt            (u) 
                                              US$ million  US$ million    US$ million 
--------------------------------------------  -----------  -----------  ------------- 
 As at 1 January 2019                                26.2      (594.2)      (568.0) 
 Net cash generated by operating activities 
  before working capital changes                  250 . 5 
 Decrease in working capital (d)                   (61.2) 
 Corporation tax paid                              (32.7) 
 Capital Expenditure (u)                          (103.8) 
 Capitalized stripping                             (27.1) 
 Repayment of loans granted to an associate          56.2 
 Issue of Bonds, net of transaction 
  costs                                             120.6      (107.8) 
 Repurchase of the Existing Bonds                 (108.0)         96.8 
 Interest accrued                                               (55.0) 
                                                   (67.2) 
 Interest paid                                        (e)         50.7 
 Payment for the call option to acquire 
  non-controlling 25% interest in the 
  Group's subsidiary LLC TEMI                      (13.0) 
 ICBC Guarantee fee                                   6.0 
 Interest received                                    3.3 
 Other                                              (1.6) 
 As at 31 December 2019                              48.2      (609.5)      (561.3) 
 -------------------------------------------  -----------  -----------  ----------- 
 
 

(d) Including an aggregate of US$187.4 million advance payments received from Gazprombank and Sberbank outstanding as at 31 December 2019. Advance payments are to be settled against physical delivery of gold produced by the Group in regular intervals over the period of up to twelve months from the reporting date based on the sales price prevailing at delivery that is determined with reference to LBMA fixing.

(e) Including US$16.0 million interest paid in relation to advance payments from Gazprombank and Sberbank.

Capital Expenditure (u) (..)

The Group invested an aggregate of US$103.8 million in 2019 compared to US$134.4 million in 2018. The key areas of focus in 2019 were on the POX project completion, exploration and development to support the underground mining at Pioneer and Malomir, expansion of tailings dams at Pioneer and Albyn and ongoing exploration related to the areas adjacent to the ore bodies of the Group's main mining operations. The Group capitalised US$12.3 million of interest expense incurred in relation to the Group's debt into the cost of the POX Hub, Malomir flotation and Pioneer flotation (2018: US$33.7 million into the cost of the POX Hub and Malomir flotation).

 
                                    Exploration   Development        Total 
                                    expenditure   expenditure        CAPEX 
                                                    and other          (u) 
                                                    CAPEX (u) 
                                    US$ million   US$ million  US$ million 
---------------------------------  ------------  ------------  ----------- 
 POX(a)                                       -          17.1           17.1 
 Pioneer (b),(c)                            4.7          29.9           34.6 
 Malomir(d), (e)                            1.2          14.1           15.2 
 Albyn(f)                                   8.4          21.6           30.0 
 Corporate and in-house services              -           6.9            6.9 
                                           14.2          89.6          103.8 
 --------------------------------  ------------  ------------  ------------- 
 
 

(a) Including US$17.1 million of development expenditure in relation to the POX Hub which is considered to be non-sustaining Capital Expenditure (u) for the purposes of calculating AISC (u) and AIC (u) .

(b) Including US$8.8 million of expenditure in relation to the underground mining project at Pioneer to be sustaining Capital Expenditure (u) for the purposes of calculating AISC (u) and AIC (u) .

(c) Including US$ 15.2 million development expenditure in relation to the Pioneer flotation (including tailing dams) to be non-sustaining Capital Expenditure for the purposes of calculating the AISC (u) and AIC (u) .

(d) Including US$2.8 million of development expenditure in relation to the underground mining project at Malomir to be sustaining Capital Expenditure (u) for the purposes of calculating AISC (u) and AIC (u) .

(e) Including US$8.2 million of development expenditure in relation to Malomir flotation (including tailing dams), which is considered to be sustaining Capital Expenditure (u) for the purposes of calculating AISC (u) and AIC (u) .

(f) Including US$10.1 million of development expenditure in relation to Albyn tailing dams and US$5.3 million in relation to road between Elginskoye and Albyn processing facilities, which are considered to be sustaining Capital Expenditure for the purposes of calculating AISC and AIC.

Foreign currency exchange differences

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

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

 
                                  31 December  31 December 
                                         2019         2018 
-------------------------------   -----------  ----------- 
  GB Pounds Sterling (GBP:US$)           0.75         0.78 
  Russian Rouble (RUB: 
   US$)                                 61.91        69.47 
--------------------------------  -----------  ----------- 
 

The Rouble recovered by 11% against the US Dollar during 2019, from RUB69.47: US$1 as at 31 December 2018 to RUB61.91: US$1 as at 31 December 2019. The average year-on-year depreciation of the Rouble against the US Dollar was approximately 3%, with the average exchange rate for 2019 being RUB64.69: US$1 compared to RUB62.68: US$1 for 2018. The Group recognised foreign exchange losses of US$21 million in 2019 (2018: gains of US$8.5 million) arising primarily on Rouble denominated net monetary assets.

Corporate activities

Guarantee over IRC's external borrowings and refinancing of IRC's project finance facility

The Group historically entered into an arrangement to provide a guarantee over its associate's, IRC, external borrowings, the ICBC Facility ('ICBC Guarantee'). At 31 December 2018 the principal amounts outstanding subject to the ICBC guarantee were US$169.6 million. Under the terms of the arrangement the Group was entitled to receive an annual fee equal to 1.75% of the outstanding amount, which amounted to US$0.6 million during the period (2018: US$4.0 million).

In March 2019, IRC has refinanced the ICBC Facility through entering into a US$240 million new facility with Gazprombank ('Gazprombank Facility'). The facility was fully drawn down during the year ended 31 December 2019 and was used, inter alia, to repay the amounts outstanding under the ICBC Facility in full, the two loans provided by the Group in the equivalent of approximately US$57 million and part of the guarantee fee of US$6 million owed by IRC to the Group in respect of the guarantee of the ICBC Facility. At 31 December 2019 the remaining outstanding contractual guarantee fee was US$5.0 million, which had a corresponding fair value after provision for credit losses of US$4.4 million and is payable by IRC no later than 31 December 2020 (31 December 2018: outstanding contractual guarantee fee of US$10.3 million with a corresponding fair value after provision for credit losses of US$6.8 million).

A new guarantee was issued by the Group over part of the Gazprombank Facility ('Gazprombank Guarantee'), the guarantee mechanism is implemented through a series of five guarantees that fluctuate in value through the eight-year life of the loan, with the possibility of the initial US$160 million principal amounts guaranteed reducing to US$40 million within two to three years, subject to certain conditions being met. For the final two years of the Gazprombank Facility, the guaranteed amounts will increase to US$120 million to cover the final principal and interest repayments. If certain springing recourse events transpire, including default on a scheduled payment, then full outstanding loan balance is accelerated and subject to the guarantee. The outstanding loan principal was US$225 million as at 31 December 2019. Under the Gazprombank Guarantee arrangements, the guarantee fee receivable is determined at each reporting date on an independently determined fair value basis, which for the year ended 31 December 2019 was estimated at the annual rate of 3.07% for 2019 by reference to the average outstanding principal balance under Gazprombank Facility. The guarantee fee charged for 2019 was US$5.6 million, with corresponding value of US$5.0 million after provision for expected credit losses

The following assets and liabilities have been recognised in relation to the ICBC Guarantee and Gazprombank Guarantee as at 31 December 2019 and 31 December 2018:

 
                                                  31 December   31 December 
                                                         2019          2018 
                                                  US$ million   US$ million 
-----------------------------------------------  ------------  ------------ 
 Other receivables - ICBC Guarantee                      4 .4           6.8 
 Other receivables - Gazpombank Guarantee                 5.0             - 
 Financial guarantee contract - ICBC Guarantee              -        (37.4) 
 Financial guarantee contract - Gazpombank          ( 8 . 9 )             - 
  Guarantee 
-----------------------------------------------  ------------  ------------ 
 

The following gains and losses resulting from the aforementioned transactions were recognised during the period:

 
                                                               2019 
                                                        US$ million 
-----------------------------------------------------  ------------ 
 Fair value change on ICBC Guarantee fee receivable             3.6 
 Gazpombank Guarantee fee for the year                          5.0 
 De-recognition of liability under ICBC Guarantee 
  arrangements                                                 37.4 
 Recognition of liability under Gazpombank Guarantee 
  arrangements                                                (8.9) 
 Interest on loans advanced to IRC                              1.8 
 Reversal of provision for expected credit losses 
  following repayment of loans advanced to IRC                  3.2 
-----------------------------------------------------  ------------ 
                                                               41.1 
-----------------------------------------------------  ------------ 
 

Option to acquire non-controlling 25% interest in LLC TEMI

In May 2019, the Group entered into the option contract to acquire non-controlling 25% interest in LLC TEMI, holder of licenses for the Elginskoye Ore Field and Afanasievskaya Prospective Ore Area, from its shareholder Agestinia Trading Limited for an aggregate consideration of US$60 million (adjusted to US$53.5 million if certain conditions are met). The option premium payable is US$13 million, which was paid during the year ended 31 December 2019. The exercise period of the option is 730 days from 22 May 2019.

The Group employed an independent third-party expert to undertake the valuations of the underlying 25% interest in LLC TEMI and the call option. As at 31 December 2019, the fair value of the derivative financial asset was US$11.0 million reflecting a loss on re-measurement to fair value of US$2.0 million and the initial US$13 million cash payment.

Placement of US$125 million new convertible bonds and concurrent repurchase of outstanding US$100 million Convertible Bonds

In July 2019, the Group has issued US$125 million convertible bonds due 2024. The bonds were issued by the Group's wholly owned subsidiary Petropavlovsk 2010 Limited (the "Issuer") and are guaranteed by the Company. The bonds carry a coupon of 8.25% per annum, payable quarterly in arrears. The bonds are, subject to certain conditions, convertible into fully paid ordinary shares of the Company with an initial exchange price of US$0.1350, subject to customary adjustment provisions.

Concurrently with the issue of the US$125 million convertible bonds, the Group also concluded the invitation to repurchase (the "Repurchase") any and all of the outstanding US$100 million 9.00% convertible bonds due 2020 (the "Existing Bonds"). Holders whose Existing Bonds have been accepted for purchase by the Issuer pursuant to the Repurchase were eligible to receive US$1,080 per US$1,000 in principal amount of the Existing Bonds (the "Repurchase Price"). The Issuer also paid, in respect of Existing Bonds accepted for purchase pursuant to the Repurchase, a cash amount representing the accrued but unpaid interest ("Accrued Interest") on each US$1,000 in aggregate principal amount of Existing Bonds accepted for repurchase from and including 18 June 2019, being the immediately preceding interest payment date applicable to the Existing Bonds, to but excluding the settlement date for the Repurchase (the "Repurchase Settlement Date"). The remaining Existing Bonds were redeemed at the Repurchase Price on 9 July 2019. The Issuer also paid a cash amount representing the Accrued Interest on each US$1,000 in aggregate principal amount of Existing Bonds from and including 18 June 2019 to redemption. The Existing Bonds were subsequently cancelled by the Issuer.

The US$11.2 million difference between cash paid to purchase the Existing Bonds and the carrying value of respective debt was recognised as loss on re-purchase of the Existing Bonds.

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 the 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, advances received from customers under prepayment arrangements and external debt.

The Group performed an assessment of the forecast cash flows for the period of at least 12 months from the date of approval of the 2019 Annual Report and Accounts. As at 31 December 2019, the Group had sufficient liquidity headroom. The Group is also satisfied that it has sufficient headroom under a base case scenario for the period to June 2020. The Group has also performed projections under a layered stressed case that is based on a gold price, which is approximately 10% lower than the upper quartile of the average of the market consensus forecasts, processing of third-party concentrate through POX facilities is approximately 10% lower than projected and oxide gold production from underground operations at Pioneer and Malomyr approximately 10% lower than projected, and Russian Rouble : US Dollar exchange rate that is approximately 10% stronger than the average of the market consensus forecasts. This layered stressed case indicates sufficient liquidity for a period of at least 12 months including under downside IRC performance scenarios.

As at 31 December 2019, the Group has guaranteed the outstanding amounts IRC owed to Gazprombank. The outstanding loan principal was US$225 million as at 31 December 2019 and the facility is subject to an initial US$160 million guarantee by the Group (see note 26). 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. IRC projections demonstrate that IRC expects to have sufficient liquidity over the next 12 months and expects to meet its obligations under the Gazprombank Facility. If a missed repayment under debt or guarantee obligations occurs which, if not remedied by the Group, 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 directors have also considered the potential impacts of Covid-19 which are described in detail in the Annual Report.

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 2019 Annual Report and Accounts. Accordingly, they continue to adopt the going concern basis of accounting in preparing these consolidated financial statements.

2020 Outlook

Production is on track to meet the full year target of 620 - 720koz of gold in 2020. The Group expects TCC .. in 2020 to be in the range of US$700 - US$800/oz excluding third parties concentrate as the pricing of concentrate depends on highly volatile gold price.

FY 2019 Consolidated Annual Financial Statements

Review of Ore Reserves and Mineral Resources

In line with best industry practice, Petropavlovsk reports its Mineral Resources and Ore Reserves in accordance with the JORC Code. The Mineral Resource and Ore Reserve estimates are an update on independent estimates prepared by Wardell Armstrong International (WAI), a UK based independent technical consultancy firm, in April 2017. The updated estimates incorporate all material exploration completed in 2017, 2018 and 2019 as well as depletion due to mining activities. To reflect recent market trends, the Company has increased its long-term gold price assumption for Mineral Resource reporting from $1,500/oz to $1,700/oz. Similarly, the long-term gold price assumption for Ore Reserve reporting was changed from $1,200/oz to $1,400/oz.

As at 31 December 2019, total Group Mineral Resources (including Reserves) amounted to 21.03Moz of gold compared to 20.52Moz at end 2018, with total Reserves amounting to 8.46Moz compared to 8.21Moz at end 2018. The increase in Mineral Resources is due to a combination of exploration success at Pioneer and Malomir and a higher gold price assumption. In particular, the higher price assumption has enabled tailings stored at Pioneer and Pokrovskiy to be included as JORC Inferred Resources given their potential to be re-processed.

There was an overall decrease in Ore Reserves at Pioneer due to mining depletion and the use of more conservative recovery and cost assumptions with respect to estimating refractory gold ores. This was more than offset by an increase in Ore Reserves at Malomir and Albyn. The increase at Malomir resulted from an updated pit design and the inclusion of new discoveries with open pit mining potential at the Quartzitovoye area. An increase in Ore Reserves at Albyn resulted from successful in-fill drilling which converted Inferred resources into Ore Reserves at the Elginskoye deposit.

The tables below provide a summary of Group Mineral Resources and Ore Reserves. Detailed asset by asset Mineral Resource and Ore Reserve information can be found on the Company web site.

An independently audited estimate is expected to be published during Q3 2020.

Group Ore Reserves as at 31/12/2019 (in accordance with the JORC Code 2012 (1) )

Total Open Pit and Underground Ore Reserves

 
                   Category           Tonnage (kt)   Grade (g/t   Metal (Moz) 
                                                      Au) 
 Total             Proved                55,300         0.78         1.38 
                  -----------------  -------------  -----------  ------------ 
  Probable                              223,316         0.99         7.08 
 ----------------------------------  -------------  -----------  ------------ 
  Proved+Probable                       278,616         0.94         8.46 
 ----------------------------------  -------------  -----------  ------------ 
 Non-Refractory    Proved                22,158         0.69         0.49 
                  -----------------  -------------  -----------  ------------ 
  Probable                               57,964         1.06         1.98 
 ----------------------------------  -------------  -----------  ------------ 
  Proved+Probable                        80,122         0.96         2.47 
 ----------------------------------  -------------  -----------  ------------ 
 Refractory        Proved                33,141         0.84         0.89 
                  -----------------  -------------  -----------  ------------ 
  Probable                              165,352         0.96         5.10 
 ----------------------------------  -------------  -----------  ------------ 
  Proved+Probable                       198,494         0.94         5.99 
 ----------------------------------  -------------  -----------  ------------ 
 

Total Open Pit Ore Reserves

 
                   Category           Tonnage (kt)   Grade (g/t   Metal (Moz) 
                                                      Au) 
 Total             Proved                55,103         0.75         1.34 
                  -----------------  -------------  -----------  ------------ 
  Probable                              221,952         0.95         6.81 
 ----------------------------------  -------------  -----------  ------------ 
  Proved+Probable                       277,055         0.91         8.14 
 ----------------------------------  -------------  -----------  ------------ 
 Non-Refractory    Proved                21,961         0.63         0.45 
                  -----------------  -------------  -----------  ------------ 
  Probable                               57,094         1.00         1.84 
 ----------------------------------  -------------  -----------  ------------ 
  Proved+Probable                        79,055         0.90         2.28 
 ----------------------------------  -------------  -----------  ------------ 
 Refractory        Proved                33,141         0.84         0.89 
                  -----------------  -------------  -----------  ------------ 
  Probable                              164,858         0.94         4.97 
 ----------------------------------  -------------  -----------  ------------ 
  Proved+Probable                       197,999         0.92         5.86 
 ----------------------------------  -------------  -----------  ------------ 
 

Total Underground Ore Reserves

 
                   Category           Tonnage (kt)   Grade (g/t   Metal (Moz) 
                                                      Au) 
 Total             Proved                 197           7.56         0.05 
                  -----------------  -------------  -----------  ------------ 
  Probable                               1,364          6.25         0.27 
 ----------------------------------  -------------  -----------  ------------ 
  Proved+Probable                        1,561          6.42         0.32 
 ----------------------------------  -------------  -----------  ------------ 
 Non-Refractory    Proved                 197           7.56         0.05 
                  -----------------  -------------  -----------  ------------ 
  Probable                                870           5.08         0.14 
 ----------------------------------  -------------  -----------  ------------ 
  Proved+Probable                        1,067          5.54         0.19 
 ----------------------------------  -------------  -----------  ------------ 
 Refractory        Proved                  -             -             - 
                  -----------------  -------------  -----------  ------------ 
  Probable                                494           8.32         0.13 
 ----------------------------------  -------------  -----------  ------------ 
  Proved+Probable                         494           8.32         0.13 
 ----------------------------------  -------------  -----------  ------------ 
 

Notes:

(1) With an exception of Tokur, Group Ore Reserves statements are prepared internally as an update of the April 2017 WAI estimate. The Pioneer, Malomir and Albyn Reserves were prepared in April 2020 in accordance with JORC Code 2012; Tokur Reserves were prepared in 2010 by WAI in accordance with JORC Code 2004 and there have been no changes to the Tokur estimates since that date

(2) Pioneer, Malomir and Albyn Ore Reserves for open pit extraction are estimated within economical pit shells using a US$1,400/oz gold price assumption and applying other modifying factors based on the projected performance of these operating mines. Tokur Reserves have been based on a US$1,000/oz gold price assumption, together with operating costs assumptions relevant at the time of the estimate

(3) The Open Pit Reserves cut-off grade for reporting varies from 0.30 to 0.70g/t Au, depending on the asset and processing method

(4) Underground Ore Reserves estimates use a mine design with decline access, trackless mining equipment and a sublevel open stope mining method with or without back fill

(5) Reserve figures have been adjusted for anticipated dilution and mine recovery

(6) The Underground Reserves cut-off grade for reporting is 1.5g/t Au

(7) In accordance with JORC Code, all open pit and underground designs have been based on Measured and Indicated Resources; in addition to the Proved and Probable Reserves quoted above, the design captures the following Inferred Resource:

- Pioneer: 61,006kt @ 0.30g/t (0.59Moz) of non-refractory and 7,647kt @ 0.67g/t (0.16Moz) of refractory

- Malomir: 166kt @ 0.77g/t (0.004Moz) of non-refractory and 6,453kt @ 0.89g/t (0.18Moz) of refractory

- Albyn 4,296 @ 1.01g/t (0.1Moz) of non-refractory and 55.7kt@ 1.25g/t (0.02Moz) of refractory

(8) Figures may not add up due to rounding

Group Mineral Resources as at 31/12/2019 (in accordance with the JORC Code 2012 (1) )

Total Open Pit and Underground Mineral Resources

 
                   Category              Tonnage (kt)   Grade (g/t   Metal (Moz) 
                                                         Au) 
 Total             Measured                 75,490         0.87         2.11 
                  --------------------  -------------  -----------  ------------ 
  Indicated                                464,138         0.86         12.76 
 -------------------------------------  -------------  -----------  ------------ 
  Measured+Indicated                       539,628         0.86         14.87 
 -------------------------------------  -------------  -----------  ------------ 
  Inferred                                 293,575         0.65         6.16 
 -------------------------------------  -------------  -----------  ------------ 
 Non-Refractory    Measured                 37,690         0.93         1.13 
                  --------------------  -------------  -----------  ------------ 
  Indicated                                143,853         0.95         4.38 
 -------------------------------------  -------------  -----------  ------------ 
  Measured+Indicated                       181,544         0.94         5.51 
 -------------------------------------  -------------  -----------  ------------ 
  Inferred                                 134,738         0.58         2.53 
 -------------------------------------  -------------  -----------  ------------ 
 Refractory        Measured                 37,800         0.81         0.98 
                  --------------------  -------------  -----------  ------------ 
  Indicated                                320,285         0.81         8.38 
 -------------------------------------  -------------  -----------  ------------ 
  Measured+Indicated                       358,084         0.81         9.37 
 -------------------------------------  -------------  -----------  ------------ 
  Inferred                                 158,837         0.71         3.63 
 -------------------------------------  -------------  -----------  ------------ 
 

Total Open Pit Mineral Resources

 
                   Category              Tonnage (kt)   Grade (g/t   Metal (Moz) 
                                                         Au) 
 Total             Measured                 73,979         0.80         1.90 
                  --------------------  -------------  -----------  ------------ 
  Indicated                                457,788         0.82         12.05 
 -------------------------------------  -------------  -----------  ------------ 
  Measured+Indicated                       531,767         0.82         13.95 
 -------------------------------------  -------------  -----------  ------------ 
  Inferred                                 285,832         0.60         5.54 
 -------------------------------------  -------------  -----------  ------------ 
 Non-Refractory    Measured                 36,179         0.79         0.92 
                  --------------------  -------------  -----------  ------------ 
  Indicated                                138,685         0.87         3.86 
 -------------------------------------  -------------  -----------  ------------ 
  Measured+Indicated                       174,864         0.85         4.78 
 -------------------------------------  -------------  -----------  ------------ 
  Inferred                                 127,593         0.48         1.97 
 -------------------------------------  -------------  -----------  ------------ 
 Refractory        Measured                 37,800         0.81         0.98 
                  --------------------  -------------  -----------  ------------ 
  Indicated                                319,103         0.80         8.18 
 -------------------------------------  -------------  -----------  ------------ 
  Measured+Indicated                       356,903         0.80         9.17 
 -------------------------------------  -------------  -----------  ------------ 
  Inferred                                 158,240         0.70         3.57 
 -------------------------------------  -------------  -----------  ------------ 
 

Total Underground Mineral Resources

 
                   Category              Tonnage (kt)   Grade (g/t   Metal (Moz) 
                                                         Au) 
 Total             Measured                 1,511          4.33         0.21 
                  --------------------  -------------  -----------  ------------ 
  Indicated                                 6,350          3.50         0.71 
 -------------------------------------  -------------  -----------  ------------ 
  Measured+Indicated                        7,861          3.66         0.93 
 -------------------------------------  -------------  -----------  ------------ 
  Inferred                                  7,743          2.47         0.62 
 -------------------------------------  -------------  -----------  ------------ 
 Non-Refractory    Measured                 1,511          4.33         0.21 
                  --------------------  -------------  -----------  ------------ 
  Indicated                                 5,168          3.10         0.51 
 -------------------------------------  -------------  -----------  ------------ 
  Measured+Indicated                        6,680          3.38         0.72 
 -------------------------------------  -------------  -----------  ------------ 
  Inferred                                  7,146          2.43         0.56 
 -------------------------------------  -------------  -----------  ------------ 
 Refractory        Measured                   -             -             - 
                  --------------------  -------------  -----------  ------------ 
  Indicated                                 1,181          5.27         0.20 
 -------------------------------------  -------------  -----------  ------------ 
  Measured+Indicated                        1,181          5.27         0.20 
 -------------------------------------  -------------  -----------  ------------ 
  Inferred                                   598           2.98         0.06 
 -------------------------------------  -------------  -----------  ------------ 
 

Notes:

(1) Mineral Resources include Ore Reserves

(2) Mineral Resource estimates for Pokrovskiy, Pioneer, Malomir and Albyn were prepared internally by the Group in accordance with JORC Code 2012 as an update of the April 2017 statement audited by WAI; Mineral Resources for Tokur were reviewed by WAI in 2010 in accordance with JORC Code 2004 and there have been no changes to the Tokur estimates since that date

(3) Open Pit Mineral Resources for Pokrovskiy, Pioneer, Malomir and Albyn are constrained by conceptual open-pit shells at a $1,700/oz long term gold price; Tokur Mineral Resources have no open pit constraints

(4) The cut-off grade for Mineral Resources for open pit mining varies from 0.25 to 0.50g/t depending on the type of mineralisation and proposed processing method

(5) A cut-off grade of1.5g/t is used to report Mineral Resources for potential underground mining at all sites with exception of Albyn where a 1.0g/t cut off was used

(6) Mineral Resources are not Reserves until they have demonstrated economic viability based on a feasibility or pre-feasibility study

(7) Grade represents estimated contained metal in the ground and has not been adjusted for metallurgical recovery

(8) Figures may not add up due to rounding

Exploration Findings

Pioneer

Exploration at North East Bakhmut (NE Bakhmut) focused on payshoots 1 and 2, to investigate the possibility of higher-grade underground mineralisation as well as to support ongoing mining activities.

Highlights for the year included:

- Two drill holes intersected mineralisation 30m to 70m below the pit floor at NE Bakhmut 1, confirming mineralisation extends well below the current open pit, with significant intersections of 14.1m@1.17g/t (C-6334), 7.2m @ 3.77g/t (C-1083) and 5.3m @ 1.36g/t (C-1083)

   -   The technical team is currently evaluating the possibility of deepening the NE Bakhmut 1 pit 

- Stope definition drilling and production grade control sampling completed at NE Bakhmut 2 resulted in underground resources increasing from c.127 to c.142koz

Deep drilling at the Nikolaevskaya zone resulted in the discovery of further downdip extensions of the orebody and an increase in the mineral resource potential for underground mining.

Deep in-fill drilling at the central section of the Andreevskaya zone hit a payshoot with the best intersection grading 58.23g/t over a thickness of 11.1m. Since this is an in-fill drill hole, it does not extend the Andreevskaya ore body but demonstrates the existence of extremely high-grade pockets of mineralisation which would not have been detected by 40x40m drill grid. Historically, the Andreevskaya open pit has produced approximately 25% more gold than expected due to this effect. As a result, the existing Andreevskaya underground resource and reserve estimates are likely to be conservative.

Albyn

Resource expansion drilling on the periphery of Elginskoye has extended known gold mineralisation in the south-west, south-east and north, resulting in a 23% increase in Reserves compared to the previous year.

Drilling at Sukholozhskiy, 500m west of the Albyn open pit, intersected high grade mineralisation, with the best intersection of 2.5m @ 12.3g/t.

Malomir

In-fill drilling at Quartzitovoye confirmed the presence of a bulk stockwork to the west of ore body 55. This was previously considered to be a target for underground mining linked to the Quartzitovoye underground mine. However, the stockwork appears to be an increasingly attractive target for an open pit mine that would replace the Quartzitovoye underground mine once depleted.

Drilling at Osipkan, a Tokur satellite located 130km away from Malomir, has identified two

zones equivalent to Inferred under JORC resources, including 97koz (2.5Mt @ 1.23g/t) and 22koz (458kt @ 1.50g/t)

Other Projects

Early stage exploration at the Chogarskaya and Verkhne-Udskaya licences in the Khabarovsk region yielded some promising results, including grab samples from the Chogarskaya license returning grades of up to 22.1g/t. At the Verkhne-Udskaya license, the average grade for mineralised trench samples is c.1g/t, whilst grab samples taken from the areas not yet trenched have shown grades of up to 10g/t.

Preliminary metallurgical tests suggest gold mineralisation at Verkhne-Udskaya is non-refractory.

Post Year End Events

In February 2020, the Group acquired exploration assets at Mariinskiy, comprising two adjacent exploration licences with a total area of c.155km(2) located c.30km north-east of Malomir and c.50km west from Tokur.

These licences cover an area where extensive historical alluvial mining has taken place over a strike length of c.18km.

Historical exploration work has identified at least 30 quartz veins with gold grades of up to 10g/t, as well as disseminated gold mineralisation with grades of up to 2.5g/t.

The Company's in-house exploration team believe that this asset has the potential to contain substantial gold resources, of a similar scale and nature to known ore bodies at Malomir, including its satellites.

Development

Pioneer flotation

Following the launch of the POX Hub, the Group has started construction of a 3.6Mtpa flotation at Pioneer plant which is expected to be operational from Q4 2020. The addition of a flotation plant will enable Pioneer's substantial refractory reserves to be processed by concentrating refractory ore at the mine prior to transporting concentrate to the POX Hub for further processing into doré.

The flotation plant will utilise two of the c.2.0Mt per annum crushing and grinding lines that are currently dedicated to the RIP circuit. Consequently, non-refractory processing capacity will be reduced to 2.7Mtpa from 6.7Mtpa. Given the harder nature of refractory ore, the combined annual throughput of refractory gold ores through the two milling lines is expected to be less than 4.0Mtpa at around 3.6Mtpa.

Elginskoye

In 2019, the Group commenced an extensive exploration program to in-fill existing drill grid and increase confidence in Ore Reserves scheduled for mining in the short and mid-term, as well as to expand known Mineral Resources along strike and down dip. As part of the exploration programme, a large number of cyanide tests were carried out to better define both refractory and non-refractory reserves.

In H2 2019, preparation work began ahead of full-scale mining at Elginskoye in H2 2020. As part of this work, a 30km long all-season road was constructed to connect Elginskoye with the processing facilities at Albyn. On-site mining infrastructure was created and waste stripping work commenced late 2019.

As at the end of Q1 2020, mining and preparation work remains on-schedule. The start of processing of Elginskoye ore will coincide with cessation of Albyn ore processing. Ore from Elginskoye will be transported by trucks to the existing Albyn RIP plant and therefore no capital investment is required to create a dedicated Elginskoye processing facility.

Q1 2020 Sales and Production Update

Gold sales

-- 51% increase in total gold sales to 162.5koz (Q1 2019: 107.7koz), of which 60.9koz (37%) came from processing third-party refractory gold at the POX Hub

-- Q1 2020 average realised gold price of $1,570/oz (Q1 2019: $1,278/oz); fully reflecting the market price of gold, following the expiry of outstanding gold hedging contracts at the end of December 2019

 
 Sales by asset (koz)                Q1 2020   Q1 2019 
----------------------------------  --------  -------- 
 JSC Pokrovskiy Mine                  86.9      22.0 
   Pioneer                            26.0      22.0 
   Third-party concentrate (POX       60.9        - 
    Hub) 
 LLC Malomirskiy Rudnik (Malomir)     35.3      44.4 
 LLC Albynskiy Rudnik (Albyn)         40.3      41.4 
----------------------------------  --------  -------- 
 Total Group                          162.5     107.7 
----------------------------------  --------  -------- 
 

Numbers may not add up due to rounding

Pokrovskiy Pressure Oxidation (POX) Hub

-- A total of 33.9koz of gold was produced from processing 35kt of Malomir refractory concentrates with stable recoveries averaging 91.5%

-- A strong quarter for the processing of third-party concentrates, with 84.2koz of gold produced from 35kt of high-grade concentrate with recoveries averaging 94.2%

Q1 2020 Operations Report

JSC Pokrovskiy Mine

The JSC Pokrovskiy mine is a holder of a number of licences, including licences for the Pokrovskiy and Pioneer deposits. The Pokrovskiy deposit ceased operations in Q1 2018 with its site and processing facilities converted to host the new POX Hub, where concentrates from the Malomir flotation plant (which is reported as part of the Malomir production table) and third-party concentrates are processed.

 
 Pokrovskiy                    Units      Q1 2020   Q1 2019 
----------------------------  ---------  --------  -------- 
 POX Plant (3rd party concentrates) 
----------------------------------------------------------- 
 Concentrate treated           t '000       35         - 
 Average grade                 g/t         72.3        - 
 Gold in concentrate           oz. '000    81.3        - 
 Recovery                      %           94.2        - 
 Gold recovered                oz. '000    76.5        - 
 Gold production (doré)   oz. '000    84.2        - 
----------------------------  ---------  --------  -------- 
 

Note: numbers may not add up due to gold in circuit

The processing of third-party material was strong in the quarter with 35kt of high-grade material (72.3g/t) processed and recoveries averaging 94.2%, in-line with expectations.

Pioneer

Pioneer is currently focused on mining non-refractory ores from several conventional open pits and underground operations. The construction of a new flotation facility at Pioneer will lead to a transition in Q4 2020 from mining non-refractory to mainly refractory ores for processing at the POX Hub.

 
 Pioneer                        Units       Q1 2020   Q1 2019 
-----------------------------  ----------  --------  -------- 
 Mining operations 
-----------------------------  ----------  --------  -------- 
 Total material moved           m3 '000      4,573     5,059 
 Ore mined                      t '000        841       331 
 Average grade                  g/t          0.94      0.95 
 Gold content                   oz. '000     25.3      10.1 
 Processing operations (RIP plant) 
------------------------------------------------------------- 
 Total milled                   t '000       1,316     1,407 
 Average grade                  g/t          0.78      0.60 
 Gold content                   oz. '000     32.8      27.4 
 Recovery                       %            87.3      81.3 
 Gold recovered                 oz. '000     28.6      22.2 
 Gold production (doré)    oz. '000     26.4      21.9 
-----------------------------  ----------  --------  -------- 
 

Note: numbers may not add up due to gold in circuit

Open-pit mining produced mostly lower grade material which was blended with higher grade ores from the Katrin pit and high-grade underground ore prior to processing at the plant.

Stripping of refractory ore has been starting at Bakhmut, Yuzhnaya and Promezhutochnaya zones in accordance with schedule of commission of flotation lines at the Pioneer processing plant in 2H2020.

LLC Malomirskiy Rudnik

LLC Malomirskiy Rudnik is a holder of a licence for the Malomir deposit, a conventional open-pit and underground mining operation transitioning towards mainly refractory ore processing using the onsite flotation plant. The resulting concentrate is shipped for processing to the Pokrovskiy POX Hub. The Malomir deposit has extensive refractory reserves and resources and both near-mine and surrounding areas are considered highly prospective for the discovery of further refractory gold.

 
 Malomir                        Units       Q1 2020   Q1 2019 
-----------------------------  ----------  --------  -------- 
 Mining Operations 
-----------------------------  ----------  --------  -------- 
 Total material moved           m3 '000      2,211     1,923 
 Non-refractory ore             t '000        84        96 
 Average grade                  g/t          1.93      6.17 
 Gold content                   oz. '000      5.2      19.0 
 Refractory ore                 t '000       1,261     1,304 
 Average grade                  g/t          1.12      0.84 
 Gold content                   oz. '000     45.6      35.2 
-----------------------------  ----------  -------- 
 Processing operations (RIP plant) 
-----------------------------------------  --------  -------- 
 Total milled                   t '000        101       168 
 Average grade                  g/t          1.81      3.98 
 Gold content                   oz. '000      5.9      21.5 
 Recovery                       %            70.3      82.3 
 Gold recovered                 oz. '000      4.1      17.7 
-----------------------------  ----------  -------- 
 Flotation Plant 
-----------------------------------------  --------  -------- 
 Ore                            t '000        969       895 
 Grade                          g/t          1.28      0.73 
 Gold content                   oz. '000     40.0      21.1 
 Recovery                       %            86.9      87.0 
 Yield                          %             3.7       2.8 
 Concentrate produced           t '000        36        25 
 Grade                          g/t          30.3      22.8 
 Gold content                   oz. '000     34.7      18.3 
-----------------------------  ----------  -------- 
 POX Plant 
-----------------------------------------  --------  -------- 
 Concentrate treated            t '000        38        32 
 Grade                          g/t          30.1      32.2 
 Gold in concentrate            oz. '000     37.1      33.1 
 Recovery                       %            91.5      83.8 
 Gold recovered                 oz. '000     33.9      27.7 
 Gold production (doré)    oz. '000     35.2      44.5 
-----------------------------  ----------  --------  -------- 
 

Note: numbers may not add up due to gold in circuit

Mining of non-refractory ore was affected by lower grades due to less proportion of high grade ore from underground mining compare with Q1 last year.

Mining of refractory ore continued according to plan as well as processing with strong flotation plant recoveries averaging 86.9%. Recoveries at the POX Hub averaged 91.5% for the quarter.

LLC Albynskiy Rudnik

LLC Albynskiy Rudnik is a holder of the licence for the Albyn deposit, the Group's principal non-refractory asset operating as a conventional open pit and RIP circuit. The mine life of the Albyn deposit is expected to cease in 2020. Thereafter, the Company intends to use Albyn's current processing facilities to treat ore from the Elginskoye and Unglichikanskoye as well as potentially from smaller deposits located nearby. These deposits, under the Company's control, contain JORC Measured, Indicated and Inferred Mineral Resources of 3.93Moz Au, including 2.32Moz of JORC Proved and Probable Ore Reserves. During 2020, the Elginskoye pit will be developed to replace the Albyn pit as the main source of ore from 2020. Road construction between Elginskoye and the Albyn processing plant was finalised in August 2019.

 
 Albyn                          Units       Q1 2020   Q1 2019 
-----------------------------  ----------  --------  -------- 
 Mining Operations 
-----------------------------  ----------  --------  -------- 
 Total material moved           m3 '000      3,353     3,223 
 Ore mined                      t '000       1,293     1,056 
 Average grade                  g/t          1.06      1.24 
 Gold content                   oz. '000     43.9      42.1 
 Processing operations (RIP Plant) 
------------------------------------------------------------- 
 Total milled                   t '000       1,152     1,137 
 Average grade                  g/t          1.16      1.15 
 Gold content                   oz. '000     42.9      41.9 
 Recovery                       %             94       93.7 
 Gold recovered                 oz. '000     40.3      39.3 
 Gold production (doré)    oz. '000     40.4      41.3 
-----------------------------  ----------  --------  -------- 
 

Note: numbers may not add up due to gold in circuit

Albyn performed in line with expectations, with tonnes and grades mined from the Albyn main ore body as well as processing with solid recovery ratio of 94%.

Q1 2020 Exploration

In Q1 2020, the Company continued exploration with the objective of increasing Mineral Resources at the Pioneer, Albyn and Tokur projects.

Highlights

-- Encouraging results at the Kera prospect (previously Ulgen), near Albyn, where grades of up to 32g/t were identified

-- Kera maiden resources estimated at c.170koz, at an average grade of 2.98g/t (low confidence resources in accordance with Russian classification system)

-- Exploration at Elginskoye expected to add up to 300koz to resources

-- Extensions of gold mineralised zones were intersected at Alexandra (Pioneer) and Osipkan (Tokur satellite)

Pioneer

Eight holes were drilled on down dip extensions of the Alexandra zone. All eight intersected gold mineralisation with grades of between 0.6 - 0.8g/t and thicknesses of between 9 - 60m. Based on these results, the Company is evaluating the possibility of extending the Alexandra pit at depth, increasing non-refractory reserves.

Albyn

Exploration was carried out at the Kera prospect (previously named Ulgen) and at Elginskoye. Trenching, pre-strip and drilling intersected further potentially economic mineralisation. In the pre-strip, where 12 lines of channel samples were completed, a mineralised zone with average apparent thickness of 3m at an average grade of 3.28g/t was identified, with the best assay having a grade of 32g/t.

Five holes were drilled with a total length of 687m which intersected gold mineralisation 40 to 80m below surface. The best drill intersections included 7.4m @ 4.06g/t and 0.6m @ 16.2g/t.

Based on drilling and trenching completed to date, a maiden resource estimate was prepared for the Kera prospect in accordance with the Russian resource classification system. The P(1) category resource, which is a broad equivalent of JORC Inferred category, is estimated as c.170koz of gold with an average grade of 2.98g/t. This estimate only covers a small section of known Kera mineralisation. The Group's geologists believe that Kera has the potential to become a 1 - 2Moz open pit reserve, capable of supporting future Albyn production.

Drilling at Elginskoye focused on in-filling drilling in the central part of the ore body and on extending resources towards the south-east. A total of 8,897m of drilling was completed during Q1 2020. This work is yet to be incorporated into the Elginskoye JORC resource model. However, an indicative estimate suggests up to 300koz could be added to existing JORC Mineral Resources.

Tokur

Some 2,390m of drilling and 24,864m(3) of trenching was completed at the Osipkan prospect, near Tokur. This work targeted north-west extensions of known Osipkan mineralised zones, yielding promising results. The best trench intersections included 7.0m @ 1.32g/t, 5.8m @ 0.88g/t and 1.0m @ 3.78g/t.

Selected drill hole intersections included 7.1m @ 2.53g/t, 3.0m@1.40g/t, 6.3m @ 2.17g/t and 4.8m @ 1.00g/t. Osipkan remains a promising non-refractory prospective satellite to Tokur.

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

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

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

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

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

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

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

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

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

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

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

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

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