Preliminary results for the FY ended 31 Dec 2012

RNS Number : 7679B

Polymetal International PLC

08 April 2013

 



Release time	IMMEDIATE
Date	08 April 2013

Polymetal International plc

Preliminary results for the year ended 31 December 2012 (Unaudited)

Polymetal International plc (LSE: POLY) (together with its subsidiaries, including JSC "Polymetal" - "Polymetal", the "Company", or the "Group") is pleased to announce the Group's preliminary unaudited results for the year ended 31 December 2012.

OPERATING HIGHLIGHTS

·      Polymetal demonstrated strong operational performance throughout the year. Total gold equivalent production of 1,063 Koz was up 31% compared to 2011 and exceeded the original guidance of 1 Moz by 6%. These excellent results were driven by stable performance at all mature mines, with a notable improvement achieved at Dukat, and successful ramp-up at Omolon and Albazino.

·      Amursk POX, the first operating POX plant in Russia's gold industry, poured first gold in 2012 and is undergoing the ramp-up period. Although certain problems were encountered during ramp-up and the process has been slower than planned, we expect the POX plant to reach full capacity by Q4 2013 as these problems are being fully addressed.

·      The Company is on track to deliver on 2013 production guidance of 1.2 Moz of gold equivalent production, with an off-take agreement signed for Albazino concentrate, and the Mayskoye concentrator approaching commissioning in April 2013 in accordance with the schedule.

·      Ore Reserves grew by 6% to 15.1 Moz of gold equivalent during 2012 while Mineral Resources (additional to Ore Reserves) grew by 35% to 18.7 Moz of gold equivalent. There has been a dramatic increase of the resource base at Albazino and potential new growth assets have been identified through successful exploration at Kutyn and Svetloye. These achievements indicate that Polymetal is on track to make development decisions on new asset development in H2 of 2013 - beginning of 2014.

FINANCIAL HIGHLIGHTS

·      Revenue in 2012 increased by 40% to US$ 1,854 million compared to 2011 ("year-on-year"), driven mostly by a 33% increase in gold equivalent sold. In addition to robust production growth, metal sales in 2012 exceeded production for both gold and silver mainly due to destockpiling of concentrate inventories at Dukat.

·      Group total cash cost¹ was US$ 703/GE oz, and remained almost flat compared to the 2011 level of US$ 701/GE oz as a result of intense management focus on cost control and despite external and inflationary cost pressures.  Strong operating performance, resulting in increased average grade processed and increased volumes, coupled with moderate Russian Rouble depreciation against the US Dollar, offset the combined impact of domestic inflation and adverse movement in the gold/silver price ratio.

·      All-in cash costs¹ comprised US$ 1,047/GE oz, a 15% decrease year-on-year, driven mostly by reduction in capital expenditure at our operating mines and stable total cash costs.

·      Adjusted EBITDA grew by 47% to US$ 918 million, ahead of revenue growth. Adjusted EBITDA margin was up by 3 pp to 50%.

·      Net earnings were US$ 401 million, up 38% year-on-year driven by the strong increase in adjusted EBITDA. Net earnings were negatively affected by additional tax provisions booked in respect of prior years and 2012 in the amount of US$ 116 million, which are not expected to be recurring.

·      Pre-tax return on capital employed (ROCE¹) was 22%, and after-tax return on equity (ROE¹) was 20%, increasing from 18% and 18%, respectively, and marking the improved capital efficiency of the Group. Basic EPS was US$ 1.03 per share, increasing 30% year-on-year;

·      A final dividend of US$ 0.31 per share (a total of US$ 119 million) in respect of FY 2012, representing 30% of net earnings is proposed by the Board in accordance with the new dividend policy;

·      Net operating cash flow more than doubled to US$ 496 million while capital expenditures declined 24% to US$ 351 million, resulting in a total positive free cash flow of US$ 139 million in 2012;

·      Group's liquidity profile remains comfortable with Net Debt / Adjusted EBITDA further reduced from 1.4 as at YE 2011 to 1.1 as at 31 December 2012, with 59% of borrowings being long-term.

Financial highlights	2012	2011	Change, %(2)
Revenue, US$m	1,854	1,326	+40%
Total cash cost, US$/GE oz	703	701	0%
All-in cash cost, US$/GE oz	1,047	1,231	-15%
Adjusted EBITDA, US$m	918	624	+47%
Adjusted EBITDA margin, %	50%	47%	+3 pp
Average realized gold price, US$/ oz	1 631	1 555	+5%
Average LBMA gold price, US$/ oz	1 668	1 572	+6%
Average realized silver price, US$/ oz	30.0	34.0	-12%
Average LBMA silver price, US$/ oz	31.1	35.3	-12%
Net earnings, US$m	401	290	+39%
ROCE, %	22%	18%	+4 pp
ROE, %	20%	18%	+2 pp
Basic EPS, US$/share	1.03	0.79	+30%
Dividend declared during the year, US$/share	0.7(3)	-	n/a
Net debt, US$m	1 037	879	+18%
Net debt/Adjusted EBITDA	1.1	1.4	-20%
Net operating cash flow, US$m	496	212	+134%
Capital expenditure, US$m	351	462	-24%
Free cash flow, US$m	139	(260)	n/a
Notes:
(2) % 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 (3) Final dividend proposed in respect of 2011 + special dividend declared in December 2012

"We have demonstrated strong financial performance for the year driven by excellent operational performance and tight cost and capital discipline", said Vitaly Nesis, CEO of Polymetal, commenting on the results.

"This success is marked by stable total cash costs, increasing margins and returns on capital, as well as increased free cash flow generation on the back of completion of our major growth projects. We are committed to delivering the value created to shareholders, by proposing a final dividend which, combined with special dividends, will result in a sector-leading yield combined with solid growth profile".

presentation and webcast

Polymetal will hold a conference call and webcast on Monday, April 8, 2013 at 9:00 am London time (12:00 pm Moscow time).

To participate in the call, please dial:

8 10 8002 4902044 (toll-free from Russia), or

0808 109 0700 (toll-free from the UK), or

1 866 966 5335 (toll-free from the US), or

[phone] (from outside the UK, the US and Russia), or follow the link:

http://webcast.irsquared.net/w/795-1028-12739/en 

Please be prepared to introduce yourself to the moderator or register.

Webcast replay will be available on Polymetal's website (www.polymetalinternational.com) and at http://webcast.irsquared.net/w/795-1028-12739/en. A recording of the call will be available immediately after the call at [phone], access code 3770138, from 1:00 pm Moscow time Monday, April 8, till 1:00 pm Moscow time Monday, April 15, 2013.

.

Enquiries

Media		Investor Relations
College Hill Leonid Fink Tony Friend	[phone]	Polymetal Maxim Nazimok Evgenia Onuschenko Elena Revenko	[e-mail] [phone] (Russia) [phone] (UK)
Joint Corporate Brokers
Morgan Stanley Bill Hutchings Sandip Patodia	[phone]	Canaccord Genuity Roger Lambert Andrey Kroupnik	[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.

TABLE OF CONTENTS

Chairman's statement

CEO statement

Operating review

Financial review

Principal risks and uncertainties

Going concern

Financial statements

Consolidated unaudited income statement

Consolidated unaudited statement of comprehensive income

Consolidated unaudited Balance Sheet

Consolidated unaudited statement of cash flows.

Consolidated unaudited statement of changes in equity

Notes to the consolidated unaudited financial statements

Reserves and resources

Chairman's statement

On behalf of the Board, I am delighted to be reporting on a year of tremendous progress for Polymetal. In our first full year as a premium listed company on the LSE, we have successfully delivered on our promises in terms of production, performance, governance and the generation of value for our stakeholders.

Performance
We have consistently demonstrated strong operational performance throughout the year, with total gold equivalent production 31% up on 2011 and six per cent ahead of original expectations. This excellent result was driven in particular by solid performance at our mature mines, robust performance at Dukat and successful ramp-ups at Omolon and Albazino.

While the completion of major projects and significant resource expansion have both contributed significantly to our success during the year and helped to develop a distinctive competitive profile for Polymetal, we have also made progress against wider strategic objectives. Throughout the year, we have announced several resource increases, the most important being the two-fold resource expansion at Albazino as a result of our ongoing exploration efforts. In December we announced the completion of the acquisition of the Olcha gold-silver deposit and a greenfield PGM project, the first platinum asset of Polymetal.

Dividend

Our dividend policy in 2012 has evolved in response to increased demand for dividend flow from institutional investors across the world. It also highlighted our ability to generate free cash flow at the current stage of our development. As a result, a new dividend policy has been adopted by the Board, raising the regular dividend payout ratio to 30% of net earnings, and introducing interim dividends and an annual consideration of a special dividend. We firmly believe that the amended dividend policy will be significantly more aligned with the interests of the Company's stakeholders and global trends in the sector, reaffirming the Company's commitment to capital allocation discipline and value distribution while retaining flexibility to invest in attractive projects.

The Board was delighted to declare, in accordance with the  new policy that, having considered the performance of the Group during the year to date, available free cash flows and future investment requirements, a special dividend of US$0.50 per ordinary share, representing a total of approximately US$191 million. This was paid in January 2013. In addition, a final dividend of US$ 0.31 per share is proposed, representing 30% of our net profit for the year.

The declaration of the first special dividend in the Company's history and the increased regular payout reaffirm our commitment to capital discipline and is also a result of solid operating and financial results of the Group to date. The implementation of our new dividend policy reflects the importance we place on delivering meaningful cash returns to our shareholders and sustainable value creation.

The Board and Governance

Governance is at the heart of our culture, providing a framework within which we can maintain and develop the values and practices that support our corporate objectives, and which ensure that Polymetal reflects high levels of ethical and responsible behaviour.

During our first full year as a premium listed company on the London Stock Exchange we have worked hard to ensure that we reflect both the letter and the spirit of the UK Corporate Governance Code and our approach is designed to achieve a balance between encouraging positive commercial values, and applying the appropriate disciplines where required.

We have been particularly focused on the Code's emphasis on the alignment of remuneration with shareholder interests, the balance and effectiveness of the Board and its composition, and the active stewardship of risk management. In order for the Board to maximise its effectiveness it must ensure that the proper governance and strategy setting procedures are in place so that the Company can maintain its ability to sustain financial performance, dividend flow to shareholders, and to generate value to all its stakeholders.

We remain committed to ensuring that the Company is run in the best interests of all its stakeholders and that the Board is accountable for responsible stewardship, disciplined performance and sustainable value delivery.

People

Polymetal's good performance this year is entirely due to the talent, dedication and hard work of all our employees. Our strong prospects for future growth are equally dependent on their continuing commitment, and we are not only highly appreciative of the efforts of our employees at all levels, but are also absolutely clear that the well-being of everyone associated with Polymetal is of critical importance.

Outlook

The Board is pleased to be able to report on such a successful year for Polymetal. We have delivered a very strong performance against the operational and strategic objectives that we set ourselves at the time of listing. We continue to make strong progress on consistent long-term strategic aims, in particular the development of a third generation of growth assets. Our focus continues to be firmly on delivering results and building sustainable value for the long term.

Bobby Godsell

Chairman

CEO statement

A successful year of delivery and growth

2012 has proved to be a strong year, with a solid set of operating results, favourable market conditions, significant progress across our key investment projects and exploration targets, and a continuing focus on safety and employee welfare.

Robust production results

This year we achieved total gold equivalent production of 1.06 Moz - 31% up on 2011 and 6% ahead of original forecasts, representing our biggest annual increase in absolute numbers to date. These excellent results were driven by stable performance at all mature mines, with a notable improvement achieved at Dukat, and successful ramp-up at Omolon and Albazino, our key growth projects.

Annual gold production increased to 589 Koz, up 33% compared to 2011, driven principally by robust operating results at Omolon and Albazino, both achieving or exceeding design capacity. Silver production was 26.5 Moz - also up 33% on 2011 - as a result of higher grades and recoveries at Dukat, successful processing of high-grade Sopka ore at Omolon, and increased grades at Khakanja.

We have commissioned our flagship Amursk POX plant and poured first gold in April 2012 as planned. However, while throughput reached expected levels in late November, we experienced some operational issues during the ramp up and have not yet achieved expected sustainable performance. We are already implementing the necessary remedial measures, and are expecting a gradual improvement throughout the year with full capacity being achieved by the fourth quarter of 2013. In the meantime, we will be able to generate cash flows by continuing concentrate sales to third-party off-takers.

Development and exploration

I am pleased to report that our development projects are well on track. The commissioning of Mayskoye, our most remote and northerly mine, is scheduled to take place in April 2013.

Furthermore, a substantial increase in the gold resource base at Albazino to nearly 6 Moz and successful exploration results at Kutyn and Svetloye indicate that we are in a strong position to make decisions on significant new asset developments in the second half of 2013 and the beginning of 2014. These assets will form a third generation of growth assets after reaching the target level of 1.4 Moz of gold equivalent production on the current asset base, which is expected in 2014.

The in-house exploration programme in 2012 and in the beginning of 2013 has been well complemented by the acquisition activity, including acquisition of the Olcha deposit, which will be part of the Dukat hub; the Svetlobor project, our first greenfield project in platinum; and, most recently, Maminskoye, a development stage asset in a perfect location with access to infrastructure. Both organic and inorganic growth projects are complementary with our business model, with capital discipline and commitment to return on capital as the core criteria of value creation.

Strong financial performance

We have achieved excellent financial results for the year driven by robust operating performance and tight cost and capital discipline.

Revenue increased by 40% to US$1,854 million compared to 2011, driven mostly by robust production growth resulting in a 33% increase in sales of gold equivalent ounces. Metal sales exceeded production for both gold and silver as a result of destockpiling of concentrate inventories at Dukat.

Group total cash cost was US$ 703/GE oz, and remained almost flat compared the 2011 level of US$ 701/GE oz as a result of intense management focus on cost control and despite external and inflationary cost pressures.  Strong operating performance, resulting in increased average grade processed and increased volumes, and coupled with moderate Russian Rouble depreciation against the US Dollar, offset the combined impact of domestic inflation and adverse movement in gold/silver price ratio.

In line with industry best practice, we have started to report all-in cash costs, which comprised US$1,047/GE oz, a 15% decrease year-on-year, driven mostly by reduction in capital expenditure at our operating mines and stable total cash costs.

Net earnings were US$ 401 million, up 39%, and basic EPS was US$1.03, up 30% year-on-year driven by strong increase in adjusted EBITDA. The net earnings and EPS were negatively affected by additional tax provisions booked in respect of prior years and 2012 in the amount of US$ 116 million, which are not expected to be recurring. The earnings growth resulted in improved returns on equity and capital employed reaching 20% and 22% respectively.

Net operating cash flow more than doubled to US$496 million while capital expenditures declined 24% to US$351 million, resulting in total positive free cash flow of US$139 million.

Our balance sheet remains strong, and liquidity profile comfortable, with the net debt/adjusted EBITDA ratio further reduced from 1.4 to 1.1 during 2012, with 59% of borrowings being long-term.

Following the successful performance during 2012, a final dividend of US$0.31 per share is proposed by the Board in accordance with our new dividend policy, and reiterating our commitment to capital discipline and delivering value to our shareholders. The cumulative dividend payout during the last twelve months, including the payment of the first special dividend, puts us among the leaders in the sector in terms of dividend yield.

Employees and communities

As one of the largest employers and taxpayers in many areas of our operations, with more than 9,000 employees in Russia and Kazakhstan, we are very conscious that our achievements are totally dependent on their commitment and dedication. We have a clear focus on the wellbeing of all our staff, and our health and safety procedures are subject to constant scrutiny, assessment and development. We continue to invest significantly in all areas relating to safety systems, procedures and equipment, which naturally remain central to our culture and working practices.

I am very pleased to report that we have encountered zero fatalities for a second year in a row, and the lost time injury frequency rate has also decreased in 2012 by another 6%, following major improvements in 2011. The tragic loss of life at the dry-cargo freighter Amurskaya, operated by a contractor of one of our subsidiaries, which capsized in the Sea of Okhotsk in October 2012, is a matter of lasting sadness and regret for everyone at Polymetal. We have already taken appropriate steps to roll-out our safety and risk management procedures to our large supplier and contractor network.

We have a long history of involvement and support for the communities in which we operate, and which are in any way affected by our activities and operations. We continue to be committed to playing a significant role in the social and economic development of communities and indigenous populations, and have an ongoing programme of investment and financial support in terms of job creation, the development of local and regional infrastructure, health, education, culture, welfare and sports.

Looking ahead

We have a great deal to look forward to - the results for 2012, and the strength of our development and exploration activities, give a good indication as to our prospects for the future. In the year ahead, we will be fully focused on unlocking the potential of the Amursk POX plant and the launch of Mayskoye, while continuing to work on the third generation of growth assets.

We remain confident in our production guidance of 1.2 Moz for 2013 and in our commitment to both cost and capital discipline, and while there are always risks associated with future prospects we firmly believe that we have the assets, strategy and expertise to continue to build Polymetal as a world class business and continue to deliver value to all our stakeholders.

Vitaly Nesis

Chief Executive Officer

Operating review

Delivering on our promises across our operations

2012 became a year of solid operating results, with reliable delivery on increased production guidance revised upwards by 5% during the year, and successful ramp-up of new mines.  This robust operating performance was further supported by a substantial increase in resource base, paving the way for development decisions on the third generation of growth assets.

Total gold equivalent production of 1,063 Koz was up 31% compared to 2011 and exceeded the original guidance of 1 Moz by 6%.  These excellent results were driven by stable performance at all our mature mines, with a notable improvement achieved at Dukat, and successful ramp-up at Omolon and Albazino.

The strong operating results were combined with considerable exploration success a dramatic increase of resource base at Albazino to nearly 6 Moz of gold, and successful exploration results at Kutyn and Svetloye. As a result, the Company is steadily approaching development decisions on new asset development in the second half of 2013. These are set to build up the "third generation" of growth assets, ensuring growth beyond 2014.

Delivering on production and sales targets

Annual gold production was 593 Koz, up 33% year-on-year, driven mainly by successful ramp-up at Omolon and Albazino.  Annual silver production was 26.5 Moz, up 33% year-on-year, as a result of higher grades and recoveries at Dukat, successful processing of high-grade Sopka ore at Omolon, and increased silver grades at Khakanja.

Importantly, metal sales for the full year exceeded production both for gold and silver.  This was achieved by planned de-stockpiling of concentrate and refined metals inventories - most importantly at Dukat and Omolon - accumulated in the first six months of the year, and contributed to stronger operating cash flows.

Delivering on key capital projects

We have made solid progress across our key construction projects, although some of them did not progress fully in line with our expectations, with a three-month delay in commissioning at Mayskoye and issues arising during the ramp-up of the Amursk POX plant. However, these issues did not have a material effect on our 2012 results and 2013 production targets. Both Amursk and Mayskoye are now the key focus of 2013 for our management team, with defined action plans in place.

In 2012, the key achievements across our growth projects included:

·      The Albazino mine and concentrator reached design throughput and recovery from the second quarter of the year;

·      The refurbished processing plant at Omolon with Merrill-Crowe section performed fully in line with expectations, processing more than 300 Kt of high gold and silver grade ore from satellite Sopka deposit; and

·      The majority of construction works were completed at the Mayskoye concentrator. Currently construction is on track for the revised start-up deadline in April 2013, with the only remaining works including installation of electrical, controlling, and auxiliary equipment.

Production highlights

	2012	2011	% change
Stripping, Kt	85,173	80,683	+6%
Underground development, m	46,717	35,150	+33%
Ore mined, Kt	12,591	11,002	+14%
- open-pit	10,937	9,636	+14%
- underground	1,654	1,366	+21%
Metal in ore mined, GE grade g/t	4.1	3.8	+10%
Ore processed, Kt	9,925	8,821	+13%
Metal in ore processed, GE grade g/t	4.4	3.8	+15%
Production
- gold, Koz	589	443	+33%
- silver, Moz	26.5	19.9	+33%
- copper, Kt	6,567	6,915	-5%
Gold equivalent production, Koz	1,063	810	+31%
Sales
- gold, Koz	593	448	+32%
- silver, Moz	28	17	+63%
- copper, Kt	7,011	6,363	+10%
Gold equivalent sales, Koz	1,092	764	+43%
Health and safety1
LTIFR	0.59	0.63	-6%
FIFR	0.00	0.00	n/a

Notes:

(1) LTIFR = lost time injury frequency rate; FIFR = fatal injury frequency rate

Analysis of production results

Mining

Stripping volumes in 2012 grew by 6%, while underground development increased by 33% to 46.7 thousand metres, mainly due to our Dukat hub where ore is increasingly sourced from underground. Ore mined was 12,591 Kt, a 14% increase over 2011 level. The bulk of ore mined (87%), is sourced from open-pit. The key contributors of growth in ore mined were Khakanja (due to intensified mining at pit 3 and completion of underground mining at Yurievskoye) and Omolon (full capacity achieved at Sopka and commencement of mining at Tsokol), further complemented by a 45% increase in ore mined at Albazino as the mine achieved full capacity.

The average gold equivalent grade in ore mined was 4.1 g/t, increasing by 10% over the 2011 level of 3.8 g/t. The solid increase in grade profile was driven mainly by increased share of ore mined at Omolon and Albazino, our new higher grade mines, combined with increased average grades at those operations by 13% and 27% respectively. Importantly, average grades were also supported by a stable grade profile at Dukat while ore mined grew 8% year-on-year.

Processing

Ore processed was up 13% in 2012 and reached 9,925 Kt.  This solid increase was mainly driven by full ramp-up of processing facilities at Albazino (reaching design throughput and recovery in the first half of the year, resulting in two-fold increase) and commencement of processing of ore from Sopka at the newly commissioned Merill Crowe section of Kubaka plant (Omolon hub), while our mature mines demonstrated stable performance at their nameplate capacity or slightly above.

As expected, average gold equivalent grade in ore processed grew by 15% to 4.4 g/t (slightly above our average reserve grade of 3.9 g/t) as the growth in processing volumes came mainly from our new high-grade mines - Omolon (with processing high-grade ore from Sopka, average grade processed grew almost three-fold year-on-year) and Albazino (contributing 12% of total ore processed by the Group in 2012, up from 7% in 2011).  At Khakanja, there was an increase in average silver grade due to processing of higher-grade ores from Khakanja's pit 3 and Avlayakan.

Production

Our original annual gold equivalent production guidance of 1 Moz for 2012 was subsequently increased to 1.05 Moz by the end of the third quarter, on the back of the strong operating results achieved. Actual gold equivalent production for the year was 1,063 Moz, a 31% increase compared to 2011, and exceeded the elevated guidance.

Major contributions to production growth were attributable to four operations:

·      Dukat - with the increased grade profile due to implementation of new underground mining methods, expansion of mining at Goltsovoye, and stability of the improved recovery levels at the main Omsukachan concentrator

·      Albazino/Amursk hub - as a result of the Albazino mine and concentrator reaching design throughput and recoveries by the second quarter of the year and commencement of commercial production at the Amursk POX, combined with continued concentrate sales to third-party offtakers

·      Omolon - as originally planned, the amount of ore processed at the Kubaka plant increased dramatically due to processing of high-grade ore from Sopka at the newly commissioned Merrill Crowe section. The amount of ore transported from Sopka by winter road was higher than planned. As a result, some ore trucking and processing was shifted from 2013 to 2012

·      At Khakanja, growth of 28% has been achieved due to increased grade profile

·      Voro and Varvara demonstrated stable performance in terms of grades and recoveries

Production dynamics on a quarterly basis is represented on the graph below. The seasonal ore transportation at Omolon (trucking of ore from Sopka by winter road in the first quarter, processing in the second and third quarter), as well as seasonal heap leaching operation at Voro contributed to a stronger production profile in the 2^nd and 3^rd quarters of the year. Such seasonality is expected to continue in 2013. In 2014, after full ramp-up of the Mayskoye concentrator and commissioning of an all-year-round heap leaching facility at Birkachan, the seasonal fluctuations are set to reduce.

Quarterly production data

(Koz)

	Q1 2011	Q2 2011	Q3 2011	Q4 2011	Q1 2012	Q2 2012	Q3 2012	Q4 2012
Gold	82	102	124	136	101	154	196	137
Silver	54	83	88	106	94	135	113	99
Copper	9	9	9	8	8	8	9	8
Gold equivalent production	145	194	221	250	203	298	317	244

Gold equivalent production by mine
(Koz)	2012	2011	% change
Dukat	357	319	+12%
Khakanja	164	128	+28%
Voro	157	160	-2%
Varvara	134	127	+6%
Omolon	173	46	+279%
Albazino/Amursk	77	30	+160%
Total production	1,063	810	+31%

Metal sales in 2012 were 1,092 Koz of gold equivalent, representing an impressive 43% increase over 2011.

In 2012, the Company continued sales of concentrates from Dukat (gold-silver), Varvara (gold-copper) and Albazino (refractory gold) to off-takers in Kazakhstan and China. For Dukat and Varvara, the off-take allows us to maximise the margins compared to in-house processing of these materials. Sales of concentrates to third party off-takers will continue in 2013, while the Company will seek to diversify off-taker base in order to achieve an optimal combination of transportation costs and treatment charges/recoveries.

For Albazino, sales to off-takers in China allow us to receive immediate cashflows and avoid building excessive stockpiles while the Amursk POX plant is undergoing the ramp-up process. In 2012, a total of 63.5 Koz of payable gold was sold to Chinese off-takers, and we are currently considering the option to continue sales of Albazino concentrate to 3rd-party off-takers for 2013 until the POX plant reaches its full capacity.

Exploration

We are conducting exploration works in four regions of Russia - Khabarovsk, Magadan, Karelia, and Sverdlovsk - as well as in Kazakhstan. Polymetal currently has 54 licences for geological studies, exploration and gold, silver and copper mining, and one coal mining licence. Our current exploration portfolio includes 43 licences with a total area of approximately 10,503 km².

Exploration activities in 2012 were concentrated on 31 licenced areas, of which seven are at an advanced stage.

Key exploration objectives for 2012 were:

·      on-going brownfield exploration activities aimed at extension of life-of-mine of our existing operations: Khakanja (with the shortest current life-of-mine), Dukat, Omolon, Varvara, and Voro.

·      continued exploration activities at Albazino with a view to considerably expanding the resource base, as suggested by earlier exploration results

·      greenfield exploration for new precious metals deposits with a potential resource base which would be sufficient in grade and size to justify construction of a standalone mine. Such targets are set to form the next generation of our growth assets and ensure Company's long-term growth prospects.

Key 2012 exploration statistics

	Unit	2012	2011	% change
Exploration works
Core drilling	km	129.4	129.7	0%
Trenching	th. m3	185.0	187.0	-1%
Underground development for exploration purposes, m
Sampling:
Geochemical sampling	th. assays	72.2	53.0	+36%
Trench sampling	th. assays	13.5	11.6	+16%
Core sampling	th. assays	102.0	71.9	+42%
Geophysical research, area covered	km2	104	75	+38%
Licences held
Exploration licences	pcs	43	39	+10%
Area covered	km2	10,503	9,664	+9%

The key highlight of our exploration activities in 2012 was a significant resource expansion at Albazino. The updated resource estimate will be further converted to reserves in 2013, with an objective to produce a feasibility study for the expansion at Albazino and take construction decisions by the end of 2013.

In addition, we have increased mineralised potential (internal non-JORC estimate, inclusive of resources) at some of our greenfield targets, notably Kutyn (+0.6 Moz of gold contained). We have also made solid progress at the other greenfield targets, locating additional ore intercepts at Svetloye and Elmus.

At the operating mines, further progress was made at:

·      Ozerny (Khakanja hub) - mining started in Q4 2012, resources converted to reserves)

·      Avlayakan (Khakanja hub) - while trial open-pit mining continued, additional in-fill drilling was performed for preparation for underground mining; resource to reserve conversion achieved.

·      Varvara - significant resource and reserve additions achieved as a result of in-fill and step-out drilling.

·      Burgali and Prognoz (Omolon hub) - additional drilling results received and ongoing preparation for resource estimates for these potential additional ore sources for Kubaka plant is under way.

Reserves and resources

	2012	2011	2012 / 2011, %
Ore Reserves, GE Moz	15.1	14.3	+6%
gold, Moz	9.6	9.2	+5%
silver, Moz	307.6	297.0	+4%
copper, Kt	82.9	43.4	+91%
Average reserve grade, GE g/t	3.9	4.2	-6%
Mineral Resources, GE Moz	18.7	13.8	+35%
gold, Moz	14.9	10.4	+43%
silver, Moz	146.1	181.1	-19%
copper, Kt	281.4	74.0	+280%
Average resource grade, GE g/t	3.3	3.9	-16%

Movements in Ore Reserves during the year (gold equivalent)
Ore Reserves as at 1 January 2012	14,326
Processed in 2011	(1,272)
Revision	763
New discoveries	1,321
Ore Reserves as at 1 January 2013	15,138

In 2012, we have achieved meaningful increases both in ore reserves and mineral resources. Ore reserves grew by 6% to 15.1 Moz of gold equivalent, more than offsetting the depletion at our operating mines. The key additions were the resource-to-reserve conversions at Tsokol and Dalniy (Omolon hub) and Avlayakan and Ozerny (Khakanja hub), adding a total of 0.8 Moz of gold and 8.7 Moz of silver, as well as Goltsovoye (Dukat hub) where following an external audit we have converted a total of 20.1 Moz of silver to reserves. At Varvara, copper ore reserves nearly doubled to 83 Kt and gold reserves increased by 39% to 1.2Moz as a result of additional in-fill and step-out drilling performed at the flanks of the deposit.

More importantly, our resource base grew 35% during the year in gold equivalent terms. The major contributor of growth in gold resources was the doubling of the resource base at Albazino (+ 3.1 Moz, reaching a total of 5.7 Moz inclusive of reserves), marking an important exploration success for the Company. In addition to that, an initial resource estimate was made and audited for Tamunier, our greenfield exploration property in the Urals, resulting in resource addition of 1.5 Moz of gold. The decrease in silver resources is mainly attributable to resource-to-reserve conversions at Goltsovoye, Tsokol, Ozerny and Avlayakan (see above). Re-evaluation of resources at Varvara resulted in a four-fold increase in copper resources to 281 Kt, in addition to a 1.0 Moz increase in gold mineral resources.

In pursuit of synergistic M&A

Growth through synergistic, value-driven M&A is an important part of our strategy. While there were no large or medium-sized transactions during the year, we have continued to closely monitor the market and have made a number of smaller transactions which meet our stringent asset acquisition criteria.

Acquisition of Svetlobor platinum exploration project

In December 2012, we acquired a 25% interest in the Svetlobor project, a greenfield platinum deposit, with another 75% to be acquired upon receipt of regulatory approvals. The transaction was settled in Polymetal shares valuing the project at approximately US$ 10 million. The acquisition of Svetlobor represents our first acquisition in PGMs (platinum group metals), driven by a combination of outstanding exploration potential and the expected platinum price upside on the back of recent labour disruptions and production cuts in South Africa, currently accounting for 73% of global supply.

The Svetlobor project is a hard-rock source of the largest platinum alluvial deposit in the world, located in a developed industrial region approximately 250 km north of Ekaterinburg, Urals. Polymetal has an established presence in the region, which will allow us to leverage both its developed infrastructure and our own skill base there.

We believe this early-stage exploration project has the potential to grow into a world-class asset in terms of the size and quality of its mineral resource base, potentially resulting in a very large low grade (approx. 1.5 g/t) open-pit operation with low stripping ratio and simple metallurgy. We plan to publish a mineral resource estimate for the project under JORC guidelines in Q4 of 2014.

Acquisition of Olcha deposit (transaction closed in January 2013)

In December 2012, we agreed to acquire the Olcha gold-silver deposit for 775,000 of the Company's ordinary shares, valuing it at approximately US$ 13.5 million. The transaction was completed in January 2013.

Olcha represents a good opportunity to add another high-grade source of feed for the Lunnoye plant, with total resources currently estimated at 0.7 Moz of gold equivalent. In addition, Olcha is a natural extension of our portfolio of advanced exploration properties in the Magadan Region. The mining and exploration licence covers an area of 2.5 square kilometres in the region and is located approximately 215 km from the Lunnoye processing plant and 230 km from the Kubaka processing plant, part of the Dukat and Omolon processing hubs respectively.

In line with Polymetal's strategy, acquisition of Olcha is expected to:

·      extend life of mine at Lunnoye by processing high-grade ore from the new source;

·      ensure effective use of open-pit mining equipment and qualified personnel after the cessation of open-pit mining at Dukat and Arylakh in 2013; and

·      gain exploration upside within a substantially under-explored licenсe area.

We plan to start open-pit mining at Olcha in Q1 2014 and processing in Q2 2014.

Acquisition of Maminskoye (transaction to be closed in second quarter of 2013)

Subsequent to the year-end, the Company agreed to purchase the Maminskoye project for a total consideration of US$ 77.2 mln, mostly payable in shares. Maminskoye is a sizeable gold deposit which could potentially be quickly turned into a 2 - 3 Mtpa heap leach operation yielding 80-120 Koz of gold production per annum. The deposit is located in a well-developed Ekaterinburg region (Urals) which is familiar to the Company and has excellent infrastructure and availability of qualified labour. The transaction is expected to be completed in the first half of 2013, with the first gold production scheduled for Q2 2016. The project enjoys easy open-pit mining conditions and simple metallurgy, allowing significant optionality in development routes for Polymetal and an excellent return on capital at a low level of risk.

Restructuring of interest in Veduga project

In the first half of 2012, we completed the restructuring of our interest in the Veduga deposit in the Krasnoyarsk region, previously held as a 50:50 joint venture with Anglo-Gold Ashanti. Anglo-Gold Ashanti has sold its share in the project, and a new company, Polygon Gold Inc., took over a 100% interest in the deposit. Polymetal currently holds a 43% stake in the new company. Polygon will operate as a standalone company with independent management, while Polymetal plans to provide certain technical and regulatory assistance to Polygon on an ongoing basis. The transaction has allowed us to find a competent owner for this non-core asset that is prepared to take it into production.

The year ahead

In 2013 our team will be fully focused on achieving our production guidance of 1.2 Moz of gold equivalent, most importantly by full ramp-up of the Amursk POX plant and timely commissioning and ramp-up of the Mayskoye concentrator. By completing these two complex projects, we will ensure that the second generation of growth assets fully achieves design capacity, allowing us to reach the strategic level of 1.4 Moz annual gold equivalent production in 2014. Subsequently we will be increasingly focused on growth opportunities beyond 2014, representing a new third generation of growth assets.

Operations

We are targeting to produce approximately 1.2 Moz of gold equivalent in 2013, including approximately 760 - 800 Koz of gold and approximately 23 - 24 Moz of silver and 5 - 6 Kt of copper. Growth will be mostly achieved in gold, which in 2013 will represent approximately 65% of the total gold equivalent production.

The key growth contributions will be coming from Albazino, which is to deliver a full year of production at design capacity, combined with ramp-up of the Amursk POX. To secure our production profile in 2013, we will additionally consider sales of Albazino concentrate to third-party off-takers in order to avoid excessive build-up of concentrate inventories during the ramp-up process of the POX plant.

Another important milestone will be the commissioning and start of commercial production at Mayskoye, which is scheduled for April 2013. The concentrate produced in the second and third quarters will then be shipped to the Amursk POX for processing and/or to potential off-takers - an option which we would welcome in the light of potential expansion at Albazino.

By 2014, the existing portfolio of assets - including Albazino and Mayskoye - will achieve full capacity, with annual gold equivalent production reaching 1.4 Moz.

Another area of focus in 2013 will be the progress on development decisions for the third generation of growth assets, including potential expansion at Albazino, and development of Kutyn, Svetloye and Maminskoye projects. These decisions will be based on reserve estimates and feasibility studies which are expected to be completed in the second half of 2013.

In terms of development of the existing asset portfolio and continuous improvement of our mining and processing facilities, the priorities for 2013 are:

·      Commencement of underground mining at Arylakh (Dukat hub) and Avlayakan (Khakanja hub);

·      Commencement of open-pit mining at Olcha (Dukat hub) and Dalneye (Omolon hub);

·      Continued development of the complex logistics chains in the remote locations of our operations, including development of the own barge fleet and construction of winter roads, thus ensuring reliability and safety of supply of ores and consumables;

·      Continued implementation of best practices in health and safety risk management, with rolling out the existing processes to our key suppliers; and

·      Development of infrastructure at Kutyn and Svetloye for the extension of exploration activities there.

Exploration

In 2013, our exploration activities will be concentrated on:

·      Continued resource-to-reserve conversions and resource category updates at our advanced standalone exploration targets and brownfield targets through in-fill drilling ;

·      Additional drilling at the flanks of Ozerny and Avlayakan with a view to extend life-of-mine at Khakanja;

·      Further increase of resource potential at Albazino through additional underground development and drilling at Olga zone, in-fill drilling at Ekaterina 1 and 2 zones, and additional step-out drilling at the flanks of the Albazino field. Completion of resource estimate at Burgali and continued exploration at the other brownfield targets in the Omolon hub area. In-fill drilling and finalization of resource estimates at Olcha and preparation for open-pit mining. Exploration for new ore bodies in the area;

·      Continued exploration at the two key greenfield targets - Kutyn and Svetloye, followed by resource estimates and preparation of oxidized ores for open-pit;

·      Continued scoping and exploration at Elmus and Semchen areas in Karelia, with a view to develop a new standalone asset in the region; and

·      Preparation of Maminskoye resources for open-pit mining and step-out drilling at the flanks of the deposit.

All of these activities are focused on delivering production growth beyond 2014, when we will have achieved our target level of production for the existing asset portfolio. With a diversified set of targets at various stages of development, some of the already approaching construction decisions in 2013, this growth already has a solid foundation.

Dukat

Our flagship operation and Russia's largest primary silver mine

Despite being one of our mature assets, Dukat has demonstrated impressive results in 2012. Gold equivalent production grew by 12%, and total cash cost reduced by 13% year-on-year as a result of superior operating performance. Adjusted EBITDA grew by 35%, marking the increased volume and improved cost levels. The operation has potential for further improvement through additional ore sources in the region (such as recently acquired Olcha) and continuous implementation of best practices and new technologies in underground mining and processing methods.

Key operating and financial statistics

Mining	Dukat			Goltsovoye			Lunnoe + Arylakh			Total
	2012	2011	% change	2012	2011	% change	2012	2011	% change	2012	2011	% change
Stripping	967	810	+19%	-	-	n/a	2,591	2,837	-9%	3,558	3,647	-2%
Underground development, m	24,311	15,705	+55%	5,248	4,238	+24%	4,601	2,444	+88%	34,160	22,387	+53%
Ore mined, Kt	1,328	1,197	+11%	84	126	-33%	370	321	+15%	1,782	1,644	+8%
Metal in ore mined (grades)
- gold	0.7	0.8	-10%	-	-	n/a	1.1	1.3	-20%	0.7	0.8	-10%
- silver	387	387	+0%	548	467	+17%	395	397	-0%	397	395	+0%

Production	Omsukchan concentrator			Lunnoe processing plant			Total
	2012	2011	% change	2012	2011	% change	2012	2011	% change
Ore processed	1,439	1,432	+0%	333	301	+11%	1,772	1,733	+2%
Metal in ore processed (grades)
- gold	0.7	0.7	-5%	1.2	1.3	-14%	0.8	0.8	-7%
- silver	401	383	+5%	411	414	-1%	403	388	+4%
Recoveries
- gold	81%	76%	+7%	90%	92%	-2%
- silver	84%	77%	+10%	88%	87%	+0%
Production			n/a
- gold, Koz	25	25	+1%	11	12	-6%	36	37	-1%
- silver, Moz	15.5	13.6	+14%	3.7	3.4	+9%	19.2	17.0	+13%
Gold equivalent, Koz	284	251	+13%	72	68	+6%	357	319	+12%
Total cash cost/silver eq oz (USD/oz)							12.1	14.0	-13%
Adjusted EBITDA, USDm							378	282	+34%

Mining

Dukat hub currently has five ore sources, with another three deposits in the exploration and/or development stage. In 2012, solid progress was achieved across the operating mines, resulting in an 8% increase in total ore mined to 1,782 Kt and stable average silver grade mined of nearly 400 g/t.

At the main Dukat mine, open-pit mining has been completed, with further mining works from 2013 fully focused on underground mining. Underground development grew by an impressive 55% to 24.3 thousand metres in 2012. The amount of ore mined was 1,328 Kt, an 11% growth, with almost 90% of ore sourced from underground. Stable average grades of 387 g/t silver were achieved, backed by completion of implementation of automated mine planning using Datamine software.

At Goltsovoye, underground development was focused on access to ore bodies 9 and 3 and grew by 24% to 5.2 thousand metres. The amount of ore mined was lower compared to 2011, at 84 Kt, however it is set to grow almost two-fold in 2013 since the development works have now been completed. The test works performed in 2012 for sublevel blast-hole stoping have yielded positive results compared to previously used shrinkage stoping, and the application of this mining method in 2013 is expected to increase both efficiency and grade control.

At Arylakh, open-pit mining is approaching completion which is expected in Q2 2013, to be then followed by underground development. Ore mined in 2012 grew by 6% to 167 Kt, combined with increased average silver grade of 519 g/t, a 10% growth.

Underground development at Lunnoye focused on ore zone 7 and grew 88% compared to 2011. Ore mined was 24% above 2011, with the average silver grade slightly short of 300 g/t.

Processing

Ore processed at the main Omsukchan concentrator was stable at 1,439 Kt. Due to increased silver grades driven by stable grade profile at Dukat and growth in silver grades at Goltsovoye, average grade processed was up 5% compared to 2012. Average recoveries grew by 7% for gold and by 10% for silver to 81% and 84% respectively, following a refurbishment of the plant and installation of the gravity circuit in 2011, and full implementation of the geotechnical mapping system in 2012 which is used to determine technological parametres of the process adjusted for the mineralogical properties ore feed. As a result, annual silver production at the Omsukchan concentrator grew by 14% to 15.5 Moz while average gold production was stable at 25 Koz.

At the Lunnoye processing plant, a record 333 Kt of ore has been processed, exceeding nameplate capacity of 300 Ktpa. While average silver grades and recoveries were stable, an increase in throughput allowed us to achieve silver production growth to 3.7 Moz, an increase of 9% compared to 2011. Ongoing debottlenecking at the plant is expected to increase throughput to 400 Ktpa by 2014 with additional ore to be sourced from the recently acquired Olcha property.

Priorities for 2013

In 2013, development of our mining operations at Dukat will be increasingly focused on the efficiency of our underground operations. At our main Dukat mine we will completely shift to underground mining, with an automated ore trucking system expected to be commissioned in the second  half of 2013. The system will allow fully automated ore underground transportation by rail, allowing us to achieve a total 1500 Ktpa capacity at the Dukat mine. Mining works will also develop at the Vostochny part of the deposit. At Goltsovoye, we expect significant growth in ore mined following the completion of preparatory works and a change in mining method. At Arylakh, along with the start of underground mining, exploration of ore zone 9 will be performed. At Lunnoye, mining works will continue at ore zone 7.

In 2013 we plan to construct a winter road to access the newly acquired Olcha deposit, which will start to supply ore to the Lunnoye plant from 2014 (open-pit mining to start in Q1 2014). At the Lunnoye processing plant, operations will be focused on the automation of the processing facility and debottlenecking with a target to increase capacity to 400 Ktpa in 2014.

Omolon Hub

Delivering full potential of a processing hub concept

Omolon delivered an excellent performance in 2012, achieving full capacity and reflecting a successful implementation of the processing hub concept. This is a tremendous turnaround story after the purchase of the under-performing Kubaka plant and satellite deposits back in 2008-2009. In 2012, Omolon produced 173 Koz of gold equivalent after successful transportation of high-grade ore from Sopka and the commissioning of the Merrill Crowe circuit at the refurbished Kubaka plant.

Key statistics

Mining	Birkachan			Sopka			Tsokol			Total
	2012	2011	% change	2012	2011	% change	2012	2011		2012	2011	% change
Stripping	9,133	7,925	+15%	9,054	4,956	+83%	3,284	-	n/a	21,471	12,880	+67%
Ore mined, Kt	1,290	1,192	+8%	1,271	735	+73%	101	-	n/a	2,662	1,928	+38%
Metal in ore mined (grades)
- gold	1.8	1.6	+7%	2.3	2.6	-14%	5.2	-	n/a	2.1	2.0	+6%
- silver	-	-	n/a	96.7	85.7	+13%	-	-	n/a	46.1	32.7	+41%

Production	Kubaka plant			Birkachan heap leach			Total
	2012	2011	% change	2012	2011	% change	2012	2011	% change
Ore processed	724	574	+26%	116	-	n/a	840	574	+46%
Metal in ore processed (grades)
- gold	5.9	2.4	+141%	1.1	-	n/a	5.2	2.4	+114%
- silver	135.1	12.1	NM	-	-	n/a	116.5	12.1	NM
Recoveries
- gold	94%	92%	+3%
- gold	88%	63%	+40%
Production			n/a
- gold, Koz	129	39	+229%	-	4	-100%	129	43	+199%
- silver, Moz	2.7	0.1	NM	-	0	-100%	2.7	0.2	NM
Gold equivalent, Koz	173	41	+318%	-	4	-100%	173	46	+279%
Total cash cost/GE oz (USD/oz)							918	1,481	-38%
Adjusted EBITDA, USDm							124	5	NM

Mining

Mining works at the Omolon hub are now performed at three deposits: Birkachan (where high-grade ore is processed at the Kubaka plant and lower grade ore is prepared for all-year-round heap leaching on-site, which will be started in 2013), Sopka (high-grade ore trucked to Kubaka by winter road, lower grade ore stockpiled for further heap leaching which is expected to be commissioned in 2015), and Tsokol where mining started in the second half of 2012 (also processed at the Kubaka plant).

Stripping volumes grew by 67% year-on-year, mostly due to a massive stripping campaign at Sopka in the middle of the year to prepare ore bodies for active mining in Q4 and in 2013, and due to an initial stripping campaign at Tsokol. Total ore mined grew to 2,662 Kt, an increase of 38% compared to 2011, mostly as a result of a major increase in mining at Sopka (by 73%), and the start of mining at Tsokol in the third quarter of the year.

At Sopka, ore mined grew to 1,271 Kt, with 324 Kt representing high-grade ore for processing at the Kubaka mill (average grades of 6.2 g/t gold and 248 g/t silver), and 947 Kt of heap leach ore (0,9 g/t gold and 45 g/t silver). The construction of the heap leaching facility at Sopka will start in the summer of 2013.

A major success of the year was the operation of a 180-km long winter road from the Sopka mine to the Kubaka mill, which allowed us to truck more than 330 Kt of ore during January-April, exceeding our initial expectations. This high-grade ore was then processed during the second and third quarters of the year. The winter road set up in December 2012 was opened on time and it began successful operation in the 2013 trucking season.

In the third quarter we started mining high gold grade ore at Tsokol, a new satellite deposit for Omolon located near Kubaka plant. The first 101 Kt at an average grade of 5.2 g/t gold were mined and processed in 2012.

At Birkachan, ore mined grew by 8% year-on-year, while average gold grade in ore mined grew by 5% for heap leach ore and by 9% for milling ore (to 3.2 g/t). In 2013, we expect a decrease in mining volumes in order to de-stockpile the operation after intensive mining during 2011 and 2012.

Processing

The refurbished processing plant with its Merrill Crowe section has performed fully in line with expectations. Total throughput increased by 26% compared to 2011 to 724 Kt, while average grades in ore processed grew dramatically, due to involvement of ores from Sopka and Tsokol, to 5.9 g/t gold and 135 g/t silver, a multiple-times increase compared to 2011. Average recovery also grew to 94% for gold and 88% for silver as a result of commissioning the Merrill Crowe section which quickly achieved the design parametres.

As a result, gold production grew to 129 Koz and silver production to 2.7 Moz, representing a nearly four-fold increase compared to 2011 in gold equivalent terms. Due to the larger than expected volume of ore trucked and processed from Sopka, some of the planned 2013 production was shifted to 2012.

Exploration

During 2012, based on prior exploration results, we converted resources at Tsokol and Dalniy to reserves, resulting in a total addition of nearly 0.5 Moz of gold equivalent to the hub's reserve base.

Our current exploration programme is aimed at further extension of the life-of-mine at the Kubaka plant by discovering additional resources within 150-180 km range from the processing facility. Key targets include Burgali, where we are currently preparing a resource estimate, and Prognoz, where substantial in-fill drilling and geotechnical studies were carried out. The ore properties at Prognoz indicate that it is easily amenable for leaching and can be economically processed at the Kubaka plant, whereas at Burgali a resource estimate is expected in 2013.

Priorities for 2013

In the coming year, mining volumes at Birkachan and Sopka will decrease as we are planning to draw down the existing ore stockpiles. We are planning to truck more than 280 Kt of high-grade ore from Sopka by winter road, and mining at Tsokol will grow since the mine will be operational for the full calendar year. Development of the Dalniy deposit is under way, with mining scheduled for the second half of 2013.

In 2013, an all-year-round heap leach facility will be commissioned at Birkachan, with production scheduled for the second half of 2013. Low-grade ore stacking at Birkachan HL continues, with a total 116 Kt of ore stacked in the second half of 2012. A stationary carbon-in-column plant at Birkachan to recover gold from heap leaching is on track to be commissioned in June 2013.

Preparatory works for the installation of heap leaching pads at Sopka will take place in 2013, with commissioning of the facility scheduled for 2015.

Average grades processed at the Kubaka plant will be slightly lower than in 2012 due to lower volumes of Sopka ore which will be processed in the year. This will be compensated for by an expected increase in total throughput to more than 770 Ktpa.

Amursk POX hub

The first operating pressure oxidation plant in Russia and the CIS

The Amursk pressure oxidation plant (POX) is unquestionably a key project and one which will give us a significant competitive advantage both nationally and in the global gold industry. This state-of-the art facility is the first operating POX plant in the former Soviet Union's gold sector, and by exploiting this technology we will open up opportunities for the economic processing of refractory gold deposits in Russia and the CIS which are currently idle due to the low recovery rate achievable by conventional processing methods. Further, Amursk POX's location, with its access to cheap power, infrastructure, and qualified labour, will ensure attractive cost levels and stability of output.

Key statistics

Processing	2012
Concentrate processed	16
Gold grade in  ore processed, g/t	38.0
Recoveries	79%
Total gold equivalent production, Koz	14

Performance in 2012

The construction of the Amursk POX facility was completed in 2011, and the plant started the commissioning process at the beginning of 2012. The first gold was poured in April, and the ramp-up process started with a gradual increase in throughput applied across all of the plant's sections. Lower grade third-party and own concentrates were used during the ramp-up process in order to avoid excessive losses into tailings.

The ramp-up process however did not develop fully in line with our expectations. In the third quarter, due to mechanical issues - mainly defective stainless pipe welding - the facility underwent several lengthy maintenance shutdowns which led to a material delay in the original ramp-up schedule.

During October and November the plant was steadily ramping up towards daily throughput capacity, with several scheduled shutdowns which were required to complete the necessary upgrades of high-pressure stainless-steel pipes, weighing down on the total amount of concentrate processed and average recoveries. In early December the plant successfully ramped up to full throughput and approximately 90% recovery.

However in mid-December the presence of chlorine in the process water caused a significant decrease in recoveries and accelerated the corrosion of certain parts of the circuit made from complex alloys. To prevent loss of gold to tailings, the facility was shut down in late December. Subsequently, the source of the chlorine in the process water was traced to limestone used to neutralize discharge from the autoclave. Limestone supply was changed accordingly, and measures to implement chlorine control for all incoming consumables were put in place.

As a result, a total of 16 Kt of Albazino concentrate was processed at Amursk POX during 2012, below our initial expectations. With artificially lower average gold grades in concentrate of 38 g/t, and an average recovery of 79% (including periods of shut-downs and re-starts, when the recoveries are lower due to lower-than-designed pressure and temperature), this has resulted in total gold production of 14 Koz in 2012.

Priorities for 2013

Full ramp-up of the Amursk POX to capacity throughput and recovery remains a top priority of our management team.

The POX was successfully restarted in mid-January. Gold recoveries are expected to normalize once all chlorine is removed from the flow sheet (with water in dry tailings) and additional water treatment equipment is installed to handle fluctuations in the chemical composition of concentrate and make-up process water. Throughput will continue to be affected until Inconel parts are replaced by the ones made from titanium and ferralium (not susceptible to corrosion in the presence of chlorine-ion). 

Full replacement of inconel by titanium will require a 6-week shutdown in Q2 2013. During this shutdown certain changes to lime/limestone preparation and concentrate intake sections will be undertaken as the actual properties of concentrate in the process differ from certain design assumptions. We therefore expect to achieve a steady level of operation at capacity throughput and recovery in Q4 of 2013.

To avoid build-up of excessive concentrate stockpiles, we are currently restarting sale of concentrates from Albazino in Q2 of 2013.

Potential impact from Albazino expansion

The expected expansion of mining operations and concentrator capacity at Albazino will also require additional capacity at the POX plant, which was originally designed to process 225 Ktpa of concentrate from a mix of Albazino and Mayskoye output. This capacity can be secured by re-directing concentrate from Mayskoye to third-party off-takers instead of internal processing at the Amursk POX- a much preferred option which will allow significant capital expenditure savings. The POX facility will then be fully focused on processing concentrates from Albazino with uniform chemical properties.

Alternatively, we are considering the simultaneous expansion of the mine and concentrator at Albazino and the POX facility at Amursk, which has sufficient land and infrastructure on-site. This decision will largely depend on the potential off-take conditions for Mayskoye. We expect that even in the event of POX expansion, the experience gained during construction and ramp-up of the existing facility will be of great value, allowing us to reduce cost and time to launch.

Albazino

Our newest asset with significant further growth potential

Albazino is our newest operating mine, and is a major greenfield exploration success. 2012 was a remarkable year for the asset, with the mine and concentrator achieving expected throughput and recoveries, and a major exploration success during the year which places Albazino in the world class assets league. As a result, Albazino produced more than 180 Koz of gold in concentrate in 2012, and the resource base has doubled compared to the beginning of the year. In 2013, further improvements in performance are expected as soon as the Amursk POX plant reaches capacity. On the back of this sizeable resource increase, we are now undertaking a feasibility study for Albazino-2 with a view to expanding the mine and concentrator.

Key statistics

Mining
	2012	2011	% change
Stripping	15,160	14,584	+4%
Ore mined, Kt	1,216	841	+45%
Gold grade in ore mined	5.4	4.3	+27%
Production	2012	2011	% change
Ore processed	1,226	620	+98%
Gold grade in  ore processed, g/t	5.3	4.3	+23%
Recoveries to concentrate	87%	70%	+24%
Concentrate produced, Kt	115	43	+166%
Gold grade in concentrate produced, g/t	49.0	42.7	+15%
Gold in concentrate, Koz	181	59	+205%
Concentrate sold, Kt	40	20	+101%
Saleable gold in concentrate sold to off-takers, Koz	63	30	+113%
Gold production at Amursk POX	14	-	n/a
Total gold equivalent production, Koz	77	30	+160%
Total cash cost/GE oz (USD/oz)	767	1,018	-25%
Adjusted EBITDA, USDm	34.7	4.5	+668%

Mining

The open-pit mine at Albazino has quickly achieved its target capacity in 2012, with 1,216 Kt of ore mined in the year, a 45% increase over 2011. Importantly, as the mine has accessed deeper levels of the pit, grades grew from 4.3 g/t in 2011 to 5.4 g/t in 2012, a 27% increase. Mining volumes are set to further increase in 2013.

Processing

The flotation concentrator at Albazino, commissioned in 2011, reached capacity throughput and recovery by Q2 2012. Total ore processed grew two-fold to 1,226 Kt of ore, while average gold grade processed grew 23% to 5.3 g/t. Recoveries to concentrate grew to 87%, up from 70% in 2011, marking successful ramp-up of the plant.  As a result, gold in concentrate produced was 181 Koz, a three-fold increase compared to 2011. Out of 115 Kt of concentrate produced (with an average gold grade of 49 g/t), 40 Kt with 63.5 Koz of payable gold content were sold during the year to third-party off-takers in China, allowing us to maximise cash flows during the ramp-up period at the Amursk POX plant. As the POX facility has started its ramp-up process from April 2012, a further 16 Kt of concentrate were processed at the POX plant in 2012, yielding production of 14 Koz of gold. Total Albazino gold production in the year was 77 Koz, up 2.6 times compared to 2011.

Ongoing improvement process

In 2012, several small-scale infrastructural projects were underway at Albazino. All of them are focused on debottlenecking the mine and enhancing its infrastructure. We have started construction of an all-year-round road which will connect Albazino and Komsomolsk-on-Amur (see map on page XX), in order to optimise outbound concentrate logistics for delivery to Amursk POX and inbound supplies and personnel logistics. The road is expected to be commissioned in the middle of 2013. An emulsion explosives plant has been constructed, with operations starting in early 2013.

Exploration success and our expansion plans

As a result of our extensive exploration programme between 2009 and 2012, several new zones were identified and a new mineral resource estimate totalling 37 Mt at an average grade of 4.8 g/t, more than doubling the total resource base to a total of 5.7 Moz (inclusive of ore reserves), was prepared and audited in 2012. The cost of discovery was approximately US$12 per ounce of resources.

The mineral resources and ore reserves estimates now cover five ore zones: Olga, Anfisa, Nadezhda, Ekaterina-1 and Ekaterina-2. Anfisa is currently subject to open-pit mining. The development plan for other zones will be determined after the completion of the optimisation study, currently expected in Q2 2013.

In 2012, the Nadezhda and Olga zones were combined in a single ore zone, and new mineralised intersections were discovered south of Ekaterina-2. We have also started underground exploration of deep ore bodies in the Olga zone.

Active exploration at Albazino is ongoing with further resource potential identified, most importantly at Ekaterina-2 and the new Tatyana zone. In-fill underground drilling in 1H 2013 is expected to lead to a substantial upgrade of inferred resources and allow meaningful resource-to-reserve conversion.

The exploration results at Albazino highlight the tremendous potential of this asset and pave the way for an expansion decision to be taken in the second half of 2013. Albazino has become an excellent example of Polymetal's ability to create value by discovering high-grade ounces close to existing processing facilities.

Different options are currently being considered for the Albazino expansion, and decisions are to be made in 2013 during the feasibility study. The expansion project will benefit from a common infrastructure with the current mine, but power generation capacity and concentrator expansion will still require significant additional capital expenditure. We are also evaluating different options for mining operations at the new zones, including a combination of open-pit and underground mining or a large single open-pit.

Further, the refractory nature of the ore, similar to the current ore mined at Albazino, will require additional capacity at the POX plant. This capacity can be secured by re-directing concentrate from Mayskoye to third-party off-takers instead of internal processing at the Amursk POX- a much preferred option which will allow significant capital expenditure savings. Alternatively, we are considering simultaneous expansion of the mine and concentrator at Albazino and the POX facility at Amursk, which has sufficient land and infrastructure on-site available. This decision will largely depend on the potential off-take conditions for Mayskoye.

Priorities for 2013

The year ahead will be an important milestone in the development of Albazino.

In 2013, the Albazino mine and concentrator will operate at capacity for a full year, which will lead to further growth in mining and processing volumes. We will reconsider the option to use the off-take agreements during the continued ramp-up of the Amursk POX plant, which is expected to achieve capacity for throughput and recoveries by Q4 2013. Therefore gold production will be split between POX and off-take.

A number of cost saving and debottlenecking measures will be implemented, in addition to the expected cost savings which will emerge as soon as the concentrate processing is fully redirected to the POX plant.

We will continue the development of the underground decline and underground in-fill drilling at the Olga zone, and will also focus on detalisation of the ore bodies at zones Ekaterina-1 and Ekaterina-2. Further exploration will be performed at the flanks of the Albazino field, with a view to discovering additional resources.

A conversion of the newly discovered mineral resources to reserves and the feasibility study for the Albazino expansion project are expected to be produced in the second half of 2013, with the construction decision to be put to the Board for approval by the end of 2013.

Mayskoye

On track to launch in early 2013

Mayskoye is the one remaining large construction project to be completed to achieve our medium-term production target of 1.4 Moz of gold equivalent in 2014. Upon completion, Mayskoye will be our second largest underground operation and our second mine with refractory ore brought into production. The development of this underground mine in a distant region of Chukotka, - with access by sea only possible during the summer navigation period, - is justified by its average reserve grade of 9.6 g/t, one of the highest across our portfolio.

Key statistics

Mining	2012	2011	% change
Underground development, m	11,068	10,999	+1%
Ore mined, Kt	40	79	-49%
Gold grade in ore mined	9.9	9.8	+1%

Mining

Underground development at Mayskoye is continuing as planned, with first ore mined from stopes in December. A total of 11,068 m of underground development was completed during 2012. A relatively small amount of ore - 40 Kt - was mined in 2012, as our focus remained on the underground mining works development in preparation for active mining upon start-up of the processing facility. Nevertheless, current stocks of ore mined to date are sufficient to provide the processing plant with more than three months of feedstock. As the plant commissioning date approaches, starting from the beginning of 2013 we have continued active ore mining from stopes, with the annual amount of ore mined expected to exceed 600 Kt in 2013.

Construction

Originally, the start-up of Mayskoye concentrator was scheduled for the end of 2012. However, during the second half of 2012 there were significant delays in delivering the remaining construction materials by rail to the ports for onward shipping to Mayskoye. As a result, some of the materials had to be airlifted after the navigation period was over. Given this fact, the start-up of Mayskoye concentrator is now scheduled for April 2013. This will allow the concentrator to produce and ship concentrate to the POX facility and/or off-takers in the summer navigation period of 2013, as originally planned, albeit in lower than expected volumes.

During 2012, all major construction works were completed at the processing plant, including installation of equipment at the crushing, grinding, flotation, thickening, filtering and drying sections. In Q1 2012, the site was connected to a local 110 KW power grid. A coal-fired heat plant was also launched in late 2012.

At the underground mine, construction and commissioning of the main ventilation unit was completed. All work on water supply and the construction of tailing facilities were completed. Initial accumulation of water in the tailings pond was performed in spring 2012.

Priorities for 2013

We continue to deliver the remaining small batches equipment for the construction of the Mayskoye concentrator. Construction is on track for the revised start-up deadline in April 2013, with works currently concentrated on the installation of electrical, controlling, and auxiliary equipment.

Given the more than two-fold resource expansion at Albazino and targeted construction decision for the expansion of the Albazino mine and concentrator in H2 2013, we will assess and make the decision on the option of 3rd-party concentrate off-take for Mayskoye in 2013. This will potentially allow us to significantly reduce capital expenditure on the expansion project by fully re-allocating existing POX capacity to the processing of concentrate from Albazino.

Negotiations with potential off-take partners have already started, and the decision will be taken upon start-up of the Mayskoye concentrator after larger samples of concentrate have been tested by off-takers, and the treatment charges and the transportation costs are be known.

Khakanja Hub

Transforming one of our core assets into a genuine processing hub

Khakanja delivered a strong performance in 2012, with a 28% growth in gold equivalent production driven by the increased grade profile from different ore sources. The increased average grades supported excellent profitability of the operation in 2012, marked by 8% reduction in total cash costs to US$621/GE oz and growth of adjusted EBITDA by 57% to US$178 million. In 2013 the Khakanja plant will operate as a genuine processing hub treating ore from four deposits - Khakanja, Yurievskoye, Avlayakan, and Ozerny.

Key statistics

Mining	Khakanja + Yurievskoe			Ozerny			Avlayakan			Total
	2012	2011	% change	2012	2011	% change	2012	2011	% change	2012	2011	% change
Stripping	4,435	9,601	-54%	449	-	n/a	1,637	1,191	+37%	6,521	10,792	-40%
Underground development, m	1,489	1,764	-16%	-	-	n/a	-	-	n/a	1,489	1,764	-16%
Ore mined, Kt	1,359	528	+157%	56	-	n/a	79	128	-38%	1,494	657	+128%
Metal in ore mined (grades)
- gold	2.6	2.9	-9%	4.8	-	n/a	15.0	17.1	-12%	3.4	5.7	-40%
- silver	197	199	-1%	46	-	n/a	124	38	+229%	188	167	+12%

Production	Khakanja plant
	2012	2011	% change
Ore processed	622	617	+1%
Metal in ore processed (grades)
- gold	4.8	4.6	+4%
- silver	277.2	172.7	+60%
Recoveries
- gold	96%	92%	+4%
- silver	80%	78%	+3%
Production			n/a
- gold, Koz	91	84	+8%
- silver, Moz	4.4	2.6	+66%
Gold equivalent, Koz	164	128	+28%
Total cash cost/GE oz (USD/oz)	614	672	-9%
Adjusted EBITDA, USDm	178	113	+57%

Mining

At the main Khakanja deposit, ore mined grew more than two-fold to 1,211 Kt, with mining works concentrated on pit 3. This resulted in increased silver grade profile (average of 220 g/t, an increase of 7% compared to 2011).

Ore mined at Yurievskoye reached a record 148 Kt, with mining works on the deposit completed in January 2013. High average grades at Yurievskoye (6.5 g/t gold) supported the overall grade profile at the Khakanja processing facility. The remaining ore and equipment will be trucked from the deposit by winter road in early 2013, and rehabilitation of the land will take place.

At Avlayakan, open-pit mining volumes decreased to 79 Kt as open-pit mining (based on current resources) is expected to be completed in 2014, then followed by underground development. 47 Kt of ore mined was shipped by sea to the port of Okhotsk and further trucked to Khakanja for processing. This complex logistic chain is justified by the high gold and silver grades (15 g/t and 124 g/t, respectively) mined at Avlayakan.

We deeply regret the loss of the ship Amurskaya and its crew in the Okhotsk Sea in October 2012. This third party vessel was contracted by Polymetal to transport the Avlayakan ore from the local port of Kiran for further processing at Khakanja. In order to secure ore supplies and ensure appropriate safety procedures in this complex logistic chain in the future, we are currently engaged in consultations with the regulatory authorities on that issue, and are investing around US$10 million in our own barge fleet in the region. In addition, we are carrying out a port infrastructure modernization project at Kiran.

In 2012, mining started at Ozerny, a new satellite mine located 40 km from the Khakanja plant, where a winter road and mine infrastructure have been constructed during the year. Mining at Ozerny started on schedule in the fourth quarter, with the first 56 Kt grading 4.8 g/t gold and 46 g/t silver mined and 13Kt successfully processed in 2012. In the first quarter of 2013, ore mined will be trucked by winter road, and the mine will then build up an ore stockpile for processing in 2014.

Processing

Total ore processed at the Khakanja plant in 2012 was stable compared to 2011 and comprised 622 Kt. However, gold production grew by 8% to 91 Koz and silver production grew by 66% to 4.4 Moz. This impressive growth has been achieved on the back of increased average grades, mostly due to high gold grade ore from Avlayakan and high silver grade from Khakanja's pit 3. Average gold grade processed increased by 4% to 4.8 g/t, and silver grade grew by 60% to 277 g/t. The growth in grades was further supported by increased recoveries of 96% for gold and 80% for silver.

Exploration

Our exploration efforts are focused on a large area surrounding the Khakanja processing plant, with the main objective remaining to extend the current life of the mine by identifying medium-sized high-grade deposits in the area. Additional drilling has been performed at Kundumi, where a number of high-grade ore intercepts were identified. However, the key results of the 2012 season are resource-to-reserve conversions at Ozerny, where mining started in Q4 2012, and Avlayakan, where in-fill drilling has been performed to prepare for underground mining. Total reserve growth was 0.45 Moz of gold equivalent.

Priorities for 2013

After conducting geotechnical studies, the decision was made to postpone the development of an underground mine at Khakanja main deposit in favour of another pushback at the open pit 1. This approach will reduce short-term capital costs and the risks associated with underground mining in difficult geotechnical conditions.

At Avlayakan, open-pit mining will continue, followed by the start of underground mining in Q4 2013/early 2014. Port facilities at Kiran will be upgraded in order to achieve the appropriate stability and safety of ore shipping conditions.

At Ozerny, mining volumes will grow in 2013 as the mine will be operating for a full calendar year, with seasonal trucking by winter road.

Accordingly, in the structure of ore feed for the Khakanja plant's share of Avlayakan and Ozerny will increase while the total volume of ore processed will be unchanged. This will result in a reduction of silver production year-on-year and the growth of gold production driven by structural grade profile change.

Voro

Our first mine, at the peak of its performance

Voro was the first of Polymetal's assets, and it continues to deliver robust operating and financial performance. The grades and production volumes in 2012 were stable, which resulted in continued leadership among our assets in terms of cost levels and EBITDA margin - a record 65% in 2012.

Key statistics

Mining	Vorontsovskoye			Degtyarskoe			Total
	2012	2011	% change	2012	2011	% change	2012	2011	% change
Stripping	11,265	10,954	+3%	1,125	1,591	-29%	12,390	12,788	-3%
Ore mined, Kt	1,684	1,665	+1%	104	194	-46%	1,788	1,871	-4%
- oxidised	926	914	+1%
- primary	758	751	+1%
Gold grade in ore mined	3.6	3.6	-1%	3.0	4.2	-28%	3.5	3.6	-3%
- oxidised	1.7	1.7	-0%
- primary	5.8	5.8	-1%
Production	Voro CIP			Voro Heap leach			Total
	2012	2011	% change	2012	2011	% change	2012	2011	% change
Ore processed	917	901	+2%	901	902	-0%	1,818	1,803	+1%
Metal in ore processed (grades)
- gold	5.3	5.9	-11%	1.6	1.7	-9%	3.4	3.8	-10%
Recoveries
- gold	79%	78%	+2%	74%	74%	-0%
Production			n/a
- gold, Koz	118	125	-6%	32	32	+1%	154	157	-2%
- silver, Moz	0.1	0.1	-2%	0.03	0.04	-16%	0.2	0.2	+2%
Gold equivalent, Koz	120	127	-6%	33	32	+1%	157	160	-2%
Total cash cost/GE oz (USD/oz)							559	553	+1%
Adjusted EBITDA, USDm							174	175	-1%

Mining

Stripping and ore mining volumes at the main Voro deposit were largely flat, at 11,265 Kt and 1,684 Kt respectively. The average grades both in primary and oxidized ore were stable at 5.8 g/t and 1.7 g/t. The preparations for mining at the south part of the Voro pit, which will be a main source of the oxidised ore in 2013, were completed during the year.

At Degtyarskoye, mining was fully completed in November, with 104 Kt of ore grading 3.0 g/t mined during 2012. Some of the ore from Degtyarskoye was processed at the Voro CIP plant, while the bulk of the ore was sent for processing to Varvara.

Both Degtyarskoye and Fevralskoye, satellite deposits of Voro, were sold in December 2012.

Processing

At the heap leach circuit the amount of ore stacked was in line with previous year, and recoveries were stable - all of which resulted in stable production output at 32 Koz of gold. At the CIL plant, ore processed was also flat at 917 Kt, 2% above 2011, and recoveries increased to 78.9%, also a 2% increase. These improvements helped to partially compensate for the decline in average grade processed (5.3 g/t in 2012 compared to 5.9 g/t in 2011, a 11% decrease), and total production at the CIL circuit comprised 118 Koz of gold, 6% below 2011.

Ongoing improvement process

Voro continues to be the lowest cost and highest margin mine, mostly due to solid grade profile, stable operating performance and favourable location allowing access to cheap power and infrastructure. Nevertheless we are committed to continuous improvement, searching for further measures to enhance efficiency and profitability of the operation. In 2012, such measures included additional automated components, and further development of computerized mine planning, including implementation of medium and long-term plans.

Priorities for 2013

In 2013 primary ore will continue to be mostly sourced from the Central pit with potential additional third-party supplies, and oxidized ore from the South pit. Our team at Voro will also be involved in the evaluation of options and development of mining operations at Maminskoye, a newly acquired deposit in the region. Although Maminskoye is expected to operate as a standalone operation, we expect that expertise sharing will be a great benefit enabling fast-track development of the deposit.

Varvara

Delivering stable operating performance in Kazakhstan

Varvara is running fully in line with expectations. Nevertheless, we remain focused on continuous improvement, implementing best practices in mining and processing technologies and leveraging existing capacity by the use of third-party ore sources. A major highlight of the year was the increase in reserves and resources on the back of exploration results on the flanks of Varvarinskoye - gold equivalent ore reserves up 50% to 1.6 Moz, mineral resources more than doubled to 3.6 Moz of gold equivalent.

Key statistics

Mining
	2012	2011	% change
Stripping	26,072	25,993	+0%
Ore mined, Kt	3,609	3,983	-9%
- float ore	1,031	1,508	-32%
- leach ore	2,577	2,475	+4%
Metal in ore mined (grades)
- gold, g/t - float ore	1.3	1.1	+13%
- gold, g/t - leach ore	0.9	0.8	+11%
- copper, % (float ore)	0.8%	0.6%	+31%

Production	Varvara - flotation			Varvara - leaching			Total
	2012	2011	% change	2012	2011	% change	2012	2011	% change
Ore processed	992	950	+4%	2,654	2,523	+5%	3,647	3,473	+5%
Metal in ore processed (grades)
- gold, g/t	1.2	1.3	-4%	1.2	1.1	+9%	1.2	1.1	+5%
- copper, %	0.8%	0.9%	-13%	-	-	n/a	0.21%	0.24%	-13%
Recoveries
- gold	61%	61%	-0%	85%	82%	+3%
- copper	92%	89%	+2%
Production			n/a
- gold, Koz	22	22	+1%	79	70	+13%	101	92	+10%
- copper, t	6,567	6,915	-5%				6,567	6,915	-5%
Gold equivalent, Koz	55	57	-3%	79	70	+13%	134	127	+6%
Total cash cost/GE oz (USD/oz)							804	747	+8%
Adjusted EBITDA, USDm							100	91	+10%

Mining

Ore mining at Varvara was 9% lower year-on-year while stripping volumes were flat, due to volatility of the stripping ratios at different parts of the deposit. However, the average gold grades for both float and leach ores demonstrated positive dynamics. Average gold grade was up 13% for the float ore (to 1.3 g/t) and up 11% for the leach ore (to 0.9 g/t), while copper content in the float ore grew 31% to 0.8%.

Processing

Gold production grew 10% year-on-year, exceeding the 100 Koz level. This growth was mainly attributable to leach circuit where throughput, grades and recoveries increased by 5%, 9% and 3%, respectively. The leverage in throughput was achieved by securing third-party sources of ore in the region, and the Company expects to continue this practice in 2013.

Copper production in 2012 was 6.6 Kt, down 5% year-on-year as a result of lower grades in ore processed in the period, partially compensated for by increased throughput and improved recoveries (+4% and +2% year-on-year, respectively).

Ongoing improvement process

In 2012 we carried out a number of projects aimed at debottlenecking and efficiency improvement. These included the design of an additional cyanidation tank, a control flotation cell on the flotation circuit, and construction of a railway spur which will be used for the transportation of supplies, most importantly ore from third-party sources, and shipping of concentrates sold to off-takers from Varvara. In addition, in 2012 we installed a walking excavator which will allow us to reduce stripping costs through the use of relatively cheap electricity and improved stripping methods. The excavator was commissioned in January 2013.

Priorities for 2013

In 2013 we will continue mining works in the central and northern parts of Varvara's main pit, and plan to start stripping in the pit's southern part. The use of third-party ores is set to continue as this will allow the plant to maintain full capacity utilisation at the leach circuit. Exploration at the flanks of Varvara will continue in order to further strengthen the reserve and resource base.

Financial review

market summary

Precious metals

The precious price dynamics in 2012 was mixed, and continued to be largely driven by the investment demand. The continued monetary easing in the US and Europe, as well as uncertainty over the future of the Eurozone, were the main drivers moderately pushing the gold price up in the first nine months of the year to a high of US$ 1,790 recorded in the beginning of October, although there was significant volatility in gold price in the middle of the year. Subsequently, gold price went down on the back of improving macroeconomic statistics from the US which triggered doubts over the continuation of the quantitative easing policy of the Federal Reserve. As a result, average gold price in 2012 was US$ 1,668/oz, up 6% compared to 2011.

Silver price dynamics generally followed gold, also displaying significant volatility during the year, however the average price level of US$ 31.1/oz was 12% lower year-on-year after abnormal spikes in 2011. The average gold/silver price ratio decreased from 45/1 in 2011 to 54/1 in 2012, a level close to the long-term average.

Foreign exchange

The Group's revenues and the majority of its borrowings are denominated in US Dollars, while the majority of the Group's costs are denominated in Russian Roubles. Therefore changes in exchange rates are affecting its financial results and performance. Both year-end and average RUB/USD exchange rates have decreased during the year, resulting in moderate strengthening of the Rouble against US Dollar. The average rate decreased by 3%, from 31.88 RUB/USD in 2011 to 31.09 RUB/USD in 2012. The year-end rate was 30.37 RUB/USD, representing a 6% strengthening compared to the beginning of the year. During the year the exchange rate was subject to a greater volatility, with a significant RUB strengthening in the first quarter, followed then by depreciation in the second quarter (with lowest level of 34.04 RUB/USD in June). In the second half of the year, the Rouble strengthening resumed, driven by tight liquidity conditions and stable oil prices.

key operating statistics

	Year ended December 31,		% change
	2012	2011
Waste mined, Kt	85,173	80,683	+6%
Underground development, m	46,717	35,150	+33%
Ore mined, Kt	12,591	11,002	+14%
Open-pit	10,937	9,636	+14%
Underground	1,654	1,366	+21%
Ore processed, Kt	9,925	8,821	+13%
Average GE grade in ore processed, g/t	4.4	3.8	+15%
Production
Gold, Koz	589	443	+33%
Silver, Moz	26.5	19.9	+33%
Copper, Kt	6.567	6.915	-5%
Gold equivalent, Koz1	1,063	810	+31%
Sales
Gold, Koz	593	448	+32%
Silver, Moz	27.8	17.0	+63%
Copper, tonnes	7.011	6.363	+10%
Gold equivalent, Koz2	1,136	851	+33%
Headcount3	8,993	8,050	+12%
Notes:     (1) Based on 1:60 Ag/Au and 5:1 Cu/Au conversion ratios.                 (2) Based on actual realised prices. (3) Average for the period

Revenue

		2012	2011	Change, %
Sales volumes
Gold	Koz	593	448	+32%
Silver	Moz	27.8	17.0	+63%
Copper	Kt	7.011	6.363	+10%
Gold equivalent sold1	Koz	1,136	851	+33%

¹ Based on actual realised prices

Sales by metal (US$ mln unless otherwise stated)		2012	2011	Change, %	Volume variance, US$ mln	Price variance, US$ mln
Gold		966	697	+39%	224	45
Average realised price	US$/oz	1,631	1,555	+5%
Average LMBA closing price	US$/oz	1,668	1,572	+6%
Share of revenues	%	52%	53%
Silver		833	580	+44%	366	(113)
Average realised price	US$/oz	30.0	34.0	-12%
Average LBMA closing price	US$/oz	31.1	35.3	-12%
Share of revenues	%	45%	44%
Copper		53	46	+15%
Share of revenues	%	3%	3%
Total metal sales		1,852	1,323	+40%	442	87
Other revenue		2	3	-39%
Total revenue		1,854	1,326	+40%

In 2012, revenue grew by 40% year-on-year to US$ 1.85 billion, driven mostly by 33% growth in gold equivalent metal sold, to 1,136 Koz. Gold sales volume was up by 32%, and silver sales were up by 63% year-on-year on the back of production growth of 33% and 33%, respectively.  Sales of both gold and silver exceeded production, with a notable excess in silver by 2.9 Moz driven by de-stockpiling of saleable concentrates at Dukat. Growth in gold equivalent sales was less due to adverse movement in gold/silver ratio in 2012 compared to 2011 (refer to market summery above).

The average realised price for gold was US$ 1,631/oz, up 5% year-on-year and in line with market price of US$ 1,668/oz. The average realised silver price comprised US$ 30.0/oz, 12% lower year-on-year, also closely reflecting market price movements.

The share of gold in total revenue declined from 53% in 2011 to 52% in 2012, while the share of silver grew from 44% to 45% due to more significant increase in silver sales offsetting change in gold/silver price ratio from 1/45 to 1/54 year-on-year.

Analysis by segment	Revenue, US$ mln			Gold equivalent sold, Koz (silver for Dukat)
	2012	2011	Change, %	2012	2011	Change, %
Dukat	673	532	+26%	22,565	15,546	+45%
Voro	268	280	-4%	161	176	-8%
Khakanja	302	214	+41%	180	138	+31%
Varvara	215	182	+18%	135	120	+12%
Omolon	296	73	+303%	177	46	+285%
Albazino/Amursk	99	45	+122%	69	31	+119%
Total revenue	1,854	1,326	+40%	1,136	851	+33%

Dukat continues to be largest segment of the Group, with a 36% share in total revenue. In 2012, Dukat demonstrated robust growth of 26%, driven by a 45% increase in silver equivalent sold. Among other mature mines, only Voro experienced a slight reduction of revenue of 4% due to lower production driven by moderate decrease in average grades processed. Other mines, Varvara and Khakanja, performed strongly in line with their production growth. At Omolon, having successfully reached full capacity with processing of high-grade ore from Sopka, achieved more than four-fold increase in revenues year-on-year and contributed 16% of the Group's total revenue. At Albazino, revenue grew to US$ 99 million, a more than two-fold increase, driven by full ramp-up of the mine and successful sales of concentrates to thirds-party off-takers in Q2 and Q3. In 2013 we expect further significant growth on the back of ramp-up of the Amursk POX plant, combined with additional off-take sales.

Cost of sales

Cost of sales
(US$ mln)	2012	2011	Change, %
On-mine costs	405	320	+27%
Smelting costs	336	264	+27%
Purchase of ore from third parties	33	17	+94%
Mining tax	121	97	+25%
Total cash operating costs	894	698	+28%
Depreciation and depletion of operating assets	202	140	+44%
Rehabilitation expenses	4	4	+8%
Total costs of production	1,100	842	+31%
Increase in metal inventories	(224)	(215)	+4%
Write-down to net realisable value	11	6	+78%
Total change in metal inventories	(213)	(209)	+2%
Cost of other sales	2	3	-26%
Total cost of sales	890	635	+40%

Cash operating cost structure	2012, US$ mln	2011, US$ mln	Change, %	2012, % of total	2011, % of total
Consumables and spare parts	276	228	+21%	31%	33%
Services	299	218	+37%	33%	31%
Labour	157	130	+21%	18%	19%
Other expenses	8	8	+8%	1%	1%
Purchase of ore from third parties	33	17	+94%	4%	2%
Mining tax	121	97	+25%	14%	14%
Total cash operating costs	894	698	+28%	100%	100%

Total cost of sales grew by 40% in 2012 to US$ 890 million, mostly driven by volume-based factors: ore mined grew by 14%, and ore processed grew by 13%. Key external cost drivers included the domestic inflation in Russia (6.6% in 2012), and appreciation Russian Rouble against the US Dollar (2.5% year-on-year based on average rate). The increased operating asset base, which now fully includes Omolon and Albazino, contributed 25 pp of the 40% increase, while volume growth at other mines and inflationary factors made up another 15%.           

The cost of services and the cost of consumables and spare parts grew by 37% and 21% respectively, mainly affected by mining and processing volume increases (14% and 12%, respectively). Specific cost increases in 2012 compared to 2011 were related to increased share of remote mines in total production as a result of full ramp-up at Omolon and Albazino, both with higher logistics and power generation costs.  Specific cost increases include ore haulage costs at Omolon and concentrate transportation costs at Albazino, and increased underground development at Dukat hub (53% year-on-year).

The total cost of labour within cash operating costs in 2012 was US$ 157 million, a 21% increase, mainly stemming from growth in the average number of employees directly involved in production by 8%, as well as review of the staff pay levels which are linked to the Russian CPI at our operating mines (6.6% in 2012).

Cost of purchase of ore from third parties increased by 94% to US$ 33 million in 2012, mainly as a result of increased volumes of ore purchases at Varvara, allowing us to leverage the existing processing capacity at the leach circuit and contribute additional margin.

Mining tax represents a consistent 14% share of total cost of sales in both 2012 and 2011 and increased by 25% to US$ 121 million driven by revenue growth.

Depreciation and depletion was US$ 202 million, up 44% year-on-year, as the Group continues to commission new mining and processing assets, most importantly at Albazino, Omolon and Amursk POX. Out of US$ 202 million, an amount of US$ 51 million of the depreciation charges was included in metal inventory, mainly in ore and concentrate stockpiles at Omolon and Albazino, respectively.

In 2012, our metal inventories increased by US$ 224 million. This increase was mainly represented by concentrate produced at Albazino (awaiting processing at Amursk POX and further sales to off-takers), and ore stockpiled at Omolon (mainly represented by low-grade heap leach ore at Birkachan and Sopka) and Khakanja (ore from Avlayakan and Ozerny awaiting transportation for further processing at Khakanja plant). The concentrate stockpile is set to reduce as soon as Amursk POX plant is fully ramped up, which is expected in 2013. The drawdown of low-grade ore at Omolon is expected as soon as heap leaching is started in 2013 at Birkachan and in 2015 at Sopka. Ore stockpiles at Avlayakan and Ozerny are largely seasonal - with Avlayakan ore transported during summer navigation and Ozerny ore transported in the beginning of the calendar year by winter road.

General, administrative and selling expenses

(US$ mln)	2012	2011	Change, %
Labour	92	72	+28%
Share based compensation	54	57	-5%
Services	18	15	+26%
Depreciation	4	4	+8%
Other	12	12	+1%
Total	182	160	+14%

General, administrative and selling expenses grew by 14% year-on-year from US$ 160 million to US$ 182 million. The key component of the increase was labour costs of US$ 92 million, with the growth driven mainly by scheduled increases in administrative personnel at the new mines, including Amursk POX and Mayskoye, and as a result of regular salary reviews.

Other expenses

(US$ mln)	2012	2011	Change, %
Taxes, other than income tax	14	11	+26%
Additional mining taxes, penalties and accrued interest	66	-	n/a
Listing expenses	-	10	-100%
Exploration expenses	33	30	+9%
Social payments	11	9	+21%
Housing and communal services	8	6	+24%
Loss on disposal of property, plant and equipment	9	6	+50%
Bad debt allowance	0	(1)	-123%
Other expenses	13	7	+77%
Total	154	78	+96%

Other expenses grew from US$ 78 million in 2011 to US$ 154 million in 2012. The increase was attributed to additional mining tax charges for prior years (including penalties and accrued interest) of US$ 66 million recorded by the Company in relation to several tax claims by the Russian tax authorities after relevant court decisions were made. For more information refer to page 39 below and to Note 13 of the consolidated unaudited financial statements. Other components of other expenses demonstrated moderate increases on the back of increased production, larger asset base and general cost inflation.

TOTAL Cash costs BY MINE

Total cash costs per gold equivalent ounce	Cash cost per GE ounce, US$/oz			Gold equivalent sold, Koz (silver for Dukat)
	2012	2011	Change, %	2012	2011	Change, %
Dukat (AgEq)	12.1	14.0	-13%	22,565	15,546	+45%
Voro	559	553	+1%	161	176	-8%
Khakanja	614	672	-9%	180	138	+31%
Varvara	804	747	+8%	135	120	+12%
Total - mature operations	655	642	+2%	890	774	+15%
Omolon	918	1,481	-38%	177	46	+285%
Albazino	767	1,018	-25%	69	31	+119%
Total - new operations	876	1,294	-32%	246	77	+218%
Total	703	701	0%	1,136	851	+33%

In 2012 the Company demonstrated strong cost performance on the back of solid production results and successful ramp-up of the new mines, Omolon and Albazino. Total cash costs per gold equivalent ounce sold (TCC) in 2012 were US$ 703/GE oz, and remained almost unchanged compared to 2011, demonstrating the Company's strong focus on cost control despite the external pressures.

The table below summarises major factors that have affected the Group's TCC dynamics year-on-year:

Reconciliation of TCC movements	US$ / oz	Change, %
Total cash cost per gold equivalent ounce - 2011	701
Domestic inflation	23	+3%
USD rate change	(37)	-5%
Mining tax change - Au&Ag price	2	+0%
Au/Ag ratio change	59	+8%
Change in average grade processed by mine	(19)	-3%
Change in recovery rate	(18)	-3%
Change in share of sales between mines	15	+2%
Other	(24)	-3%
Total cash cost per gold equivalent ounce - 2012	703	0%

Total cash cost by mine:

·      Dukat's total cash cost per silver equivalent ounce sold decreased by 13% year-on-year to US$ 12.1/AgEq oz.  Sustainable improvement in both grades and recoveries, resulting in 13% growth in silver production, more than offset significant increases in underground development, and increases in electricity tariff rates and other external factors.

·      At Voro, TCC in 2012 was US$ 559/GE oz, just 1% above the 2011 level of US$ 553/GE oz. The robust operating performance at Voro, with stable grades, throughput and recoveries at both heap leach and CIP circuits, fully offset the external cost inflation drivers.

·      Khakanja's TCC was US$ 614/GE oz, a 9% decrease year-on-year. This superior cost performance was mainly driven by significant improvement in average grade processed (from 7.4 g/t to 9.4 g/t year-on-year) as the plant treated higher gold grade ore from Yurievskoye and high silver grade ore from deep levels of Khakanja's pit 3. Due to scheduled reduction in average grade processed in 2013 (completion of mining at Yurievskoye, pushback at pit 1 at the main Khakanja deposit), and higher share of remote mines in ore processed (Avlayakan and Ozerny), we expect cost levels at Khakanja in 2013 are set to increase over 2011 levels.

·      At Varvara, TCC was US$ 804/GE oz, growing by 8% year-on-year. The growth was mainly driven by increased purchases of third-party ore combined with reduction of copper production due to scheduled grade decline.

·      At Omolon, total cash costs reduced by a notable 38% to US$ 918/GE oz as the processing hub reached its design capacity and processed significant volumes of high-grade ore from Sopka.  However, cost levels at Omolon remained above average for the Group's assets due to a) higher stripping ratios in 2012, driven by massive stripping campaigns at Birkachan and Sopka deposits and by commencement of mining at Tsokol; b) reallocation of costs from low-grade stockpiles to higher-grade current feed at Sopka and Birkachan as a result of refinements in cost allocation models undertaken by the year-end.

·      At Albazino/Amursk hub, TCC was US$ 767/ GE oz, which is 25% lower compared to 2011, as the mine and concentrator has ramped up to the design throughput, combined with improved recoveries and grades. However, due to slower than expected ramp-up of the Amursk POX the Company had to reallocate significant volumes of concentrate produced to third-party off-takers in China, resulting in total cash cost level which is higher than average expected over the life of mine. We expect further significant improvement in total cash costs at Albazino/Amursk in 2013 upon full ramp-up of the Amursk POX to its design throughput and recovery.

Analysis of 2H 2012 versus 1H 2012 performance:

Total cash costs per gold equivalent ounce	Cash cost per GE ounce, US$/oz			Gold equivalent sold, Koz (silver for Dukat)
	2H 2012	1H 2012	Change, %	2H 2012	1H 2012	Change, %
Dukat (AgEq)	12.1	12.2	-1%	11,656	10,909	+7%
Voro	566	549	+3%	94	67	+42%
Khakanja	625	600	+4%	103	77	+34%
Varvara	811	796	+2%	72	62	+16%
Total - mature operations	652	658	-1%	486	404	+20%
Omolon	914	933	-2%	127	50	+152%
Albazino	771	750	+3%	55	13	+313%
Total - new operations	871	895	-3%	182	64	+186%
Total	712	691	+3%	668	467	+43%

Cost performance in 2H 2012 versus 1H 2012 ("half-on-half") was driven mainly by change in mix of sales with a higher share from the new mines, Omolon and Albazino as these operations were the main contributors to the increase in production and sales volumes. Total cash costs per gold equivalent ounce sold (TCC) in 2H 2012 were US$ 712/GE oz, up just 3% above 1H 2012 level. This was a result of solid operating performance at both mature mines and new operations, with cost dynamics at each of them individually not exceeding domestic inflation levels.

·      Dukat's total cash cost per silver equivalent ounce sold decreased by another 1% half-on-half to US$ 12.1/AgEq oz after a more significant improvement achieved in 1H 2012. The continuing improvement in operating performance was further supported by increased sales driven by drawdown of concentrate inventories by the year-end.

·      At Voro, TCC in 2H 2012 was US$ 566/GE oz compared to US$ 549/GE oz in 1H 2012, a 3% increase mainly related to general inflation factors and a slight decline in average grade processed after completion of mining at Degtyarskoye.

·      Khakanja's TCC was US$ 625/GE oz, a 4% increase half-on-half. The specific cost factors, apart from some general cost inflation, were related to processing higher grade but higher cost ore from Avlayakan, as well as to decline in average grades at the main Khakanja deposit after completion of mining high silver grade ore in pit 3, and commencement of processing of ore from Ozerny where mining only started in Q4.

·      At Varvara, TCC was US$ 811/GE oz, up 2% half-on-half due to general cost inflation and increased use of third-party ore.

·      TCC at Omolon were US$ 914/GE oz, 2% lower half-on-half as a result of significant sales growth representing mainly sales of precipitate produced from higher grade ore from Sopka. Further cost improvement was constrained by high stripping ratios due to commencement of mining at Tsokol, and revisions to cost allocation models between high-grade and low-grade ores undertaken in the second half of the year.

·      At Albazino, TCC was US$ 771/ GE oz, up 3% compared to 1H 2012, mainly due to lower recoveries and higher cost levels at the Amursk POX plant during its ramp-up period.

all-in cash costs

	2012		2011		Change, %
	US$ mln	US$ / GE oz	US$ mln	US$ / GE oz	For US$ / GE oz
Total cash costs	798	703	596	701	0%
SG&A and other operating expenses not included in TCC	143	126	107	125	+1%
Capital expenditure excluding new projects	179	157	278	327	-52%
Exploration expenditure (capital and current)	68	60	66	78	-23%
All-in cash costs	1,189	1,047	1,048	1,231	-15%

Polymetal, in line with the industry best practices, will from now on report an additional cost metric - "all-in cash costs" - which is intended to include all ongoing operating and capital expenditure of the Group (excluding only capital expenditure on separate growth projects). We believe that all-in cash costs are an important metric to analyse the cash flow generation capacity in our capital-intensive sector.

All-in cash costs are comprised of:

·      total cash costs (current conventional definition);

·      all selling, general and administrative expenses for operating mines and head office not included in TCC (mainly represented by head office SG&A);

·      other expenses (excluding write-offs and non-cash items, in line with the methodology used for calculation of adjusted EBITDA);

·      current period capex for operating mines (i.e. excluding new project capex, but including all exploration expenditure (both expensed and capitalised in the period) and minor brownfield expansions)

All-in cash costs in 2012 and 2011 include total capital expenditure for Omolon and Albazino from the start of commercial production at those mines, despite some of the capital spending being related to plant expansion and/or completion of the major construction projects. This approach was taken to ensure transparency of the all-in cash costs calculation.

All-in cash costs in 2012 were US$ 1,047/GE oz, a 15% decrease year-on-year, driven mostly by reduction in capital expenditure at our operating mines and stable total cash costs.

Adjusted EBITDA and EBITDA margin

Reconciliation of Adjusted EBITDA (US$ mln)	2012	2011	Change, %
Net earnings	401	290	+38%
Finance cost (net)	22	25	-10%
Income tax expense	216	119	+82%
Depreciation and depletion	156	97	+62%
EBITDA	796	530	+50%
Share based compensation	54	57	-5%
Exchange (gains)/losses	(7)	14	-149%
Listing expenses	-	10	-100%
Change in fair value of contingent liability	5	7	-31%
Rehabilitation costs	4	4	+8%
Write-down of inventory	11	6	+78%
Change in fair value of derivatives	-	2	-100%
Gain on acquisition of remaining interest in joint venture and (loss)/profit on  disposal of subsidiaries	(10)	(5)	+110%
Additional mining taxes, penalties and accrued interest	66	-	n/a
Adjusted EBITDA	918	624	+47%
Adjusted EBITDA margin	50%	47%	+3 pp

Adjusted EBITDA by segment (US$ mln)	2012	2011	Change, %
Dukat	378	282	+34%
Voro	174	175	-1%
Khakanja	178	113	+57%
Varvara	100	91	+10%
Omolon	124	5	NM
Amursk hub (including Albazino and Mayskoye)	23	(6)	NM
Corporate and other and intersegment operations	(59)	(36)	+61%
Total	918	624	+47%

In 2012, adjusted EBITDA grew by 47% to US$ 918 million, ahead of revenue growth, with adjusted EBITDA margin reaching 50%. The key growth and profitability drivers were production growth, reduction of cost levels at our growth projects, Omolon and Albazino, and excellent operating and cost performance at Dukat and Khakanja. Adjusted EBITDA at Dukat grew by 34% to US$ 378 million, at Khakanja by 57% to US$ 178 million. Omolon and Amursk POX hub (excluding Mayskoye) contributed US$ 124 million and US$ 35 million, respectively.

Other income statement items

Foreign exchange differences in 2012 resulted in a net gain of US$ 7 million versus a US$ 13 million loss in 2011. These gains/losses are unrealised non-cash items and represent the appreciation/depreciation of the Group's mostly US Dollar denominated borrowings against the Russian Rouble, the functional currency of the Group. The US$ 60 million non-cash net foreign exchange loss recorded in 1H 2012 due to devaluation of the Russian Rouble in May-June 2012 was more than offset by subsequent appreciation in the second half of the year.

The Company does not use any hedging instruments for managing foreign exchange risk, other than a natural hedge arising from the fact that the majority of the Group's revenue is denominated or calculated in US dollars. Though income statement volatility may arise in the financial reporting, the Company believes that the underlying matching of revenue cash flows against debt repayments and related interest represents an economically effective hedging strategy.

A US$ 10 million net gain on acquisition and disposal of subsidiaries has been recorded in 2012 mainly as a result of transactions with the Group's holding in Amikan Holding Limited, which owns the Veduga gold deposit in the Krasnoyarsk region of the Russian Federation. The Group has initially consolidated 100% holding in Amikan, previously held in joint venture with AngloGold Ashanti Holdings, and then formed a new entity, Polygon Gold Inc., in which it currently owns 42.6%.

additional mining and profit tax charges and provisions

In 2012, the Group lost two cases in courts in respect of its tax litigations related to prior periods at Dukat (Magadan Silver) and Varvara, resulting in US$ 29.5 million and US$ 23.1 million of additional taxes paid during the year, respectively.

Further, there is an ongoing litigation at Dukat (CJSC Magadan Silver) where the application of technical loss limits applied in the calculation of Mineral Extraction Tax has been challenged by the tax authorities. The Group assesses the probability of additional taxes to be accrued as high and accordingly has created provisions for the tax exposure in the amount of US$ 9.2 million.

The Group has also provided for a number of other tax exposures in the amount of US$ 36.6 million in respect of other taxes it considers likely to be payable, and US$ 17.1 million in respect of excess profit tax in Kazakhstan.

None of the above provisions or additional taxes is expected to be recurring and/or to significantly affect the Group's future effective tax rate.

The additional taxes paid or accrued as at 31 December 2012 are summarised below:

	Magadan Silver case	Varvara case	Technical loss limits	Excess profit taxes in Kazakhstan	Other tax exposures	Total
Total additional tax exposures	29.5	23.1	9.2	17.1	36.6	115.5
Settled during 2012	(29.5)	(23.1)	-	-	-	(52.6)
Provisions for tax exposures made at 31 Dec 2012	-	-	9.2	17.1	36.6	62.9
Total additional tax exposures:	29.5	23.1	9.2	17.1	36.6	115.5
·     included in other operating expenses	15.0	10.1	9.2	-	31.6	65.9
·     Included in income tax expense	14.5	13.0	-	17.1	5.0	49.6

Net earnings, earnings per share and dividends

Profit before tax in 2012 was US$ 617 million, up 51% compared 2011, exceeding the Adjusted EBITDA growth mostly due to positive impact of the foreign exchange gains/losses. The Group's income effective income tax rate in 2012 was 35%, up from 29% in 2011. This is mainly due to the fact that it includes US$ 49.6 million of additional profit tax charges (see above). The effective tax rate for the reporting period which excludes additional mining and income tax charges (see above), was 24.3%. The difference between this rate and the statutory profit tax rate of 20% is arising mainly from non-deductible expenses, most importantly share-based compensation (a non-cash item, US$ 54 million in 2012).

As a result, net profit for the year in 2012 was US$ 401 million, up 38% from the US$ 290 million in 2011. Basic earnings per share were US$ 1.03, up 30% year-on-year. Return on equity (ROE) and return on capital employed (ROCE) increased to 20% and 22% in 2012 from 18% and 18% in 2011, respectively, demonstrating the increased capital discipline and operating efficiency of the Group.

In accordance with the new dividend policy (revised in October 2012) the Board proposes a final dividend of US$ 119 million, or US$ 0.31 per share, representing 30% of the Group's net profit for the year attributable to the equity holders of the Company. In addition to that, a special dividend of US$ 191 million, or US$ 0.50 per share, was declared in December 2012 and paid in January 2013. With the two dividend payments taken together, the Group's payout ratio increases dramatically from 26% in 2011 to 79% in 2012.

Capital expenditure

(US$ mln)	2012	2011	Change, %
Amursk/Albazino	79	133	-41%
Mayskoe	66	85	-22%
Omolon	40	68	-41%
Dukat	49	55	-10%
Khakanja	20	20	-1%
Voro	11	13	-10%
Varvara	16	15	+6%
Corporate and exploration	77	79	-3%
Capitalised interest	14	12	+16%
Total capital expenditure1	372	479	-22%

¹ Total capital expenditure includes amounts payable at the end of the period. On a cash basis, capital expenditure was US$ 351 million in 2012 (2011: US$ 462 million).

In 2012, total capital expenditure was US$ 372 million, down 22% year-on-year which reflects completion of several major Group's investment projects in 2011, including construction of Albazino and Amursk POX and expansion at Omolon. The only continuing major project in 2012 was the construction of Mayskoye which is on track to be completed in April 2013. Capital expenditure exceeded the Group's original target mainly due to accelerated development at the Group's new growth projects (Albazino-2, Kutyn, Svetloye), and additional expenses incurred during ramp-up of the Amursk POX plant.

The major capital expenditure items in 2012 were:

·      US$ 79 million were invested at Albazino/Amursk, most importantly in commissioning activities at POX (60% of total), and drilling and underground exploration drift at the newly discovered ore bodies in the licence area (Albazino-2) (27% of total), and infrastructure development at Albazino (all-year round access road, explosives plant etc.);

·      US$ 66 million was spent on construction of the processing plant and underground mine at Mayskoye, where the Group is targeting completion in April 2013. The investments in 2012 were concentrated on installation of equipment at the site (mills, ventilation, piping, power substation etc.), while the remaining activities in 2013 only include air-lifting remaining auxiliary equipment and its installation;

·      US$ 40 million was invested in the Omolon hub operations. The expenditure in 2012 mainly represented expansion of the hub's mining fleet with growing mining and stripping volumes at Birkachan and Sopka (46% of total spending) and development of Tsokol mine (4% of total). In addition, the construction of an all-year-round heap leaching facility at Birkachan commenced in 2012 (19% of total);

·      Capital expenditure at Dukat was US$ 49 million, a 10% decrease. The expenditure, apart from mining fleet upgrades and maintenance capex, mainly comprises expansion of underground operations (development at Dukat, Lunnoye, Goltsovoye totalling approx. 20% of capital expenditure) and maintenance at the Omsukchan concentrator (approx. 14%);

·      US$ 20 million was invested in the Khakanja hub, representing mainly development of a new mine at Ozerny where mining started in Q4 2012;

·      Voro and Varvara's capital expenditures in 2012 were less significant and mainly represented routine maintenance investment and upgrades to the mining fleet and the total amount remained slightly below 2011 level at US$ 27 million;

·      The Company continues to actively invest in greenfield and brownfield exploration (included in Corporate segment). Capital expenditure on exploration in 2012 was US$ 68 million, and focused on key advanced targets such as the expansion of Albazino (US$ 8 million in 2012), in-fill drilling at Mayskoye prior to start of stoping, and development of Kutyn (US$ 4 million) and Svetloye (US$ 5 million), our two greenfield projects with highest potential;

·      Total capital expenditure in 2012 includes US$ 14 million of capitalised interest (2011: US$ 12 million)

·      In addition to capital expenditure, additions to property, plant and equipment in the financial statements also include asset purchases during the year in the total amount of US$ 12 million, the most significant being the acquisition of Svetlobor platinum project (see above).

Cash flows

(US$ mln)	2012	2011	Change, %
Operating cash flows before changes in working capital	710	477	+49%
Changes in working capital	(215)	(265)	-19%
Total operating cash flows	496	212	+134%
Capital expenditure	(351)	(462)	-24%
Other	(6)	(11)	-44%
Investing cash flows	(357)	(472)	-24%
Financing cash flows
Net (decrease) / increase in gross debt	(149)	197	-176%
Proceeds from the IPO	-	763
MTO and squeeze-out obligation repayment	(569)	-	n/a
Dividends paid	(77)	-	n/a
Other	-	(52)	-100%
Total financing cash flows	(794)	907	-188%
Net (decrease) / increase in cash and cash equivalents	(655)	647	n/a
Cash and cash equivalents at the beginning of the year	659	11	+5859%
Effect of foreign exchange rate changes on cash and cash equivalents	15	1	+2433%
Cash and cash equivalents at the end of the year	19	659	-97%

Operating cash flows in 2012 strengthened dramatically, supported by excellent operating results and consequent EBITDA growth. Operating cash flows before changes in working capital grew 49% year-on-year to US$ 710 million. Net operating cash flows more than doubled and comprised US$ 496 million, as a result of decreasing demand for working capital in 2012 (19% lower year-on-year).

Investing cash flows' dynamics was mainly driven by decreasing capital expenditure (down 24% from US$ 462 million in 2011 to US$ 351 million in 2012) investment in the major growth projects (Omolon, Albazino and Amursk POX) is completing. As a result, free cash flow was positive at US$ 139 million in 2012 compared to a negative of US$ 260 million in 2011.

Total cash and cash equivalents decreased from US$ 659 million as at 31 December 2011 to US$ 19 million as at 31 December 2012 as a result of the following:

·      Settlement of the MTO obligation and further buyouts of the remaining shares in JSC Polymetal, totalling US$ 569 million;

·      Inaugural dividend payment of US$ 77 million in June 2012; and

·      Net repayment of borrowings of US$ 149 million during 2012.

BALANCE SHEET

In 2012, the Company has recorded the following significant movements of key balance sheet items:

·      Net increase in current inventories of US$ 261 million incurred mainly due to growth of low-grade ore inventories at Omolon and concentrate inventories at Albazino (awaiting further processing at the POX facility or sale to off-taker);

·      Net increase in current payables of US$ 205 million, mainly due to recognition of a dividend payment liability for special dividends of US$ 191 million declared in December 2012 and the subsequently paid in January 2013; and

·      Full settlement of the MTO obligation (US$ 534 million as at 31 December 2011) and additional repurchases of shares in JSC Polymetal of US$ 27 million during 2012, resulting in reduction of non-controlling interest and share purchase obligation balances within equity, and a corresponding net decrease in retained earnings balance attributable to the equity holders of the Company.

Liquidity and funding

Net debt	31 December 2012	31 December 2011	Change, %
Short-term debt and current portion of long-term debt	244	348	-30%
MTO/squeeze-out obligation	-	535	-100%
Dividends payable	191	-	n/a
Long-term debt	620	655	-5%
Gross debt	1,055	1,538	-31%
Less: cash and cash equivalents	19	659	-97%
Net debt	1,037	879	+18%
Net debt / adjusted EBITDA	1.1	1.4	-20%

The Group continues 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$ 1,037 million as of 31 December 2012, representing a Net debt / Adjusted EBITDA ratio of 1.1, down 20% from 1.4 as at 31 December 2011. The decrease was a result of strong growth in operating cash flows combined with completion of a major investment cycle and a corresponding decrease in capital expenditure.

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 (59%) were long-term as of 31 December 2012, while the average cost of debt remained at a low 3.1% in 2012 (2011: 3.2%), 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.

2013 outlook

The financial performance in 2013 will be driven by the following key factors:

·      The Company is on track to deliver on its 1.2 Moz of gold equivalent production guidance;

·      Our revenue base will be dependent on the gold and silver price dynamics, currently demonstrating significant volatility in response to uncertainty in the global financial market;

·      In the cost base, while the appreciation of the Russian rouble may have an adverse effect, the continued increase in operating efficiency and throughput at the new mines, most importantly Albazino/Amursk, will serve as a key internal factor supporting the current cost levels; and

·      Low capital requirements due to completion of all current major investment projects, and resulting significant free cash flow generation.

Principal risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance and could cause actual results to differ materially from expected and historical results.

The principal risks and uncertainties of the Group are listed below:

·     Market risk;

·     Production risks, including:

a)    low grade/ potential dilution;

b)    ore and concentrate shipping;

c)    supply chain risks; and

d)    low recovery rate;

·     Production risk - construction and renovation;

·     Legal risk;

·     Taxation risk;

·     Mergers and acquisitions;

·     Environmental risks;

·     Political risk;

·     Currency risk;

·     Human resources;

·     Liquidity risk;

·     Failure to meet exploration objectives;

·     Interest rate risk; and

·     Inflation risk.

A detailed explanation of these risks and uncertainties can be found on pages 60 to 63 of the 2011 annual report which is available at www.polymetalinternational.com. Further updates will be presented in the full annual financial report for 2012.

Going concern

The business of the Group, its strategy and the factors that may affect future performance are described on pages 1 to 30 of this report. The risks in achieving the Group's strategic objectives, together with assessment of their potential impact and mitigating actions are set out above. The financial position of the Group, its cash flows and liquidity are further analysed on pages 31 to 42 of this report.

The Board, having considered all relevant factors related to financial position, risks and business prospects of the Group, and its projected future cash flows, has a reasonable expectation that the Group has adequate resources to continue operations in the foreseeable future. Accordingly, the Group continues to adopt the going concern basis in preparing the financial statements for the year ended 31 December 2012.

Financial statements

Polymetal International plc

Consolidated unaudited income Statement

			Year ended		Year ended
		Notes	31 December 2012		31 December 2011
			US$'000		US$'000
Revenue		4	1,854,065		1,326,430
Cost of sales		5	(889,565)		(635,337)
Gross profit			964,500		691,093
General, administrative and selling expenses		9	(181,648)		(160,026)
Other operating expenses		10	(153,855)		(78,344)
Share of loss of associates and joint ventures		15	(1,804)		(1,952)
Operating profit			627,193		450,771
(Loss)/Profit on disposal of subsidiaries		2	(10,709)		4,931
Gain on acquisition of remaining interest in joint venture		15	21,051		-
Net foreign exchange gains / (losses)			6,677		(13,634)
Change in fair value of derivative financial instruments			-		(1,855)
Change in fair value of contingent consideration liability			(4,717)		(6,828)
Finance income			4,657		4,208
Finance costs		12	(26,787)		(28,746)
Profit before income tax			617,365		408,847
Income tax expense		13	(216,204)		(118,985)
Profit for the financial year			401,161		289,862
Profit for the period attributable to:
Equity shareholders of the Parent			394,348		289,323
Non-controlling interest			6,813		539
			401,161		289,862
			US$		US$
Earnings per share
Basic		18	1.03		0.79
Diluted		18	1.03		0.74
	Year ended	Year ended	Year ended		Year ended
	31 December 2012	31 December 2011	31 December 2012		31 December 2011
	Cents per share	Cents per share	$'000		$'000
Final dividend proposed in relation to the year (Note 14)	31	20	119,034		76,537
Special dividend declared (Note 14)	50	-	191,343		-

 

Polymetal International plc

Consolidated unaudited Statement of Comprehensive Income

		Year ended		Year ended
		31 December 2012		31 December 2011
		US$'000		US$'000
Profit for the financial year		401,161		289,862
Other comprehensive income/(loss)
Effect of translation to presentation currency		110,550		(115,474)
Total comprehensive income for the financial year		511,711		174,388
		Year ended		Year ended
		31 December 2012		31 December 2011
		US$'000		US$'000
Total comprehensive income for the financial year attributable to:
Equity Shareholders of the Parent		494,776		185,033
Non-controlling interest		16,935		(10,645)
		511,711		174,388

Polymetal International plc

Consolidated unaudited Balance Sheet

		31 December		31 December
	Notes	2012		2011
		US$'000		US$'000
Assets
Property, plant and equipment		2,149,400		1,901,974
Goodwill		115,106		108,587
Investments in associates and joint ventures	15	29,822		23,558
Non-current loans		14,811		8,962
Deferred tax asset	13	58,024		62,118
Non-current inventories	16	100,972		58,222
Total non-current assets		2,468,135		2,163,421
Current inventories	16	859,856		599,312
Current VAT receivable		103,192		111,887
Trade and other receivables		107,596		67,991
Prepayments to suppliers		31,044		38,912
Income tax prepaid		14,481		11,787
Cash and cash equivalents		18,622		658,795
Total current assets		1,134,791		1,488,684
Total assets		3,602,926		3,652,105
Liabilities and shareholders' equity
Accounts payable and accrued liabilities		(312,218)		(107,404)
Current borrowings	17	(244,211)		(348,429)
Share purchase obligation under MTO		-		(534,597)
Income tax payable		(63,021)		(13,366)
Other taxes payable		(72,119)		(21,327)
Environmental obligations		(1,565)		-
Total current liabilities		(693,134)		(1,025,123)
Non-current borrowings	17	(619,612)		(654,666)
Contingent consideration liability		(25,276)		(22,290)
Deferred tax liability		(75,938)		(79,342)
Environmental obligations		(65,128)		(54,463)
Other non-current liabilities		(134)		(1,623)
Total non-current liabilities		(786,088)		(812,384)
Total liabilities		(1,479,222)		(1,837,507)
NET ASSETS		2,123,704		1,814,598
Stated capital account		1,576,123		1,566,386
Treasury shares in JSC Polymetal		-		(395)
Share-based compensation reserve		119,291		59,239
Translation reserve		(54,366)		(151,029)
Share purchase obligation under MTO	1	-		(561,659)
Retained earnings		482,656		753,572
Total equity attributable to the parent		2,123,704		1,666,114
Non-controlling interest		-		148,484
Total equity		2,123,704		1,814,598

Polymetal International plc

Consolidated unaudited Balance Sheet (continued)

The notes on pages 50 to 76 form part of these financial statements.

These unaudited financial statements are approved and authorised for issue by the Board of Directors on 7 April and signed on its behalf by

Vitaly Nesis

Chief Executive

Bobby Godsell

Chairman of the Board of Directors

7 April 2013

Polymetal International plc

Consolidated Statement of Cash Flows

	Notes		Year ended		Year ended
			31 December 2012		31 December 2011
			US$'000		US$'000
Net cash generated by operating activities	20		495,835		211,956
Cash flows from investing activities
Purchases of property, plant and equipment			(350,807)		(461,632)
Consideration for acquisitions	2		(20,797)		(4,761)
Proceeds from disposal of subsidiary			25,000		5,300
Other loans advanced, net			(14,559)		(4,249)
Interest received			5,686		143
Contingent consideration payment			(1,227)		(6,943)
Net cash used in investing activities			(356,704)		(472,142)
Cash flows from financing activities
Borrowings obtained	17		1,236,036		1,695,078
Repayments of borrowings	17		(1,384,913)		(1,498,518)
Proceeds from issuance of shares of the Company	18		-		762,641
Purchase of treasury shares in the Company	18		-		(46,649)
Payments on finance lease obligations			-		(5,217)
MTO and squeeze-out obligation repayment			(568,837)		-
Dividends paid			(76,537)		-
Net cash (used in) / generated by financing activities			(794,251)		907,335
Net decrease/increase in cash and cash equivalents			(655,120)		647,149
Cash and cash equivalents at the beginning of the financial year			658,795		11,056
Effect of foreign exchange rate changes on cash and cash equivalents			14,497		590
Cash and cash equivalents at the end of the financial year			18,622		658,795

Polymetal International plc

Consolidated Statement of Changes in Equity

	Notes	Number of 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
Balance at 1 January 2011		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 in exchange for assets	2		66,966	-	24	-	-	-	66,990		66,990
Issuance of ordinary shares under ISSF		332,641,773	-	-	-	-	-	-	-		-
Issuance of share on IPO		53,350,000	762,641	-	-	-	-	-	762,641		762,641
Purchase of treasury shares in the Company		(3,305,988)	(46,649)	-	-	-	-	-	(46,649)		(46,649)
Share purchase obligation under MTO		-	-	-	-	-	(561,659)	-	(561,659)		(561,659)
Reclassification to non-controlling interest		-	(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)	753,572	1,666,114	148,484	1,814,598
Total comprehensive income		-	-	-	-	100,428	-	394,348	494,776	16,935	511,711
Amortisation of bonus received from depositary		-	-	-	-	-	-	1,259	1,259	-	1,259
Share-based compensation		-	-	53,515	-	-	-	-	53,515	764	54,279
Issue of shares in exchange for assets	2	520,422	9,737	-	-	-	-	-	9,737	-	9,737
Dividends	14	-	-	-	-	-	-	(267,880)	(267,880)	-	(267,880)
Acquisition of non-controlling interest under MTO and Squeeze-out	1	-	-	6,537	395	(3,765)	561,659	(398,643)	166,183	(166,183)	-
Balance at 31 December 2012		383,206,207	1,576,123	119,291	-	(54,366)	-	482,656	2,123,704	-	2,123,704

Notes to the Consolidated unaudited financial statements

1.     General

The financial information for the year ended 31 December 2012 or 2011 does not constitute statutory accounts as defined in Article 105 of Companies (Jersey) Law 1991. Statutory accounts for the year ended 31 December 2011 have been delivered to the Registrar of Companies and are available on the Group's website www.polymetalinternational.com. The auditor's report on those accounts was unqualified, did not include a reference to any matters to which the auditor 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. The audit of the statutory accounts for the year ended 31 December 2012 is not yet complete. The accounts will be finalised on the basis of the financial information presented by the Directors in this unaudited preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

Corporate information

 

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 became the new ultimate parent company of Joint Stock Company Polymetal (JSC Polymetal) and its subsidiaries, joint ventures and associates (the JSC Polymetal Group) and owned  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.

On 17 February 2012, the Company executed the Mandatory Tender Offer ("the MTO") made on 23 November 2011 at a cost of US$534 million acquiring 30,317,610 shares in JSC Polymetal via its wholly-owned subsidiary PMTL Ltd.

On execution of the MTO, Otkritie Securities Ltd tendered the shares it had legally acquired in JSC Polymetal, which for accounting purposes were then effectively transferred from being shown as treasury shares in JSC Polymetal to being held by PMTL Ltd with a corresponding reduction in the level of the non-controlling interest. The Group settled the loan balance with Otkritie Securities Ltd through a payment of US$250 million.

Through these two transactions, the Company's holding in JSC Polymetal increased to 397,287,592 Ordinary Shares, representing approximately 99.48% of the total share capital of JSC Polymetal. On 20 April 2012, the Company delivered notice of its intention 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. In the period to 10 July 2012 2,087,408 additional shares in JSC Polymetal were acquired such that at that date the Company's holding in JSC Polymetal had further increased to 399,375,000 shares, representing 100% of the total share capital of JSC Polymetal.

Total cash outflows in respect of the MTO and Squeeze Out for the year amounted to US$569 million, offsetting the share purchase liability recognised when the offer was initially made. This comprised MTO payments of US$534 million and other payments of US$37 million.

On execution of the MTO and the Squeeze Out, the non-controlling interest balance in reserves was derecognised in proportion to the percentage acquired in the period, with the minority's share of the other reserves previously transferred to "non-controlling interests" on the original formation of the Group transferred back. The treasury shares balance and the share purchase obligation reserve were also eliminated. The difference of US$ 399 million was recognised within retained earnings.

Significant subsidiaries

As disclosed above at 31 December 2012, the Company held an effective 100% 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 2012		31 December 2011
CJSC Gold of Northern Urals	Vorontsovskoye	Russia	100		100
LLC Okhotskaya Mining and Exploration Company	Khakandjinskoye Yurevskoye	Russia	100		100
	Avlayakan
	Ozernoe
CJSC Magadan Silver	Dukat Lunnoe Arylakh Goltsovoye	Russia	100		100
Mayskoye Gold Mining Company LLC	Mayskoye	Russia	100		100
Omolon Gold Mining Company LLC	Kubaka Birkachan	Russia
	Sopka Kvartsevaya		100		100
Albazino Resources Ltd	Albazino	Russia	100		100
Amur Hydrometallurgical Plant LLC	N/A	Russia	100		100
JSC Varvarinskoye	Varvarinskoye	Kazakhstan	100		100

Significant shareholders

At 31 December 2012, the significant shareholders in the Company are: Pearlmoon Limited, the ultimate beneficial owner of which is Petr Kellner (20.83%), Powerboom Investments Limited, the ultimate beneficial owner of which is Alexander Nesis (17.87%), Vitalbond Limited and its affiliated companies, the ultimate beneficial owner of which is Alexander Mamut (10.11%), 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 (4.26%). No other parties control more than 3% of the Company shares. There were no changes to the Significant shareholders' ownerships as of 1 April 2013.

Going concern

In assessing its going concern status, the Directors have taken account of the Group's financial position, anticipated future trading performance, its borrowings and other available credit facilities and its capital expenditure commitments and plans

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 unaudited consolidated financial statements.

Basis of presentation

The Group's annual unaudited consolidated financial statements for the year ended 31 December 2012 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.

Reclassifications

Where a change in the presentational format between the prior year and current year financial statements has been made during the period, comparative figures have been restated accordingly.

In the current period shipping expenses have been presented within cost of sales rather than within General, Administrative and Selling expenses. The comparative information has been revised to be on a consistent basis with costs of US$9.6 million for the year ended 31 December 2011 being reclassified.

At 31 December 2012 US$ 39 million  of ore stock piles at Omolon were classified as non-current inventories following management's assessment that these stock piles will be processed starting from 2015. Previously these amounts were included within current metal inventories. The comparative figures of US$ 14 million have been restated to be presented on a consistent basis.

At 31 December 2012 US$ 4 million on capital spare parts were classified as property, plant and equipment rather than non-current inventories. The comparative figures of US$2.3 million have been restated to be presented on a consistent basis.

Standards and Interpretations in issue not yet adopted

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

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 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 2014.

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 2014.

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 after1 January 2014.

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 2014.

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 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 Consolidated and Separate Financial Statements 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 Investments in Associates 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.

Amendments to IFRS 1 Government loans and to IFRS 7 Disclosures - Offsetting Financial Assets and Financial Liabilities  are effective for annual periods on or after 1 January 2013.

Amendments to IAS 32 Financial Instruments - Presentation is effective for annual periods on or after 1 January 2014.

2.     Acquisitions and Disposals

(a)    Asset acquisitions

Veduga

On 7 February 2012 the Group completed the acquisition from AngloGold Ashanti Holdings PLC (AngloGold) of AngloGold's 50% interest in various companies held in joint venture with Polymetal comprising the AngloGold Ashanti - Polymetal Strategic Alliance for US$20 million. It subsequently entered into a series of transactions with new investors (unrelated parties), retaining a 42.65% economic interest in the principal asset - the Veduga licence. See Note 15 for further information.

Semchenskoye Zoloto

On 22 August 2012 the Group acquired 100% interest in "Semchenskoye Zoloto LLC"  (Semchenskoye Zoloto) from Suntsov V.A. (25% interest) and Polister Limited (75% interest) , both unrelated parties. Semchenskoye Zoloto holds the exploration licence for Semchenskoye field in Karelia. The Group paid cash consideration of US$ 0.8 million; in addition, a contingent consideration of US$0.5 million is payable  by the Group in case the exploration of the licence area proves to be successful and the mining licence for the new gold deposit is received before 25 December  2014. Another US$1.2 million is payable depending on the level of proved and probable ore reserves of the new deposit.

After evaluation of the possible outcome of the contingency, the Group estimated fair value of the contingent consideration to be US$ 0.1 million.

Semchenskoye Zoloto 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$0.8 million and other current liabilities of US$ 0.024 million.

Svetlobor

On 17 December 2012, the Group acquired 24.99% interest in JSC Nevyansk Group (NG), a Russian legal entity whose wholly-owned subsidiary holds a mining and exploration licence for the Svetlobor area. The Group issued consideration in the form of 130,053 new ordinary shares in the Company. Simultaneously, CJSC VTB Capital (VTB) purchased a 75.01% stake in NG in exchange for 390,369 new Polymetal ordinary shares, which were subscribed for by a subsidiary of VTB for a total cash consideration of US$6.9 million.

The Group also entered into legally binding agreement to acquire the 75.01% stake in NG from VTB, as soon as  this transaction is approved by the Government Commission on Monitoring of Foreign Investments, for cash consideration of US$6.9 million, plus any interest accrued on this amount at a rate of 7.25% per annum.

The Group determined 17 December 2012 to be the date when it obtained control over NG, and consolidated the acquiree from that date. The cash received from VTB has been accounted for as a loan and included within borrowings (Note 17). NG does not meet the definition of a business pursuant to IFRS 3 (2008) and this transaction has been treated as an acquisition of assets. The allocation of the consideration paid to the assets acquired was as follows:

	US$'000
Net assets acquired
Mineral rights	9,449
Other assets	299
Other liabilities	(11)
Net assets acquired	9,737
Consideration:
Fair value of shares issued	9,737

In the prior year, the following transactions took place:

 

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.

(b)    Disposal of subsidiary

In December 2012 the Group disposed of following minor subsidiaries: Ural'skoye GRP LLC, Severno-Ural'skoye GRP LLC and JSC Aurum. For further information on the partial disposal of Amikan Holding Limited, which owns the Veduga gold deposits, see Note 15.

	Ural'skoye	Severno-Ural'skoye	Aurum	Amikan	Total
	US$'000	US$'000	US$'000	US$'000	US$'000
Net assets disposed of:
Property, plant and equipment	295	2,749	127	67,842	71,013
Other non-current assets	1,388	-	2,317	3,577	7,282
Current assets	1,848	1,688	-	230	3,766
Current liabilities	(549)	(17)	(1,278)	-	(1,844)
Non-current liabilities	-	(3,572)	-	(17,995)	(21,567)
	2,982	848	1,166	53,654	58,650
Consideration receivable	1,593	1,475	3	28,000	31,071
Fair value of interest in associate undertaking acquired	-	-	-	20,201	20,201
Intercompany debt assigned to acquirer	-	-	-	(3,331)	(3,331)
Gain / (loss) on disposal	(1,389)	627	(1,163)	(8,784)	(10,709)

In the prior year, the Group disposed of the following 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 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

3.     Segment Information

The Group has seven reportable segments:

·      Voro (CJSC Gold of Northern Urals);

·      Khakanja (LLC Okhotskaya Mining and Exploration Company);

·      Dukat (CJSC Magadan Silver);

·      Omolon (Omolon Gold Mining Company LLC);

·      Varvara (JSC Varvarinskoye);

·      Amursk-Albazino (Albazino Resources Ltd, Amur Hydrometallurgical Plant LLC); and

·      Mayskoye (Mayskoye Gold Mining Company 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 or 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, 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.

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 unaudited consolidated financial statements.

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

For the year ended 31 December 2012 ($'000)		Voro		Khakanja		Dukat		Omolon		Varvara		Amursk - Albazino		Mayskoye		Total reportable segments		Corporate and other		Intersegment operations and balances		Total
Revenue from external customers		268,427		302,482		672,881		295,748		215,241		99,182		-		1,853,961		104		-		1,854,065
Intersegment revenue		183								674		9,730				10,587		480,432		(491,019)		-
Cost of sales, excluding depreciation, depletion and write-down of inventory to net realisable value		80,890		101,429		262,198		154,934		104,674		51,937		-		756,063		366,971		(400,085)		722,949
Cost of sales		103,276		131,788		294,120		205,350		118,438		73,069		(3,363)		922,679		366,971		(400,085)		889,565
Depreciation included in Cost of sales		(21,539)		(29,477)		(31,698)		(39,422)		(14,033)		(15,496)		-		(151,665)		-		-		(151,665)
Write-down of inventory to net realisable value		-		(4)		71		(10,571)		269		(4,206)		3,363		(11,078)		-		-		(11,078)
Rehabilitation expenses		(847)		(878)		(295)		(423)		-		(1,430)		-		(3,873)		-		-		(3,873)
General, administrative and selling expenses,   excluding depreciation, amortization and share   based compensation		7,823		8,833		12,487		9,279		4,329		10,297		8,779		61,827		99,428		(38,323)		122,932
General, administrative and selling expenses		20,085		15,842		23,197		15,581		5,342		11,669		9,088		100,804		157,389		(76,545)		181,648
Intercompany SGA expenses		(10,322)		(6,545)		(10,211)		(6,219)		(858)		(1,161)		(147)		(35,463)		(2,759)		38,222		-
Depreciation included in SGA		(1,940)		(464)		(499)		(83)		(155)		(211)		(162)		(3,514)		(923)		-		(4,437)
Share based compensation		-		-		-		-		-		-		-		-		(54,279)		-		(54,279)
Other operating expenses excl additional tax charges		6,358		14,535		20,038		7,335		6,471		11,946		2,868		69,551		17,659		734		87,944
Other operating expenses		6,358		14,535		73,645		7,335		18,775		11,946		2,868		135,462		17,659		734		153,855
Mining taxes, penalties and accrued interest						(53,607)				(12,304)						(65,911)						(65,911)
Share of loss of associates and joint ventures																-		1,804				1,804
Adjusted EBITDA		173,539		177,685		378,158		124,200		100,441		34,732		(11,647)		977,107		(5,326)		(53,345)		918,436
Depreciation expense		23,479		29,941		32,197		39,505		14,188		15,707		162		155,179		923		-		156,102
Rehabilitation expenses		847		878		295		423		-		1,430		-		3,873		-		-		3,873
Write-down of inventory to net realisable value		-		4		(71)		10,571		(269)		4,206		(3,363)		11,078		-		-		11,078
Mining taxes, penalties and accrued interest (Note 13)		-		-		53,607		-		12,304		-		-		65,911		-		-		65,911
Share-based compensation		-		-		-		-		-		-		-		-		54,279		-		54,279
Operating profit / (loss)		149,213		146,862		292,130		73,701		74,218		13,389		(8,446)		741,066		(60,528)		(53,345)		627,193
Loss on disposal of subsidiaries																						(10,709)
Gain on acquisition of remaining interest in joint venture																						21,051
Foreign exchange																						6,677
Change in fair value of contingent consideration																						(4,717)
Finance income																						4,657
Finance costs																						(26,787)
Profit before tax																						617,365
Income tax expense																						(216,204)
Profit for the year attributable to the equity holders of the parent																						401,161
Current metal inventories		59,437		85,282		102,062		119,023		52,097		135,059		13,515		566,475		486		(4,557)		562,404
Current non-metal inventories		7,953		53,215		49,432		65,786		21,293		45,022		31,200		273,901		43,116		(19,565)		297,452
Non-current segment assets:
Property, plant and equipment, net		90,950		146,146		449,867		255,597		153,297		584,363		320,119		2,000,339		176,823		(27,762)		2,149,400
Goodwill				14,238		8,737				68,411				23,720		115,106						115,106
Non-current inventory		4,213		7,554		10,993		48,095		5,933		9,832		10,119		96,739		4,233		-		100,972
Investments in associates																		29,822				29,822
Total segment assets		162,553		306,435		621,091		488,501		301,031		774,276		398,673		3,052,560		254,480		(51,884)		3,255,157
Additions to non-current assets:
Property, plant and equipment		11,419		28,394		52,452		49,778		15,520		93,048		106,262		356,873		21,142		(5,700)		372,315
Acquired on acquistion of group of assets		-		-		-		-		-		-		-		-		10,270		-		10,270

For the year ended 31 December 2011  ($'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)		-
Cost of sales, excluding depreciation, depletion and write-down of inventory to net realisable value	93,635		88,582		207,526		66,008		91,613		27,810		-		575,174		368,128		(410,311)		532,991
Cost of sales	118,463		102,473		233,771		80,482		104,737		35,701		1,893		677,520		368,128		(410,311)		635,337
Depreciation included in Cost of sales	(23,091)		(15,563)		(22,650)		(11,035)		(12,701)		(7,493)		-		(92,533)		-		-		(92,533)
Write-down of inventory to net realisable value	16		2,476		(2,657)		(3,352)		(423)		(398)		(1,893)		(6,231)		-		-		(6,231)
Rehabilitation expenses	(1,753)		(804)		(938)		(87)		-		-		-		(3,582)		-		-		(3,582)
General, administrative and selling expenses,   excluding depreciation, amortization and share   based compensation	6,778		6,713		9,679		8,355		3,972		9,185		6,093		50,775		81,919		(33,906)		98,788
General, administrative and selling expenses	16,726		11,391		18,208		8,990		5,153		10,009		6,458		76,935		140,609		(57,518)		160,026
Intercompany expenses in SGA	(8,082)		(4,389)		(8,007)		(533)		(827)		(686)		(119)		(22,643)		(970)		23,612		(1)
Depreciation included in SGA	(1,866)		(289)		(522)		(102)		(354)		(138)		(246)		(3,517)		(604)		-		(4,121)
Share based compensation	-		-		-		-		-		-		-		-		(57,116)		-		(57,116)
Other operating expenses excl listing expenses	5,071		6,136		34,031		3,396		4,194		3,171		4,165		60,164		7,066		1,603		68,833
Other operating expenses	5,071		6,136		34,031		3,396		4,194		3,171		4,165		60,164		16,577		1,603		78,344
Listing expenses																	(9,511)				(9,511)
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)		2,691,654
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

4.     Revenue

Revenue analysed by geographical regions of customers is presented below:

		Year ended
		31 December 2012	31 December 2011
		US$'000	US$'000
Sales within the Russian Federation		1,055,569	859,720
Sales to China		178,059	119,823
Sales to Europe		219,546	207,184
Sales to Kazakhstan		396,543	136,660
Sales to other countries		2,495	-
Total metal sales		1,852,212	1,323,387
Other sales		1,853	3,043
Total		1,854,065	1,326,430

Metal sales to related parties (sales to Nomos-Bank) are disclosed in Note 19.

Included in revenues for the year ended 31 December 2012 are revenues which arose from sales to three of the Group's largest customers amounting to US$357 million, US$340 million and US$ 234 million, respectively (2011: US$258 million, US$242 million and US$137 million, respectively). No other customers individually account for more than 10% of the Group's revenues.

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

	Year ended 31 December 2012			Year ended 31 December 2011
	Thousand ounces/ tonnes (unaudited)	Average price (U.S. Dollar per troy ounce/tonne) (unaudited)	U.S. Dollars	Thousand ounces/ tonnes (unaudited)	Average price (U.S. Dollar per troy ounce/tonne) (unaudited)	U.S. Dollars
Gold (thousand ounces)	593	1,631	966,463	448	1,556	697,135
Silver (thousand ounces)	27,797	30	832,886	17,045	34	580,182
Copper (tonnes)	7,011	7,540	52,863	6,363	7,240	46,070
Total			1,852,212			1,323,387

5.     Cost of Sales

	Year ended
	31 December 2012	31 December 2011
	US$'000	US$'000
Cash operating costs
On-mine costs (Note 6)	404,726	319,740
Smelting costs (Note 7)	335,564	264,414
Purchase of ore from third parties	29,519	16,817
Purchase of ore from related parties	3,035	-
Mining tax	120,910	96,955
Total cash operating costs	893,754	697,926
Depreciation and depletion of operating assets (Note 8)	202,404	140,253
Rehabilitation expenses	3,873	3,583
Total costs of production	1,100,031	841,762
Increase in metal inventories	(223,640)	(215,492)
Write-down to net realisable value (Note 16)	11,078	6,232
Total change in metal inventories	(212,562)	(209,260)
Cost of other sales	2,096	2,835
Total	889,565	635,337

 Mining tax is a royalty payable in Russian Federation and Kazakhstan which is calculated based on the value of the precious metals extracted in the period. This value is usually determined based on the realised selling price of precious metals or, in case if there were no sales during the period, cost of sales of metals extracted (Russian Federation) or the average market price (Kazakhstan) during the period.

Mining tax in respect of the metal inventories produced during the year is recognised within cost of sales, while the additional mining tax accruals in respect of various disputes with tax authorities are recognised within other expenses (see Note 10).

6.     On-mine costs

	Year ended
	31 December 2012	31 December 2011
	US$'000	US$'000
Consumables and spare parts	137,788	110,695
Services	161,533	120,398
Labour	100,127	83,299
Taxes, other than income tax	1,168	1,839
Other expenses	4,110	3,509
Total (Note 5)	404,726	319,740

7.     Smelting costs

	Year ended
	31 December 2012	31 December 2011
	US$'000	US$'000
Consumables and spare parts	138,258	117,407
Services	137,339	97,666
Labour	57,063	47,088
Taxes, other than income tax	902	178
Other expenses	2,002	2,075
Total (Note 5)	335,564	264,414

8.     Depletion and depreciation of operating assets

	Year ended
	31 December 2012	31 December 2011
	US$'000	US$'000
Mining	141,491	106,402
Smelting	60,913	33,851
Total (Note 5)	202,404	140,253

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 3), also excludes amounts absorbed into unsold metal inventory balances.

9.     General, administrative and selling expenses

	Year ended
	31 December 2012	31 December 2011
	US$'000	US$'000
Labour	92,429	72,291
Services	18,430	14,580
Share based compensation	54,279	57,116
Depreciation	4,437	4,122
Other	12,073	11,917
Total	181,648	160,026

10.    Other expenses

	Year ended
	31 December 2012	31 December 2011
	US$'000	US$'000
Taxes, other than income tax	14,205	11,278
Mining taxes, penalties and accrued interest (Note 13)	65,911	-
Listing expenses	-	9,511
Exploration expenses	32,908	30,212
Social payments	10,544	8,692
Housing and communal services	7,860	6,357
Loss on disposal of property, plant and equipment	9,325	6,203
Bad debt allowance	267	(1,171)
Other expenses	12,835	7,262
Total	153,855	78,344

Exploration expenses include an $5.8 million write down of evaluation and exploration assets relating to the Corporate and other segment, where management have decided to suspend development activities relating to the Fevralskoye field.

Mining taxes, penalties and accrued interest have been accrued in respect of various disputes with the Russian and Kazakh tax authorities. The background to these cases and their impact on the results of the Group has been set out in more detail within Note 13. US$26.9 million was paid during the year ended 31 December 2012, US$39 million represents accrued expenses as of 31 December 2012 (see Note 20).

11.    Employee costs

The weighted average number of employees during the year ended December 2012 was:

	Year ended
	31 December 2012	31 December 2011
	Number	Number
Voro	901	848
Khakanja	1,132	1,021
Dukat	1,926	1,824
Omolon	1,027	913
Varvara	695	657
Amursk-Albazino	1,119	897
Mayskoye	759	617
Corporate and other	1,434	1,274
Total	8,993	8,051

	Year ended
	31 December 2012	31 December 2011
	US$'000	US$'000
Wages and salaries	252,152	204,379
Social security costs	53,963	40,040
Share-based payment	54,279	57,116
Total payroll costs	360,394	301,535
Reconciliation:
Less: employee costs capitalised	(50,021)	(30,250)
Less: employee costs absorbed into unsold metal inventory balances.	(27,590)	(30,935)
Employee costs included in operating costs	282,783	240,350

Compensation for key management personnel is disclosed within Note 19.

12.    Finance Costs

	Year ended
	31 December 2012	31 December 2011
	US$'000	US$'000
Interest expense on borrowings	18,523	20,074
Unwinding discount on borrowings	4,643	5,344
Unwinding of discount on environmental obligations	3,621	3,328
Total	26,787	28,746

Interest expense on borrowings excludes borrowing costs capitalised in the cost of qualifying assets of US$14.7 million and US$12.5 million during the years ended 31 December 2012 and 2011, respectively. These amounts were calculated based on the Group's general borrowing pool and by applying an effective interest rate of 3.06% and 2.81%, respectively, to cumulative expenditure on such assets.

13.    Income Tax

The income tax expense for the year ended 31 December 2012 is as follows:

	Year ended
	31 December 2012	31 December 2011
	US$'000	US$'000
Current income taxes	174,443	127,671
Excess profit taxes payable in Kazakhstan	17,111	-
Income tax expense arising in respect of lost litigation	27,475	-
Deferred income taxes	(2,825)	(8,686)
	216,204	118,985

A reconciliation between the reported amount of income tax expense attributable to profit before income for the year ended 31 December 2012 is as follows:

	Year ended
	31 December 2012	31 December 2011
	US$'000	US$'000
Profit before income tax	617,365	408,847
Statutory income tax expense at the tax rate of 20%	123,473	81,769
Loss incurred in tax-free jurisdictions	(4,336)	5,998
Share-based compensation	10,856	11,423
Excess profit taxes payable in Kazakhstan	17,111	-
Income tax arising in respect of lost litigation	27,475	-
Income tax provision in respect of other exposures	5,055	-
Tax effect of non-deductible expenses and other permanent differences	36,570	19,795
Total income tax expense	216,204	118,985

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 CJSC Gold of Northern Urals, CJSC Magadan Silver for the period up to 2009, LLC Okhotskaya Mining and Exploration Company 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.

Income Tax and other expenses arising in respect of lost litigation

The additional income tax charges incurred in respect of litigations in the year total US$27.5 million and comprise US$14.5 million in respect of a case concerning Magadan Silver sales to ABN AMRO in 2007 and US$13.0 million in respect of cases relating to the deductibility of transportation and processing expenses and of foreign exchange losses in Varvara. Including US$5 million of additional income tax exposures provided for and US$17.1 million excess profit tax in Kazakhstan recognised for the first time in 2012, there was total additional income tax expense of US$49.6 million in the year.

The Group has also provided for mining taxes, interest and penalties totaling US$65.9 million which are recognised within Other Operating Expenses (see Note 10). These expenses comprised US$15.0 million in respect of the Magadan Silver / ABN AMRO case, US$9.2 million in respect of the Magadan Silver MET case, US$10.1 million in respect of Varvara litigation and US$31.6 million  in respect of other exposures. These principal cases are described below. Other exposures considered possible but not probable and therefore not provided for total to US$3 million and are described in Note 28, Contingent Liabilities.

Magadan Silver litigation in respect of ABN AMRO sales

On 10 July 2012, the Supreme Arbitration Court of the Russian Federation (SAC) made a final ruling on the tax dispute between CJSC Magadan Silver, a subsidiary of the Group, and tax authorities in relation to the sale of silver by the Group in 2007 pursuant to certain sale contracts with ABN AMRO Bank.

As a consequence of the Supreme Arbitration Court decision, the Group recognised in full the tax liabilities, interest and penalties of US$29.5 million indicated in the judgment. This amount comprised US$14.5 million in income tax and US$15.0 million in mining taxes, penalties and accrued interest (see Note 10).

Varvara Litigation

On 5 November 2012 the Kostanay regional court (in Kazakhstan) issued a ruling on the tax dispute between JSC Varvarinskoye and the tax authorities in respect of the deductibility of non-cash foreign exchange losses and of transportation, treatment and refining charges levied by copper concentrate off-takers. As a consequence of the regional court's decision, the Group recognised liabilities of US$23.1 million as indicated in the judgement. The liability comprised US$13.0 million in income tax and US$10.1 million in penalties and accrued interest, recognised within Other Operating Expenses (see Note 10).

Magadan Silver litigation in respect of Mineral Extraction Tax ("MET")

In March 2012, a field tax audit was concluded in relation to CJSC Magadan Silver with respect to all taxes, duties and contributions to social funds for the period 1 January 2008 to 31 December 2009. As a result of this audit the tax authorities issued an assessment in relation to the alleged misapplication of technical loss limits in the calculation of mineral extraction tax. The case has been heard by the first level of the Russian courts, which ruled in favour of the tax authorities on 21 January 2013. Whilst the Group intends to appeal the decision to the next court, it has provided for liabilities arising comprising US$6.5 million in respect of mineral extraction taxes, and related interest and penalties of US$2.7 million. These amounts are recognised within Other Operating Expenses (see Note 10).

Other Exposures

At 31 December 2012 the Group has raised an additional provision for certain additional exposures of US$5.0 million in respect of income tax and US$31.6 million in respect of other taxes it considers will likely be payable, plus related interest and penalties. These amounts are recognised within Other Operating Expenses (see Note 10).

Excess Profit taxes in Kazakhstan

Under Kazakhstan law, excess profit taxes arise where a company's profit for the year after tax exceeds 25% of allowable contractual expenses incurred, which was the case for Varvara in 2012. Excess profit tax is calculated on a sliding scale; the additional current tax charge accrued for the year was $17.1 million.

Deferred taxation

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 2012
	10,990	(7,822)	(78,023)	4,521	53,661	(2,624)	2,073	(17,224)
Charge/(credit) to income statement	1,654	(13,484)	4,576	1,343	2,068	926	5,743	2,826
Disposal	-	369	2,201	88	1,378	-	(578)	3,458
Exchange differences	699	(1,528)	(8,064)	126	514	(136)	1,415	(6,974)
At 31 December 2012	13,343	(22,465)	(79,310)	6,078	57,621	(1,834)	8,653	(17,914)

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

	Year ended
	31 December 2012	31 December 2011
	US$'000	US$'000
Deferred tax liabilities	(75,938)	(79,342)
Deferred tax assets	58,024	62,118
	(17,914)	(17,224)

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, Amursky Hydrometallurgy Plant 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 2012 and 31 December 2011 the aggregate tax losses carried forward were US$288.1 million (RUB 8.8 billion) and US$268.3 million (RUB 8.6 billion), respectively.

The Group believes that recoverability of the recognized net deferred tax asset (DTA) of US$57.6 million at 31 December  2012 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 2012. 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 related detailed mine plans and forecasts provide sufficient supporting evidence that the Group will generate 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 2012
	US$'000
Year ended 31 December 2014	2,888
31 December 2015	7,981
31 December 2016	6,692
31 December 2017	9,982
31 December 2018	28,792
31 December 2019	30,451
31 December 2020	42,087
31 December 2021	60,436
31 December 2022	98,794
Total loss carried forward for tax purposes	288,103

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$1,712 million (2011: US$1,066.3 million).

14.    Dividends

On 14 June 2012 a dividend of 20 cents per share was paid to shareholders by the Company resulting in cash outflows of US$76.5 million. No dividends were paid in 2011.

On 5 December 2012, the Board approved the payment of a special dividend of US$0.50 per ordinary share, which will result in a cash outflow of $191 million. The dividend was paid on 21 January 2013.

A final dividend has been proposed in relation to the year of 31 cents per share (2011: 20 cents per share) giving a total expected dividend of US$119 million (2011: US$76.5 million). 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.

15.    Investments in Associates and Joint Ventures

The Group's investments in joint ventures and associates as at 31 December 2012 and 2011 consisted of the following:

		31 December 2012			31 December 2011
		Voting power %	Carrying Value		Voting power %	Carrying Value
			US$'000			US$'000
ASSOCIATES
JSC Ural-Polymetal		33.3	10,507		33.3	11,152
Polygon Gold		42.65	19,315		-
JOINT VENTURES
JV with AngloGold Ashanti Limited		-	-		50	12,406
			29,822			23,558
Total

Joint venture with AngloGold Ashanti Limited

In February 2008, the Company signed an agreement to set up a strategic alliance and entered into a series of joint ventures with AngloGold Ashanti Limited with each party owning 50% of each joint venture. The joint ventures were created in order to execute development projects in several territories of the Russian Federation.

On 7 February 2012, the Company acquired AngloGold's 50% equity interest and debt investments in the various joint venture companies held with Polymetal (Note 2). The principal company acquired was Amikan Holding Limited, which owns the Veduga gold deposit in the Krasnoyarsk region of the Russian Federation, with other entities acquired not holding any material assets or liabilities. The consideration for the acquisition was US$20 million in cash comprising US$18.4 million for the equity and US$1.6 million for debt investment in Amikan. At the acquisition date, the Group's existing 50% investment had a carrying value of US$14.2 million together with a loan asset of US$6.9 million. The transaction costs were nil. Amikan Holding Limited meets the definition of a business under IFRS 3 (2008) Business combinations and the transaction was accounted for using the acquisition method. The allocation of the purchase price based on the consideration paid and on the fair value of Amikan net assets acquired is as follows:

	Pre-transactionbook value US$'000		Fair value adjustment US$'000		Fair value US$'000
Exploration and development	20,188		47,654		67,842
Deferred tax asset	3,577		-		3,577
Other assets (net)	230		-		230
Borrowings	(8,464)		-		(8,464)
Deferred tax liability	-		(9,531)		(9,531)
Net assets acquired	15,531		38,123		53,654
Debt investment acquired					1,572
					55,226
Satisfied by:
Carrying value of investment in JV held previously					14,175
Consideration paid in cash					20,000
Revaluation to fair value of previously held interest					12,651
Bargain purchase gain (negative goodwill)					8,400
Total					55,226

The total gain on acquisition of the remaining interest in the joint venture was US$21.1 million, comprising a US$12.7 million revaluation to fair value of previously held interest and a bargain purchase gain of US$8.4 million. The bargain purchase gain resulted from AngloGold Ashanti Limited strategic decision to exit the Russian Federation.

 

Equity investment in Polygon Gold Inc.

Polygon Gold Inc. ("Polygon"), a private shell company, was initially set up between Polymetal and Tyner Enterprises Inc. ("Tyner") who initially held 250 and 100 shares respectively in the new venture. Tyner is controlled and managed by Len Homeniuk, a non-executive Director of Polymetal International plc.

On 14 May 2012, Polymetal sold 100% of Amikan Holding Limited to Polygon in exchange for consideration of US$20 million in cash and 750 ordinary shares of Polygon. In addition, Sibproekt LLC ("Sibproekt"), an unrelated local partner, provided a US$21 million loan to Polygon and received 100 newly issued Polygon shares for no consideration. This resulted in Polymetal holding an initial 81.8% equity ownership in Polygon. Under the new shareholder agreement, Polymetal obtained one of the four board seats giving it significant influence.

On 4 June 2012, Polygon's share capital was increased to 1,571 shares by the issuance of 471 new shares to an affiliate of Gazprombank OJSC ("Gazprombank") for a total consideration of US$14.2 million paid in cash. The proceeds from the offering will be used to finance the Veduga project and repay part of Polygon's debt. In addition, Gazprombank has expressed an interest in providing project financing to Polygon to develop Veduga into a producing mine.

On 7 June 2012, Polymetal sold 230 of its shares in Polygon to Sibproekt for a total consideration of US$8.0 million payable in cash, US$5 million of which was paid with US$3.0 million payable by 28 February 2013.

The Group's equity ownership in Polygon Gold Inc. had now decreased to 42.65%. It continued to exercise significant influence over Polygon.

In addition, the Group has provided a US$10 million convertible debt facility to Polygon (see Note 19).

The effects of these transactions are shown on a combined basis below:

		US$'000
Net assets of subsidiary disposed of (100% basis)		53,654
Intercompany debt asset transferred to Polygon		3,331
Less fair value of interest in associate undertaking retained		(20,201)
Net assets disposed of		36,784
Loss on disposal		(8,784)
Total consideration		28,000
Less unpaid consideration		(3,000)
Proceeds from disposal of subsidiary		25,000

The above loss on disposal arose partly due to the 6.4% interest in Polygon, which has a fair value of $3 million, being transferred to Tyner, a related party, for a cash consideration of US$ nil in exchange for introducing the other funding partners into the project and for assuming an ongoing management role. The remaining loss arose principally due to the dilution in Polymetal's economic interest as a result of the 100 shares being issued to Sibproekt on 14 May 2012 for no consideration. The Group considers that Sibproekt's local operating expertise will though be of significant benefit to the project.

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 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% of Ural-Polymetal, respectively,. 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 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:

	Polygon Gold Inc		AngloGold Ashanti Limited		JSC Ural-Polymetal
	31 December		31 December		31 December	31 December
	2012		2011		2012	2011
	US$'000		US$'000		US$'000	US$'000
Non-current assets	68,609		89,159		48,894	45,925
Current assets	13,731		477		12,970	9,229
Non-current liabilities	(18,150)		(25,013)		(10,237)	(7,582)
Current liabilities	(19,844)		(2,592)		(14,651)	(12,198)
Equity	(44,347)		(62,031)		(36,975)	(35,374)

	Polygon Gold Inc		AngloGold Ashanti Limited		JSC Ural-Polymetal
	31 December 2012		31 December 2011		31 December 2012	31 December 2011
	US$'000		US$'000		US$'000	US$'000
Revenue	-		-		40,794	3,266
Net (loss)/ income	(1,658)		(1,820)		(3,660)	944
Group's share in joint venture's net (loss)/income	(706)		(910)		(1,098)	315

16.    Inventories

	31 December 2012		31 December 2011
	US$'000		US$'000
Inventories expected to be recovered after twelve months
Consumables and spare parts	62,401		44,318
Ore stock piles	38,571		13,904
Total non-current inventories	100,972		58,222
Inventories expected to be recovered in the next twelve months
Ore stock piles	297,753		202,339
Сopper, gold and silver concentrate	146,406		72,973
Work in-process	65,737		48,859
Metal for refinery	21,439		17,718
Dore	31,045		22,889
Refined metals	24		24
Total metal inventories	562,404		364,802
Consumables and spare parts	297,452		234,510
Total	859,856		599,312

At 31 December  2012 the gold and silver concentrate included US$50.2 million (31 December 2011: US$45.3 million) in respect of Dukat and Amursk-Albazino. In addition, the Group has presented separately the metal for refining.  Previously these amounts were included within work in-process. The comparative figures have been adjusted to be presented on a consistent basis.

At 31 December 2012 US$39 million of ore stock piles at Omolon were classified as non-current inventories following management's assessment that these stock piles will be processed starting from 2016 (31 December 2011: US$14 million). Previously these amounts were included within current metal inventories. The comparative figures have been adjusted to be presented on a consistent basis.

During the year ended 31 December 2012, the Group recognised a US$4 million write-down to net realisable value of its concentrate and dore in Amursk-Albazino and US$10 million write-down to net realisable value of its ore stock piles at Omolon due to low content of precious metals. During the year ended 31 December 2011, the Group recognised a US$2.8 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.

In addition, during the year ended 31 December 2012 the Group wrote-down US$5 million of costs (2011: US$3.5 million) in Omolon which did not significantly enhance the value of the ore stock piles.

During the year ended 31 December 2012 the Group reversed previous obsolescence provisioning against consumables and spare parts inventory in the amount of US$3 million (year ended 31 December 2011: reversal of US$0.6 million).

The amount of inventories held at net realisable value at 31 December 2012 is US$145.4 million  (31 December 2011: nil).

17.    Borrowings

Borrowings at amortised cost:

		Actual interest rate at 31 December
					31 December 2012				31 December 2011
	Type of rate	2012	2011		Current	Non-current	Total		Current	Non-current	Total
					US$'000	US$'000	US$'000		US$'000	US$'000	US$'000
Secured loans from third parties
U.S. Dollar denominated	floating	3.1%	3.26%		222,874	485,862	708,736		337,346	615,574	952,920
Total					222,874	485,862	708,736		337,346	615,574	952,920
Unsecured Loans from third parties
U.S. Dollar denominated	floating	2.8%	-		-	100,000	100,000		-	-	-
U.S. Dollar denominated	fixed	7.35%	-		6,859	7,712	14,571		-	-	-
Euro denominated	floating	2.8%	3.1%		5,306	7,243	12,549		2,693	12,161	14,854
Total					12,165	114,955	127,120		2,693	12,161	14,854
Loans from related patries
Euro denominated	floating	4.4%	5.5%		8,583	15,932	24,515		8,048	23,956	32,004
CAD denominated	floating	8%	8%		589	711	1,300		342	1,116	1,458
RUB denominated	fixed	5.7%	4.3%		-	2,152	2,152		-	1,859	1,859
Total					9,172	18,795	27,967		8,390	26,931	35,321
					244,211	619,612	863,823		348,429	654,666	1,003,095

Bank loans

The Group has a number of borrowing arrangements with various lenders. These borrowings consist of unsecured and secured loans and credit facilities denominated in Rubles, U.S. Dollars, Euro  and Canadian Dollars. .Where security is provided it is in form of pledge of revenue from certain sales agreements.

During  the year ended 31 December 2012, the Group drew down a total of US$1,236 million and repaid US$1,385 million, a net repayment of US$145 million.

The Group secured three new facilities in the period for a total amount of US$300 million with unrelated parties. Two credit facilities were fully drawn down in the period. The credit facilities are repayable in thirteen and six equal quarterly instalments respectively starting from first quarter 2014. Interest is payable quarterly.

Another credit facility was drawn down in amount of US$7.7 million and is payable in nine quarterly instalments starting from second quarter 2018. Interest is payable quarterly.

Included in the US$1,385 million was the repayment of the Otkritie "REPO" facility of US$250 million in February 2012.

As at 31 December 2012, the Group has US$913 million of undrawn funds available under its credit facilities (2011: US$803 million). The most significant financial covenant in place is that the ratio of net debt to EBITDA must not exceed 3.25.

During the years ended  31 December 2012 and 2011, the Group was in compliance with its debt covenants.

The table below summarises maturities of borrowings:

Year ended 31 December	US$'000
2013	244,211
2014	312,481
2015	259,805
2016	31,922
2017	7,692
2018	2,571
2019	3,427
2020	1,714
Total	863,823

 

18.    Stated capital account and retained earnings

As at 31 December 2012, the Company's issued share capital consisted of 520,422 ordinary shares (2011: 53,350,000 ordinary shares) of no par value, each carrying one vote. The Company does not hold any shares in treasury (2011: none). 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 no. of shares		Stated capital account, US$'000
	no. of shares		no. of shares
Balance at 1 January 2011	n/a		-	-		865,483
Issue of treasury shares in exchange for assets	-		-	-		66,966
Amortisation of bonus received from depository	-		-	-		819
Issuance of ordinary shares under ISSF	332,641,770		-	332,641,770		-
Issuance of share 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	382,685,782		-	382,685,782		1,566,386
Issue of shares in exchange for assets	520,422		-	520,422		9,737
Balance at 31 December 2012	383,206,204		-	383,206,204		1,576,123

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.

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 2012		31 December 2011
Weighted average number of outstanding common shares	382,705,692		366,969,369
Dilutive effect of share appreciation plan	-		25,875,610
Weighted average number of outstanding common shares after dilution	382,705,692		392,844,979

There were no adjustments required to earnings for the purposes of calculating dilutive Earnings per share in the current year (2011: nil).

The Group has certain share based payment awards, issued, in 2010, which currently vest in line with the Company's weighted average share price over a six month period from December 2012 to June 2013 against a fixed target (for further details see Note 32). Based on the Company's share price in the equivalent six month period to 31 December 2012 then these awards are not dilutive for the purposes of calculating diluted EPS and accordingly, both Basic and Diluted EPS are identical for the year ended 31 December 2012.

These awards were dilutive for the year ended 31 December 2011. The dilutive effect of equity-settled share appreciation rights has been calculated using the treasury stock method.

19.    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
	31 December 2012		31 December 2011
	US$'000			US$'000
Income from transactions with related parties
Revenue from sales to Nomos-Bank	466,250			258,794
Interest income on deposits placed with Nomos-Bank	1,500			-
Other income from equity method investments	3,680			1,559
Expenses from transactions with related parties
Interest expense on loans provided by Nomos-Bank	2,016			2,339
Purchases from equity method investments	3,035			-
Lease payments to Nomos Leasing	-			5,082

Outstanding balances owed to or from related parties at 31 December 2012 are presented below:

	31 December 2012		31 December 2011
	US$'000		US$'000
Short-term loans provided to equity method investments	11,792		315
Long-term loans provided to equity method investments	5,469		6,303
Short-term loans provided to entity under common control	-		1,522
Total loans provided to related parties	17,261		8,140
Short-term loans provided by Nomos-Bank	9,172		8,318
Long-term loans provided by Nomos-Bank	16,643		25,223
Long-term loans provided by equity method investments	2,152		1,860
Total loans provided by related parties	27,967		35,401
Accounts receivable from related parties	4,717		2,940
Interest receivable from related parties	836		1,573

Carrying values of other long-term loans provided to related parties as at 31 December 2012 and 31 December 2011 approximate their fair values. Details of the significant terms of the loans provided by related parties are disclosed in Note 17.

In the year, the Group entered into an agreement with Tyner Enterprises , an entity controlled by Leonard Homeniuk, a non-executive director of Polymetal. As set out in Note 15, on 14 May 2012, a 6.4% interest in a new venture, Polygon, was transferred to Tyner and a put option on those shares was granted.

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 2012		31 December 2011
	US$'000		US$'000
Share-based payments	27,682		28,901
Short-term benefits of board members	2,454		2,278
Short-term employee benefits	2,981		1,779
Post-employment benefits	264		70

* Key management personnel of the Group are considered to be the Directors of the Company and the Directors of JSC Polymetal.

20.    Notes to the unaudited consolidated Statement of Cash Flows

	Notes		Year ended		Year ended
			31 December 2012		31 December 2011
			US$'000		US$'000
Profit before tax			617,365		408,847
Adjustments for:
Depreciation and depletion, recognised in statement of comprehensive income			156,102		96,654
Mining taxes, penalties and accrued interest	10		39,150		-
Write-down of exploration assets			7,654		13,263
Write-down of inventory to net realisable value	5		11,078		6,232
Share-based compensation			54,279		57,116
Finance costs	12		26,787		28,746
Finance income	12		(4,657)		(4,208)
Loss on disposal of property, plant and equipment	10		9,325		6,203
Change in contingent consideration liability			4,717		6,828
Change in allowance for doubtful debts	10		267		(1,171)
Rehabilitaion expenses			3,873		2,862
Loss from equity method investments	15		1,804		1,952
Change in fair value of derivatives			-		1,855
Foreign exchange (gain) / loss			(6,677)		13,634
Profit/(Loss) on disposal of subsidiaries	2		10,709		(4,931)
Gain on acquisition of remaining interest in joint venture	15		(21,051)		-
Other non-cash expenses			5,152		1,388
Movements in working capital
Increase in inventories			(219,678)		(225,751)
Decrease /(increase)in VAT receivable			14,262		(22,766)
Increase in trade and other receivables			(34,284)		(19,699)
Decrease/(Increase) in prepayments to suppliers			9,307		(11,437)
Increase in trade and other payables			7,305		6,394
Increase in other taxes payable			8,480		8,676
Cash generated from operations			701,269		370,687
Interest paid			(34,629)		(32,414)
Income tax paid			(170,805)		(126,317)
Net cash generated by operating activities			495,835		211,956

Additions to property, plant and equipment of US$8 million and US$16.9 million during the year ended 31 December 2012 and 31 December 2011, respectively were acquired on deferred payment terms.

Other non-cash transactions during the year ended 31 December 2012 includes the issuance of $1.5 million of shares for the acquisition of assets in 2012 (2011: the issuance of $67.0 million of treasury shares for the acquisition of assets.

21.    Subsequent Events

On 24 January 2013 the Group completed the acquisition of 100% of Olymp Ltd., a Russian legal entity holding the mining and exploration licence for the Olcha gold-silver deposit in exchange for 775,000 new ordinary shares in Polymetal. Following the admittance of the newly-issued shares to trading, the total issued share capital of the Company comprised 383,981,204 shares.

Olymp Ltd. does not meet the definition of a business pursuant to IFRS 3 (2008) thus it is accounted for as an acquisition of a group of assets. The Group purchased mineral rights of US$13.4 million and other current liabilities of $(0.01) million.

On 20 February 2013 the Group has entered into a binding memorandum of understanding with Vitalex Investments Ltd and Arrowline Investments Ltd to acquire a 100% interest in ZAO "Maminskaya Gornorudnaya kompania"("MGK"), which holds an exploration and mining licence for the Maminskoye gold mining field ("Maminskoye") valid until 2023.

The total consideration payable for the shares in MGK at completion is equal to approximately US$77.2 million, being the agreed enterprise value reduced by the amount of debt of MGK outstanding at completion (estimated to be US$18.3 million). The consideration will consist of US$3.9 million payable in cash, with the balance of US$73.3 million payable in Polymetal's shares. The exact number of Polymetal shares to be issued to the sellers will be based on the weighted average price of a Polymetal share on the London Stock Exchange in US dollars during the 30 calendar days prior to completion. Completion is conditional on prior approval by the Federal Antimonopoly Service of the Russian Federation, completion by MGK of the acquisition of the site as described below, and necessary MGK lenders' consents. The long-stop date for satisfaction of these conditions is 30 April 2013.

A final dividend has been proposed in relation to the year of 31 cents per share (2011: 20 cents per share) giving a total expected dividend of US$119 million (2011: US$76.5 million). 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.

Reserves and resources

Mineral Resources and Ore Reserves as at 1 January 2013 ⁽¹⁾ 

	Tonnage	Content
	Kt	Au, Koz	Ag, Koz	Cu, Kt	Pb, Kt	Zn, Kt	Gold equivalent, Koz
Mineral Resources
Measured	13,496	683	36,911	17	10	-	1,385
Indicated	51,721	2,936	54,340	84	36	25	4,260
Measured + Indicated	65,217	3,619	91,251	101	46	25	5,645
Inferred	111,918	11,266	54,852	180	41	3	13,082
Measured + Indicated + Inferred	177,136	14,885	146,103	281	87	28	18,727
Ore Reserves
Proved	61,653	5,373	186,921	12	12	-	8,548
Probable	57,760	4,224	120,706	71	11	-	6,590
Proved + Probable	119,413	9,597	307,627	83	23	-	15,138

¹ Mineral Resources and Ore Reserves are reported in accordance with the JORC Code (2004). Mineral Resources are in addition to Ore Reserves. Discrepancies in calculations are due to rounding.

Ore Reserves: Precious Metals Deposits as at 1 January 2013 ⁽¹⁾

Ore Reserves	Tonnage	Grade			Content
	Kt	Au, g/t	Ag, g/t	GE, g/t	Au, Koz	Ag, Koz	GE, Koz
Proved
Dukat (2)	9,200	0.9	451	8.4	254	133,382	2,477
Voro (3)	14,500	2.9	4	2.9	1,340	1,744	1,369
Lunnoye	1,640	1.6	253	5.8	83	13,341	305
Arylakh	220	0.6	307	5.8	5	2,206	41
Khakanja	1,670	2.0	154	4.6	108	8,274	246
Mayskoye (4)	2,699	9.7	-	9.7	839	-	839
Albazino	9,280	4.5	-	4.5	1,329	-	1,329
Sopka Kvartsevaya	3,510	2.5	103	4.3	285	11,652	480
Birkachan (5)	6,750	1.6	5	1.7	353	1,164	372
Dalniy	1,960	3.5	85	4.9	218	5,344	307
Tsokol Kubaka	390	6.4	11	6.6	81	134	83
Ozerny	560	5.4	34	6.0	97	615	108
Avlayakan	160	14.9	95	16.5	74	475	82
Total Proved	52,539			4.8	5,066	178,331	8,038
Probable
Dukat (2)	5,200	1.2	448	8.7	202	74,837	1,449
Lunnoye	1,720	1.0	363	7.1	56	20,052	391
Arylakh	300	1.1	807	14.6	11	7,900	143
Khakanja	140	4.0	195	7.3	18	880	33
Mayskoye (4)	5,178	9.5	-	9.5	1,587	-	1,587
Albazino	4,110	3.8	-	3.8	502	-	502
Sopka Kvartsevaya	180	3.9	146	6.3	22	837	36
Birkachan (5)	5,440	3.4	15	3.6	592	2,548	635
Tsokol Kubaka	710	6.1	11	6.3	139	245	143
Ozerny	240	4.9	35	5.5	38	267	42
Avlayakan	270	22.1	181	25.1	193	1,579	219
Total Probable	23,488			6.9	3,361	109,145	5,180
Proved + Probable
Dukat (2)	14,400	1.0	450	8.5	455	208,219	3,926
Voro (3)	14,500	2.9	4	2.9	1,340	1,744	1,369
Lunnoye	3,360	1.3	309	6.4	139	33,393	696
Arylakh	520	0.9	595	10.9	16	10,105	184
Khakanja	1,810	2.2	157	4.8	126	9,154	279
Mayskoe (4)	7,877	9.6	-	9.6	2,426	-	2,426
Albazino	13,390	4.3	-	4.3	1,831	-	1,831
Sopka Kvartsevaya	3,690	2.6	105	4.4	308	12,489	516
Birkachan (5)	12,190	2.4	10	2.6	945	3,712	1,007
Dalniy	1,960	3.5	85	4.9	218	5,344	307
Tsokol Kubaka	1,100	6.2	11	6.4	220	379	226
Ozerny	800	5.3	34	5.8	135	882	150
Avlayakan	430	19.4	150	21.9	267	2,055	301
Total Proved + Probable	76,027			5.4	8,427	287,475	13,218

¹ Ore Reserves are reported in accordance with the JORC Code (2004). Discrepancies in calculations are due to rounding

² Including Nachalny-2

³ Including Voro South

⁴ Estimate prepared by Snowden as at 01.07.2011 Price: Au=900 $/oz

⁵ Ore Reserves for underground mining were not re-estimated. Previous estimation as at 01.07.2011 by SRK Consulting is left. Price: Au=900 $/oz and Ag=14.5 $/oz.

Ore Reserves: Polymetallic Ore Deposits as at 1 January 2013 ⁽¹⁾

Ore Reserves	Tonnage	Grade					Content
	Kt	Au, g/t	Ag, g/t	Cu, %	Pb, %	GE, g/t	Au, Koz	Ag, Koz	Cu, Kt	Pb, Kt	GE, Koz
Proved
Goltsovoye (2)	404	-	661	-	3.08	11.0	-	8,590	-	12.4	143
Varvara (3)	8,710	1.1	-	0.55	-	1.3	307	-	11.9	-	367
Total Proved	9,114					1.7	307	8,590	11.9	12.4	510
Probable
Goltsovoye (2)	492	-	732	-	2.18	12.2	-	11,562	-	10.7	193
Varvara (3)	33,780	0.8	-	0.44	-	1.1	863	-	71.0	-	1,218
Total Probable	34,272					1.3	863	11,562	71.0	10.7	1,410
Proved + Probable
Goltsovoye (2)	896	-	700	-	2.58	11.7	-	20,152	-	23.2	336
Varvara (3)	42,490	0.9	-	0.45	-	1.2	1,170	-	82.9	-	1,585
Total Proved + Probable	43,386					1.4	1,170	20,152	82.9	23.2	1,920

¹Ore Reserves are reported in accordance with the JORC Code (2004). Discrepancies in calculations are due to rounding

²Estimate prepared by Wardell Armstrong at Ag price = US$ 23/ oz and Pb price = US$ 1800/t. Lead is not included in gold equivalent calculation.

³Cu grade only represents average grade of Float feed. Ore Reserves of Float feed: 2.1 Mt Proved and 16.2 Mt Probable.

Mineral Resources: Precious metals as at 1 January 2013 ⁽¹⁾

Mineral Resources	Tonnage	Grade			Content
	Kt	Au, g/t	Ag, g/t	GE, g/t	Au, Koz	Ag, Koz	GE, Koz
Measured
Dukat (2)	2,450	0.6	298	5.6	48	23,463	439
Voro (3)	1,390	1.5	4	1.5	66	161	69
Lunnoye	370	1.5	241	5.5	18	2,869	66
Arylakh	140	0.8	301	5.8	3	1,270	25
Khakanja	220	2.6	166	5.4	19	1,175	38
Mayskoye (4)	463	6.3	-	6.3	93	-	93
Albazino (5)	1,730	4.0	-	4.0	223	-	223
Sopka Kvartsevaya	190	1.9	78	3.2	11	467	19
Birkachan (6)	660	0.9	6	1.0	19	120	21
Dalniy	430	2.0	41	2.7	28	572	38
Tsokol Kubaka	20	5.7	11	5.9	4	8	4
Avlayakan	20	11.0	133	13.2	7	89	9
Ozerny	220	2.5	26	2.9	18	187	21
Total Measured	8,303			4.0	558	30,381	1,064
Indicated
Dukat (2)	1,790	0.6	317	5.9	35	18,226	339
Lunnoye	480	0.9	286	5.7	14	4,420	88
Arylakh	190	0.7	417	7.6	4	2,474	45
Khakanja	80	3.4	145	5.9	9	374	15
Mayskoye (4)	1,642	6.1	-	6.1	324	-	324
Albazino (5)	10,750	4.3	-	4.3	1,498	-	1,498
Sopka Kvartsevaya	30	2.9	110	4.7	3	118	5
Birkachan (6)	1,320	1.2	8	1.4	53	340	59
Dalniy	200	2.2	46	3.0	14	295	19
Oroch (7)	1,365	3.3	143	5.6	143	6,284	247
Tsokol Kubaka	140	4.9	9	5.1	22	41	22
Avlayakan	80	12.6	97	14.2	31	236	35
Ozerny	490	2.9	13	3.2	46	206	50
Total Indicated	18,557			4.6	2,197	33,014	2,747
Measured + Indicated
Dukat (2)	4,240	0.6	306	5.7	83	41,690	778
Voro (3)	1,390	1.5	4	1.5	66	161	69
Lunnoye	850	1.2	267	5.6	33	7,289	154
Arylakh	330	0.7	369	6.9	7	3,744	70
Khakanja	300	2.8	161	5.5	27	1,549	53
Mayskoye (4)	2,105	6.2	-	6.2	417	-	417
Albazino (5)	12,480	4.3	-	4.3	1,722	-	1,722
Sopka Kvartsevaya	220	2.0	83	3.4	14	585	24
Birkachan (6)	1,980	1.1	7	1.2	72	460	80
Dalniy	630	2.1	43	2.8	42	868	57
Oroch (7)	1,365	3.3	143	5.6	143	6,284	247
Tsokol Kubaka	160	5.0	10	5.2	26	49	26
Avlayakan	100	12.3	105	14.0	38	325	43
Ozerny	710	2.8	17	3.1	64	392	70
Total Measured + Indicated	26,860			4.4	2,754	63,395	3,811
Inferred
Dukat (2)	30	0.6	360	6.6	1	363	7
Lunnoye	1,020	1.6	435	8.8	52	14,272	290
Arylakh	90	0.9	340	6.5	3	1,015	20
Khakanja	10	3.1	274	7.7	1	88	2
Mayskoye (4)	16,016	8.6	-	8.6	4,428	-	4,428
Albazino (5)	12,730	4.9	-	4.9	1,999	-	1,999
Birkachan (6)	560	11.3	51	12.2	202	915	217
Oroch (7)	561	3.3	225	7.0	59	4,056	126
Tsokol Kubaka	350	6.8	12	7.0	77	134	79
Avlayakan	70	14.4	234	18.3	32	528	41
Kirankan (8)	142	6.5	8	6.7	30	39	30
Svetloye (9)	4,083	5.8	4	5.9	767	544	776
Ozerny	250	3.2	16	3.5	26	125	28
Kutyn (10)	5,505	4.1	-	4.1	717	-	717
Tamunier (11)	24,070	1.9	-	1.9	1,475	-	1,475
Total Inferred	65,487			4.9	9,868	22,079	10,236
Measured + Indicated + Inferred
Dukat (2)	4,270	0.6	306	5.7	84	42,053	785
Voro (3)	1,390	1.5	4	1.5	66	161	69
Lunnoye	1,870	1.4	359	7.4	85	21,561	444
Arylakh	420	0.8	362	6.8	10	4,759	89
Khakanja	310	2.8	164	5.6	28	1,637	56
Mayskoye (4)	18,121	8.3	-	8.3	4,845	-	4,845
Albazino (5)	25,210	4.6	-	4.6	3,721	-	3,721
Sopka Kvartsevaya	220	2.0	83	3.4	14	585	24
Birkachan (6)	2,540	3.4	17	3.6	274	1,376	296
Dalniy	630	2.1	43	2.8	42	868	57
Oroch (7)	1,926	3.3	167	6.0	201	10,341	374
Tsokol Kubaka	510	6.3	11	6.5	102	183	105
Avlayakan	170	13.2	159	15.8	70	852	85
Kirankan (8)	142	6.5	8	6.7	30	39	30
Svetloye (9)	4,083	5.8	4	5.9	767	544	776
Ozerny	960	2.9	17	3.2	90	517	98
Kutyn (10)	5,505	4.1	-	4.1	717	-	717
Tamunier (11)	24,070	1.9	-	1.9	1,475	-	1,475
Total Measured + Indicated + Inferred	92,347			4.7	12,622	85,474	14,047

¹  Mineral Resources are reported in accordance with the JORC Code (2004). Mineral Resources are additional to Ore Reserves. Discrepancies in calculations are due to rounding

²  Including Nachalny-2.

³  Including Voro South

⁴  Estimate prepared by Snowden as at 01.07.2011 Price: Au=1150 $/oz

⁵  Revaluation performed only for mineral resources of Anfisa and Olga zones for open-pit mining. Initial estimate of mineral resources performed by Snowden as at 01.08.2012. Price: Au=1500 $/oz. Zones Ekaterina 1 and 2, and resources of Anfisa and Olga zones (including Nadezhda) for underground mining remained unchanged.

⁶ Mineral Resources for underground mining were not re-estimated. Previous estimate as at 01.07.2011 by SRK Consulting remained unchanged. Price: Au=1150 $/oz and Ag=18.5 $/oz.

⁷  Estimate prepared by SRK Consulting as at 01.07.2011. Price: Au=900 $/oz and Ag=13 $/oz

⁸  Estimate prepared by SRK Consulting as at 01.07.2011. Price: Au=1000 $/oz и Ag=16 $/oz

⁹  Estimate prepared by Snowden as at 01.07.2011. COG=1.5 g/t

¹⁰ Estimate prepared by Snowden as at 01.07.2011. COG=3.0 g/t

¹¹ Estimate prepared by Snowden as at 01.01.2012. COG (Au)=1.0 g/t. The mineral resource estimate includes ore zone 2 where Inferred mineral resources are estimated at: 840 Kt, grading 4.0 g/t Au, 49 g/t Ag, containing 109 Koz Au and 1,327 Koz Ag. In other parts of the deposit there are no silver mineral resources.

Mineral Resources: Polymetallic ore Deposits as at 1 January 2013 ¹

Mineral Resources	Tonnage	Grade						Content
	Kt	Au, g/t	Ag, g/t	Cu, %	Pb, %	Zn, %	GE, g/t	Au, Koz	Ag, Koz	Cu, Kt	Pb, Kt	Zn, Kt	GE, Koz
Measured
Goltsovoye (2)	263	-	773	-	3.9	-	12.9	-	6,530	-	10.3	-	109
Varvara (3)	4,930	0.8	-	0.48	-	-	1.3	125	-	17.4	-	-	212
Total Measured	5,193						1.9	125	6,530	17.4	10.3	-	321
Indicated
Goltsovoye (2)	408	-	617	-	2.8	-	10.3	-	8,097	-	11.4	-	135
Varvara (3)	31,660	0.7	-	0.47	-	-	1.1	739	-	79.9	-	-	1,139
Perevalnoye (4)	1,096	-	375	0.34	2.3	2.3	6.8	-	13,229	3.7	24.8	25.0	239
Total Indicated	33,164						1.4	739	21,326	83.6	36.2	25.0	1,513
Measured + Indicated
Goltsovoye (2)	671	-	678	-	3.3	-	11.3	-	14,627	-	21.7	-	244
Varvara (3)	36,590	0.7	-	0.47	-	-	1.1	865	-	97.3	-	-	1,351
Perevalnoye (4)	1,096	-	375	0.34	2.3	2.3	6.8	-	13,229	3.7	24.8	25.0	239
Total Measured + Indicated	38,357						1.5	865	27,856	101.0	46.5	25.0	1,834
Inferred
Goltsovoye (2)	1,614	-	622	-	2.3	-	10.4	-	32,260	-	37.8	-	538
Varvara (3)	44,740	1.0	-	0.58	-	-	1.6	1,398	-	180.0	-	-	2,298
Perevalnoye (4)	78	-	206	0.46	3.7	3.7	4.1	-	513	0.4	2.8	2.8	10
Total Inferred	46,432						1.9	1,398	32,773	180.4	40.6	2.8	2,846
Measured + Indicated + Inferred
Goltsovoye (2)	2,285	-	638	-	2.6	-	10.6	-	46,887	-	59.4	-	781
Varvara (3)	81,330	0.9	-	0.54	-	-	1.4	2,263	-	277.3	-	-	3,649
Perevalnoye (4)	1,174	-	364	0.35	2.4	2.4	6.6	-	13,742	4.1	27.6	27.8	249
Total Measured +Indicated+ Inferred	84,789						1.7	2,263	60,629	281.4	87.1	27.8	4,680

¹ Mineral Resources are reported in accordance with the JORC Code (2004). Mineral Resources are additional to Ore Reserves. Discrepancies in calculations are due to rounding.

² Estimate prepared by Wardell Armstrong. COG (Ag) for ore zone 1 is 50 g/t,  and for ore zone 2 is 150 g/t of silver equivalent. Lead is not included in gold equivalent calculation.

³ Only for fresh and powder ore types with high copper content (total Mineral Resources of fresh and powder are 46.3 and 5.2 Mt respectively)

⁴ Estimate prepared by SRK Consulting as at 01.07.2011. Prices: Ag = 13$/oz, Cu=220c/lb, Pb=70c/lb, Zn=90c/lb. Lead and zinc are not included in gold equivalent calculation.

This estimate was prepared by employees of JSC Polymetal Management Company and CJSC Polymetal Engineering, subsidiaries of the Company, led by Mr. Valeri Tsyplakov, who assumes overall responsibility for the Mineral Resources and Ore Reserves Report. Mr. Tsyplakov is the employed full-time as the Managing Director of CJSC Polymetal Engineering and has more than 12 years' experience in gold and silver mining. He is a Member of the Institute of Materials, Minerals & Mining (MIMMM), London, and a Competent Person under the JORC Code (2004).

Other Competent Persons employed by the Company are responsible for relevant research on which the Mineral Resources and Ore Reserves estimate is based. They include:

·        Geology and Mineral Resources - Vladimir Ryabukhin, Adviser to Director General of JSC Polymetal Management Company, MIMMM, with 39 years' relevant experience;

·        Geology and Mineral Resources - Mikhail Fomkin, Head of Geologic Modeling, MIMMM, with 27 years' relevant experience;

·        Mining and Ore Reserves - Igor Epstein, Head of Mining and Technology Department, MIMMM, with 31 years' relevant experience;

·        Processing and Metallurgy - Igor Agapov, Deputy Director of Science and Technology, MIMMM, with 15 years' relevant experience;

·        Environmental Issues - Tatiana Kuleshova, Director for Ecology, MIMMM, with 22 years' relevant experience.

All Competent Persons have given consent for their material to be included in the Report, based on the information provided by them and in the form and the context in which the material is hereby presented.

Metals prices used in estimating Mineral Resources and Ore Reserves are listed below (unless otherwise indicated in the footnotes):

Ore Reserves:

Au = US$ 1300 /oz;

Ag = US$ 23 /oz;

Cu = US$ 6500 /t;

Pb = US$ 1800 /t.

Mineral Resources:

Au = US$ 1500 /oz;

Ag = US$ 26 /oz;

Cu = US$ 7800 /t.

Gold equivalent data is based on 1:60 Ag/Au and 5:1 Cu/Au conversion ratios. Lead and zinc are not included in calculation of gold equivalent data.

 

END

 

 

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