Annual Report 2011

RNS Number : 0144C

Polymetal International PLC

25 April 2012

 



Release time	IMMEDIATE
Date	25 April 2012

Polymetal International plc

Annual Report 2011

Polymetal International plc (LSE: POLY) (together with its subsidiaries, including JSC "Polymetal" - "Polymetal", the "Company", or the "Group") today publishes its Annual Report for the year ended 31 December 2011.

The Annual Report has been posted on the Company's website today and now available to shareholders at

http://www.polymetalinternational.com/investor-relations/downloads/annual-report.aspx 

In compliance with 9.6.1 of the Listing Rules, a copy of this document has been submitted to the National Storage Mechanism and will be available shortly at www.hemscott.com/nsm.do.

The Disclosure and Transparency Rules (DTR) require that an announcement of the publication of an Annual Report should include the disclosure of such information from the Annual Report as is of a type that would be required to be disseminated in a Half-yearly Report in compliance with the DTR 6.3.5(2) disclosure requirement. Accordingly, the following information is extracted from the Annual Report in unedited full text. References to page numbers and notes to the accounts made in the following Appendices refer to page numbers in the Annual Report.

APPENDIX I - Important events during the year

Delivering a strong performance

In 2011 Polymetal delivered another year of strong performance. We produced 810 Koz of gold equivalent ounces¹, an increase of 8% over 2010. While there was some grade decline at mature operations, this was more than compensated for by new operations and the successful expansion of the Dukat mill.

Key production achievements

Annual gold production was essentially flat at 443 Koz, with a further 28 Koz of payable gold contained in Albazino concentrates prepared for processing at the Amursk POX plant. Silver production increased by 15% to 19.9 Moz, an all-time record for Polymetal. Copper production increased by 73% reaching 6.9 tonnes.

Throughout the year all our key projects progressed as planned (see table below).

Capital projects completed in 2011

·     Full ramp-up of Albazino processing plant and successful start of commercial production

·     Reconstruction of Omsukchan concentrator - gravity circuit launched

·     Expansion of the Kubaka plant - Merrill-Crowe section installed

·     Inaugural silver and gold concentrate sales (Dukat to Kazakhstan, Albazino to China)

·     Implementation of laser scanning of mining works at Dukat for further automated mine planning

Production highlights

	2011		2010		% Change
Stripping, Kt	80,683		63,283		+27
Underground development, m	35,150		23,577		+49
Ore mined, Kt	11,002		7,474		+47
Open-pit	9,636		6,509		+48
Underground	1,366		965		+42
Ore processed, Kt	8,821		7,845		+12
Average grade processed, GE g/t	3.8		3.8		-1
Production2,3
Gold, Koz	443		444		0
Silver, Moz	19.9		17.3		+15
Copper, tonnes	6,915		4,003		+73
Sales
Gold, Koz	448		440		+2
Silver, Moz	17.0		18.0		-5
Copper, tonnes	6,363		3,991		+59
Safety4
LTIFR	0.7		1.9		-63
FIFR	-		0.5		-100

Notes

1 Based on 1:60 Ag/Au and 5:1 Cu/Au conversion ratios

2 As of 1 April 2011, the Group changed its methodology for calculating and reporting on the metals it produced. Previously, production of metals contained in doré and zinc precipitate was recorded by the Group upon shipment of the doré or precipitate from its mine gold rooms to third party refineries. Under the new methodology, these metals are considered to be produced upon receipt of doré or precipitate at the Group's gold rooms. In addition, production of metals contained in concentrates was previously recorded upon shipment of concentrate to third party off-takers, whereas under the new methodology these metals are considered to be produced when concentrate is bagged, sampled and prepared for shipment. The Company believes that the new methodology is more accurate as it reflects the Group's physical production and eliminates variations associated with shipment cycles. This mostly applies to concentrates, where stockpile build-up accelerated during 2011. To a lesser extent, it also applies to doré and precipitate, where shipment cycles have remained largely unchanged during 2011. Consequently, year-on-year comparisons have not been restated, as the Company believes such restatement would not lead to material differences to those results.

3 Polymetal reports production of metals contained in concentrates based on percentages payable for these metals by off-takers. Final assays are typically determined at the receiving smelters several months after shipment from the Group's mines.

4 LTIFR = Lost Time Injury Frequency Rate; FIFR = fatal injury frequency rate

Analysis of production results

Mining

Ore mined was 11,002 Kt, 47% above 2010 levels. The bulk of ore mined - around 88% (2010: 87%), came from open-pit mines, a strong strategic preference for Polymetal. The largest increase - 1,248 Kt, representing a 2.8 fold increase - came from Omolon. Significant additional contributions came from the Amursk hub with another 625 Kt of ore, due to start of underground mining at Mayskoye and the open-pit mine at Albazino reaching full capacity.

Average grades in ore mined decreased slightly from 4.4 g/t of metal equivalent to 3.8 g/t, with the decline mostly coming from mature operations such as Dukat, Khakanja and Voro. The grade decline at Omolon was related to mine sequencing (mostly heap leach ore mined at Sopka). This was compensated for by grade growth at new operations, in particular Albazino and Mayskoye which both produce high grade refractory gold ores.

Processing

Ore processed was up 12% in 2011 at 8,821 Kt. The difference between ore mined and processed resulted principally from inability to operate a winter road at the start of 2011 at Omolon. As a result, ore from Sopka could not be processed at the Kubaka plant as originally planned. However, some Sopka ore was delivered to Khakanja by sea and processed there. Notable increases have been seen at Dukat, on completion of the Omsukchan concentrator reconstruction, and at Varvara at both leach and float circuits in line with mining volume increases.

Average gold equivalent grades processed in 2011 were stable compared to 2010 at 3.8 g/t. However the ramp-up of new mines - in particular Albazino and Omolon - in the second half of the year pushed the grade up to 4.5 g/t in the fourth quarter. Next year we plan to process ore with grades close to our current reserve grade of 4.2 g/t.

Production

Throughout the year we consistently improved production results on a quarter-on-quarter basis, as we overcame the operational challenges of the first half of the year and started to reap the rewards of ramping-up new plants and reconstruction of existing facilities in the second half of the year. As a result, in Q4 we achieved a record production level of 250 Koz of gold equivalent, representing a run-rate of 1 Moz per year.

Major contributions to production growth resulted from three operations:

·     Dukat - which saw grade stabilisation by the year end and increased production capacity following gravity circuit completion

·     Amursk hub - the start of production and ramp-up of the Albazino processing plant produced saleable flotation concentrate

·     Omolon - ramp-up of the Kubaka plant, which will be followed by a significant increase in production in 2012 on the back of full use of Sopka ore and introduction of the Merrill-Crowe section into commercial production

	2011		2010		% Change
Gold equivalent production, Koz	810		753		+8
Dukat	319		280		+14
Khakanja	128		170		-25
Voro	160		185		-14
Varvara	127		99		+28
Omolon	46		19		+142
Albazino	30		-		n/a

Sales

	2011		2010		% Change
Au, Koz	452		440		+3
Ag, Moz	17.0		17.9		-5
Cu, Kt	5,984		3,991		+50
Gold equivalent, Koz	765		758		+1

Sales of metal in 2011 were 765 Koz of metal equivalent, representing a 1% increase over 2010. Sales were lower than production volumes by 6% as some of the concentrate produced by the Group was not delivered to third-party refineries. The difference was short-term in nature and is not expected to reoccur.

During 2011 the Group commenced successful sales of concentrates from its Dukat and Albazino plants. Dukat now sells most of its production in the form of flotation and gravitation concentrates to a third-party refinery in Kazakhstan, a decision made based on the economics of third party refining compared with in-house refinery costs and recovery.

Concentrate produced at the Albazino plant was sold to generate immediate cash flows from the Amursk/Albazino project prior to completion and commencement of commercial gold production at the Amursk POX. 20,000 tonnes of concentrate - with gold content at more than 40 g/t - was successfully sold to a Chinese off-taker. Additional sales may take place in 2012, depending on market conditions and the exact timing of the Amursk POX camp-up.

Exploration

In 2011, we conducted exploration works in four regions of Russia - Khabarovsk, Karelia, Magadan and Sverdlovsk - as well as in Kazakhstan. We currently have 52 licences for geological studies, exploration and gold and silver mining. Our exploration projects portfolio includes 39 licences with a total area of approximately 9,664 km².

In 2011 we conducted exploration projects in 25 licensed areas, of which seven are at an advanced stage.

Key exploration objectives in 2011 included:

·     increasing the resource base of existing processing facilities (Albazino, Dukat, Omolon, Varvara, Voro)

·     ensuring a constant supply of ore for Khakanja, which currently has the shortest life of our existing mines

·     exploring for new gold and silver deposits having a potential for the creation of new standalone mines.

2011 exploration projects

	Unit		2011		2010		% Change
Exploration works
Core drilling	km		129.7		84.0		+54
Trenching	th. m3		187.0		315.0		-41
Geochemical sampling	th. assays		53.0		48.0		+10
- trench	th. assays		11.6		19.0		-39
- core	th. assays		71.9		60.0		+20
Geophysical sampling	km2		75		51		+47
Licences held
Exploration licences			39		34		+15
Area covered	km2		9,664		8,908		+8
As a result of these exploration activities, we have identified new or expanded mineralised areas with estimated 4.6 - 6.7 Moz of contained gold (internal non-JORC estimate), in addition to our existing reserves and resources.

Reserves and resources

	2011		2010		% Change
Ore reserves (proved + probable), GE Moz	14.3		15.9		-10
Gold, Moz	9.2		10.0		-8
Silver, Moz	297.0		331.3		-10
Copper, Kt	43.4		58.0		-26
Mineral resources (indicated + measured + inferred), GE Moz	13.8		13.5		+4
Gold, Moz	10.4		9.5		+10
Silver, Moz	181.1		212.0		-15
Copper, Kt	74.0		80.0		-8
Total Reserves and Resources	28.2		29.3		-4

We expect that a modest reduction in Polymetal's ore reserves in 2011 will be more than reversed in 2012 as our exploration efforts translate into new significant reserve and resource additions.

During 2011, the Group's reserves and resources were revised as at 30 June 2011 as part of an audit by mineral experts. Mineral Expert Reports and reserve and resource statements as of 30 June 2011 can be reviewed in the Prospectus dated 28 October 2011, issued by the Company in relation to the Initial Public Offering of its shares on the London Stock Exchange. As at 30 June 2011, the Group's proved and probable ore reserves were 15.0 Moz of gold equivalent, and mineral resources (measured, indicated and inferred) were 13.4 Moz of gold equivalent.

Objectives for 2012

Our development strategy is aimed at optimising operations and increasing the effectiveness of our existing plants. We also aim to improve current assets by developing their reserve and resource base - creating a new generation of assets - whilst maintaining total unit production costs at a level of no more than 50% of market prices.

Operations

In the coming year we expect to produce 590-640 Koz of gold, 21-23 Moz of silver and 6-7 Kt of copper. As a result, the Group aims to increase its total annual gold equivalent production to over 1 Moz¹. The structure of production mix is shifting towards gold as opposed to silver: our share of gold is expected to grow from 55% in 2011 to more than 65% in 2012.

We are firmly focused on delivering further growth in 2012, driven by the start-up of the Amursk POX facility and achievement of full production capacity at Omolon. Other operations will support this by maintaining grade and volume.

In 2012, we are also targeting completion and ramp-up of the Mayskoye concentrator. This will contribute significant production volumes from 2013 as the concentrate produced at Mayskoye will be further treated at the Amursk plant. By 2014, the existing portfolio of assets - including Albazino and Mayskoye - will achieve full capacity, with annual gold equivalent production targeted at 1.4 Moz.

As part of our commitment to enhancing existing mining and processing facilities, we have implemented a number of initiatives, which include:

·     full implementation of JORC-based mine planning based on use of the Datamine system for mine modelling and laser scanning. Mine planning will include full cycle, from reserve and resource estimation and audit to detailed mine sequencing plans on-site

·     design and implementation of automated production management systems, including second generation automated enterprise management systems

·     further implementation of energy saving solutions and audit of energy use, including automated systems for energy saving and control

·     research, design and implementation of technologies for improving recoveries and optimization of ore processing (geotechnological mapping).

Exploration

Further growth post-2014 will be mostly based on the results of ongoing exploration projects, both greenfield and brownfield. We believe these will lead to development of additional mines, allowing us to leverage the existing processing capacity at the maturing mines. Delivering on the ongoing exploration projects and progressing further to feasibility studies and subsequent construction remains one of our strategic priorities.

Acquisitions

On the M&A front, Polymetal continues to be focused on relatively small potential near-mine targets, aimed at increasing ore feed for maturing operations such as Varvara and Voro.

FINANCIAL REVIEW

·     Revenue was up 43% to US$ 1,326 million, driven by 13% increase in gold equivalent ounces sold and a 26% increase in the average realised gold price;

·     Adjusted EBITDA of US$ 624 million, up 47% and exceeding revenue growth; adjusted EBITDA margin was up 110 bps to 47% despite ramp-up of new mines and operational challenges in the beginning of the year;

·     Total cash cost of US$ 701/AuEq oz, up 26% compared to 2010 as a result of Russia's domestic inflation of 6.1%, Rouble strengthening against the US dollar by 3.4%, and relatively high cost levels at Omolon and Albazino mines which have just commenced commercial production and are still in ramp up mode;

·     Total cash cost of mature operations (ex. Omolon and Albazino) was US$ 642/ AuEq oz, up 19% compared to 2010;

·     Diluted EPS up 12% to US$ 0.74 per share as net earnings increased by 21% to US$290 million;

·     Adjusted diluted EPS up 30% to US$ 0.89 per share as adjusted net earnings (excluding share based compensation) increased by 41% to US$ 347 million;

·     Inaugural dividend of US$ 0.20 per share proposed in accordance with the new dividend policy;

·     Strong liquidity and funding profile: Net debt / adjusted EBITDA reduced to 1.41, with 65% of borrowings being long-term;

·     The Company is on track to deliver 1 Moz gold equivalent production in 2012, with all related investments completed or nearing completion by the end of 2011.

	2011	2010	Change, %1
operating highlights 2
Stripping, Kt	80,683	63,283	+27%
Underground development, m	35,150	23,577	+49%
Ore mined, Kt	11,002	7,474	+47%
Open-pit	9,636	6,509	+48%
Underground development	1,366	965	+42%
Average grade in ore mined (gold equivalent, g/t)	3.8	4.4	-15%
Ore processed, Kt	8,821	7,845	+12%
Average grade in ore processed (gold equivalent, g/t)	3.8	3.8	-1%
Production
Gold, Koz	443	444	0%
Silver, Moz	19.9	17.3	+15%
Copper, Kt	6.9	4.0	+73%
Gold equivalent, Koz 3	810	753	+8%
Sales
Gold, Koz	448	440	+2%
Silver, Moz	17.0	18.0	-5%
Copper, Kt	6.4	4.0	+59%
Gold equivalent, Koz 4	851	750	+13%
Average headcount	8,051	6,912	+16%
Financial highlights
Revenue, US$m	1,326	925	+43%
Adjusted EBITDA5, US$m	624	425	+47%
Total cash cost, US$/AuEq oz	701	555	+26%
Adjusted EBITDA margin, %	47.0%	45.9%	+100 bps
Net income6	290	239	+21%
Diluted EPS, US$/share	0.74	0.66	+12%
Adjusted net income, US$m	347	247	+41%
Adjusted diluted EPS, US$/share	0.89	0.68	+30%
Net debt, US$m	879	785	+12%
Net debt/Adjusted EBITDA	1.41	1.85	-24%
Operating cash flow before changes in working capital, US$m	462	333	+39%
Operating cash flow, US$m	212	215	-1%
Notes:
(1) % changes can be different from zero even when absolute amounts are unchanged because of rounding. Likewise, % changes can be equal to zero when absolute amounts differ due to the same reason. This note applies to all the tables in this release (2) Unaudited (3) Based on 1:60 Ag/Au and 5:1 Cu/Au conversion ratios (4) Based on actual realised prices (5) The calculation of Adjusted EBITDA is explained below (6) Net income represents profit for the financial year

"2011 was a very successful year for the Company. We believe that a combination of robust operating performance, with a good momentum achieved in the second half of the year, favorable market conditions and meaningful progress across all key investment projects, has delivered strong financial results in 2011 and superior positioning for value creation in the coming years", said Vitaly Nesis, CEO of Polymetal, commenting on the results.

"Polymetal's inaugural dividend payment demonstrates our commitment to delivering this value to our shareholders. We expect a strong financial year in 2012 on the back of meaningful production growth to 1 Moz, and robust cashflow generation as investments made in prior years are starting to pay off."

Precious metals market summary

2011 witnessed another period of strong price growth both for gold and silver, with gold reaching its all-time high in the beginning of September at US$ 1900/oz, and silver demonstrating even stronger growth, going up to as much as US$ 48.4/oz in April, with the gold/silver ratio standing at 32, a record low. Both gold and silver were rising on the back of continuing debt crisis in peripheral EU countries and US budget deficit problems, which, together with continued quantitative easing policy by the Federal Reserve System, raised doubts both about euro and dollar long-term strength as a reserve currency. Gold and silver therefore were viewed as "safe havens" by many institutions and private investors, while silver price highs were purportedly also driven by speculative dealing, to which the less liquid silver market is more sensitive.

By the end of the year, there was a moderate price decline to US$ 1564/oz for gold and US$ 27.8/oz for silver. As a result, the average 2011 gold price was US$ 1,572/oz, up 28%, and the silver price was US$ 35.3/oz, up 75% compared to 2010. The gold/silver ratio during 2011 dropped to 45 Ag/Au compared to 61 Au/Ag in the prior year.

Looking ahead to 2012, the Company believes that the gold price will stay above US$ 1,500/oz, as the key fundamental factors affecting the price are still in place for this year and are supporting the investment demand for gold. For silver, the Company expects a more modest price performance, with an average level slightly above US$ 30/oz.

Revenue

		2011	2010	Change, %
Sales volumes
Gold	Koz	448	440	+2%
Silver	Moz	17.0	18.0	-5%
Copper	kt	6.363	3.991	+59%
Gold equivalent sold1	Koz	851	750	+13%

¹Based on actual realised prices

Sales by metal (US$ mln unless otherwise stated)		2011	2010	Change, %	Volume variance, US$ mln	Price variance, US$ mln
Gold		697	542	+29%	+10	+145
Average realised price	US$/oz	1,556	1,232	+26%
Share of revenues	%	53%	59%
Silver		580	353	+64%	-18	+245
Average realised price	US$/oz	34.0	19.6	+73%
Share of revenues	%	44%	38%
Copper		46	29	+58%
Share of revenues	%	3%	3%
Total metal sales		1,323	924	+43%
Other revenue		3	1	+121%
Total revenue		1,326	925	+43%

In 2011, revenue grew by 43% to US$ 1,326 million, driven mostly by significant increases in the gold and silver prices. Gold sales volume was up by 2%, in line with production dynamics. Silver sales volumes were down 5% despite 15% production growth, as the Group started to sell most of its silver produced at the Dukat plant (the major silver producing segment) in the form of silver concentrate to a third party off-taker in Kazakhstan. This has led to a one-off increase in finished goods inventories representing concentrate in transit or awaiting treatment at third-party refineries.

The average realised price for gold was US$ 1,556/oz, up 26% compared to 2010 and in line with market price of US$ 1,572/oz. The average realised silver price stood at US$ 34.0/oz, up 73% compared to 2010 which again closely reflects the market price levels and movements.

The share of gold in total revenue reduced from 59% in 2010 to 53% in 2011, while the share of silver grew from 38% to 44% on the back of the significant change in the gold/silver price ratio in the market.

Revenue by segment (US$ mln)	2011	2010	Change, %
Dukat	532	345	+54%
Voro	280	214	+31%
Khakanja	214	215	-1%
Varvara	182	125	+45%
Omolon	73	25	+192%
Albazino	45	-	n/a
Other	-	1	n/a
Total revenue	1,326	925	+43%

Dukat continues to be the largest revenue contributor for the Group, with 40% of metal sales revenues coming from that segment. Voro and Varvara contributed 21% and 14% to the revenues respectively, broadly unchanged from 2010, while the share of Khakanja declined in 2011 from 23% to 16% as a result of a 25% decrease in gold equivalent produced driven by a lower grade profile. Albazino generated its first sales of gold concentrate to a Chinese third party off-taker in 2011 amounting to 3% of total revenues, and will become a meaningful revenue generating operation in 2012.

Cost of sales

Cost of sales
(US$ mln)	2011	2010	Change, %
On-mine costs	320	174	+84%
Consumables and spare parts	111	67	+66%
Services	120	61	+99%
Labour	83	44	+90%
Taxes, other than income tax	2	0	n/a
Other expenses	4	3	+35%
Smelting costs	255	174	+47%
Consumables and spare parts	117	80	+46%
Services	88	57	+54%
Labour	47	34	+39%
Taxes, other than income tax	0	0	n/a
Other expenses	2	2	+8%
Purchase of ore from third parties	17	11	+50%
Mining tax	97	57	+69%
Total cash operating costs	688	416	+66%
Depreciation and depletion of operating assets	140	76	+85%
Rehabilitation expenses	4	3	+25%
Total costs of production	832	494	+68%
Increase in metal inventories	(215)	(53)	+305%
Write-down to net realisable value	6	15	-59%
Total change in metal inventories	(209)	(38)	+453%
Cost of other sales	3	2	+87%
Total cost of sales	626	458	+37%

Cash operating cost structure	2011, US$ mln	2011, % of total	2010, US$ mln	2010, % of total
Consumables and spare parts	228	33%	147	35%
Services	208	30%	118	28%
Labour	130	19%	78	19%
Other expenses	8	1%	5	1%
Purchase of ore from third parties	17	2%	11	3%
Mining tax	97	14%	57	14%
Total cash operating costs	688	100%	416	100%

Total cost of sales grew by 37% in 2011 to US$ 626 million, mainly on the back of volume-based growth both in ore mined (by 47%) and ore processed (by 12%). The key cost drivers were the domestic inflation in Russia (6.1% CPI growth in 2011), and appreciation of the rouble against the dollar (3.4% increase in average rate from 2010 to 2011). The increased operating assets base, which now fully includes Omolon and Albazino, both currently higher cost assets, contributed 21% of the 37% increase, while inflationary factors and production growth at other mines made up another 16%.

Diesel fuel price inflation in particular is an important factor affecting the Company's cost base and driving cost increases, especially for remote mines generating power using diesel gensets, and in-house and third party transportation costs. Depending on the region, the price of diesel fuel increased by 20-50% in 2011.

The total cost of labour within cash operating costs increased by 68% in 2011 to a total of US$ 130 million, as a result of general labour cost inflation, and also as a result of growth in the average number of employees directly involved in production by 46% as a result of production commencing at Albazino and a full year of commercial production at Omolon (including the Sopka mine). The cost of labour at those operations was mostly included in inventory costs in 2010. Another important factor was the increase in social tax rates in Russia from 26% to 34%.

The cost of consumables and spare parts and the cost of services grew by 55% and 77% respectively, mainly affected by mining and processing  volume increases (47% and 12%, respectively), and further inflated by increased diesel and electricity prices, as well as increases in US dollar costs for other consumables in line with general CPI levels. Specific cost increases throughout the year were related to a shift of mining and, to some extent, processing volumes mix towards more complex and expensive mines and locations. In particular, significant increases are attributable to increased ore and concentrate haulage costs at Dukat, Omolon and Khakanja, as well as concentrate shipping costs and general transportation costs at Albazino.

Mining tax represents a consistent 14% share of total cost of sales and has increased by 69% in 2011 on the back of soaring metal prices, as well as an increased amount of total metal contained in ore mined in 2011.

Depreciation and depletion expenses nearly doubled in 2011 and amounted to US$ 140 mln as the Group put into production new mining and processing assets and completed several capex projects, including expansion of the Omsukchan factory at Dukat, the start-up of a new mine at Goltsovoye and a trial mine at Avlayakan, the launch of commercial production at Albazino, and the inclusion of a full year of mining and production at Omolon. The biggest increases are attributable to three mines where mining volumes significantly exceeded ore processed at relevant processing plants: ore mined at Sopka and not processed at Kubaka (Omolon hub), Albazino ore and concentrate prepared for further processing, and ore at the Avlayakan trial mine. At all locations mentioned, depreciation charges (mainly represented by depletion of mineral rights) were mostly included in metal inventories at the year-end.

In 2011 a net metal inventory increase of US$ 215 million was recorded as the Group has been building concentrate stockpiles at Albazino (awaiting further processing at Amursk POX in 2012), and Dukat (concentrate in transit and in third-party refineries), both largely representing one-off factors. The Group has also been building ore stockpiles at Sopka (awaiting transportation by winter road at the beginning of 2012), Mayskoe and Avlayakan.

General, administrative and selling expenses

(US$ mln)	2011	2010	Change, %
Labour	72	43	+69%
Services	24	21	+18%
Share based compensation	57	8	+623%
Depreciation	4	2	+106%
Other	12	9	+34%
Total	170	82	+107%

General, administrative and selling expenses grew from US$ 82 million to US$ 170 million, with the bulk of the increase arising from increase in non-cash share-based compensation costs. Labour costs grew by 69% as a result of the start of production and/or mining at Omolon, Albazino and Mayskoe, whilst previously general and administrative costs of those operations were capitalised.

Other expenses

(US$ mln)	2011	2010	Change, %
Taxes, other than income tax	11.3	14.5	-22%
Listing expenses	9.5	-	n/a
Exploration expenses	30.2	8.1	+273%
Omolon plant pre-commissioning expenses	-	7.2	-100%
Social payments	8.7	6.5	+34%
Housing and communal services	6.4	4.3	+49%
Loss on disposal of property, plant and equipment	6.2	6.3	-1%
Bad debt allowance	(1.2)	2.3	-150%
Other expenses	7.3	6.4	+13%
Total	78.3	55.5	+41%

Other expenses grew by 41% to US$ 78.3 million. The increase was mostly comprised of listing expenses (a US$ 9.5 million one-off item, representing transaction costs of the Company's listing on the London Stock Exchange, excluding costs related to new capital issued), and an increase in exploration expenses (US$ 22.1 million) related to assets where no probable or proved reserves were established. Other components demonstrated a moderate increase on the back of increased production, asset base and general cost inflation.

TOTAL Cash cost BY MINE

Cash costs per gold equivalent ounce	Cash cost per AuEq ounce, US$/oz			Gold equivalent sold, Koz1
	2011	2010	2011/2010, %	2011	2010	2011/2010, %
Dukat (AgEq)	14.0	9.9	+41%	15,546	17,608	-12%
Voro	553	423	+31%	176	174	+1%
Khakanja	672	478	+41%	138	175	-21%
Varvara	747	626	+19%	120	101	+19%
Total - mature operations	642	540	+19%	774	731	+6%
Omolon	1,481	1,162	+27%	46	19	+146%
Albazino	1,018	-	n/a	31	-	n/a
Total - new operations	1,294	1,162	+11%	77	19	+314%
Total	701	555	+26%	851	750	+13%
1 Based on average realised prices
Cash costs per tonne milled
	Cash cost per tonne milled, US$/t			Ore processed, Kt
	2011	2010	2011/2010, %	2011	2010	2011/2010, %
Dukat	138	109	+27%	1,733	1,533	+13%
Voro	48	40	+19%	1,803	1,931	-7%
Khakanja	173	113	+53%	617	622	-1%
Varvara	30	25	+20%	3,473	3,076	+13%
Total - mature operations	70	55	+29%	7,627	7,163	+6%
Omolon	185	48	+285%	574	682	-16%
Albazino	88	-	n/a	620	-	n/a
Total - new operations	134	48	+180%	1,194	682	+75%
Total	79	54	+46%	8,821	7,845	+12%

The Company believes it has demonstrated a good ability to control costs in the face of both global and local inflationary pressures which the mining industry is facing. Total cash costs per gold equivalent ounce sold were US$ 701/AuEq oz, up 26% compared to 2010. The cash cost dynamics was significantly influenced by Omolon and Albazino, the former operating under design capacity during 2011, and the latter going through the ramp-up stage and reaching design volumes and recoveries in the last quarter of the year. As a result, both operations have demonstrated cash costs which are higher than at our mature mines, but the Group is confident that their 2012 performance will be in line with the Group's average. Excluding these two operations, total cash cost was US$ 642/AuEq oz, or up just 19% compared to 2010. The key factors contributing to the growth in cash costs were Russian domestic inflation (6.1%) and appreciation of the US dollar against the rouble (3.4%) in 2011.

Cash cost by mine:

·     At Dukat, the cash cost per silver equivalent ounce sold grew by 42% to US$ 14.0/AgEq oz due to an increased share of underground mining (Goltsovoye) and increased ore and concentrate haulage costs, as well as significantly higher mining tax on the back of rapid growth in the average silver price by 73% year-on-year. General inflation and increased diesel fuel prices also contributed to the growth. However, in the second half of 2011, cash cost per silver equivalent dropped to US$ 13.4/AgEq oz as the both grades and recoveries improved, and silver prices slightly retreated from April highs.

·     At Voro, the cash cost per gold equivalent ounce sold in 2011 was US$ 553/AuEq oz, the lowest among our assets. Cash cost of gold equivalent ounce increased by 31% in 2011 on the back of a decrease in average grade in ore mined from 5.2 g/t to 3.6 g/t and a resulting production volume decline, combined with increased metal prices driving up mining tax, as well as general inflationary factors.

·     Khakanja's cash cost per gold equivalent ounce sold was US$ 672/AuEq oz, up 41% compared to 2010. The growth in cost was driven mainly by the grade decline after processing of high grade ore from Yurievskoe had been completed and the grades declined at the main Khakanja mine, coupled by Avlayakan ore transportation costs and diesel fuel price growth.

·     Varvara has demonstrated the least cost inflation among our assets, with cash cost per gold equivalent ounce growing by 19% in 2011 to US$ 747/ AuEq oz. The growth was mainly driven by increased use of third party ore and metal prices pushing the mining taxes up. On the positive side, cost inflation has been limited due to average grade improvement and 13% growth in total ore processed at the mine, with a 28% increase in gold equivalent production achieved in 2011.

·     At Omolon, cash costs were US$ 1,481/AuEq oz sold, significantly above the Company's and industry average as the Group has been unable to reach this year's production volume targets.  From a spike of US$ 1,833/AuEq oz in first half of the year, the Group achieved a notable improvement to US$ 1,303/ AuEq oz in the second half, on the back of significant increased grade in Birkachan ore processed (from 1.9 g/t in 1H 2011 to 3.1 g/t in 2H 2011) and improved recoveries. The Group expects a radical improvement in the cost profile of the Kubaka plant in 2012 as it will be able to process high grade ore from the Sopka mine as originally planned and achieve more than a three-fold increase in gold equivalent production volume.

·     At Albazino, the cash cost was US$ 1,018/ AuEq oz, a high level driven by the ramp-up of both the mine and processing plant during 2011. By the end of the year the processing plant has reached both its designed volume and recoveries, so the Group is quite positive about the 2012 cost outlook.

Cash costs by mine, 2H vs 1H:

Cash costs per gold equivalent ounce	Cash cost per ounce, US$/oz			Gold equivalent sold, Koz1
	2H 2011	1H 2011	Change, %	2H 2011	1H 2011	Change, %
Dukat (AgEq)	13.4	15.2	-12%	182	159	+14%
Voro	598	530	+13%	102	74	+38%
Khakanja	717	617	+16%	68	69	-2%
Varvara	749	730	+3%	62	60	+4%
Total - mature operations	658	623	+6%	414	362	+14%
Omolon	1,303	1,833	-29%	31	15	+105%
Albazino	993	-	n/a	32	-	n/a
Total - new operations	1,147	1,833	-37%	63	15	+320%
Total	721	671	+7%	477	377	+26%
1 Based on average realised prices
Cash costs per tonne milled
	Cash cost per tonne milled, US$/t			Ore processed, Kt
	2H 2011	1H 2011	Change, %	2H 2011	1H 2011	Change, %
Dukat	133	144	-7%	915	818	+12%
Voro	49	47	+3%	968	838	+16%
Khakanja	214	131	+63%	305	312	-2%
Varvara	31	28	+12%	1,786	1,687	+6%
Total - mature operations	73	67	+9%	3,975	3,654	+9%
Omolon	256	115	+122%	275	299	-8%
Albazino	86	-	n/a	620	-	n/a
Total - new operations	140	115	+21%	895	299	+199%
Total	85	71	+20%	4,870	3,953	+23%

In the second half of 2011, cash cost inflation was much more moderate as compared to the first half of the year and was largely driven by a 13% increase in the average realised gold price pushing mining taxes up, and continuing increase in throughput volumes at most of our operations, but also gaining from depreciation of the rouble against the US dollar and lower Russia domestic inflation (down by 1.1%). As a result, excluding Albazino and Omolon (now in ramp-up mode), cash cost per gold equivalent ounce grew by only 6% and the total cash cost per tonne milled increased by 9%. All-in, total cash costs per gold equivalent ounce increased by 7% to US$ 721/AuEq oz, while total cash costs per tonne milled grew by 20% to US$ 85/t.

Cash cost by mine:

·     At Dukat, cash cost per silver equivalent ounce sold decreased by 12% to US$ 13.4/AgEq oz as a result of significant improvement in both gold and silver recoveries in the second half of the year which was achieved after the recent refurbishment of the plant. The cash cost per tonne also improved by 7% half-on-half from US$ 144/t to US$ 133/t on the back of a 12% increase in throughput at the Omsukchan plant providing some economies of scale.

·     At Voro, despite a 13% growth to US$ 598/AuEq oz on the back of significantly increasing volumes of oxidized ore mined and stacked as well as higher stripping volumes in the second half of the year as compared to the first half, cash cost per gold equivalent ounce remained the lowest among our assets. Cash cost per tonne milled grew only 3% to US$ 49/t and are below Company's average.

·     Khakanja's cash cost per gold equivalent ounce sold was US$ 717/AuEq oz, above company average. The 16% increase in costs compared to 1H 2011 was driven mainly by the grade decline after processing of high grade ore from Yurievskoe had been completed and the grades declined at the main Khakanja mine, coupled by Avlayakan ore transportation costs. These factors also contributed to the higher cash cost per tonne milled of US$ 214/t in the second half of the year.

·     Varvara has demonstrated very moderate cost inflation, with cash cost per gold equivalent ounce increased by 3% half-on-half to US$ 749/oz. Cash cost per tonne milled were the lowest in the Company's portfolio and accounted for US$ 31/t in the second half of 2011.

·     At Omolon, from a high of US$ 1,833/AuEq oz in first half of the year, the Group has achieved a notable improvement to US$ 1,303 / GE oz the second half, on the back of significant increased grade in Birkachan ore processed (from 1.9 g/t in 1H 2011 to 3.1 g/t in 2H 2011) and improved recoveries.

·     At Albazino, the cash cost was US$ 993/AuEq oz (based on the average US$/RUR exchange rate in 2H 2011), a high level driven by the ramp-up of both the mine and processing plant during 2011. By the end of the year the processing plant has reached its designed volume, so the cash costs per tonne of US$ 86/t close to Company's average.

Adjusted EBITDA and EBITDA margin

Reconciliation of Adjusted EBITDA (US$ mln)	2011	2010	Change, %
Net income	290	239	+21%
Finance cost (net)	25	21	+18%
Income tax expense	119	67	+76%
Depreciation and depletion	97	70	+37%
EBITDA	530	398	+33%
Share based compensation	57	8	+623%
Exchange gains/losses	14	0	n/a
Listing expenses	10	-	n/a
Change in fair value of contingent liability	7	4	+89%
Rehabilitation costs	4	3	+25%
Write-down of inventory	6	15	-59%
Change in fair value of derivatives	2	1	+104%
Gain on disposal of subsidiary/bargain purchase gain	(5)	(4)	+38%
Adjusted EBITDA	624	425	+47%
Adjusted EBITDA margin	47.0%	45.9%	+110 bps

Adjusted EBITDA by segment (US$ mln)	2011	2010	Change, %
Dukat	282	154	+83%
Voro	175	131	+33%
Khakanja	113	120	-6%
Varvara	91	55	+66%
Omolon	5	(8)	-159%
Amursk hub (including Albazino and Mayskoe)	(6)	(14)	-60%
Corporate and other and intersegment operations	(36)	(12)	+191%
Total	624	425	+47%

In 2011, adjusted EBITDA grew by 47% to US$ 624 million, slightly ahead of revenue growth. This year the Group fully benefited from increased metal prices, production growth, and our ability to keep costs under control in a challenging environment. The adjusted EBITDA margin grew slightly by 110bps to 47.0%. Dukat and Voro contributed most to the adjusted EBITDA growth. Adjusted EBITDA at Dukat grew by 83% to US$ 282 million on the back of soaring silver prices and a 17% increase in silver production volumes, while at Voro the Group benefited from the lowest cost base among its assets, pushing adjusted EBITDA up by 33% despite some production volume decline. At Albazino (excluding Amursk and Mayskoe, both assets under construction), in 2011 the Group has already achieved a positive adjusted EBITDA contribution of US$ 4.5 million.

Other income statement items

Foreign exchange losses increased significantly from US$ 0.3 million in 2010 to US$ 13.6 million in 2011, mainly stemming from the appreciation of the Group's mostly US dollar denominated borrowings against the Russian rouble as the US dollar appreciated against the rouble by 5.6% year-on-year. The Company does not use any hedging instruments on foreign exchange, other than a natural hedge arising from the fact that the majority of the Group's revenue is denominated or calculated in US dollars.

A US$ 6.8 million non-cash loss was recorded in 2011, arising from changes in the fair value of contingent consideration liabilities. The change mainly arises from an increase in metal prices, as the Group is obliged to pay a perpetual 2% of revenues from deposits acquired as part of the acquisition of Kubaka in 2008. In September 2011, the Group fully settled deferred liabilities in relation to the acquisition of Varvara by paying US$ 5.5 million consideration to the previous owner.

Net INCOME, earnings per share and dividends

Pre-tax earnings in 2011 were US$ 409 million, up 33% compared to 2010, reflecting strong revenue growth and controlled cost dynamics. The Group's effective tax rate in 2011 was 29%, up from 22% in 2010, as a result of an increase in various non-deductible expense items or expenses incurred in jurisdictions outside Russia. The biggest single non-deductible expense item was share-based compensation (a non-cash item, US$ 57 million in 2011 compared to US$ 8 million in 2010). Other significant non-deductible expenses included contingent consideration, and charitable and social expenses.

As a result, net income grew by 21% to US$ 290 million. Basic earnings per share were US$ 0.79, or 18% higher than 2010 (the average number of shares in issue in 2011 was 2% higher as a result of the IPO). Diluted earnings per share were US$ 0.74, up 12% compared to 2010 and further influenced by an increase in the dilutive effect of shares potentially issuable by the Company under the terms of its Long-term Employee Incentive Programme.

From 2011, the Company has implemented a new dividend policy. For 2011, the Directors propose to pay a dividend of US$ 0.20 per share, and from 2012 the Company intends to pay a dividend of 20% of net earnings provided that net debt to adjusted EBITDA ratio is below 1.75.

Capital expenditure

(US$ mln)	2011	2010	Change, %
Amursk/Albazino	133	179	-26%
Mayskoe	85	51	+66%
Omolon	68	43	+59%
Dukat	55	26	+112%
Khakanja	20	7	+172%
Voro	13	12	+8%
Varvara	15	22	-33%
Corporate	13	31	-58%
Exploration	66	59	+12%
Capitalised interest	12	14	-11%
Total capital expenditure1	480	444	+8%

¹Total capital expenditure including amounts payable at the end of the period

In 2011, total capital expenditure was US$ 480 million, up 8% compared to 2010 as the Group was completing a number of major projects during the year. The Company expects that in 2012 it will see a considerable decrease in investment as most of the construction projects on the existing assets have been completed or are nearing completion.

The major capital expenditure items in 2011 were:

·     US$ 133 million has been invested in completion of construction at Amursk POX and Albazino concentrator, with all major construction works completed at both sites in 2011. The concentrator already is up and running and the Amursk POX is completing the commissioning stage;

·     US$ 85 million was spent on construction of processing plant and underground mine at Mayskoye, where the Group is targeting completion in Q4 2012;

·     US$ 68 million was invested in the Omolon operations, including installation of a Merrill Crowe section and completion of refurbishment at the Kubaka plant (completed in December 2011) and expansion of the mining fleet at Sopka and Birkachan;

·     Capital expenditure at Dukat was US$ 55 million, representing mainly completion of refurbishment of the Omsukchan concentrator (gravity circuit installed) and expansion of underground operations and fleet at Dukat and Goltsovoye mines;

·     Other operating mines incurred less significant capital expenditures in 2011, mainly representing routine maintenance investment and upgrades to mining fleet;

·     We have continued to actively invest in greenfield and brownfield exploration. Capital expenditure on exploration was US$ 66 million, up 12% compared to 2010;

·     Total capital expenditure in 2011 includes US$ 12 million of capitalised interest (2010: US$ 14 million).

Cash flows

(US$ mln)	2011	2010	Change, %
Operating cash flows before changes in working capital	462	333	+39%
Changes in working capital	(250)	(118)	+113%
Total operating cash flows	212	215	-1%
Investing cash flows	(472)	(410)	+15%
Financing cash flows
Net changes in gross debt	191	178	+8%
Proceeds from IPO	763	-	n/a
Other	(47)	-	n/a
Total financing cash flows	907	178	+410%
Net decrease/increase in cash and cash equivalents	647	(17)	n/a
Cash and cash equivalents at the beginning of the year	11	28	-61%
Effect of foreign exchange rate changes on cash and cash equivalents	1	(0)	-373%
Cash and cash equivalents at the end of the year	659	11	n/a

Cash flows in 2011 were strong, supported by metal prices and the inflow of funds from the IPO. Cash and cash equivalents increased from US$ 11 million in 2010 to US$ 659 million as at 31 December 2011 as a result of the following:

·     Operating cash flows before changes in working capital were US$ 462 million, up 39% from 2010 and supported by growth in adjusted EBITDA;

·     Changes in working capital were negative at US$ 250 million (2010: US$ 118 million) mainly as a result of increase in metal inventories at Omolon (ore mined at Sopka for further processing in 2012 at the Kubaka plant) and Albazino (concentrate produced for further processing at the Amursk POX in 2012) and, to a lesser extent, at other mines where the amounts of ore mined exceeded processing capacity in 2011 and stockpiles of saleable concentrate have built up;

·     Investing cash flows were up 15% driven by progress at major capital expenditure projects in 2011;

·     Financing cash flows were US$ 907 million, mainly represented by the IPO proceeds of US$ 763 million and US$ 191 million net increase in debt.

Liquidity and funding

Net debt	2011	2010	Change, %
Short-term debt and current portion of long-term debt	348	91	+285%
MTO obligation	535	-	n/a
Finance lease liabilities	-	5	-100%
Long-term debt	655	595	+10%
Derivatives	-	105	-100%
Gross debt	1,538	796	+93%
Less: cash and cash equivalents	659	11	n/a
Net debt	879	785	+12%
Net debt / adjusted EBITDA	1.41	1.85	-23.8%

The Group is keen to maintain a safe liquidity and funding profile, underpinned by strong operating cash flows and robust short-term and long-term liquidity management policies.

The Group's net debt stood at US$ 879 million as of 31 December 2011, representing a Net debt / adjusted EBITDA ratio of 1.41 as a result of receipt of IPO proceeds received in November 2011, and recognition of the MTO obligation. 

The Group continues to focus on building a healthy debt profile, which is comfortable both from the liquidity and cost standpoints. The majority of our borrowings (65%) were long-term as at 31 December 2011, while the average cost of debt remained at a low 3.2% in 2011 (2010: 3.1%), supported by low base interest rates and our ability to negotiate competitive premiums on the back of the improved financial position of the Company and our excellent credit history.

APPENDIX II - Principal risks and uncertainties

Effective risk identification and management

Managing our risks well is critical to the long-term sustainability and success of the Company. We believe that delivery of sustainable value to our stakeholders should be based on effective risk identification and an appropriate response to each risk.

Risk management process

Polymetal's risk management process is designed to minimise the potential threats to achieving our strategic objectives. The process incorporates the following stages:

·     Identify and document risks;

·     Assess, quantify and classify each risk;

·     Develop and implement risk mitigation/control strategies; and

·     Monitor, report and review risk.

The Audit and Risk Committee of the Board sets the agenda for the risk management policies and procedures of the Group and is responsible for reviewing their effectiveness. Its duties include the review of:

·     policies and overall process to identify and assess business risks and manage their impact on the Company and the Group;

·     regular assurance reports from management, internal audit, external audit and others on matters related to risk and control; and

·     the timeliness of, and reports on, the effectiveness of corrective action taken by management.

Risk identification

An awareness of risk is embedded within the Group and is grounded in our strong ethical values and proactive corporate culture. Our risk management philosophy is driven by the Company's Board of Directors and runs through all our management, employee and connected stakeholder activities - from developing strategy to day-to-day operations.

Risk management is one of the key functions of the Audit and Risk Committee. Strategic risks are identified by the Board based on a detailed understanding of the Company, its markets and the legal, social, political, economic, technological, environmental and cultural environments in which we operate. Our risk identification system considers not only single, mutually exclusive risks, but also multiple linked and correlated risks.

Risk matrices are used to record, prioritise and track each risk through the risk management process. These are regularly reviewed by the Audit and Risk Committee.

Risk assessment

Once identified, potential risk factors are assessed to consider the impact (consequences) the event or events may have on achieving objectives and the likelihood (probability) of the event. Together these create a risk profile.

Impact/Financial Consequences

>US$50m

Catastrophic          

·     Significant impact on strategy or operational activities

·     Multiple significant stakeholder concern

US$50m-US$10m

Major

·     Major impact on strategy or operational activities

·     Major stakeholder concern

 US$10- US$5m

Moderate

·     Serious impact on strategy or operational activities

·     Moderate stakeholder concern

 US$5m- US$0.1m

Minor         

·     Minor impact on strategy or operational activities

·     Limited stakeholder concern

<US$0.1m

Insignificant

·     Minimal impact on strategy or operational activities

·     Low stakeholder concern

Likelihood/Probability

·     Almost certain: Occurs one or more times per year and is likely to reoccur within one year

·     Likely: Occurs less than once a year and is likely to reoccur within five years

·     Possible: Could occur or may reoccur at some point within 10 years

·     Unlikely: Has happened at some time or could happen within 20 years

·     Rare: Is highly unlikely that it could occur in the next 20 years

Risk response

When the appropriate ranking has been identified, a response to each risk is formulated and implemented. Management assesses the effects of a risk's likelihood and impact, as well as costs and benefits. A response is then evaluated, that brings the risk within acceptable tolerance levels.

Monitoring and reporting

Ongoing monitoring processes are embedded in Polymetal's business operations. These track the effective application of internal control and risk management policies and procedures, including internal audit and specific management reviews. Risk matrices are used to re-evaluate and adjust controls in response to changes in Company's objectives, business and the external environment.

Management is responsible for the implementation of effective follow-up procedures to ensure appropriate actions occur in response to changes in risk and control assessments.

Risk category	Risk description and potential effect	Risk response
1 Market risk	Gold and silver price volatility can result in material and adverse movement in the Group's operating results, revenues and cash flows. Movement in gold equivalent price for all metals produced of 10% will cause EBITDA to increase/decrease 19% in accordance with Group budgeted figures for 2012.	The Group monitors gold and silver prices on an ongoing basis. There are market signs which support analyst and investor confidence in the current levels of gold and silver prices. The Group has therefore decided not to hedge gold prices in order to maximise the benefits from the positive price trends.
2 Production risks	The risk of failure to meet the planned production programme. Failure to meet production targets may adversely affect operating performance and financial results of the Group.	Annual, quarterly and monthly production budgeting and subsequent monthly control against budget is designed to mitigate the risk. The effectiveness and efficiency of the production process is ensured by the Group's engineering team senior management.
2.1 Production risk - low grade / potential dilution of ore	The risk of lower than expected metal grade or dilution is caused by complex mining and geological conditions, mainly at underground mines.	An approved production programme includes increased volume of operational prospecting works, such as in-fill drilling and grade control sampling.
2.2 Production risk - ore and concentrate shipping	The Company operates in remote locations that require complex and significant transportation of ore and gold/silver concentrates, most of which is conducted by third party contractors. Production targets may not be reached if any element of the logistics chain is disrupted.	To mitigate the logistics risk the Group invests considerable amounts into construction and maintenance of permanent and temporary winter roads at exploration and production sites. The Group exercises effective control over the whole logistics chain, including selection and operation of contractors.
2.3 Production risk - supply chain risks	The Group's production activity depends heavily on the effectiveness of supply chains. These might be negatively affected by complex logistics to remote locations and delays in construction and delivery of purchased mining and processing equipment or spare parts.	The Group has implemented and constantly improves the supply chain system to closely link the production demand of resources with inventory levels, optimise the number of order placements and ensure the in-time inventory and equipment delivery to production sites.
2.4 Production risk - low recovery rate	Recoveries at the Group's processing plants may not reach planned levels due to complex technological properties of ore processed.	To mitigate the risk the Group invests considerable amounts in ore quality assessment procedures and seeks to control ore quality by formation of ore stacks with the required characteristics.
3 Production risk - construction and renovation	Failure to meet return required from the major capital expenditure projects, such as building new mines and processing facilities or production capacity increase / renovation at existing mines, as a result of failure to meet project delivery timeline and budgets which can adversely affect the Group's financial results, cash flow position and increase capital costs. Most significant ongoing projects include launch of Amursk POX facility and construction of Mayskoye concentrator.	The Group's engineering team is responsible for the oversight of capital expenditure projects, including project support, coordination of service organisations, contractors, constructors and cooperation with regulatory bodies. Significant parts of exploration and development projects are performed by the Group in-house by Polymetal Engineering, a subsidiary company with significant expertise and track record of designing and commissioning mines and processing plants. On complex projects, such as construction of the Amursk POX plant, the Group employs world class consultants with recognised international experience.
4 Legal risk	Operating in developing countries, such as Russia and Kazakhstan, has a risk of changes in tax and other legislation which may occur from time to time. The most sensitive areas are regulation of foreign investments, private property and environmental protection. In the recent years, however, both Russian and Kazakh governments have become more predictable in implementing new regulations and taxes, demonstrating consciousness of the investment climate.	Polymetal has a successful track record of operating in both Russian and Kazakh jurisdictions, having developed its own expertise in corporate, tax, licensing and other legal areas. The Group's financial and legal teams monitor current legislation and proposed changes and incorporate these into the practice. Corporate and operating management teams are responsible for meeting the legal requirements in their operating activities. Head office and on-site legal teams guarantee appropriate controls over compliance issues.
5 Mergers and acquisitions	The Group invests considerable amounts in gold mining assets and operations in the Russian Federation and Kazakhstan. There is a risk of failure to achieve expected benefits from any acquisition in the case of adverse changes in assumptions or inaccuracy of estimates made, or where the information used for decision making was incomplete or inaccurate. Failure to deliver expected benefits from an acquisition can results in adverse financial performance, lower planned production volumes or problems with product quality.	Rigorous due diligence procedures are applied to the evaluation and execution of all acquisitions to assess the consequences of the acquisition, based on economic, ecological, political and social factors. Board and/or shareholder approval is required for any acquisition.
6 Environmental risks	Environmental damage may arise from operations, including air and water pollution from toxic waste. Waste storage and recycling is subject to government regulation. Potential impacts include fines and penalties, statutory liability for environmental rehabilitation and other financial consequences that may be significant.	The Group has implemented a number of initiatives to monitor and limit the impact of its operations on the environment. These include external expert assessment of pollution generated and adoption of industry best practice on the corporate level policies and procedures.
7 Political risk	Operating in Russia and Kazakhstan involves some risk of political instability, which includes, but is not limited to, changes in government, negative policy shifts and civil unrest. These may have an adverse effect on the Group's market value and operating environment.	The Group actively monitors political developments on an ongoing basis. We aim to maintain open working relationships with local authorities in the countries where we operate.
8 Currency risk	Currency risk arises as the Group's revenue is linked to London Bullion Market Association (LBMA) gold and silver fixings and denominated in US Dollars. The expenses are mostly incurred and denominated in Russian Rubles.	Natural hedging is used to reduce the risk exposure: revenue is matched with US Dollar denominated debt. Flexible budgeting is used to monitor the effect of exchange rate fluctuations on the Group's financial results.
9 Human resources	Failure to retain key employees or to recruit new staff mainly at the Group's mining and processing facilities may lead to increased staff costs, interruptions to existing operations and delay in new projects. Lack of skilled and knowledgeable staff at remote locations may occur due to extreme weather conditions.		A working conditions improvement programme is in place. Remuneration policies are designed to incentivise, motivate and retain key employees. There is an increased focus on health and safety - and there is active promotion of a positive corporate culture within the Group.
10 Liquidity risk	Inability to raise sufficient funds to meet current operating or ongoing financial needs, to develop new projects and growth.		The Group's Treasury function is responsible for ensuring that there are sufficient funds in place, including loan facilities, cash flow from operating activities and cash on hand to meet short-term business requirements. Long-term credit lines are used to finance new projects and organic growth. In 2011, the Group moved to the LSE's main market, raising additional US$768 million during its IPO. Part of the IPO proceeds will be used to reduce the current net debt level.
11 Failure to meet exploration objectives	Exploration and development are capital- and time-intensive activities and may involve a high degree of risk. They are, however, necessary for the future growth. Failure to discover new reserves of sufficient magnitude could adversely affect the Group's medium and long-term growth prospects.		The Group invests considerable amounts in focused exploration projects to obtain sufficient information about the quantity and quality of expected reserves and to estimate expected cash flows. The Group's team of mining and engineering specialists has a track record of successful greenfield and brownfield exploration leading to subsequent development of exploration fields into commercial production.
12 Interest rates	The Group is exposed to interest rate risk as significant part of the Group's debt portfolio comprises US Dollar-denominated floating rate borrowings.		Based on analysis of the current economic situation, the Group has decided to accept the risk of floating interest rate rather than hedge it or borrow at fixed rates. However the Group does not rule out the possibility of fixing the interest rate on its borrowings in the future, should assessment of the ongoing economic situation suggest this may be profitable.
13 Inflation risk	The Group is exposed to potentially high rates of inflation in the Russian Federation and Kazakhstan. Higher rates of inflation may increase future operating costs and have a negative impact on financial results if there is no related depreciation of the local currency against US Dollar or an increase in LBMA gold and silver fixings.		As part of the budgeting process, the Group estimates possible inflation levels and incorporates them into cost planning.

APPENDIX III - Directors' responsibility statement

The Directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted for use in the European Union (IFRS). The financial statements are required by law to be properly prepared in accordance with the Companies (Jersey) Law 1991. International Accounting Standard 1 requires that financial statements present fairly for each financial year the Group's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the preparation and presentation of financial statements'.

In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. However, the Directors are also required to:

•     properly select and apply accounting policies;

•     present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

•     provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

•     make an assessment of the Company's ability to continue as a going concern.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK and Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement

We confirm that to the best of our knowledge:

•     the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and

•     the management report, which is incorporated into the directors' report, includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

By order of the Board,

Vitaly Nesis

Chief Executive

24 April 2012

APPENDIX IV - Financial statements

Polymetal International plc

Consolidated Income Statement

			Year ended		Year ended
		Note	31 December 2011		31 December 2010
			US$'000		US$'000
Revenue		6	1 326 430		925 376
Cost of sales		7	(625 740)		(458 114)
Gross profit			700 690		467 262
General, administrative and selling expenses		11	(169 623)		(82 100)
Other operating expenses		12	(78 344)		(55 524)
Share of loss of associates and joint ventures		19	(1 952)		(1 170)
Operating profit			450 771		328 468
Gain on disposal of subsidiaries		4	4 931		3 580
Foreign exchange loss, net			(13 634)		(337)
Change in fair value of derivative financial instruments		29	(1 855)		(909)
Change in fair value of contingent consideration liability		29	(6 828)		(3 616)
Finance income			4 208		785
Finance costs		15	(28 746)		(21 541)
Profit before income tax			408 847		306 430
Income tax expense		16	(118 985)		(67 414)
Profit for the financial year			289 862		239 016
Profit for the period attributable to:
Equity shareholders of the Parent			289 323		239 016
Non-controlling interest			539		-
			289 862		239 016
			Year ended		Year ended
			31 December 2011		31 December 2010
Earnings per share			US$		US$
Basic		31	0.79		0.67
Diluted		31	0.74		0.66
	Year ended	Year ended		Year ended	Year ended
	31 December 2011	31 December 2010		31 December 2011	31 December 2010
	Cents per share	Cents per share		US$'000	US$'000
Final dividend proposed in relation to the year (Note 35)	20	-		76 537	-

Polymetal International plc

Consolidated Statement of Comprehensive Income

		Year ended	Year ended
		31 December 2011	31 December 2010
		US$'000	US$'000
Profit for the financial year		289 862	239 016
Other comprehensive loss
Effect of translation to presentation currency		(115 474)	(12 937)
Total comprehensive income for the financial year		174 388	226 079
		Year ended	Year ended
		31 December 2011	31 December 2010
		US$'000	US$'000
Total comprehensive income for the financial year attributable to:
Equity Shareholders of the Parent		185 033	226 079
Non-controlling interest		(10 645)	-
		174 388	226 079

Polymetal International plc

Consolidated Balance Sheet

	Note	31 December 2011	31 December 2010
		US$'000	US$'000
Assets
Property, plant and equipment	17	1 901 974	1 643 481
Goodwill	18	108 587	114 712
Investments in associates and joint ventures	19	23 558	26 821
Non-current loans	20	8 962	5 187
Deferred tax assets	16	62 118	57 676
Non-current inventories	21	44 318	21 017
Total non-current assets		2 149 517	1 868 894
Current inventories	21	613 216	368 515
Current VAT receivable		111 887	94 148
Trade and other receivables	22	67 991	43 683
Prepayments to suppliers		38 912	29 025
Income tax prepaid		11 787	4 378
Cash and cash equivalents	23	658 795	11 056
Total current assets		1 502 588	550 805
Total assets		3 652 105	2 419 699
Liabilities and shareholders' equity
Trade and other payables	27	(79 548)	(67 028)
Current borrowings	24	(348 429)	(90 610)
Accrued liabilities		(27 856)	(23 303)
Share purchase obligation under MTO	1	(534 597)	-
Income tax payable		(13 366)	(3 993)
Other taxes payable		(21 327)	(13 365)
Finance lease liabilities	25	-	(4 819)
Total current liabilities		(1 025 123)	(203 118)
Non-current borrowings	24	(654 666)	(595 359)
Derivatives	29	-	(105 437)
Contingent consideration liability	29	(22 290)	(23 754)
Deferred tax liabilities	16	(79 342)	(83 345)
Environmental obligations	26	(54 463)	(45 156)
Other non-current liabilities		(1 623)	(2 578)
Total non-current liabilities		(812 384)	(855 629)
Total liabilities		(1 837 507)	(1 058 747)
NET ASSETS		1 814 598	1 360 952
Stated capital account	31	1 566 386	865 483
Treasury shares in JSC Polymetal		(395)	(457)
Share-based compensation reserve		59 239	7 896
Translation reserve		(151 029)	(49 443)
Share purchase obligation under MTO	1	(561 659)	-
Retained earnings	31	753 572	537 473
Total equity attributable to the parent		1 666 114	1 360 952
Non-controlling interest		148 484	-
TOTAL EQUITY		1 814 598	1 360 952

Polymetal International plc

Consolidated Balance Sheet (continued)

The notes on pages 31 to 91 form part of these financial statements.

These financial statements are approved and authorised for issue by the Board of Directors on 24 April and signed on its behalf by

Vitaly Nesis

Chief Executive

Bobby Godsell

Chairman of the Board of Directors

24 April 2012

Polymetal International plc

Consolidated Statement of Cash Flows

	Notes		Year ended	Year ended
			31 December 2011	31 December 2010
			US$'000	US$'000
Net cash generated by operating activities	34		212 099	215 215
Cash flows from investing activities
Purchases of property, plant and equipment	17		(461 632)	(403 769)
Consideration for asset acquisitions	4		(4 761)	(8 479)
Loans provided to third parties	20		(1 286)	(421)
Receipt of repayment of loans provided to third parties			156	14
Loans provided to related parties	33		(5 029)	(3 871)
Receipt of repayment of loans provided to related parties	33		1 910	7 845
Contingent consideration payment	29		(6 943)	(1 500)
Proceeds from subsidiary disposal	4		5 300	-
Net cash used in investing activities			(472 285)	(410 181)
Cash flows from financing activities
Borrowings obtained	24		1 695 078	1 142 927
Repayments of borrowings	24		(1 498 518)	(960 781)
Proceeds from issuance of shares of the Company	31		762 641	-
Purchase of treasury shares in the Company	31		(46 649)
Payments on finance lease obligations			(5 217)	(4 225)
Net cash generated by financing activities			907 335	177 921
Net increase / (decrease) in cash and cash equivalents			647 149	(17 045)
Cash and cash equivalents at the beginning of the financial year	23		11 056	28 317
Effect of foreign exchange rate changes on cash and cash equivalents			590	(216)
Cash and cash equivalents at the end of the financial year	23		658 795	11 056

Polymetal International plc

Consolidated Statement of Changes in Equity

	Notes	Polymetal International shares outstanding	Stated capital account	Share based compensation reserve	Treasury shares in JSC Polymetal	Translation reserve	Share purchase obligation	Retained earnings	Total equity attributable to the parent	Non-controlling interest	TOTAL equity
		Number	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
Balance at 1 January 2010		n/a	804 329	-	(481)	(36 506)	-	298 457	1 065 799	-	1 065 799
Total comprehensive income		-	-	-	-	(12 937)	-	239 016	226 079	-	226 079
Amortisation of bonus received from depositary		-	978	-	-	-	-	-	978	-	978
Share based compensation		-	-	7 896	-	-	-	-	7 896	-	7 896
Issue of treasury shares of JSC Polymetal in exchange for assets	4	-	60 176	-	24	-	-	-	60 200	-	60 200
Balance at 31 December 2010		n/a	865 483	7 896	(457)	(49 443)	-	537 473	1 360 952	-	1 360 952
Total comprehensive income		-	-	-	-	(104 290)	-	289 323	185 033	(10 645)	174 388
Amortisation of bonus received from depositary		-	819	-	-	-	-	-	819	-	819
Share based compensation		-	-	56 266	-	-	-	-	56 266	850	57 116
Issue of treasury shares of JSC Polymetal in exchange for assets	4,31	-	66 966	-	24	-	-	-	66 990	-	66 990
Issuance of ordinary shares under ISSF	31	332 641 773	-	-	-	-	-	-	-	-	-
Issuance of shares on IPO	31	53 350 000	762 641	-	-	-	-	-	762 641	-	762 641
Сancellation of treasury shares of the Company	31	(3 305 988)	(46 649)	-	-	-	-	-	(46 649)	-	(46 649)
Share purchase obligation under MTO	31	-	-	-	-	-	(561 659)	-	(561 659)	-	(561 659)
Reclassification to non-controlling interest	1	-	(82 874)	(4 923)	38	2 704	-	(73 224)	(158 279)	158 279	-
Balance at 31 December 2011		382 685 785	1 566 386	59 239	(395)	(151 029)	(561 659)	753572	1 666 114	148 484	1 814 598

1.     General

The financial information for the year ended 31 December 2011 contained in this document does not constitute statutory accounts as defined in Article 105 of Companies (Jersey) Law 1991. The financial information for the year ended 31 December 2011 has been extracted from the financial statements of Polymetal International plc, a copy of which has been delivered to the Jersey Financial Services Commission. The auditors' report on those accounts was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis of matter and did not include a statement under Article 113B (2) or (3) of Companies (Jersey) Law 1991.

 

Formation of the Polymetal International plc Group

Polymetal International plc (the Company) was incorporated on 29 July 2010 as a public limited company under Companies (Jersey) Law 1991.

On 2 November 2011, the Company was admitted to the Official List of the UK Listing Authority and commenced trading on the London Stock Exchange's premium listed market. The Company is the new ultimate parent company of Joint Stock Company Polymetal (JSC Polymetal) and its subsidiaries, joint ventures and associates (the JSC Polymetal Group) and owns 83.26% of the issued share capital of JSC Polymetal as at 31 December 2011, with 8.11% held by third parties and 8.63% effectively held as treasury shares (see Note 31).

On 30 September 2011, PMTL Holding Limited (PMTL), the Company's wholly-owned subsidiary, made an offer (known as the Institutional Share Swap Facility or the ISSF) to certain institutional shareholders of JSC Polymetal to acquire their JSC Polymetal shares and JSC Polymetal GDRs. The ISSF terms provided for the issue of new shares in the Company in exchange for JSC Polymetal shares or GDRs on a one for one basis.

The completion of the ISSF was conditional on the IPO such that 2 November 2011 was the date on which Polymetal International plc, via PMTL, acquired control of the JSC Polymetal Group and the enlarged Group (the Group) was formed. Polymetal International issued new shares to those investors participating in the ISSF and who tendered these shares to PMTL.Polymetal International plc contributed JSC Polymetal shares acquired in the course of the ISSF as a capital investment in PMTL.

Following completion of the ISSF, PMTL became the owner of more than 50 per cent of the issued share capital of JSC Polymetal and, in accordance with Russian law, launched a mandatory tender offer (MTO) for all of the JSC Polymetal shares or GDRs not held by it.

The formation of the enlarged Polymetal International Group has been accounted for as a reverse acquisition under IFRS 3 Business Combinations. Although the ISSF resulted in Polymetal International plc becoming the controlling shareholder of the JSC Polymetal Group, for accounting purposes in the consolidated financial statements, JSC Polymetal is treated as the acquirer of the Company.

The following accounting treatment has been applied to account for the reverse asset acquisition:

·      the consolidated assets and liabilities of the subsidiary Joint Stock Company Polymetal were recognised and measured at their pre-restructuring carrying amounts, without restatement to fair value;

·      the assets and liabilities of the Company are recognized at their fair value and are consolidated from 2 November 2011, the date at which the new company was formed;

·      comparative numbers presented in the consolidated financial statements are those reported in the consolidated financial statements of Joint Stock Company Polymetal, for the year ended 31 December 2010, except for the presentation of the stated capital account, which has been retrospectively restated to reflect the legal issued share capital of the Company as the legal parent;

·      the Group's consolidated income statement and statement of other comprehensive income for the year ended 31 December 2011 therefore comprises the results of the JSC Polymetal Group from 1 January 2011 to 1 November 2011 and the results of the Group from 2 November 2011 to 31 December 2011. The Group's retained earnings and other reserves shown in the balance sheet as at 31 December 2011 and the statement of changes in equity are the effective 91.1% share (after excluding treasury shares) in the equity of the JSC Polymetal Group acquired by the Company on formation of the Group on 2 November 2011 plus the subsequent equity movements of the Group in the period to 31 December 2011.

·      the open MTO offer represents an unavoidable obligation to transfer cash to any persons taking up the offer. In accordance with IAS 32 Financial Statements: Presentation a US$561.7 million Rouble-denominated liability was recognised at 2 November 2011, with a corresponding debit recognised in reserves. At 31 December the liability was retranslated at the year end exchange rate to US$534.6 million with the movement recognised within the Translation reserve.

Significant subsidiaries

As disclosed above at 31 December 2011, the Company held an effective 91.1% interest in JSC Polymetal. Through this subsidiary, the Company held the following significant mining and production subsidiaries:

			Effective interest held by JSC Polymetal, %
Name of subsidiary	Deposits	Country of incorporation	31 December 2011		31 December 2010
CJSC Zoloto Severnogo Urala	Vorontsovskoye	Russia	100		100
JSC Okhotskaya GGC	Khakandjinskoye Yur'evskoe	Russia	100		100
CJSC Serebro Magadana	Dukat Lunnoe Arylakh Goltsovoye	Russia	100		100
ZK Mayskoye LLC	Mayskoye	Russia	100		100
Omolon Gold Mining Company LLC	Kubaka Birkachan	Russia	100		100
Albazino Resources LLC	Albazino	Russia	100		100
Amursky Hydrometallurgy Plant LLC	N/A	Russia	100		100
Rudnik Kvartseviy LLC	Sopka Kvartsevaya	Russia	100		100
JSC Varvarinskoye	Varvarinskoye	Kazakhstan	100		100

Significant shareholders

At 31 December 2011, the significant shareholders in the Company are: Pearlmoon Limited, the ultimate beneficial owner of which is Petr Kellner (20.86%), Powerboom Investments Limited, the ultimate beneficial owner of which is Alexander Nesis (17.90%), Vitalbond Limited and its affiliated companies, the ultimate beneficial owner of which is Alexander Mamut (10.12%), MBC Development Limited, the ultimate beneficial owner of which is Mr. Alexander Mosionzhik (4.44%), and Staroak Limited, the ultimate beneficial owner of which is Mr. Oleg Shuliakovskii (4.27%). No other parties control more than 3% of the Company shares. There were no changes to the Significant shareholders' ownerships as of 1 April 2012.

Going concern

In assessing its going concern status, the Group has taken account of its financial position, anticipated future trading performance, its borrowings and other available credit facilities and its capital expenditure commitments and plans. It has also considered the US$534 million payment made in February 2012 for the purchase of JSC Polymetal shares not participating in the Group reconstruction under the Mandatory Tender Offer and the further payment expected in June 2012 to purchase the remaining JSC Polymetal shares under the Squeeze Out (meaning the compulsory acquisition of JSC Polymetal Shares under Russian law), together with the risks facing the Group.

The board is satisfied that the Group's forecasts and projections, having taken account of reasonably possible changes in trading performance, show that the Group has adequate resources to continue in operational existence for at least the next 12 months from the date of this document and that it is appropriate to adopt the going concern basis in preparing these consolidated financial statements.

Basis of presentation

The Group's annual consolidated financial statements for the year ended 31 December 2011 are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and endorsed by the European Union. IFRS includes the standards and interpretations approved by the IASB including International Accounting Standards (IAS) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC).

The financial statements have been prepared on the historical cost basis, except for certain financial instruments which are measured at fair value.

The accounting policies set out in Note 2 have been applied in preparing the consolidated financial statements for the year ended 31 December 2011. The Group used IFRS, effective as at 31 December 2011, in preparation of these Consolidated financial statements.

Standards and Interpretations in issue not yet adopted

The following new or amended IFRS accounting standards not yet adopted are expected to have a significant impact on the Group:

IFRS 9 Financial Instruments - Classification and Measurement reflects the first phase of the IASB's three stage project to replace IAS 39. The first phase deals with the classification and measurement of financial assets and financial liabilities. The standard applies to annual periods beginning on or after 1 January 2015.

IFRS 10 Consolidated Financial Statements replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses accounting for consolidated financial statements and SIC-12 Consolidation - Special Purpose Entities. IFRS 10 provides a single basis for consolidation with a new definition of control. The standard applies to annual periods beginning on or

after 1 January 2013.

IFRS 11 Joint Arrangements replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities - Non-monetary Contributions by Venturers. Under IFRS 11 a joint arrangement is classified as either a joint operation or a joint venture, and the option to proportionately consolidate joint ventures has been removed. Interests in joint ventures must be equity accounted. This standard applies to annual periods beginning on or after 1 January 2013.

IFRS 12 Disclosures of Interests in Other Entities will accompany IFRS 10 and IFRS 11. This standard combines the disclosure requirements previously covered by IAS 27, related to consolidated financial statements, IAS 31 Interest in Joint Ventures and IAS 28 Investments in Associates, as well as including additional disclosure requirements. This standard applies to annual periods beginning on or after

1 January 2013.

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine provides a model for accounting for costs associated with the removal of waste during the production phase of a surface mine, including guidance on the apportionment of the costs incurred for obtaining a current and future benefit and how capitalised costs are depreciated. This interpretation applies to annual periods beginning on or after 1 January 2013.

The following new, amended or revised IFRS accounting standards and interpretations not yet adopted are not expected to have a significant impact on the Group:

IFRS 13 Fair Value Measurement provides a single framework for all fair value measurements and applies to annual periods beginning on or after 1 January 2013.

An amendment to IAS 1 Presentation of Financial Statements which requires items to be grouped in other comprehensive income based on whether those items are subsequently reclassified to profit or loss. The amendment is to be applied for annual periods beginning on or after 1 July 2012.

An amendment to IAS 12 Income taxes is to be applied for annual periods beginning on or after 1 January 2012.

An amendment to IAS 19 Employee Benefits is to be applied retrospectively for annual periods beginning on or after 1 January 2013.

Amendments have been made to IAS 27 and it has been reissued as IAS 27 Separate Financial Statements. The revised standard prescribes the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial

statements. The accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates in consolidated financial statements are prescribed by IFRS 10, IFRS 11 and IFRS 12. The revised standard is to be applied for annual periods beginning on or after 1 January 2013. Amendments have been made to IAS 28 and it has been reissued as IAS 28

Investments in Associates and Joint Ventures. The revised standard prescribes the application of the equity method when accounting for investments in associates and joint ventures. The revised standard is to be applied for annual periods beginning on or after 1 January 2013.

The amendment to IFRS 7 Financial Instruments: Disclosures is effective for annual periods beginning on or after 1 July 2011.

2.     Significant Accounting Policies

Basis of consolidation

Subsidiaries

The consolidated financial statements of the Group include the financial statements of the Company, its subsidiaries and, if applicable, special purpose entities, from the date that control effectively commenced until the date that control effectively ceased. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Income and expenses of subsidiaries acquired or disposed of during the period are included in the consolidated income statement from the effective date of acquisition and up to the effective date of disposal, as appropriate.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

All intra-group balances, transactions and any unrealised profits or losses arising from intra-group transactions are eliminated on consolidation.

Changes to the Group's ownership interests that do not result in a loss of control over the subsidiaries are accounted for as equity transactions. The carrying amount of the Group's interests and non-controlling interests are adjusted to reflect the change in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interest is adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the Parent.

When the Group loses control of a subsidiary, the profit or loss on the disposal is calculated as the difference between 1) the aggregated fair value of the consideration received and the fair value of any retained interest and 2) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and non controlling interests.

For non-wholly owned subsidiaries, non-controlling interests are initially measured at the non-controlling interest's proportion of the fair values of net assets recognised at acquisition. Thereafter, a share of the profit or loss for the financial year and other movements in the net assets or liabilities of the subsidiary is attributed to the non-controlling interests as shown in the income statement and balance sheet.

 

Business combinations

IFRS 3 Business Combinations applies to a transaction or other event that meets the definition of a business combination. When acquiring new entities or assets, the Group applies judgement to assess whether the assets acquired and liabilities assumed constitute an integrated set of activities, whether the integrated set is capable of being conducted and managed as a business by a market participant, and, and thus whether the transaction constitutes a business combination, using the guidance provided in the standard. Acquisitions of businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in the consolidated income statement as incurred. Transaction costs incurred in connection with the business combination are expensed. Provisional fair values are finalised within 12 months of the acquisition date.

Where applicable, the consideration for the acquisition may include an asset or liability resulting from a contingent consideration arrangement. Contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Subsequent changes in such fair values are adjusted against the cost of acquisition retrospectively with the corresponding adjustment against goodwill where they qualify as measurement period adjustments. Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period about facts and circumstances that existed at the acquisition date. The measurement period may not exceed one year from the effective date of the acquisition. The subsequent accounting for contingent consideration that does not qualify for as a measurement period adjustment is based on how the contingent consideration is classified. Contingent consideration that is classified as equity is not subsequently remeasured. Contingent consideration that is classified as an asset or liability is remeasured at subsequent reporting dates in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or IAS 39 Financial Instruments Recognition and Measurement with the corresponding amount being recognised in profit or loss.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the acquisition date, except that:

·         Deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively;

·         Liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 Share-based Payment at the acquisition date; and

·         Assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard.

Where a business combination is achieved in stages, the Group's previously held interests in the acquired entity are remeasured to fair value at the acquisition date (i.e. the date the Group attains control) and the resulting gain or loss, if any, is recognised in the consolidated statement of comprehensive income. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in equity are reclassified to profit or loss, where such treatment would be appropriate if that interest was disposed of.

Goodwill and goodwill impairment

Goodwill arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

If the Group's interest in the fair value of the acquiree's identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held equity interest in the acquiree (if any), the excess is recognised immediately in the consolidated income statement as a bargain purchase gain.

Goodwill is not amortized but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is
an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

On disposal of a subsidiary, the attributable goodwill is included in the determination of the profit or loss on disposal.

Acquisition of mining licences

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

Investments in associates

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence constitutes the power to participate in the financial and operating policy decisions of the investee but does not extend to a control or joint control over the enactment of those policies. The results and assets and liabilities of associates are incorporated in the consolidated financial statements using the equity method of accounting.

Interests in joint ventures

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

Equity method of accounting

Under the equity method, an investment in an associate or jointly controlled entity (investee) is initially recognised in the consolidated balance sheet at cost and adjusted thereafter to recognise the Group's share of the profit or loss and other comprehensive income of the investee. When the Group's share of the losses of an associate exceeds the Group's interest in that entity, the Group ceases to recognise its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee.

Any excess of the cost of acquisition over the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an investee recognised at the date of acquisition is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

The requirements of IAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group's investments. Where an indicator of impairment exists or the carrying value of the asset contains goodwill with an indefinite useful life, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets (IAS 36) as a single cash generating unit through the comparison of its recoverable amount (the higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36.

When a Group entity transacts with its investees, profits and losses resulting from the transactions with the investee are recognised in the Group's consolidated financial statements only to the extent of interests in the associate that are not related to the Group.

Functional and presentation currency

The functional currency for each entity in the Group is determined as the currency of the primary economic environment in which it operates. For all Russian entities the functional currency is the Russian Rouble (RUR). The investment holding companies, including Polymetal International plc, also have a Rouble functional currency as they are in substance an extension of the Russian group and have significant Rouble-denominated intercompany loans in most cases. The functional currency of the Group's entity located in Kazakhstan and operating with significant degree of autonomy is the Kazakh Tenge (KZT).

The Group has chosen to present its consolidated financial statements in U.S. Dollars (US$), as management believes it is a more convenient presentation currency for international users of the consolidated financial statements of the Group as it is a common presentation currency in the mining industry. The translation of the financial statements of the Group entities from their functional currencies to the presentation currency is performed as follows:

·         all assets and liabilities are translated at closing exchange rates at each reporting period end date;

·         all income and expenses are translated at the average exchange rates for the periods presented, except for significant transactions that are translated at rates on the date of such transactions;

·         resulting exchange differences are included in equity and presented as movements relating to the effect of translation to the Group's presentation currency within the Translation reserve; and

·         in the consolidated statement of cash flows, cash balances at the beginning and end of each reporting period presented are translated using exchange rates prevalent at those respective dates. All cash flows in the period are translated at the average exchange rates for the periods presented, except for significant transactions that are translated at rates on the date of transaction.

On the disposal of a foreign operation (i.e. a disposal of the Group's entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, a disposal involving loss of joint control over a jointly controlled entity that includes a foreign operation, or a disposal involving loss of significant influence over an associate that includes a foreign operation), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Company are reclassified to profit or loss.

In the case of a partial disposal that does not result in the Group losing control over a subsidiary that includes a foreign operation, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognised in the consolidated income statement. For all other partial disposals (i.e. reductions in the Group's ownership interest in associates or jointly controlled entities that do not result in the Group losing significant influence or joint control), the proportionate share of the accumulated exchange differences is reclassified to the consolidated income statement.

Goodwill and fair value adjustments on identifiable assets and liabilities acquired arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognised in equity.

Exchange rates used in the preparation of the consolidated financial statements were as follows:

	31 December 2011		31 December 2010
Russian Rouble/U.S. Dollar
Year end	32.20		30.48
Average for the year	29.39		30.36
Kazakh Tenge/U.S. Dollar
Year Period end	148.40		147.40
Average for the year	146.60		147.35

The Rouble and Kazakh Tenge are not freely convertible currencies outside the Russian Federation and Kazakhstan and, accordingly, any translation of Rouble and Kazakh Tenge denominated assets and liabilities into U.S. Dollar for the purpose of the presentation of consolidated financial statements does not imply that the Group could or will in the future realise or settle in U.S. Dollars the translated values of these assets and liabilities.

Foreign currency transactions

Transactions in currencies other than the entity's functional currencies (foreign currencies) are recorded at the exchange rates prevailing on the dates of the transactions. All monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates prevailing at the reporting date. Non‑monetary items carried at historical cost are translated at the exchange rate prevailing on the date of transaction. Non-monetary items carried at fair value are translated at the exchange rate prevailing on the date on which the most recent fair value was determined. Exchange differences arising from changes in exchange rates are recognised in the consolidated income statement.

Property, plant and equipment

Mining assets

Mining assets and leases include the cost of acquiring and developing mining assets and mineral rights. Mining assets are depreciated to their residual values using the unit-of-production method based on proven and probable ore reserves under the Russian Resource Reporting Code (GKZ), which is the basis on which the Group's mine plans are prepared. Changes in proven and probable reserves are dealt with prospectively. Depreciation is charged on new mining ventures from the date that the mining asset is capable of commercial production. In respect of those mining assets whose useful lives are expected to be less than the life of the mine, depreciation over the period of the asset's useful life is applied. The difference in the depreciation charge which would have been applied had the Group based the depreciation expense on JORC reserves is considered to be immaterial. When there is little likelihood of a mineral right being exploited, or the value of the exploitable mineral right has diminished below cost, an impairment loss is recognised in the consolidated income statement.

Capital construction-in-progress assets are measured at cost less any recognised impairment. Depreciation commences when the assets are ready for their intended use. Mineral exploration and evaluation costs, including geophysical, topographical, geological and similar types of costs, are expensed as incurred. When it has been determined that a mineral property can be economically developed as a result of established proven and probable reserves, the costs incurred in exploration and development of such property, including costs to further delineate the ore body are capitalised.

Non-mining assets are depreciated to their residual values on a straight-line basis over their estimated useful lives. When parts of an item of property, plant and equipment are considered to have different useful lives, they are accounted for and depreciated separately. Depreciation methods, residual values and estimated useful lives are reviewed at least annually.

Estimated useful lives are as set out below:

Machinery and equipment	Up to 20 years
Transportation and other assets	Up to 15 years

Assets held under finance leases are depreciated over the shorter of the lease term and the estimated useful lives of the assets.

Gains or losses on disposal of property, plant and equipment are determined by comparing the proceeds from disposal with the asset's carrying amount at the date. The gain or loss arising is recognised in the consolidated income statement.

Stripping costs

When it has been determined that a mining asset can be economically developed as a result of established proven and probable reserves, the costs to remove any overburden and other waste materials to initially expose the ore body, referred to as stripping costs, are capitalised as a part of mining assets.

Post-production stripping costs are recognised as a component of inventory and included in cost of sales in the same period as the revenue from the sales of inventory is recognised.

Estimated ore reserves

Estimated proven and probable ore reserves reflect the economically recoverable quantities which can be legally recovered in the future from known mineral deposits. The Group's reserves are estimated in accordance with GKZ and JORC Code.

 

Leases

Finance leases

Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Assets subject to finance leases are capitalised as property, plant and equipment at the lower of fair value or present value of future minimum lease payments at the date of acquisition, with the related lease obligation recognised at the same value. Assets held under finance leases are depreciated over their estimated economic useful lives or over the term of the lease, if shorter. If there is reasonable certainty that the lessee will obtain ownership by the end of the lease term, the period of expected use is useful life of the asset.

Finance lease payments are calculated using the effective interest rate method, and allocated between the lease finance cost, which is included in finance cost, and the capital repayment, which reduces the related lease liability payable to the lessor.

Operating leases

Operating lease payments are recognised as an expense on a straight-line basis over the lease term. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

Impairment of property, plant and equipment

An impairment review of property, plant and equipment is carried out when there is an indication that those assets have suffered an impairment loss. If any such indication exists, the carrying amount of the asset is compared to the estimated recoverable amount of the asset in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, theestimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately in the consolidated income statement.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the original carrying amount that would have been determined had no impairment loss been recognised in prior periods.

A reversal of an impairment loss is recognised in the consolidated income statement immediately.

Inventories

Metal inventories

Inventories including refined metals, metals in concentrate and in process, doré and ore stockpiles are stated at the lower of production cost or net realisable value. Production cost is determined as the sum of the applicable expenditures and expenses incurred directly or indirectly in bringing inventories to their existing condition and location. Refined metals are valued at the average total cost of production per saleable unit of metal. Work in-process, metal concentrate and doré are valued at the average total production costs at each asset's relevant stage of production. Ore stockpiles are valued at the average cost of mining ore.

Net realisable value represents the estimated selling price for that product based on prevailing spot metal prices, less estimated costs to complete production and selling costs .

Consumables and spare parts

Consumables and spare parts are stated at the lower of cost or net realisable value. Cost is determined on the weighted average moving cost. The portion of consumables and spare parts not reasonably expected to be used within one year is classified as a long-term asset in the Group's consolidated balance sheet. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.

Financial instruments

Financial assets and financial liabilities are recognised when a group entity becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in the consolidated income statement.

Financial Instruments Designated as Fair Value Through Profit and Loss (FVTPL)

A financial instrument other than a financial instrument held for trading may be designated as at FVTPL upon initial recognition if:

·         such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

·         the financial instrument forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

·         it forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial instruments at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. Fair value is determined in the manner described in Note 29.

Financial assets

The effective interest rate method is a method of calculating the amortised cost of a financial instrument and of allocating interest income or expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash receipts or payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Effective interest rate method

Non-derivative financial assets are classified into the following specified categories: FVTPL, available for sale (AFS) financial assets and 'loans and receivables'. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. No financial instruments have been classified as available for sale.

Income is recognised on an effective interest basis for financial instruments other than those financial assets classified as at FVTPL.

Loans and receivables

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

AFS financial assets

Investments other than those classified as held for trading, held-to-maturity or loans and receivables are classified as available for sale financial assets. These assets are subsequently measured at fair value and unrealised gains and losses are recognised in equity until the investment is disposed or impaired, at which time the cumulative gain or loss previously recognised in equity is included in the consolidated income statement.

When an available for sale financial asset is considered to be impaired, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the period.

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For equity investments classified as AFS, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.

For all other financial assets objective evidence of impairment could include:

·         significant financial difficulty of the issuer or counterparty; or

·         breach of contract, such as a default or delinquency in interest or principal payments; or

·         it becoming probable that the borrower will enter bankruptcy or financial re-organisation; or

·         the disappearance of an active market for that financial asset because of financial difficulties.

For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in the consolidated income statement.

For financial assets measured at amortised cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through
the consolidated income statement to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

Financial liabilities

Other financial liabilities

Other financial liabilities (including borrowings) are subsequently measured at amortised cost using the effective interest method.

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in the consolidated income statement.

Derivative financial instruments

The Group may enter into a variety of derivative financial instruments to manage its exposure to certain risks. Further details of derivative financial instruments are disclosed in Note 29.

Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in the consolidated income statement immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in the consolidated income statement depends on the nature of the hedge relationship.

Derivatives embedded in non-derivative host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the hybrid contracts are not measured at FVTPL.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in the consolidated income statement in the period in which they are incurred.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances, cash deposits and highly liquid investments with original maturities of three months or fewer, which are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

Environmental obligations

An obligation to incur environmental restoration, rehabilitation and decommissioning costs arises when disturbance is caused by the development or ongoing production of mining assets. Such costs arising from the decommissioning of plant and other site preparation work, discounted to their net present value using a risk-free rate applicable to the future cash flows, are provided for and capitalised at the start of each project, as soon as the obligation to incur such costs arises. These costs are recognised in the consolidated income statement over the life of the operation, through the depreciation of the asset in the cost of sales line and the unwinding of the discount on the provision in the finance costs line. Costs for restoration of subsequent site damage which is created on an ongoing basis during production are provided for at their net present values and recognised in the consolidated income statement as extraction progresses.

Changes in the measurement of a liability relating to the decommissioning of plant or other site preparation work (that result from changes in the estimated timing or amount of the cash flow or a change in the discount rate), are added to or deducted from the cost of the related asset in the current period. If a decrease in the liability exceeds the carrying amount of the asset, the excess is recognised immediately in the consolidated income statement.

The provision for closure cost obligations is remeasured at the end of each reporting period for changes in estimates and circumstances. Changes in estimates and circumstances include changes in legal or regulatory requirements, increased obligations arising from additional mining and exploration activities, changes to cost estimates and changes to the risk free interest rate.

Employee benefit obligations

Remuneration paid to employees in respect of services rendered during a reporting period is recognised as an expense in that reporting period. The Group pays mandatory contributions to the state social funds, including the Pension Fund of the Russian Federation and Kazakhstan, which are expensed as incurred.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax. Income taxes are computed in accordance with the laws of countries where the Group operates.

Current tax

The tax currently payable is based on taxable profit for the period. Taxable profit differs from profit as reported in the consolidated income statement because of items of income or expense that are taxable or deductible in other periods and items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date.

Deferred tax

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available
to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

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

Current and deferred tax

Current and deferred tax is recognised in the consolidated income statement, except when they relate to items that are recognised in the consolidated statement of comprehensive income or directly in equity, in which case, the current and deferred tax also recognised in consolidated statement of comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

Revenue recognition

Revenue is derived principally from the sale of gold and silver bullions and copper, gold and silver concentrate and is measured at the fair value of consideration received or receivable, after deducting discounts.

Revenue from the sale of gold and silver bullion and sale of copper gold and silver concentrate is recognised when the risks and rewards of ownership are transferred to the buyer, the Group retains neither a continuing degree of involvement nor control over the goods sold, the amount of revenue can be measured reliably, and it is probable that the economic benefits associated with the transaction will flow to the Group. Revenue from the sale of gold and silver bullion represents
the invoiced value of metal shipped to the buyer, net of value added tax (VAT).

Sale of gold and silver bullion

The Group processes doré produced in the Russian Federation (at Dukat, Khakanja, Voro, and Omolon) into London Good Delivery Bars prior to sale. This final stage of processing is carried out on a toll-treatment basis at four state-owned refineries. The Group sells gold and silver bullion to banks through long-term agreements. The sales price, as determined in the agreement, may be variable based upon the London Bullion Market Association (LBMA) spot price or fixed but the Group's policy is not to enter into fixed price contracts. For domestic sales, title passes from the Group to the purchaser at the refinery gate with revenue recognised at that point. For export sales, once the gold and/or silver bars have been approved for export by Russian customs, they are then transported to the vault of the purchaser, which is typically located in London. Title passes and revenue is recognised at the point when the gold and/or silver bars are received by the purchaser.

Sales of copper, gold and silver concentrate

The Group sells copper, gold and silver concentrate under pricing arrangements where final prices are determined by quoted market prices in a period subsequent to the date of sale. Concentrate sales are initially recorded based on forward prices for the expected date of final settlement. Revenue is recorded at the time of shipment, which is also when risks and rewards pass to the buyer. Revenue is calculated based on the copper, gold and silver content in the concentrate and using the forward London Metal Bulletin (LMB) or London Metal Exchange (LME) price to the estimated final pricing date, adjusted for the specific terms of the relevant agreement. Until final settlement occurs, adjustments to revenue are made to take into account the changes in metal quantities upon receipt of new information and assay. Revenue is presented net of refining and treatment charges which are subtracted in calculating the amount to be invoiced.

The Group's sales of copper, gold and silver concentrate are based on a provisional price and as such, contain an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of the concentrate at the forward exchange price at the time of sale. The embedded derivative, which does not qualify for hedge accounting, is measured at FVTPL with changes in its fair value recognised within revenue
in the consolidated income statement for each period prior to the final settlement.

 

Share-based compensation

The Group applies IFRS 2 Share-based Payments to its accounting for share-based compensation. IFRS 2 requires companies to recognise compensation costs for share-based payments to employees based on the grant-date fair value of the award.

The fair value of share-based payments is calculated by the Group at the grant date using the two-stage Monte-Carlo simulation model. The expense is recognised on a straight-line basis over the vesting period of the awards.

The fair value of the awards granted is recognised as a general and administrative expense over the vesting period with a corresponding increase in the share-based compensation reserve. Where relevant, the proceeds received on exercise of the awards, net of any directly attributable transaction costs, are credited to the stated capital account, and the amounts recognised within the share-based compensation reserve transferred to retained earnings.

 

Earnings per share

Earnings per share calculations are based on the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated using the treasury stock method, whereby the proceeds from the potential exercise of dilutive stock options with exercise prices that are below the average market price of the underlying shares are assumed to be used in purchasing the Company's common shares at their average market price for the period.

3.     Critical accounting judgments and key sources of estimation uncertainty

The following are the critical judgments, apart from those involving estimations (see below), that the management has made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in consolidated financial statements.

Production start date

The Group assesses the stage of each mine construction project to determine when a mine moves into the production stage. The criteria used to assess the start date are determined by the unique nature of each mine construction project and include factors such as the complexity of a plant and its location.

The Group considers various relevant criteria to assess when the mine is substantially complete and ready for its intended use and moves into the production stage. Criteria considered but are not limited to the following:

·         the level of capital expenditure incurred compared to the construction cost estimates;

·         the completion of a sufficient level of testing on the mine plant and equipment;

·         the ability to produce gold and silver in saleable form (within specifications); and

·         the ability to sustain ongoing commercial level of production of gold.

When a mine construction project moves into the production stage and depreciation commences, the capitalisation of certain mine construction costs and interest ceases and costs are either regarded as inventory or expensed, except for capitalisable costs related to mining asset additions or improvements, underground mine development or ore reserve development.

Acquisitions

IFRS 3 Business Combinations applies to a transaction or other event that meets the definition of a business combination. When acquiring new entities or assets, the Group applies judgment to assess whether the assets acquired and liabilities assumed constitute an integrated set of activities and thus whether the transaction constitutes a business combination, using the guidance provided in the standard. In making this determination, management evaluates the inputs, processes and outputs of the asset or entity acquired.

As a result of this evaluation process, management has determined that its 2011 acquisitions of Kutynskaya GGK LLC, Industriya LLC and Office LLC did not meet the definition of a business combination and as such the Group has accounted for these transactions as asset acquisitions (see Note 4). Such purchases are recorded at cost, allocated across the assets and liabilities acquired pro-rata to their fair values.

Key sources of estimation uncertainty

Preparation of the consolidated financial statements in accordance with IFRS requires the Group's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The determination of estimates requires judgments which are based on historical experience, current and expected economic conditions, and all other available information. Actual results could differ from those estimates.

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period.

The most significant areas requiring the use of management estimates and assumptions relate to:

·         fair value of net assets acquired and liabilities assumed in business combinations;

·         ore reserve estimates;

·         depreciation;

·         impairment of goodwill, mining assets and other property, plant and equipment;

·         inventory obsolescence and write-downs;

·         share-based compensation;

·         environmental obligations;

·         contingencies; and

·         income taxes.

Fair value of net assets acquired and liabilities assumed in business combinations

In accordance with the Group's policy, the Group allocates the cost of the acquired entity to the assets acquired and liabilities assumed based on their fair values as estimated on the date of acquisition. Any difference between the cost of the acquired entity and the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The Group exercises significant judgment in the process of identifying tangible and intangible assets and liabilities, valuing these assets and liabilities, and estimating their remaining useful lives. The valuation of these assets and liabilities is based on assumptions and criteria that, in some cases, include management's estimates of discounted future cash flows.

If actual results are not consistent with estimates and assumptions considered, the Group may have to adjust its estimates of the fair values of assets and liabilities recognised and the goodwill balance during the measurement period. Such a remeasurement could have an impact on the amounts reported in the consolidated income statement in current and future periods.

Ore reserve estimates

An ore reserve estimate is an estimate of the amount of product that can be economically and legally extracted from the Group's properties. Ore reserve estimates are used by the Group in the calculation of: depletion of mining assets using the units-of-production method; impairment charges and in forecasting the timing of the payment of decommissioning and land restoration costs. Also, for the purpose of impairment review and the assessment of the timing of the payment of decommissioning and land restoration costs, management may take into account mineral resources in addition to ore reserves where there is a high degree of confidence that such resources will be extracted.

In order to calculate ore reserves, estimates and assumptions are required about geological, technical and economic factors, including quantities, grades, production techniques, recovery rates, production costs, transport costs, commodity demand, commodity prices, discount rates and exchange rates. Estimating the quantity and/or grade of ore reserves requires the size, shape and depth of ore bodies to be determined by analysing geological data such as the logging and assaying of drill samples. This process may require complex and difficult geological judgments and calculations to interpret the data.

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

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

·         Depletion charged in the consolidated income statement where such charges are determined by using the units-of-production method;

·         Provisions for decommissioning and land restoration costs where changes in estimated reserves affect expectations about the timing of the payment of such costs; and

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

Depreciation

Mining assets are depreciated using the units-of-production method except where the useful lives of the assets are shorter than the life of mine. The units-of-production depreciation calculations are based on proved and probable reserves under the Russian Resource Reporting Code (GKZ), which is the basis on which management's mine plans are prepared. For other property, plant and equipment, the straight-line method is applied over the estimated useful life of the asset which does not exceed the estimated mine life based on proved and probable ore reserves as the useful lives of these assets are considered to be limited to the life of the relevant mine.

The calculation of the units-of-production rate of depreciation could be impacted to the extent that actual production in the future is different from current forecast production based on proved and probable ore reserves. This would generally arise when there are significant changes in any of the factors or assumptions used in estimating ore reserves. The Group's units-of-production depreciation rates are based on the GKZ reserves figures which are different to the reserves calculated under the JORC reporting code and included into the Group's external reporting.

Impairment of goodwill, mining assets and other property, plant and equipment

The Group considers both external and internal sources of information in assessing whether there are any indications that goodwill, mining assets or other property, plant and equipment owned by the Group are impaired. External sources of information the Group considers include changes in the market, economic and legal environment in which the Group operates that are not within its control and that affect the recoverable amount of goodwill, mining assets or other property, plant and equipment.

Internal sources of information the Group considers include the manner in which mining properties and plant and equipment are being used or expected to be used and indications of economic performance of the assets. In determining the recoverable amounts of the Group's mining assets and other property, plant and equipment, the Group's management makes estimates of the discounted future after-tax cash flows expected to be derived from the Group's mining properties, costs to sell the mining properties and the appropriate discount rate. Reductions in metal price forecasts, increases in estimated future costs of production, increases in estimated future capital costs, reductions in the amount of recoverable reserves and resources and/or adverse current economics can result in a write-down of the carrying amounts of the Group's goodwill, mining assets or other property, plant and equipment.

In making the assessment for impairment, assets that do not generate independent cash flows are allocated to an appropriate cash-generating unit. Management necessarily applies its judgment in allocating assets that do not generate independent cash flows to appropriate cash-generating units, and also in estimating the timing and value of underlying cash flows within the value-in-use calculation. Subsequent changes to the cash-generating unit allocation or to the timing of cash flows could impact the carrying value of the respective assets.

Inventory obsolescence and write-downs

In determining mine operating costs recognised in the consolidated income statement, the Group's management makes estimates of quantities of ore stacked on leach pads and in process and the recoverable gold, silver and copper in this material to determine the average costs of finished goods sold during the period. Changes in these estimates can result in a change in mine operating costs of future periods and carrying amounts of inventories.

Share-based compensation

The Group issued equity-settled share appreciation rights to certain employees. Equity-settled share appreciation rights are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value determined at the grant date of the awards is expensed as services are rendered over the vesting period, based on the Group's estimate of the rights that will eventually vest.

The fair value of share based compensation is measured using the Monte-Carlo model. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioral considerations.

The most significant assumptions used in estimation of the cost of equity-settled stock appreciation rights are; the expected volatility of the Company's share price over the life of the award; the risk-free interest rate used; the level of expected forfeitures and the expectation at the grant date of the dividends to be paid over the life of the awards. Expected volatility is based on the historical volatility of return on the Company's GDRs.

The risk-free rates used in the valuation model are based on US Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant.

Expected forfeitures are estimated using historical trends of executive director and employee turnover.

At the grant date, the Group had not historically declared dividends. As such, the expected annual dividend per share was therefore nil. Any subsequent change in dividend policy will be taken into account when valuing options granted in the future.

Environmental obligations

The Group's mining and exploration activities are subject to various laws and regulations governing the protection of the environment. The Group's provision for future decommissioning and land restoration cost represents management's best estimate of the present value of the future cash outflows required to settle the liability which reflects estimates of future costs, inflation, movements in foreign exchange rates and assumptions of risks associated with the future cash outflows; and the applicable interest rate for discounting the future cash outflows. Actual costs incurred in future periods could differ materially from the estimates. Additionally, future changes to environmental laws and regulations, life of mine estimates and discount rates could affect the carrying amount of this provision.

Contingencies

By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of such contingencies inherently involves the exercise of significant judgments and estimates of the outcome of future events.

Income taxes

The Group is subject to income taxes in the Russian Federation and Kazakhstan. Significant judgment is required in determining the provision for income taxes due to the complexity of legislation. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. The estimation of that probability includes judgments based on the expected performance. Various factors are considered in order to assess the probability of the future utilisation of deferred tax assets, including past operating results, operational plan, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected.

4.     Acquisitions and Disposals

(a)    Asset acquisitions

Kutyn LLC

On 29 April 2011, the Group acquired a 100% interest in Kutynskaya GGK LLC (Kutyn) from Olsen Business Limited, an unrelated party, in exchange for 3,500,000 JSC Polymetal GDRs. The GDR share price on the acquisition date was US$19.14. The Group acquired Kutyn as it holds the mining licence for Kutyn gold deposit located in the Khabarovsk region.

Kutyn does not meet the definition of a business pursuant to IFRS 3 (2008) thus this acquisition was accounted for as an acquisition of a group of assets. The allocation of the cost of acquisition to the group of assets acquired was as follows:

	US$'000
Mineral rights	67,719
Property, plant and equipment	618
Other liabilities	(1,347)
Net assets acquired	66,990
Consideration:
Fair value of GDRs transferred	66,990

Industriya LLC

On 27 May 2011, the Group acquired a 100% interest in Industriya LLC (Industriya) from Kuzmichev V.V., an unrelated party. The Group acquired Industriya as it holds the hard-rock gold exploration and mining licence for the Elmus property. The Group paid cash consideration of US$1.787 million. Industriya does not meet the definition of a business pursuant to IFRS 3 (2008) thus it was accounted for as an acquisition of a group of assets. The Group purchased mineral rights of US$1.82 million and other current liabilities of US$(0.042) million.

Office LLC

On 13 May 2011, the Group acquired a 100% interest in Office LLC (Office) from ICT-Kolyma LLC, an unrelated party, for US$10.3 million, of which US$6.2 million was netted against advance provided to ICT-Kolyma LLC in 2010. The Group acquired Office as it holds three storeys of an office premises in Magadan. The cost of the office premises was US$9.76 million, with the residual amount of US$0.56 million representing other assets and liabilities acquired.

In the prior year, the following transactions took place:

Rudnik Avlayakan LLC and Kirankan LLC

On 8 October 2010, the Group acquired a 100% interest in Rudnik Avlayakan LLC (Avlayakan)
and Kirankan LLC (Kirankan) from Doland Business Limited, an unrelated party, in exchange for 3,500,000 of JSC Polymetal GDRs, with a market price of US$17.2 per GDR on the acquisition date.
The Group acquired Avlayakan and Kirankan as they hold the mining licences for Avlayakan and Kirankan gold and silver deposits located in the Khabarovsk region.

Avlayakan and Kirankan did not meet the definition of a business pursuant to IFRS 3 (2008) thus these acquisitions were accounted for as an acquisition of a group of assets. The allocation of the cost of acquisition to the group of assets acquired was as follows:

	US$'000
Mineral rights	64,297
Property, plant and equipment	916
Construction in progress	492
Other liabilities	(440)
Non-current borrowings	(5,065)
Net assets acquired	60,200
Consideration:
Fair value of GDRs transferred	60,200

PD RUS LLC

On 9 December 2010, the Group acquired a 100% interest in PD RUS LLC (PD RUS) from Castalian Trading Limited, an unrelated party. The Group acquired PD RUS as it holds the mining and exploration licence for Svetloye gold deposit located in the Khabarovsk region. The Group paid cash consideration of US$9.25 million in the form of settlement of PD RUS's liabilities.

PD RUS did not meet the definition of a business pursuant to IFRS 3 (2008) thus it was accounted for as an acquisition of a group of assets. The allocation of the cost of acquisition to the group of assets acquired was as follows:

	US$'000
Mineral rights	7,345
Property, plant and equipment	744
Other assets	1,161
Net assets acquired	9,250
Consideration:
Cash	9,250

(b)    Disposal of subsidiary

CJSC Northeastern Coal Company

On 29 June 2011 the Group sold 100% in CJSC Northeastern Coal Company for US$5.3 million to an unrelated party. CJSC Northeastern Coal Company did not perform any operations during 2010 or 2011. The gain on disposal was calculated as follows:

	US$'000
Consideration received	5,300
Carrying value of property, plant and equipment disposed of	(5,725)
Carrying value of other liabilities disposed of	5,356
Gain on disposal	4,931

(c)    Disposal of subsidiary in exchange for an interest in an associate

In November 2010, a Group subsidiary signed an agreement to establish JSC Ural-Polymetal (Ural-Polymetal), with Valentorskiy Rudnik LLC and Kuzmichev V.V. The Group contributed 100% of its interest in North Ural LLC, a subsidiary of the Group, holding the Galka gold, zinc and silver mining licence to Ural-Polymetal (see Note 19). The other investors also contributed assets in the entity with the Group receiving a 33% equity interest in Ural-Polymetal.

The carrying value of the net assets transferred to the equity investment on the date of disposal approximated fair value. The amount disposed of was as follows:

	US$'000
Carrying value of assets disposed
Mineral rights	3,936
Other assets	2,641
Net assets disposed of	6,577
Gain on disposal	3,580
Fair value of interest in associate undertaking acquired	10,157

5.     Segment Information

The Group has seven reportable segments:

·         Voro (CJSC Zoloto Severnogo Urala);

·         Khakanja (JSC Okhotskaya GGC, Rudnik Avlayakan LLC and Kirankan LLC, see Note 4);

·         Dukat (CJSC Serebro Magadana, CJSC Ayax);

·         Omolon (JSC Omolon Gold Mining Company, Rudnik Kvartseviy LLC);

·         Varvara (JSC Varvarinskoye);

·         Amursk-Albazino (Albazino Resources LLC, Amursky Hydrometallurgy Plant LLC); and

·         Mayskoye (ZK Mayskoye LLC).

Reportable segments are determined based on the Group's internal management reports and are separated based on the Group's geographical profile. Minor companies and activities (management, exploration, purchasing and other companies) which do not meet the reportable segment criteria are disclosed within Corporate and other. Each segment is engaged in gold, silver and copper mining and related activities, including exploration, extraction, processing and reclamation. The Group's segments are all based in the Russian Federation other than Varvara which is based in Kazakhstan.

The measure which management and the Chief Operating Decision Maker (the CODM) use to evaluate the performance of the Group is segment adjusted EBITDA, which is defined as profit for the period adjusted for depreciation and amortization, write-downs of inventory to net realisable value, share-based compensation expenses, listing expenses, rehabilitation expenses, gains or losses arising on disposal of subsidiaries, foreign exchange gains or losses, changes in the fair value of derivatives, changes in the fair value of contingent consideration, finance income, finance costs and income tax expenses. The accounting policies of the reportable segments are consistent with those of the Group's accounting policies under IFRS as described in Note 2.

Revenue shown as corporate and other comprises, principally, intersegment revenue relating to the supply of inventories, spare parts and fixed assets to the Group's production entities. Intersegment revenue is recognised based on costs incurred plus a fixed margin basis. External revenue shown within Corporate and other represents revenue from services provided to third parties by the Group's non-mining subsidiaries.

Business segment current assets and liabilities, other than current inventory, are not reviewed by the CODM and therefore are not disclosed in these consolidated financial statements.

The segment adjusted EBITDA reconciles to the profit before income tax as follows:

For the year ended 31 December 2011 (US$'000)	Voro		Khakanja		Dukat		Omolon		Varvara		Amursk - Albazino		Mayskoye		Total reportable segments		Corporate and other		Intersegment operations and balances		Total
Revenue from external customers	280 206		214 114		531 964		73 417		182 004		44 689		-		1 326 394		36		-		1 326 430
Intersegment revenue	458		202		1 141		9 157		8 964		-		-		19 922		459 043		(478 965)		-
Share of loss of associates and joint ventures	-		-		-		-		-		-		-		-		1 952		-		1 952
Adjusted EBITDA	175 180		112 885		281 869		4 815		91 189		4 523		(10 258)		660 203		14		(36 351)		623 866
Depreciation expense	(24 957)		(15 852)		(23 172)		(11 137)		(13 055)		(7 631)		(246)		(96 050)		(604)		-		(96 654)
Rehabilitation expenses	(1 753)		(804)		(938)		(88)		-		-		-		(3 583)		-		-		(3 583)
Write-down of inventory to net realisable value	16		2 476		(2 657)		(3 352)		(423)		(398)		(1 893)		(6 231)		-		-		(6 231)
Listing expenses	-		-		-		-		-		-		-		-		(9 511)		-		(9 511)
Share-based compensation	-		-		-		-		-		-		-		-		(57 116)		-		(57 116)
Operating profit / (loss)	148 486		98 705		255 102		(9 762)		77 711		(3 506)		(12 397)		554 339		(67 217)		(36 351)		450 771
Income from disposal of subsidiaries																					4 931
Foreign exchange (loss)																					(13 634)
Change in fair value of derivatives																					(1 855)
Change in fair value of contingent consideration																					(6 828)
Finance income																					4 208
Finance costs																					(28 746)
Profit before tax																					408 847
Income tax expense																					(118 985)
Profit for the year attributable to the equity holders of the parent																					289 862
Current metal inventories	48 911		49 005		92 378		89 414		39 279		47 795		16 768		383 550		214		(5 057)		378 707
Current non-metal inventories	7 379		35 099		41 897		45 621		22 175		35 327		10 679		198 177		52 526		(16 194)		234 509
Non-current segment assets:
Property, plant and equipment, net	98 872		151 311		415 421		229 851		153 505		483 370		171 645		1 703 975		197 999		-		1 901 974
Goodwill			13 431		8 242				64 537				22 377		108 587						108 587
Non-current inventory	2 947		6 401		7 356		9 711		2 842		8 278		3 912		41 447		2 871		-		44 318
Investments in associates and joint ventures																	23 558				23 558
Total segment assets	158 109		255 247		565 294		374 597		282 338		574 770		225 381		2 435 736		277 168		(21 251)		2 691 653
Additions to non-current assets:
Property, plant and equipment	12 693		39 148		71 878		74 858		15 897		155 188		94 476		464 138		19 232		(3 821)		479 549
Acquired in acquisition of group of assets															-		79 912		-		79 912

As at and for the year ended 31 December 2010 (US$'000)	Voro		Khakanja		Dukat		Omolon		Varvara		Amursk Albazino		Mayskoye		Total reportable segments		Corporate and other		Intersegment operations and balances		Total
Revenue from external customers	213,906		215,300		345,457		24,649		125,456		-		-		924,768		608		-		925,376
Intersegment revenue	310		57		116		-		-		-		-		483		287,462		(287,945)		-
Share of loss of associates and joint ventures	-		-		-		-		-		-		-		-		(1,170)		-		(1,170)
Adjusted EBITDA	131,349		119,831		153,932		(8,202)		54,831		(9,104)		(5,281)		437,356		(7,254)		(5,223)		424,879
Depreciation expense	(22,537)		(14,030)		(21,957)		(1,662)		(9,062)		-		(767)		(70,015)		(319)		-		(70,334)
Rehabilitation expenses	(1,059)		(524)		(170)		(232)		(877)		-		-		(2,862)		-		-		(2,862)
Write-down of inventory to net realisable value	-		(491)		(1,043)		(384)		(13,401)		-		-		(15,319)		-		-		(15,319)
Share based compensation	-		-		-		-		-		-		-		-		(7,896)		-		(7,896)
Operating profit / (loss)	107,753		104,786		130,762		(10,480)		31,491		(9,104)		(6,048)		349,160		(15,469)		(5,223)		328,468
Gain from disposal of subsidiaries																					3,580
Foreign exchange (loss)																					(337)
Change in fair value of derivatives																					(909)
Change in fair value of contingent consideration																					(3,616)
Finance income																					785
Finance costs																					(21,541)
Profit before tax																					306,430
Income Tax expense																					(67,414)
Profit for the year attributable to the equity holders of the parent																					239,016
Current metal inventories	45,086		18,578		56,497		34,746		24,315		12,664		1,541		193,427		-		-		193,427
Current non-mental inventories	7,450		34,227		35,106		23,674		16,901		17,983		6,242		141,583		45,969		(12,464)		175,088
																					368,515
Non-current segment assets:
Property, plant and equipment	118,808		155,799		424,529		206,352		152,888		348,589		123,691		1,530,656		112,825		‑		1,643,481
Goodwill	-		14,189		8,707		‑		68,177		‑		23,639		114,712		-		‑		114,712
Non-current inventories	2,593		3,042		6,514		4,146		‑		‑		‑		16,295		4,722		‑		21,017
Investments in associates and joint ventures	‑		‑		‑		‑		‑		‑		‑		‑		26,821		‑		26,821
																					1,806,031
Additions to non-current assets:
Additions property, plant and equipment	11,828		9,837		43,354		60,657		21,766		204,827		59,748		412,017		31,543		-		443,560
Acquired in acquisition of group of assets	-		-		-		-		-		-		-		-		73,794		-		73,794

6.     Revenue

Revenue by major customers is as follows:

				Year ended 31 December	Year ended 31 December
				2011	2010
				US$'000	US$'000
VTB				241 815	301 015
Kazzink				136 661	4 901
Russian Federation State Fund of Precious Metals (GOHRAN)				122 048	7 752
Metalor S. A.				106 870	80 942
Sberbank				106 430	76 316
HSBC				100 314	9 703
Other				250 455	127 963
Total sales to third parties				1 064 593	608 592
Sales to related parties
Nomos-Bank				258 794	315 405
Total metal sales				1 323 387	923 997
Other				3 043	1 379
Total				1 326 430	925 376

Revenue from transactions with individual customers which composed 10% (or more) of the Group's total revenue analysed by reporting segments is presented below:

	Year ended 31 December 2011 (US$'000)
	Dukat	Khakanja	Voro	Omolon	Total
VTB	191 889	-	49 926	-	241 815
Nomos-Bank	-	177 559	18 288	62 947	258 794
Kazzinc	136 661	-	-	-	136 661
Total	328 550	177 559	68 214	62 947	637 270

	Year ended 31 December 2010 (US$'000)
	Dukat	Khakanja	Voro	Omolon	Total
Nomos-Bank	81 641	167 208	42 084	24 472	315 405
VTB	235 146	32 797	33 072	-	301 015
Total	316 787	200 005	75 156	24 472	616 420

Revenue analysed by geographical regions of customers is presented below:

			Year ended 31 December	Year ended 31 December
			2011	2010
			US$'000	US$'000
Sales within the Russian Federation			862 763	780 284
Sales to China			119 823	44 515
Sales to Europe			207 184	95 676
Sales to Kazakhstan			136 660	4 901
Total			1 326 430	925 376

Presented below is an analysis of revenue from gold, silver and copper sales:

	Year ended 31 December 2011			Year ended 31 December 2010
	Thousand ounces/ tons (unaudited)	Average price (U.S. Dollar per troy ounce/ton) (unaudited)	US$'000	Thousand ounces/ tons (unaudited)	Average price (U.S. Dollar per troy ounce/ton) (unaudited)	US$'000
Gold (thousand ounces)	448	1 556.1	697 135	440	1 232.09	542 118
Silver (thousand ounces)	17 045	34.04	580 182	17 961	19.64	352 721
Copper (tons)	6 363	7 240.3	46 070	3 991	7 305.94	29 158
Total			1 323 387			923 997

7.     Cost of Sales

	Year ended
	31 December 2011	31 December 2010
	US$'000	US$'000
Cash operating costs
On-mine costs (Note 8)	319 740	173 922
Smelting costs (Note 9)	254 817	173 540
Purchase of ore from third parties	16 817	11 198
Mining tax	96 955	57 210
Total cash operating costs	688 329	415 870
Depreciation and depletion of operating assets (Note 10)	140 253	75 709
Rehabilitation expenses	3 583	2 862
Total costs of production	832 165	494 441
Increase in metal inventories	(215 492)	(53 160)
Write-down to net realisable value (Note 21)	6 232	15 319
Total change in metal inventories	(209 260)	(37 841)
Cost of other sales	2 835	1 514
Total	625 740	458 114

8.     On-mine costs

	Year ended
	31 December 2011	31 December 2010
	US$'000	US$'000
Consumables and spare parts	110 695	66 810
Services	120 398	60 536
Labour	83 299	43 743
Taxes, other than income tax	1 839	242
Other expenses	3 509	2 591
Total (Note 7)	319 740	173 922

9.     Smelting costs

	Year ended
	31 December 2011	31 December 2010
	US$'000	US$'000
Consumables and spare parts	117 407	80 339
Services	88 069	57 249
Labour	47 088	33 900
Taxes, other than income tax	178	134
Other expenses	2 075	1 918
Total (Note 7)	254 817	173 540

10.    Depletion and depreciation of operating assets

	Year ended
	31 December 2011	31 December 2010
	US$'000	US$'000
Mining	106 402	48 211
Smelting	33 851	27 498
Total (Note 7)	140 253	75 709

Depreciation on operating assets excludes depreciation relating to non-operating assets (included in general, administrative and selling expenses) and depreciation related to assets employed in development projects where the charge is capitalised. Depreciation expense, which is excluded in the Group's calculation of Adjusted EBITDA (see note 5), also excludes amounts absorbed into unsold metal inventory balances.

11.    General, administrative and selling expenses

	Year ended
	31 December 2011	31 December 2010
	US$'000	US$'000
Labour	72 291	42 745
Services	24 177	20 540
Share-based compensation	57 116	7 896
Depreciation	4 122	2 005
Other	11 917	8 914
Total	169 623	82 100

12.    Other expenses

	Year ended
	31 December 2011	31 December 2010
	US$'000	US$'000
Exploration expenses	30 212	8 105
Taxes, other than income tax	11 278	14 467
Listing expenses	9 511	-
Social payments	8 692	6 468
Housing and communal services	6 357	4 269
Loss on disposal of property, plant and equipment	6 203	6 296
Omolon plant pre-commissioning expenses	-	7 156
Bad debt allowance	(1 171)	2 333
Other expenses	7 262	6 430
Total	78 344	55 524

Costs incurred in connection with the admission to the Official List of the UK Listing Authority and the related Group restructuring have been expensed. Costs incurred in relation to the issuance of the new (primary) equity at the time of admission have been deducted from the Stated Capital account.

Exploration expenses include an US$13.2million write down of evaluation and exploration assets relating to the Dukat segment, where management have decided to suspend development activities principally relating to the Rogovikskaya field.

 

13.    Employee costs

The weighted average number of employees as of 31 December 2011 was:

	Year ended 31 December 2011	Year ended 31 December 2010
	Number	Number
Voro	848	830
Khakanja	1 021	914
Dukat	1 824	1 787
Omolon	913	607
Varvara	657	614
Amursk-Albazino	897	581
Mayskoye	617	397
Corporate and other	1 274	1 182
Total	8,051	6,912

	Year ended 31 December 2011	Year ended 31 December 2010
	US$'000	US$'000
Wages and salaries	204 379	143 107
Social security costs	40 040	23 785
Share-based payments	57 116	7 896
Total payroll costs	301 535	174 788
Less: employee costs capitalised	(30 250)	(41 802)
Less: employee costs absorbed into unsold metal inventory balances.	(30 935)	(6 398)
Employee costs included in operating costs	240 350	126 588

The Group pays mandatory contributions to state social funds, including the pension funds of the Russian Federation and Kazakhstan, which are expensed as incurred. The Group contributed US$31.8 million and US$15.3 million during the years ended 31 December 2011 and 2010, respectively.

Compensation for key management personnel is disclosed within Note 33.

14.    Auditor's remuneration

	Year ended 31 December 2011	Year ended 31 December 2010
	US$'000	US$'000
Fees payable to the auditor and their associates for the audit of the Company's Annual Report:
United Kingdom	250	-
Overseas	555	877
Total audit fees	805	877
Audit-related assurance services	-	135
Taxation compliance services	28	30
Other services	3,482	-
Total non-audit fees	3 510	165
Total auditor remuneration	4,315	1,042

Other services provided in the year relate to services in relation to the Group listing and capital raising in the year (see Note 1). US$0.5 million of these costs were allocated to the Stated Capital Account in line with the methodology as set out in Note 31.

15.    Finance Costs

	Year ended 31 December	Year ended 31 December
	2011	2010
	US$'000	US$'000
Interest expense on borrowings	20 074	16 991
Unwinding of discount on borrowings	5 344	2 138
Unwinding of discount on decommissioning obligations	3 328	2 412
Total	28 746	21 541

Interest expense on borrowings excludes borrowing costs capitalised in the cost of qualifying assets of US$12.5 million and US$9.59 million during the years ended 31 December 2011 and 2010, respectively. These amounts were calculated based on the Group's general borrowing pool and by applying an effective interest rate of 2.81% and 6.11%, respectively, to cumulative expenditure on such assets.

16.    Income Tax

The income tax expense for the year ended 31 December 2011 is as follows:

	31 December	31 December
	2011	2010
	US$'000	US$'000
Current income taxes	127 671	76 922
Deferred income taxes	(8 686)	(9 508)
	118 985	67 414

A reconciliation between the reported amount of income tax expense attributable to profit before income for the year ended 31 December 2011 is as follows:

	Year ended 31 December 2011	Year ended 31 December 2010
	US$'000	US$'000
Profit before income tax	408 847	306 430
Statutory income tax expense at the tax rate of 20%	81 769	61 286
Loss incurred in tax-free jurisdictions	5 998	234
Share-based compensation	11 423	1 579
Tax effect of non-deductible expenses and other permanent differences	14 490	4 315
Prior year adjustment	5 305	-
Total income tax expense	118 985	67 414

The actual tax expense differs from the amount which would have been determined by applying the statutory rate of 20% for the Russian Federation and Kazakhstan to profit before income tax as a result of the application of relevant jurisdictional tax regulations, which disallow certain deductions which are included in the determination of accounting profit. These deductions include share-based compensation, social related expenditures and other non-production costs, certain general and administrative expenses, financing expenses, foreign exchange related and other costs.

In the normal course of business, the Group is subject to examination by tax authorities throughout the Russian Federation and Kazakhstan. Out of the large operating companies of the Group, tax authorities have audited OJSC Okhotskaya Mining and Exploration Company, CJSC Magadan Silver for the period up to 2007, CJSC Gold of Northern Urals for the period up to 2009 and JSC Varvarinskoye for the period up to 2010. According to Russian and Kazakhstan tax legislation, previously conducted audits do not fully exclude subsequent claims relating to the audited period. No significant adjustments have been proposed by the Federal Tax Service of the Russian Federation and Tax Service of the Republic of Kazakhstan as at 31 December 2011.

Deferred taxation is attributable to the temporary differences that exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.

The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the reporting period.

	Environmental obligation	Inventories	Property, plant, and equipment	Trade and other payables	Tax Losses	Loan	Other	Total
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
At 1 January 2011
	8 881	2 774	(84 262)	822	36 213	-	9 903	(25 669)
(Charge) / credit to profit or loss	2 723	(11 538)	2 985	3 663	21 234	(2 875)	(7 506)	8 686
Exchange differences	(614)	942	3 254	36	(3 786)	251	(324)	(241)
At 31 December 2011
	10 990	(7 822)	(78 023)	4 521	53 661	(2 624)	2 073	(17 224)

Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so. The following is the analysis of deferred tax balances (after offset) for financial reporting purposes:

	31 December 2011	31 December 2010
	US$'000	US$'000
Deferred tax liabilities	(79 342)	(83 345)
Deferred tax assets	62 118	57 676
	(17 224)	(25 669)

Tax losses carried forward represent amounts available for offset against future taxable income generated by JSC Omolon Gold Mining Company, ZK Mayskoye LLC, Albazino Resources LLC and the Company during the period up to 2021. Each legal entity within the Group represents a separate tax-paying component for income tax purposes. The tax losses of one entity cannot be used to reduce taxable income of other entities of the Group. As at 31 December 2011 and 31 December 2010 the aggregate tax losses carried forward were US$268.3 million (RUB 8.6 billion) and US$181.1 million (RUB 5.52 billion), respectively.

The Group believes that recoverability of the recognized net deferred tax asset (DTA) of US$62.1 million at 31 December 2011 is more likely than not based upon expectations of future taxable income in the Russian Federation and Kazakhstan and available tax planning strategies.

Losses incurred in certain taxable entities in recent years have created a history of losses as of
31 December 2011. The Group has concluded that there is sufficient evidence to overcome the recent history of losses based on forecasts of sufficient taxable income in the carry-forward period.

The Group's estimate of future taxable income is based on established proven and probable reserves which can be economically developed. The income from the Group's proven and probable mineral reserves is a predictable source of future income and produces sufficient taxable income for realisation of the Group's net DTA. The Group is projecting to generate sufficient taxable earnings to be able to fully realise its net DTA even under various stressed scenarios. The amount of the DTA considered realisable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced due to delays in production start dates, decreases in ore reserve estimates, increases in environmental obligations, or reductions in precious metal prices.

The Group's tax losses carried forward expire as follows:

	31 December 2011
	US$'000
Year ended 31 December 2012	-
31 December 2013	13
31 December 2014	2 735
31 December 2015	7 563
31 December 2016	12 385
31 December 2017	21 813
31 December 2018	34 359
31 December 2019	43 937
31 December 2020	46 916
31 December 2021	98 578
Total losses carried forward for tax purposes	268 299

The deferred tax liabilities for taxes that would be payable on the unremitted earnings of certain of the Group subsidiaries have not been recognised as the Group has determined that the undistributed profit of its subsidiaries will not be distributed in the foreseeable future. The temporary differences associated with investments in subsidiaries, for which deferred tax liabilities have not been recognised, amount to US$1,066.3 million (2010: US$ nil).

17.    Property, Plant And Equipment

	Exploration and evaluation assets	Mining assets	Non-mining assets	Capital construction in-progress	Total
	US$'000	US$'000	US$'000	US$'000	US$'000
Cost
Balance at 1 January 2010	66 364	1 021 066	62 427	222 115	1 371 972
Additions	63 053	87 603	4 741	288 163	443 560
Transfers	(59 299)	112 470	1 641	(54 812)	-
Change in decommissioning liabilities	-	7 836	-	-	7 836
Acquired on acquisition of group of assets	565	72 737	-	492	73 794
Eliminated on disposal of subsidiary	(3 936)	-	-	-	(3 936)
Disposals	(1 633)	(12 151)	(4 259)	-	(18 043)
Translation to presentation currency	(572)	(9 039)	(481)	(2 528)	(12 620)
Balance at 31 December 2010	64 542	1 280 522	64 069	453 430	1 862 563
Additions	63 386	103 286	12 999	299 878	479 549
Transfers	(7 945)	208 807	8 726	(209 588)	-
Change in decommissioning liabilities	-	5 876	-	-	5 876
Acquired on acquisition of group of assets	-	70 156	9 756	-	79 912
Eliminated on disposal of subsidiary	(5 383)	-	(342)	-	(5 725)
Disposals	(13 263)	(12 580)	(1 167)	(120)	(27 130)
Translation to presentation currency	(6 464)	(96 541)	(6 577)	(32 173)	(141 755)
Balance at 31 December 2011	94 873	1 559 526	87 464	511 427	2 253 290

Accumulated depreciation, amortisation	Exploration and evaluation assets	Mining assets	Non-mining assets	Capital construction in-progress	Total
	US$'000	US$'000	US$'000	US$'000	US$'000
Balance at 1 January 2010	-	(123 546)	(5 878)	-	(129 424)
Charge for the year	-	(89 610)	(7 138)	-	(96 748)
Disposals	-	3 965	1 888	-	5 853
Translation to presentation currency	-	1 174	63	-	1 237
Balance at 31 December 2010	-	(208 017)	(11 065)	-	(219 082)
Charge for the year	-	(155 875)	(6 697)	-	(162 572)
Disposals	-	5 949	468	-	6 417
Translation to presentation currency	-	22 776	1 145	-	23 921
Balance at 31 December 2011	-	(335 167)	(16 149)	-	(351 316)
Net book value
1 January 2010	66 364	897 520	56 549	222 115	1 242 548
31 December 2010	64 542	1 072 505	53 004	453 430	1 643 481
31 December 2011	94 873	1 224 359	71 315	511 427	1 901 974

Mining assets at 31 December 2011 included mineral rights with net book value which amounted to US$363.5 million (31 December 2010: US$384.3 million). Mineral rights of the Group comprise assets acquired upon acquisition of subsidiaries and asset acquisitions.

At 31 December 2010 property, plant and equipment included leased assets with net book value of US$10.6 million (all of which was machinery). At 31 December 2011 there were no leased assets.

Exploration expenses include an US$13.2 million write down of evaluation and exploration assets relating to the Dukat segment, where management have decided to suspend development activities principally relating to the Rogovikskaya field.

Property, plant and equipment with a total net book value of US$137.8 million (including mineral rights with net book value of US$9.2 million) were pledged as collateral to secure the Group's borrowings at 31 December 2010 (see Note 24). No property, plant and equipment were pledged as collateral at 31 December 2011.

18.    Goodwill

	31 December	31 December
	2011	2010
	US$'000	US$'000
At 1 January	114 712	115 729
Translation effect	(6 125)	(1 017)
At 31 December	108 587	114 712

Goodwill has been allocated for impairment testing purposes to the following cash-generating units comprising operating segments:

	31 December	31 December
	2011	2010
	US$'000	US$'000
Varvara	64 537	68 177
Mayskoye	22 377	23 639
Khakanja	13 431	14 189
Dukat	8 242	8 707
Total	108 587	114 712

The carrying amount of goodwill is reviewed annually to determine whether it is in excess of its recoverable amount. The recoverable amount of cash-generating unit is determined based on a fair value less costs to sell calculation. Fair value is based on the application of the Discounted Cash Flow Method (DCF). The DCF method is attributable to the development of proved and probable reserves. The tail margin method, an extension of the DCF method, is attributable to the development of resources beyond proved and probable reserves, assuming they could be developed after the end of the DCF forecast period. Resources used in calculations are based on the amounts of measured and indicated and inferred resources, which are adjusted for a conversion factor in order to obtain a forecast production figure. A steady state cash flow per unit of subject metal is usually applied to the annual resource recovery amount to determine the total annual cash flow, based on past experience with an appropriate risk adjustment.

The discount rate used in the calculations was fixed and equalled the Polymetal WACC (9% both periods). The DCF method is used based on proved and probable reserves and uses the following key assumptions:

• production volumes;

• commodity prices;

• proved and probable reserves; and

• production costs.

Recoverable reserves and resources are based on the proven and probable reserves and resources in existence at the end of the year. Production costs are based on management's best estimate over the life of the mine. Estimated production volumes are based on detailed life of mine plans and take into account development plans for the mines approved by management as part of the long-term planning process. Commodity prices are based on latest internal forecasts, benchmarked against external sources of information.

The tail margin method is used to value resources not currently included within an asset's mine plan. The

methodology involves calculating an estimated unit cost per ounce in order to forecast net operating cash flows which are discounted to present value. While applying the tail margin method the Company used the following key assumptions:

• production forecasts were calculated based on the weighted average amount of measured and indicated and inferred resources with a conversion factor of 0.7 for measured and indicated resources and 0.5 for inferred resources; and

• steady state cash flow per unit of subject metal (gold or silver) was determined as the average of cash flows per unit of subject metal for the period during which their values in real terms were relatively stable.

In management's view, no reasonably possible changes in the key assumptions would trigger an impairment charge of goodwill.

19.    Investments in Associates and Joint Ventures

The Group's investments in joint ventures and associates as at 31 December 2011 and 2010 consisted of the following:

			31 December 2011			31 December 2010
			Voting power %	Carrying Value		Voting power %	Carrying Value
				US$'000			US$'000
ASSOCIATES
JSC Ural-Polymetal			33.3	11 152		33.3	10 901
JOINT VENTURES
JV with AngloGold Ashanti Limited			50	12 406		50	15 920
				23 558			26 821
Total

Joint venture with AngloGold Ashanti Limited

In February 2008, the Company signed an agreement to set up a strategic alliance and a joint venture (the Joint Venture) with AngloGold Ashanti Limited. Within the framework of this agreement each party owns 50% in the Joint Venture. The Joint Venture was created in order to execute development projects in several territories of the Russian Federation. In February 2012 the Group acquired the remaining 50% interest in the Joint Venture, see Note 35 for further post balance sheet event disclosures.

Equity investment in JSC Ural-Polymetal

In November 2010, a Group subsidiary signed an agreement to establish JSC Ural-Polymetal (Ural-Polymetal), with Valentorskiy Rudnik LLC and Kuzmichev V.V. The Group contributed 100% of its interest in North Ural LLC, a subsidiary of the Group, holding Galka gold, zinc and silver mining licence (see Note 4) to Ural-Polymetal. In addition to Galka, assets contributed to Ural-Polymetal by other investors consist of an operating copper and zinc open-pit mine, an operating copper and iron ore underground mine and a processing plant. Within the framework of this agreement the Group, Valentorskiy Rudnik LLC and Kuzmichev V.V. each own 33.3%, 55.7% and 11%, respectively, of Ural-Polymetal. Ural-Polymetal was established in order to execute development projects in the North Ural region of the Russian Federation concerned with silver, zinc, copper and iron ore extraction and processing.

The Group's ownership interests in the subsidiaries of the Joint Venture and Ural-Polymetal as at 31 December 2011 and 2010 are as follows:

		Ownership interest, %
Joint venture with AngloGold Ashanti Limited	Country of incorporation	31 December 2011		31 December 2010
СJSC Enisey Mining and Geological Company	Russia	50		50
Imitzoloto LLC	Russia	50		50
Amikan LLC	Russia	50		50
Zoloto Taigi LLC	Russia	50		50
JSC Ural-Polymetal
Polymetals of North Ural LLC	Russia	33		33
Valentorskiy Medniy Karier LLC	Russia	33		33
Uraldragmet LLC	Russia	33		33

The following tables summarise the aggregate financial position and the Group's share in the net losses of the Joint Venture with AngloGold Ashanti Limited and the investment in Ural-Polymetal:

	AngloGold Ashanti Limited 100% basis			JSC Ural-Polymetal 100% basis
	31 December	31 December		31 December	31 December
	2011	2010		2011	2010
	US$'000	US$'000		US$'000	US$'000
Non-current assets	84 191	89 159		45 925	46 952
Current assets	659	477		9 229	6 722
Non-current liabilities	(24 560)	(25 013)		(7 582)	(9 215)
Current liabilities	(4 784)	(2 592)		(12 198)	(11 824)
Equity	(55 506)	(62 031)		(35 374)	(32 634)

	AngloGold Ashanti Limited			JSC Ural-Polymetal
	Year ended 31 December 2011	Year ended 31 December 2010		Year ended 31 December 2011	Year ended 31 December 2010
	US$'000	US$'000		US$'000	US$'000
Revenue	-	-		28 603	3 266
Net (loss)/ income	(5 731)	(1 820)		2 740	(780)
Group's share in joint venture's net (loss)/income	(2 866)	(910)		914	(260)

20.    Non-current loans

	Interest rate		31 December 2011		31 December 2010
			US$'000		US$'000
AngloGold Ashanti Limited (Note 33)	7% - 8%		6 303		3 455
Employees	6.00%		2 659		1 732
Total			8 962		5 187

21.    Inventories

	31 December 2011		31 December 2010
	US$'000		US$'000
Inventories expected to be recovered after twelve months
Consumables and spare parts	44 318		21 017
Total	44 318		21 017
Inventories expected to be recovered in the next twelve months
Ore stock piles	216 243		103 914
Work in progress	111 866		70 023
Сopper, gold and silver concentrate	27 685		16 762
Dore	22 889		2 407
Refined metals	24		321
Total metal inventories	378 707		193 427
Consumables and spare parts	234 509		175 088
Total	613 216		368 515

During the year ended 31 December 2011, the Group recognised a US$2.8 million (2010: US$13.5 million) write-down to net realisable value of its ore stock piles in Varvara due to poor gold and copper recovery on ore with lower content of precious metals respectively.

As of 31 December 2011 and 31 December 2010 amount of inventories held at NRV is nil.

In addition, during the year ended 31 December 2011 the Group wrote-down US$3.5 million of costs (2010: nil) in Omolon which did not significantly enhance the value of the ore stockpiles.

During 2011 the Group reversed previous obsolescence provisioning against consumables and spare parts inventory during the year ended 31 December 2011 in the amount of US$0.6 million (2010: write-down of US$1.8 million).

22.    Trade and Other Receivables

		31 December 2011	31 December 2010
		US$'000	US$'000
Trade receivables		37 609	19 765
Non-trade receivables		28 099	23 574
Short-term loans provided to entity under common control		1 522	-
Short-term loans provided to employees		1 426	2 507
Short-term loans provided to equity method investments		315	-
Total trade and other receivables		68 971	45 846
Less: Allowance for doubtful debts		(980)	(2 163)
Total		67 991	43 683

Trade receivables mainly relate to JSC Varvarinskoye for their sales of provisionally priced copper and gold concentrate, and to CJSC Serebro Magadana for their sales of provisionally priced silver concentrate.

		31 December		31 December
		2011		2010
		US$'000		US$'000
Kazzink		30 960		4 901
Metalor S. A.		4 440		3 014
Trafigura		2 036		11 096
Other		173		754
Total		37 609		19 765

The average credit period on sales of copper, gold and silver concentrate at 31 December 2011 was
28 days (2010: 22 days). No interest is charged on trade receivables. The Group's allowance for doubtful debt relates to its non-trade receivables. The Group's trade receivables are neither past due nor impaired as at 31 December 2011 and 31 December 2010.

Non-trade receivables include amounts receivable from sale of fuel or operating lease of machinery to contractors, the average credit period for non-trade receivables at 31 December 2011 was 143 days (2010: 101 days). No interest is charged on non-trade receivables.

Non-trade receivables disclosed above include those that are past due at the end of the reporting period for which the Group has not recognised a bad debt allowance because there has not been a significant change in credit quality and the amounts are still considered to be recoverable. Such past due but not impaired receivables amounted to US$2.8 million as at 31 December 2011 (2010: US$1.08 million), the majority of which mature within 90 days. The Group does not hold any collateral or other security over these balances nor does it have a legal right of offset against any amounts owed by the Group to the counterparty.

23.    Cash and Cash Equivalents

 

	31 December 2011	31 December 2010
	US$'000	US$'000
Bank deposits - RUB	15 695	-
-foreign currencies	629 259	-
Current bank accounts - RUB	2 110	2 120
- foreign currencies	11 684	8 884
Other cash and cash equivalents	47	52
Total	658 795	11 056

Bank deposits as at 31 December 2011 bear interest of 3.5 % per annum with an average maturity at inception of 90 days. All US$629 million of deposits held in foreign currencies was held in US dollars at 31 December 2011 (2010: nil).

24.    Borrowings

	Interest rate	Actual rate	31 December 2011	31 December 2010
			US$'000	US$'000
Borrowings at amortised cost
Bank loans
US$ denominated
Otkritie	1m LIBOR+2,75%	3.05%	250 050	-
Raiffeisenbank	1m LIBOR +3.1%	3.40%	150 000	153 000
Syndicate of Banks	3m LIBOR +3%	3.88%	136 203	127 133
UniCredit bank AG	3m LIBOR + 2.75%	3.33%	100 000	100 000
UniCredit bank	3m LIBOR + 2.75%	3.33%	100 000	100 000
BSGV	3m LIBOR + 2.5%	3.08%	100 000	-
ING bank (Eurasia)	3m LIBOR +2.5%	3.08%	66 667	75 000
BNP Paribas	3m LIBOR + 2.5%	3.08%	50 000	-
Sberbank	3m LIBOR +6.5%	6.81%	-	50 000
Gazprombank	3.5%-4.5%		-	21 000
HSBC	3m LIBOR +3.5%	3.85%	-	8 070
RUB denominated
HSBC	MOSPRIME +3%	6.42%	-	10 828
Other			14 774	-
Loans from related parties (Note 33)			35 401	40 938
Total borrowings			1 003 095	685 969
Less: current borrowings			(348 429)	(90 610)
Non-current borrowings			654 666	595 359

The table below summarises maturities of borrowings:

Maturing during the Year ended:	US$'000
31 December 2012	348 429
31 December 2013	244 435
31 December 2014	223 169
31 December 2015	185 012
31 December 2016	2 050
Total	1 003 095

Bank loans

As at 31 December 2011, the Group has US$803 million of undrawn funds available under its credit facilities (2010: US$237 million). The most significant financial covenant in place is that the ratio of net debt to EBITDA must not exceed 3.25.

Otkritie

On 6 September 2011 the Group entered into a general master repurchase agreement (the GMRA). Under the GMRA 34,450,357 Polymetal shares (representing approximately 8.6% of the issued share capital of JSC Polymetal) were transferred to Otkritie Securities Limited in exchange for an aggregate purchase price of US$250 million.

The accounting substance of this arrangement is that it is a securitised loan. It has been accounted for at amortised cost with interest accrued for. The treasury shares have accordingly not been shown as sold and these shares are therefore excluded from the calculation of non-controlling interest in the JSC Polymetal Group.

On Repurchase Date the Group has the obligation to repurchase all of the Polymetal Shares transferred under the GMRA for the repurchase price which is calculated as the sum of (i) the price received for the relevant Polymetal shares; and (ii) the aggregate amount obtained by daily application of LIBOR + 2.75% to the relevant price for the number of days during the period commencing on the relevant transfer date and ending on the Repurchase Date.

Subsequent to the reporting date, the Group accelerated the Repurchase Date and repaid the loan in full on 16 February 2012 in accordance with the terms of the GMRA.

BSGV

In June 2011, the Group entered into a long-term credit facility with BSGV which allows the Group to borrow funds, denominated in U.S. Dollars, up to US$100.0 million to finance its current operations. Borrowings under this credit facility are available until May 2014. The credit facility is repayable in quarterly instalments. Interest is also payable quarterly. The repayment of this long-term credit facility is guaranteed with a pledge of revenue under a sales agreement with Rosbank (see Note 28). Following the re-organisation of Joint-Stock Company "Banque Societe Generale Vostok" ("BSGV") by way of merger with Joint Stock Commercial Bank "ROSBANK, the rights of BSGV inured to the benefit of Joint Stock Commercial Bank "ROSBANK" (Open joint-stock company).

BNP Paribas

In January 2011, the Group entered into a long-term credit facility with BNP Paribas which allows the Group to borrow funds, denominated in U.S. Dollars, up to US$50.0 million to finance the Group's general corporate purposes and for refinancing of short-term and long-term indebtedness of the Group. Borrowings under this credit facility are available until February 2015. The credit facility is repayable in eleven equal quarter instalments starting from July 2012. Interest is payable quarterly.

The repayment of this long-term loan is guaranteed with a pledge of revenue under a sales agreement with Nomos-Bank (see Note 28), a related party.

 

Raiffeisenbank

In October 2010, the Group received a long-term facility from Raiffeisenbank which allows the Group to borrow funds up to US$150 million. The Group used the funds in part, to refinance long-term credit obtained from Raiffeisenbank in December 2009. The remainder is being used to finance its current operations. The loan facility is available until September 2015. Interest is payable monthly.

Syndicate of Banks (including restructuring on 6 April 2011)

Upon the acquisition of JSC Varvarinskoye, the Group assumed a long-term loan of US$85.7 million, payable to a Syndicate of Banks including Investec Bank Ltd, Investec Bank plc, Nedbank Limited and Natixis Bank (Syndicate of Banks). This loan had a carrying amount of US$74.7 million on 6 April 2011.

In addition to the loan described above, the Group assumed obligations for amounts payable for previously realised flat forward gold sales and purchase contracts. As at 6 April 2011, the Group had not settled its liability under these contracts. This had a carrying amount of US$50.8 million on 6 April 2011.

For repayment of these two liabilities a cash sweep arrangement was applied to all free cash flows generated from JSC Varvarinskoye. In accordance with the cash sweep agreement, on each day following the quarter-end, JSC Varvarinskoye shall pay 100% of the amount by which the cash inflow for the quarter exceeds US$5.0 million. In 2013 and 2014, 35% and 65%, respectively, of the obligation would become due if not previously repaid through the cash sweep arrangement.

In addition the Group had unrealised net derivative liabilities for the forward sale and purchase commitments which were presented separately (see Note 28). This had a carrying amount of US $100.7 million on 6 April 2011.

On 6 April 2011, the Group signed an agreement to restructure its debt obligations and related derivative gold forward sale and purchase contracts (the Restructuring). As a result of this Restructuring, the Group's derivative forward sale and purchase commitments outstanding as at the date of the Restructuring were converted to debt obligations based on the present value of the future net settlement payments of these derivative contracts. Following a partial immediate repayment of US$14.8 million, the remaining debt obligation held by Three K Exploration and Mining Limited, a wholly owned subsidiary of the Group, was transferred to JSC Polymetal. All security arrangements held with the counterparty under the debt obligations and forward sale and purchase agreements, such as pledges of shares and movable and immovable property, plant and equipment, have been foregone as part of this restructuring.

The derivatives were previously recognised at fair value and no gain or loss arose on their conversion to debt. The amendment to the previous debt obligations did not constitute a significant modification and it continues to be held at their previous carrying value. These totalled US$226.2 million before and US$211.4 million after the repayment of US$14.8 million. The carrying value of the new debt arrangement at 6 April 2011 was therefore US$211.4 million, for which the fair value was US$221 million. The difference will be accreted using the effective interest rate method as an additional interest charge over the term of the loan. The par value of the debt transferred, net of repayment, was US$230 million.

As of 31 December 2011 the Group repaid US$80.0 million and following schedule was agreed: US$30.0 million in 2013, and US$60.0 million in each of 2014 and 2015.

 

UniCredit bank AG (incorporated in Great Britain)

In November 2010, the Group received a long-term loan from UniCredit bank of US$100.0 million to finance its current operations and to refinance other credit facilities. The loan is repayable in equal instalments on a quarterly basis through November 2015. Interest is payable quarterly.

The repayment of this long-term loan is partially guaranteed by the pledge of revenue under a sale agreement completed with HSBC Bank (see Note 28).

 

UniCredit bank (incorporated in the Russian Federation)

In November 2010, the Group received a long-term loan from UniCredit bank of US$100.0 million to finance its current operations and to refinance long-term facilities obtained from UniCredit bank in August and September 2009. The loan is repayable in equal instalments on a quarterly basis through November 2015. Interest is payable quarterly.

The repayment of this long-term loan is guaranteed by the pledge of revenue under a sale agreement completed with HSBC Bank (see Note 28).

 

ING bank (Eurasia)

In December 2010, the Group received a long-term loan from ING Bank (Eurasia) of US$75.0 million to finance its current operations. The loan is repayable in nine equal instalments on a quarterly basis through December 2013. Interest is payable quarterly.

Nomos-Bank

In January 2010, the Group received two long-term credit facilities from Nomos-Bank, a related party, which allows the Group to borrow funds, denominated in Euros, up to Euro 6.5 million
(US$8.7 million as at 31 December 2011) to finance the purchase of equipment for Amursky Hydrometallurgy Plant LLC. The credit facilities are repayable in ten equal semi-annual instalments over five years starting from April 2011. Interest is payable quarterly.

In July 2010, the Group received two long-term credit facilities from Nomos-Bank, denominated in Euro, up to Euro 1.76 million and Euro 1.3 million (US$2.6 million and US$1.9 million as at 31 December 2011 and 2010, respectively) to finance the purchase of equipment for Amursky Hydrometallurgy Plant LLC. Borrowings under these credit facilities are available through to 2016. The credit facilities are repayable in ten equal semi-annual instalments over five years starting from October and November 2010, respectively. Interest is payable quarterly.

In September 2010, the Group received an additional long-term credit facility from Nomos-Bank,
denominated in Canadian Dollars, up to Canadian Dollar 1.5 million (US$1.6 million as at 31 December 2011) to finance the purchase of equipment for Amursky Hydrometallurgy Plant LLC. Borrowings under this credit facility are available until December 2015. The credit facility is repayable in ten equal semi-annual instalments over five years starting from December 2010. Interest is payable quarterly.

In October 2010, the Group received a long-term credit facility from Nomos-Bank, denominated in Canadian Dollars up to Canadian Dollar, 0.85 million (US$0.88 million as at 31 December 2011) to finance the purchase of equipment for Amursky Hydrometallurgy Plant LLC. Borrowings under this credit facility are available until December 2015. The credit facility is repayable in ten equal semi-annual instalments starting from December 2010. Interest is payable quarterly.

In addition the Group has certain undrawn facilities at 31 December 2011, including: VTB, HSBC, Gazprombank, Alfabank (Note 30).

 

Gazprombank

In February 2010, the Group entered into a long-term credit facility with Gazprombank which allows the Group to borrow funds, denominated in Russian Roubles or U.S. Dollars, up to US$74.8 million (Russian Rouble 2.1 billion as at 31 December 2011) to finance its current operations. Borrowings under this credit facility were available until December 2011 and were settled in full at that date. The repayment term is established separately for each loan received from the credit facility at the time of draw-down date. Each loan received from the credit facility must be repaid within twelve months of the draw-down. Interest is payable monthly, based on a fixed rate determined by Gazprombank for each tranche but not to exceed 14% annually for funds borrowed in Russian Roubles and 9% for funds borrowed in U.S. Dollars.

25.    Finance Lease Liabilities

In April 2009 the Group entered into finance sale and leaseback agreement, denominated in Russian Roubles, with Nomos-Leasing, a related party. The Group leased certain of its machinery, equipment and transport vehicles. The lease term of finance lease was until July 2012. The Group's obligations under finance leases are secured by the lessors' title to the leased assets.

The implicit interest rate of underlying obligation under finance lease is fixed at 24.25% per annum.

Future minimum lease payments for the assets under finance leases are as follows:

	31 December 2010
Current portion	4,819
Non-current portion	-
Present value of minimum payments	4,819
Interest payable over the term of lease	81
Total future minimum lease payments	4,900

The Group proposed to the lessor to purchase the leased property and settle its leasing liabilities prior to the maturity dates. Accordingly, the total amount of leasing obligations is classified as current as of 31 December 2010. The purchase was completed in January 2011 for the amount of US$4.9 million (including leasing liability of US$4.8 million and interest of US$0.1 million).

26.    Environmental Obligations

Environmental obligations include decommissioning and land restoration costs and are recognised on the basis of existing project business plans as follows:

	31 December 2011		31 December 2010
	US$'000		US$'000
Opening balance	45 156		32 487
Changes in the year:
Decommissioning liabilities	5,876		7,836
Rehabilitation liabilities	3,583		2,862
Unwinding of discount	3 328		2 412
Amounts paid	(213)		(161)
Translation effect	(3 267)		(280)
Closing Balance	54 463		45 156

The principal assumptions used for the estimation of environmental obligations were as follows:

	2011		2010
Discount rates	3.9% - 7.28%		3.7% - 9.4%
Inflation rates	5% - 7.18%		3.9% - 7.9%
Expected mine closure dates	1 - 23 years		1 - 24 years

The expected timings for the settlement of environmental obligations are as follows:

	31 December 2011		31 December 2010
	US$'000		US$'000
Within one year	424		256
Due from second to fifth year	11 436		9 141
Due from sixth to tenth year	30 339		25 362
Due from eleventh to fifteenth year	3 687		5 834
Due from sixteenth to twentieth year	3 309		-
Due thereafter	5 268		4 563
Total	54 463		45 156

The Group does not hold any assets that are legally restricted for purposes of settling environmental obligations.

27.    Trade and Other Payables

	31 December 2011		31 December 2010
	US$'000		US$'000
Trade payables	61 219		54 217
Labour liabilities	10 049		7 273
Other payables	8 280		5 538
Total	79 548		67 028

In 2011, the average credit period for payables was 51 days (2010: 57 days). There was no interest charged on the outstanding payables balance during the credit period. The Group has financial risk management policies in place, which include budgeting and analysis of cash flows and payments' schedules to ensure that all amounts payable are settled within the credit period.

28.    Commitments and Contingencies

Commitments

Capital commitments

The Group's budgeted capital expenditure commitments as at 31 December 2011 amounted to US$42.7 million (2010: US$55.2 million).

Operating leases: Group as a lessee

The land in the Russian Federation and Kazakhstan on which the Group's production facilities are located is owned by the state. The Group leases this land through operating lease agreements, which expire in various years through 2058.

Future minimum lease payments due under non-cancellable operating lease agreements at the end of the period were as follows:

	31 December 2011		31 December 2010
	US$'000		US$'000
Due within one year	1 758		2 148
From one to five years	3 065		2 791
Thereafter	1 594		1 469
Total	6 417		6 408

Forward sales commitments

Under the sale agreements with Nomos-Bank, the Company's subsidiary, JSC Okhotskaya GGC are required to sell 45,000 ounces of gold and 3,350,000 ounces of silver during 2012 at a price determined by London Bullion Market Association (LBMA).

Under the sale agreement with Rosbank, the Company's subsidiary, CJSC Zoloto Severnogo Urala is required to sell 39,000 ounces of gold during 2012; 48,000 ounces of gold during 2013; 19,000 ounces of gold during 2014 at a price determined by LBMA.

Under the sale agreement with Sberbank, the Company's subsidiary, CJSC Zoloto Severnogo Urala is required to sell 64,000 ounces of gold during 2012 at a price determined by LBMA.

Under the sale agreements with Gazprombank, the Company's subsidiaries, JSC Omolon Gold Mining Company and JSC Okhotskaya GGC are required to sell 36,000 ounces of gold till 28 February 2012 at a price determined by LBMA.

Under the sale agreement with Trafigura Beheer B.V., the Company's subsidiary, JSC Varvarinskoe is required to sell 17,000 ounces of gold during 2012 at a price determined by LBMA and 4,488,000 dry metric tons of copper concentrate during 2012 at a price determined by the London Metal Exchange (LME) and adjusted for further processing costs.

Under the sale agreement with Glencore, the Company's subsidiary, JSC Varvarinskoe is required to sell 9,000 ounces of gold during 2012 at a price determined by LBMA and 2,448,000 dry metric tons of copper concentrate during 2012 at a price determined by LME and adjusted for further processing costs.

Contingencies

Taxation

Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the companies of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in its interpretation of the legislation and assessments.

As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.

With regards to matters where practice concerning payment of taxes is unclear, management estimated the tax exposure at 31 December 2011 to be approximately US$46.7 million (2010: US$38.8 million) including the CJSC Serebro Magadana tax litigation described below. This amount had not been accrued at 31 December 2011 as management does not believe the payment to be probable.

Transfer pricing legislation, which was introduced from 1 January 1999, provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controlled transactions, provided that the transaction price differs from the market price by more than 20%. Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, and all cross-border transactions (irrespective whether performed between related or unrelated parties), where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. There is no formal guidance as to how these rules should be applied in practice. Arbitration court practice in this respect is contradictory and inconsistent.

The Group's subsidiaries regularly enter into controllable transactions (e.g. intercompany transactions) and based on the transaction terms the Russian tax authorities may qualify them as non-market. Tax liabilities arising from intercompany transactions are determined using actual transaction prices. It is possible with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could potentially be challenged in the future. Given the brief nature of the current Russian transfer pricing rules, the impact of any such challenge cannot be reliably estimated although it may be significant.

Litigation

During the respective periods, the Group was involved in a number of court proceedings (both as a plaintiff and as a defendant) arising in the ordinary course of business.

During 2009 a field tax audit was performed in relation to CJSC Serebro Magadana with respect to all taxes, duties and contributions to social funds for the period from 1 January 2007 to 31 December 2007 (including CJSC Serebro Territorii as a legal predecessor).

As a result of this audit, the tax authorities issued Decision #12-13/23 dated 31 March 2009. The most significant issues were the alleged understatement of profits tax by US$18.4 million (including interest and penalties) and the understatement of mineral extraction tax by US$4.4 million (including interest and penalties) owing to the potential application of transfer pricing rules in respect of export transactions with ABN AMRO Bank N.V. The tax authorities challenged the prices applied by CJSC Serebro Magadana (previously CJSC Serebro Territorii) owing to their deviation by more than 20% from London stock exchange fixings and accounting prices set by the Central Bank of the Russian Federation. This deviation was caused by signing a flat forward sales contract with Standard Bank of London that provided for fixed prices that were agreed by CJSC Serebro Territorii in 2004. CJSC Serebro Territorii supplied silver to ABN AMRO Bank N.V. in 2007 in accordance with its obligations under the contract and at the fixed priced stipulated in the contract. In 2004 the negotiated fixed prices were consistent with market prices. However, due to a significant increase in the price of silver in the intervening period, by 2007 the contract price was much lower than the London Metal Exchange price.

CJSC Serebro Magadana appealed against this Decision in the arbitration court and has been successful in the latest appeal. The Directors believe that CJSC Serebro Magadana should win any new challenge based on its argument that it was bound by the contractual obligations and had sound business reasons to apply such prices.

In the opinion of management of the Group, there are no current legal proceedings or other claims outstanding, which could have a material effect on the result of operations, financial position or cash flows of the Group and which have not been accrued or disclosed in the consolidated financial statements.

29.    Fair Value Accounting

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable as follows:

Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

At 31 December 2011 and 31 December 2010 the Group held the following financial instruments:

	31 December 2011
	US$'000
	Level 1		Level 2		Level 3		Total
Receivables from provisional copper, gold and silver concentrate sales	-		37 609		-		37 609
Contingent consideration liabilities	-		-		(22 290)		(22 290)
	-		37 609		(22 290)		15 319

	31 December 2010
	US$'000
	Level 1		Level 2		Level 3		Total
Receivables from provisional copper, gold and silver concentrate sales	-		19,011		-		19,011
Derivatives	-		(105,437)		-		(105,437)
Contingent consideration liabilities	-		-		(23 754)		(23 754)
	-		(86,426)		(23 754)		(110 180)

During the reporting periods, there were no transfers between Level 1 and Level 2.

Receivables from provisional copper, gold and silver concentrate sales

The fair value of receivables arising from copper, gold and silver concentrate sales contracts that contain provisional pricing mechanisms is determined using the appropriate quoted forward price from the exchange that is the principal active market for the particular metal. As such, these receivables are classified within Level 2 of the fair value hierarchy.

Derivatives

The fair value of derivative financial instruments is determined using either present value techniques or option pricing models that utilise a variety of inputs that are a combination of quoted prices and market-corroborated inputs. The fair value of the Group's derivative contracts is adjusted for the Group's credit risk based upon the observed credit default swap spread as appropriate. The Group closed the open derivative positions at 6 April 2011 as part of the Restructuring as described in Note 24.

The table below sets forth a summary of changes in the fair value of the Group's Level 2 financial liabilities for the year ended 31 December 2011:

	31 December		31 December
	2011		2010
	US$'000		US$'000
Opening balance	105 437		149 514
Change in fair value, included in profit or loss	1 855		909
Settlement	(107 292)		(44 986)
Closing Balance	-		105 437

Commodity forward contracts

Except for the forward sales contracts entered by JSC Varvarinskoye, other Group's forward sales contracts (see Note 28) qualify for the normal purchase/sales or "own use" exemption. Prior to their Restructuring in April 2011, the fair value of Varvarinskoye commodity forward contracts was determined by discounting contractual cash flows using a discount rate derived from observed U.S. Treasury yield curve rates. Contractual cash flows were calculated using a forward pricing curve derived from market forward prices for each commodity. The commodity forward contracts were classified within Level 2 of the fair value hierarchy.

Contingent consideration liabilities

In 2008, the Group recorded a contingent consideration liability related to the acquisition of 98.1% of the shares in JSC Omolon Gold Mining Company (Omolon). The fair value of the contingent consideration liability was determined using a valuation model which simulates expected production of gold and silver at the Kubaka mine and future gold and silver prices to estimate future revenues of Omolon. This liability is revalued at each reporting date based on 2% of the life of mine revenues with the resulting gain or loss recognised in the consolidated income statement. The liability recognised at 31 December 2011 was US$22.3 million (2010: US$18.3 million).

In 2009, the Group recorded a contingent consideration liability related to the acquisition of 100% of shares in JSC Varvarinskoye in Kazakhstan. The fair value of the contingent consideration liability was determined using a valuation model which simulates expected future prices of gold, silver and copper against the gold strike price applied pursuant to the terms of the gold forward purchase contracts entered into (see Note 25) and the copper price as published by the LME as at the date when the gold forward purchase contracts described above were entered into. The liability recognised at 31 December 2010 was US$5.5 million and was fully settled in July 2011. The contingent consideration liability is classified within Level 3 of the fair value hierarchy.

The table below sets forth a summary of changes in the fair value of the Group's Level 3 financial liabilities for the year ended 31 December 2011:

	31 December		31 December
	2011		2010
	US$'000		US$'000
Opening balance	23 754		21 775
Change in fair value, included in profit or loss	6 828		3 616
Translation effect	(1 349)		(137)
Settlement	(6 943)		(1 500)
Total	22 290		23 754

The directors consider that a change in a reasonably possible valuation assumption used would not have a material effect on the Group.

30.    Risk Management Activities

Capital management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group's overall strategy remains from prior years.

The capital structure of the Group consists of net debt (borrowings as detailed in Note 24 offset by cash and bank balances as detailed in Note 23) and equity of the Group (comprising the Stated Capital account, reserves and retained earnings as detailed in Note 31).

The Group is not subject to any externally imposed capital requirements. The Group's Board reviews the capital structure of the Group on a semi-annual basis. As part of this review, the Board considers the cost of capital and the risks associated with each class of capital.

Major categories of financial instruments

The Group's principal financial liabilities comprise borrowings, derivatives, finance lease liabilities, trade and other payables. The Group has various financial assets such as accounts receivable, loans advanced and cash and cash equivalents.

	31 December 2011	31 December 2010
	US$'000	US$'000
Financial assets
Financial assets at FVTPL
Receivables from provisional copper, gold and silver concentrate sales	37 609	19 011
Loans and receivables, including cash and cash equivalents
Cash and cash equivalents	658 795	11 056
Trade and other receivable	30 382	24 672
Non-current loans	8 962	5 187
Total financial assets	735 748	59 926
Financial liabilities
Financial liabilities at FVTPL
Derivatives	-	105 437
Contingent consideration liability	22 290	23 754
Financial liabilities at amortised cost
Share purchase obligation under MTO	534 597	-
Current and non-current borrowings	1 003 095	685 969
Finance lease liabilities	-	4 819
Trade and other payables*	62 738	55 118
Total financial liabilities	1 622 720	875 097

*Trade and other payables exclude employee benefits and social security.

The carrying values of cash and cash equivalents, share purchase obligation, trade and other receivables, trade and other payables and short-term debt recorded at amortised cost approximate to their fair values because of the short maturities of these instruments. The estimated fair value of the Group's long-term debt, calculated using the market interest rate available to the Group as at 31 December 2011, is US$591.8 million, and the carrying value as at 31 December 2011 is US$654.6 million (see Note 24). Carrying values of the other long-term loans provided to related parties as at 31 December 2011 and 31 December 2010 approximated to their fair values.

The main risks arising from the Group's financial instruments are foreign currency and commodity price risk, interest rate, credit and liquidity risks.

At the end of the reporting period, there are no significant concentrations of credit risk for receivables designated at FVTPL. The carrying amount reflected above represents the Group's maximum exposure to credit risk for such receivables.

Derivative financial instruments

Presented below is a summary of the Group's derivative contracts recorded on the consolidated balance sheet at fair value.

	Consolidated balance sheet location	31 December 2011	31 December 2010
		US$'000	US$'000
Flat forward gold sales and purchase contracts	Derivatives	-	(105 437)
Receivable from provisional copper, gold and silver concentrate sales	Accounts receivable	37 609	19 011

	Location of gain (loss) recorded in profit or loss	Year ended	Year ended
		31 December	31 December
		2011	2010
		US$'000	US$'000
Flat forward gold sales and purchase contracts	Change in fair value of derivatives	(1 855)	(909)
Receivable from provisional copper, gold and silver concentrate sales	Revenue	(5 979)	1 660

The Group closed out the open derivative positions on 6 April 2011 as part of the Restructuring as described in Note 24.

Foreign currency and commodity price risk

In the normal course of business the Group enters into transactions for the sale of its commodities, denominated in U.S. Dollars. In addition, the Group has assets and liabilities in a number of different currencies (primarily Russian Rouble and Kazakh Tenge). As a result, the Group is subject to transaction and translation exposure from fluctuations in foreign currency exchange rates.

The Group does not use derivative instruments to currently hedge its exposure to foreign currency risk.

The carrying amounts of monetary assets and liabilities denominated in foreign currencies other than functional currencies of the individual Group entities at 31 December 2011 and 31 December 2010 were as follows:

	Assets			Liabilities
	31 December 2011	31 December 2010		31 December 2011	31 December 2010
	US$'000	US$'000		US$'000	US$'000
U.S. Dollar	681 023	28 206		973 395	791 779
Euro	274	27		49 524	44 585
GBP	5 604	-		375	-
Total	686 901	28 233		1 023 294	836 364

Currency risk is monitored on a monthly basis by performing a sensitivity analysis of foreign currency positions in order to verify that potential losses are at an acceptable level.

The table below details the Group's sensitivity to changes of exchange rates by 10% which is the sensitivity rate used by the Group for internal analysis. The analysis was applied to monetary items denominated in respective currencies at the reporting dates.

	31 December 2011	31 December 2010
	US$'000	US$'000
Profit or loss (RUB to U.S. Dollar)	(34 790)	55 438
Profit or loss (RUB to Euro)	(6 964)	4 471
Profit or loss (RUB to GBP)	882	-
Profit or loss (KZT to U.S. Dollar)	2 518	21 114

Forward sales and purchase contracts

As at 31 December 2010, the Group held the following derivative financial instruments which were subsequently closed out on 6 April 2011 as part of the Restructuring as described in Note 24.

A flat forward gold sales contract was assumed on the acquisition of JSC Varvarinskoye in October 2009. On the same date the Group entered into an offsetting flat forward gold purchase contract with the same notional amount and monthly settlement dates as the aforementioned flat forward gold sales contract. The gold forward purchase contract economically locks in the losses on the existing flat forward gold sales contract. The contracts have total notional amounts of 320,160 ounces of gold; fixed forward sales price of US$574.25 per ounce and fixed forward purchase price of US$1,129.65 per ounce; and monthly settlement dates between November 2009 and April 2014.

The Group was liable to pay a net settlement amount on each delivery date. If any settlement were not paid on its applicable delivery date, such settlement amount would accrue interest at 3 months LIBOR plus 3% and shall be payable on 31 December 2013 (35% of the total and all interest accrued thereon to date) and on 31 December 2014 (the full balance of the settlement amount and all interest accrued thereon to date). In addition, a cash sweep mechanism applied to all free cash flows generated by Varvarinskoye until all the obligations were fully repaid.

As at 6 April 2011 and 31 December 2010 net settlement amounts of US$50.8 million and US$50.9 million, respectively, have not been paid and were recorded in the "Non-current borrowings" line of the balance sheet (see Note 24).

These contracts had not been designated as hedging instruments. Changes in the fair value were recorded as part of gain/loss on financial instruments in the consolidated income statement. As the Group has legally enforceable master netting agreement with counterparties and intends to settle the contracts on a net basis, the flat forward gold sales and purchase contracts are presented net in the balance sheet as derivatives.

During the period ended 6 April 2011, the Group settled derivative contracts resulting in realised derivative losses of US$1.9 million (2010: loss of US$0.9 million).

Provisionally priced sales

Under a long-established practice prevalent in the industry, copper, gold and silver concentrate sales are provisionally priced at the time of shipment. The provisional prices are finalised in a contractually specified future period (generally one to three months) primarily based on quoted LBMA or LME prices. Sales subject to final pricing are generally settled in a subsequent month. The forward price is a major determinant of recorded revenue.

LME copper price averaged US$8,820 per ton since January 2011 compared with the Group's recorded average provisional price of US$8,629 per ton. The applicable forward copper price at 31 December 2011 was US$7,592 per ton. During the year 2011 decreasing copper prices resulted in a provisional pricing mark-to-market loss of US$0,4 million (included in revenue). At 31 December 2011 the Group had copper sales of 3,067 tons priced at an average of US$7,682 per ton, subject to final pricing in the first quarter of 2012.

LBMA gold price averaged US$1,572 per ounce since January 2011 compared with the Group's recorded average provisional price of US$1,581 per ounce. The applicable forward gold price at 31 December 2011 was US$1,525 per ounce. During the third quarter 2011 decreasing gold prices resulted in a provisional pricing mark-to-market loss of US$1.2 million (included in revenue). At 31 December 2011 the Group had gold sales of 67,751 ounces priced at an average of US$1,667 per ounce, subject to final pricing in the first quarter of 2012.

LBMA silver price averaged US$35.30 per ounce since January 2011 compared with the Group's recorded average provisional price of US$38.50 per ounce. The applicable forward silver price at 31 December 2011 was US$30.50 per ounce. During the third quarter 2011 decreasing silver prices resulted in a provisional pricing mark-to-market loss of US$4.3 million (included in revenue). At 31 December 2011 the Group had silver sales of 972,092 ounces priced at an average of US$29.4 per ounce, subject to final pricing in the first quarter of 2012.

Interest rate risk

The Group is exposed to interest rate risk because entities in the Group borrow funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings. The Group does not currently hedge its exposure to interest rate risk.

The Group's exposure to interest rates on financial assets and financial liabilities are detailed in the liquidity risk section of this note.

For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the end of the reporting period was outstanding for the whole period. A 100 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management's assessment of the reasonably possible change in interest rates.

If interest rates had been 100 basis points higher/lower and all other variables were held constant, the Group's profit for the year ended 31 December 2011 would decrease/increase by US$6.5 million (2010: US$6.9 million). This is mainly attributable to the Group's exposure to interest rates on its variable rate borrowings.

The Group's sensitivity to interest rates has increased during the current period mainly due to the increase in variable rate debt instruments.

Credit risk

Credit risk is the risk that a customer may default or not meet its obligations to the Group on a timely basis, leading to financial losses to the Group. The Group's financial instruments that are potentially exposed to concentration of credit risk consist primarily of cash and cash equivalents and loans and receivables.

Accounts receivable are regularly monitored and assessed and where necessary an adequate level of provision is maintained. Trade accounts receivable at 31 December 2011 and 31 December 2010 are represented by provisional copper, gold and silver concentrate sales transactions. A significant portion of the Group's trade accounts receivable is due from reputable export trading companies. With regard to other loans and receivables the procedures of accepting a new customer include checks by a security department and responsible on-site management for business reputation, licences and certification, creditworthiness and liquidity. Generally, the Group does not require any collateral to be pledged in connection with its investments in the above financial instruments. Credit limits for the Group as a whole are not set up.

The credit risk on liquid funds is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The major financial assets at the balance sheet date other than trade accounts receivable presented in Note 22 are cash and cash equivalents at 31 December 2011 of US$659 million (2010: US$11 million).

Liquidity risk

Liquidity risk is the risk that the Group will not be able to settle all liabilities as they are due.

The Group's liquidity position is carefully monitored and managed. The Group manages liquidity risk by maintaining detailed budgeting, cash forecasting processes and matching the maturity profiles of financial assets and liabilities to help ensure that it has adequate cash available to meet its payment obligations.

The following tables detail the Group's remaining contractual maturity for its financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The tables include both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate curves at the end of the reporting period. The contractual maturity is based on the earliest date on which the Group may be required to pay.

Presented below is the maturity profile of the Group's financial liabilities as at 31 December 2011:

						31 December 2011	31 December 2010
						US$'000	US$'000
	Less than	3-12 months	1-5 years		More than	Total	Total
	3 months				5 years
Derivatives	-	-	-		-	-	117 269
Share purchase obligation under MTO	534 597	-	-		-	534 597	-
Borrowings	16 877	361 915	704 117		-	1 082 909	781 247
Finance lease liability	-	-	-		-	-	4 900
Trade and other payables	54 749	7 485	494		-	62 728	55 119
Contingent consideration	393	3 022	8 265		27 464	39 144	31 541
Total	606 616	372 422	712 876		27 464	1 719 378	990 076

31.    Stated capital account and retained earnings

The Company was incorporated in Jersey on 29 July 2010 as a public no par value company with limited liability under the Companies (Jersey) Law 1991 for the purpose of becoming the new holding company of JSC Polymetal.

On incorporation, the number of shares that the Company was authorised to issue pursuant to its memorandum of association was an unlimited number of shares. Two shares were issued on incorporation at a price of US$1 per share. One of these subscriber shares referred to above was transferred to Metal One Limited (a company incorporated in the British Virgin Islands) on 12 August 2010. On 13 August 2010, the Company issued a further 9,998 shares to Metal One Limited at a price of US$1 per share. These shares, which were unpaid, were redeemed on completion of the IPO.

On 30 September 2011, PMTL, the Company's wholly owned subsidiary, made an offer (known as the Institutional Share Swap Facility or the ISSF) to certain institutional shareholders of JSC Polymetal to acquire their Polymetal Shares and Polymetal GDRs. The consideration under the ISSF is the issue of new shares in the Company in exchange for Polymetal Shares on a one for one basis. Under the ISSF, which completed simultaneously with the IPO on 2 November 2011, 332,641,773 new shares in the Company were issued.

On 2 November 2011, the Company successfully completed its IPO. 53,350,000 shares with no par value were issued at a price of 920 pence (US$14.74) per share. The net proceeds raised were US$762.6 million. As part of the price stabilisation provisions, 3,305,988 of the new shares were repurchased at a cost of US$46.6 million and cancelled by the Company in the five week period following the IPO.

The total transaction costs incurred were US$33.7 million. US$24.2 million of the transaction costs were attributable to the issue of new equity and have been deducted against the Stated capital account, while US$9.5 million were attributable to the expenses associated with the above noted Restructuring. Joint transaction costs were allocated based on the ratio of new shares issued, in relation to total shares outstanding.

As at 31 December 2011, the Company's issued share capital consisted of 382,685,785 ordinary shares of no par value, each carrying one vote. The Company does not hold any ordinary shares in treasury. The ordinary shares reflect 100% of the total issued share capital of the Company.

The movements in the Stated Capital account in the year were as follows:

	Stated Capital Account		Treasury shares	Total shares		Stated Capital Account
	no. of shares		no. of shares	no. of shares		US$'000
Balance at 31 December 2010	n/a		-	-		865 483
Issue of treasury shares in JSC Polymetal in exchange for assets	-		-	-		66 966
Amortisation of bonus received from depository	-		-	-		819
Issuance of ordinary shares under ISSF	332 641 773		-	332 641 773		-
Issuance of shares on IPO	53 350 000		-	53 350 000		762,641
Repurchased shares	(3 305 988)		3 305 988	-		(46 649)
Cancellation of repurchased shares	-		(3 305 988)	(3 305 988)		-
Non-controlling interest arising on restructuring	-		-			(82 874)
				-
Balance at 31 December 2011	382 685 785		-	382 685 785		1 566 386

Retained Earnings

Reserves available for distribution to shareholders are based on the available cash in the Company under Jersey law. The ability to distribute cash up to the Company from the Russian and Kazakh operating companies will be based on the statutory historical information of each stand-alone entity, which is prepared in accordance with Russian or Kazakh accounting standards and which differs slightly from IFRS. Russian legislation identifies the basis of distribution as accumulated profit. However, current legislation and other statutory regulations dealing with distribution rights are open to legal interpretation; consequently, actual distributable reserves may differ from the amount of accumulated profit under Russian statutory accounting rules.

Weighted average number of shares: Diluted earnings per share

The Group had potentially dilutive securities, namely the Group's equity-settled share appreciation plan, which was established during 2010 (see Note 32).

Basic/dilutive earnings per share were calculated by dividing profit for the year attributable to equity holders of the parent by the weighted average number of outstanding common shares before/after dilution respectively. The calculation of the weighted average number of outstanding common shares after dilution is as follows:

	Year ended		Year ended
	31 December 2011		31 December 2010
Weighted average number of outstanding common shares	366 969 369		358 732 335
Dilutive effect of share appreciation plan	25 875 610		3 140 220
Weighted average number of outstanding common shares after dilution	392 844 979		361 872 555

There were no adjustments required to earnings for the purposes of calculating dilutive Earnings per share in the current year (2010: nil). The dilutive effect of equity-settled share appreciation rights has been calculated using the treasury stock method.

32.    Share-Based Payments

In 2010, the Group established an equity incentive plan (the Plan) for executive directors and senior employees of the Group in which the grant of equity-settled share appreciation rights up to 30 million shares in JSC Polymetal (the Bonus Fund) was approved. The number of awards to which a qualifying participant is entitled was determined by the board of JSC Polymetal on 8 November 2010. Group management believes that such awards better align the interests of its employees with those of its shareholders.

Under the terms of the plan these awards were eligible for immediate vesting on the Group restructuring and listing. However, the executive Director and senior managers waived that right and the entitlement to JSC Polymetal shares was exchanged for an entitlement to Polymetal International shares on a one to one basis with the same vesting conditions as existed previously. As the cancellation and reissuance of the awards was done solely to preserve the existing rights of the award holders, no accelerated share based charge has been recognised.

The aggregate number of shares comprising the Bonus Fund will be determined on 11 June 2013 and will depend on the excess of the weighted average price of the Company's shares during the period between 11 March 2013 and 11 June 2013 over an established price of US$16.74.

Equity-settled stock appreciation rights granted have an exercise price of 1 penny, vest at the end of a 2.6 year service period and are exercisable on the vesting day in one year from the vesting date.

The fair value of the awards granted during the year ended 31 December 2010, was estimated using a two-stage Monte-Carlo model. The fair value is then amortised on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of two-stage Monte-Carlo option pricing requires management to make certain assumptions with respect to selected model inputs. The following assumptions were used to determine the grant date fair value:

·         Expected forfeitures. This assumption is estimated using historical trends of executive Director and employee turnover. As the Group typically only grants awards to senior employees and the turnover rate for such employees is minimal, the Group has estimated expected forfeitures to be 5%. Estimated forfeitures are adjusted over the requisite service period to the extent actual forfeitures differ or are expected to differ from such estimates. Changes in estimated forfeitures are recognised in the period of change and impact the amount of expense to be recognised in future periods.

·         Expected volatility. Expected volatility has been estimated based on an analysis of the historical stock price volatility of the Company's GDRs from February 2007, when the JSC Polymetal GDRs became publicly traded.

·         Expected life. The average expected life was based on the contractual term of the option of 3.6 years. As the Plan has a 2.6 years vesting condition and the participant may exercise their right to redeem shares within one year after vesting occurs and such right is obtained, the Group used the 2.6 years expected term for the first stage of the Monte-Carlo simulation (the First date) and 3.6 - for the second stage (the Second date).

·         Fair value of common stock is equal to the market price of underlying GDR's at the grant date.

·         Risk-free interest rate. The risk-free rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant.

At the grant date, the Group had not historically declared dividends and management believed the Company would not declare a dividend over the life of the option. As such, the expected annual dividend per share was therefore nil. Any subsequent change in dividend policy will be taken into account when valuing options granted in the future.

Risk free rate	0.79% for the First date, 1.24% for the Second date
Expected dividend yield	Nil
Expected volatility	40%
Expected life, years	2.6 for the First date, 3.6 for the Second date
Fair value per share, U.S. Dollars	16.97

A summary of option activity under the Plan for the year ended 31 December 2011 is presented below:

	Awards		Weighted average exercise price (per share)		Weighted average fair value of awards (per share)		Weighted average remaining contractual term
	number		US$		US$		Years
Awards at 1 January 2011	29 917 460		0.03		4.96		3.45
Forfeited	(577 778)		0.03		4.96		-
Non-vested awards at 31 December 2011	29 339 682		0.03		4.96		2.45

None of the share awards outstanding as at 31 December 2011 were exercisable as they are not fully vested. For the year ended 31 December 2011, share-based compensation in the amount of US$57 million, (2010: US$7.9 million) was recognised in general, administrative and selling expenses in the consolidated income statement (see Note 11). As at 31 December 2011 and 31 December 2010, the Group had US$ 75.7 million and US$136 million, respectively of unrecognised share-based compensation expense related to non-vested equity-settled stock appreciated rights with a weighted average expected amortisation period of 2.45 years and 3.45 years, respectively.

33.    Related Parties

Related parties are considered to include shareholders, affiliates, associates, joint ventures and entities under common ownership and control with the Group and members of key management personnel. In the course of its business the Group entered into various transactions with Nomos-Bank (an entity in which Alexander Nesis, a significant shareholder of the Company (Note 1), also holds a substantial interest), equity method investments and its employees and officers as follows:

	Year ended		Year ended
	31 December		31 December
	2011		2010
	US$'000		US$'000
Interest expense on loans provided by Nomos-Bank	2,339		1 886
Revenue from sales to Nomos-Bank	258 794		315 405
Other income from entities under common control	1 559		-
Lease payments to Nomos Leasing	5 082		4 819

Outstanding balances are presented below:

	31 December 2011		31 December 2010
	US$'000		US$'000
Short-term loans provided to equity method investments	315		-
Long-term loans provided to equity method investments	6 303		3 455
Short-term loans provided to entity under common control	1 522		-
Total loans provided to related parties	8 140		3 455
Short-term loans provided by Nomos-Bank	8 318		14 379
Long-term loans provided by Nomos-Bank	25 223		24 820
Long-term loans provided by equity method investments	1 860		1 739
Total loans provided by related parties	35 401		40 938
Capital lease liabilities to Nomos Leasing	-		4 819
Other accounts receivable from related parties	2 940		175
Interest receivable from Nomos-Bank	1 573		-

Carrying values of other long-term loans provided to related parties as at 31 December 2011 and 31 December 2010 approximate their fair values.

Details of the significant terms of the loans provided by related parties are disclosed in Note 24. As at 31 December 2011 and 31 December 2010, the Group has certain forward sales commitments to related parties (see Note 28).

The amounts outstanding at the balance sheet dates are unsecured and expected to be settled in cash. No expense has been recognised in the reporting period for bad or doubtful debts in respect of the amounts owed by related parties. All trade payable and receivable balances are expected to be settled on a gross basis.

The remuneration of directors and other members of key management personnel during the periods was as follows:

	Year ended 31 December 2011		Year ended 31 December 2010
	US$'000		US$'000
Share-based payments	28 901		4 264
Short-term benefits of board members*	2 278		982
Short-term employee benefits	1 779		844
Post-employment benefits	70		18

*Benefits of board members include the remuneration of the board members of JSC Polymetal.

The remuneration of directors and key executives is determined by the remuneration committee having regard to the performance of individuals and market trends.

34.    Notes to the consolidated Statements of cash flows

	Notes	Year ended	Year ended
		31 December 2011	31 December 2010
		US$'000	US$'000
Profit before tax		408 847	306 430
Adjustments for:
Depreciation expense		96 654	70 334
Write-down of exploration assets	17	13 263	-
Write-down of inventory to net realisable value	7	6 232	15 319
Share-based compensation	11, 32	57 116	7 896
Finance costs	15	28 746	21 541
Finance income		(4 208)	(785)
Loss on disposal of property, plant and equipment	12	6 203	6 296
Change in fair value of contingent consideration liability	29	6 828	3 616
Change in allowance for doubtful debts	12	(1 171)	2 333
Loss from equity method investments	19	1 952	1 170
Change in fair value of derivative financial instruments	29	1 855	909
Foreign exchange losses		13 634	337
Gain on disposal of subsidiary	4	(4 931)	(3 580)
Other non-cash expenses		1 388	(1 840)
Movements in working capital
Increase in inventories		(222 889)	(86 424)
Increase in VAT receivable		(22 766)	(10 491)
Increase in trade and other receivables		(19 556)	(32 023)
Increase in prepayments to suppliers		(11 437)	(13 296)
Increase in trade and other payables		6 394	19 899
Increase in other taxes payable		8 676	4 821
Cash generated from operations		370 830	312 462
Interest paid		(32 414)	(16 991)
Income tax paid		(126 317)	(80 256)
Net cash generated by operating activities		212 099	215 215

Additions to property, plant and equipment of US$16.9 million and US$4.8 million during the year ended 31 December 2011 and 31 December 2010, respectively were acquired on deferred payment terms. Other non-cash transactions during the year ended 31 December 2011 included the issuance of US$67.0 million of treasury shares for the acquisition of assets in 2011.

35.    Subsequent Events

On 7 February 2012 the Company completed the acquisition from AngloGold Ashanti Holdings PLC (AngloGold) of AngloGold's 50% interest in various companies (the Companies) held in joint venture with Polymetal comprising the AngloGold Ashanti - Polymetal Strategic Alliance (the Alliance). The Companies include Amikan Holding Limited, which owns the Veduga gold deposit in the Krasnoyarsk region of the Russian Federation. The consideration for the acquisition, including the repayment of all shareholder loans made by AngloGold to the Companies, was US$20 million, paid in cash. The Group's existing 50% investment had a carrying value of US$12.4 million along with a loan asset of US$6.3 million. The Group intends to introduce a new joint venture partner in 2012 and as such the asset is considered held for sale under the definitions within IFRS 5.

On 17 February 2012 the Company executed the Mandatory Tender Offer, made on 23 November 2011 (the MTO) at a cost of US$538 million. As a result the Company's holding in JSC Polymetal has increased to 397,287,592 Ordinary Shares, representing approximately 99.48% of the total share capital of JSC Polymetal. The Company intends to exercise its right to proceed with a statutory squeeze out (i.e. purchase) of the remaining JSC Polymetal shares on terms and within the period as provided under applicable Russian law.

As set out in Note 24, on 31 August 2012 (the Repurchase Date) Polymetal ESOP Limited would have been obligated to repurchase all of the JSC Polymetal Shares transferred under the General Master Repurchase Agreement (the GMRA) for the repurchase price which is calculated as the sum of (i) the price received for the relevant Polymetal shares; and (ii) the aggregate amount obtained by daily application of LIBOR + 2.75% to the relevant price for the number of days during the period commencing on the relevant transfer date and ending on the Repurchase Date. On 16 February 2012, Polymetal ESOP Limited accelerated the Repurchase Date under the GMRA and settled its obligations under the GMRA in full for US$250 million.

A final dividend has been proposed in relation to the year of 20 cents per share (2010: nil) giving a total expected dividend of US$76.5 million (2010: nil). This is subject to approval by shareholders at the Annual General Meeting and has therefore not been included as a liability in these financial statements.

Enquiries

Media		Investor Relations
College Hill Leonid Fink Tony Friend	[phone]	Polymetal Pavel Danilin Maxim Nazimok	[phone]
Joint Corporate Brokers
Morgan Stanley Edward Knight Sandip Patodia	[phone]	Canaccord Genuity John Prior Roger Lambert	[phone]

FORWARD-LOOKING STATEMENTS

THIS RELEASE MAY INCLUDE STATEMENTS THAT ARE, OR MAY BE DEEMED TO BE, "FORWARD-LOOKING STATEMENTS". THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS AT THE DATE OF THIS RELEASE. THESE FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, INCLUDING THE WORDS "TARGETS", "BELIEVES", "EXPECTS", "AIMS", "INTENDS", "WILL", "MAY", "ANTICIPATES", "WOULD", "COULD" OR "SHOULD" OR SIMILAR EXPRESSIONS OR, IN EACH CASE THEIR NEGATIVE OR OTHER VARIATIONS OR BY DISCUSSION OF STRATEGIES, PLANS, OBJECTIVES, GOALS, FUTURE EVENTS OR INTENTIONS. THESE FORWARD-LOOKING STATEMENTS ALL INCLUDE MATTERS THAT ARE NOT HISTORICAL FACTS. BY THEIR NATURE, SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS BEYOND THE COMPANY'S CONTROL THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON NUMEROUS ASSUMPTIONS REGARDING THE COMPANY'S PRESENT AND FUTURE BUSINESS STRATEGIES AND THE ENVIRONMENT IN WHICH THE COMPANY WILL OPERATE IN THE FUTURE. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE. THERE ARE MANY FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENTS ARE BASED

 

END

 

 

FR EELBLLZFEBBV