01 September 2021

Petropavlovsk PLC

Interim Results for the Period Ended 30 June 2021

Petropavlovsk PLC ("Petropavlovsk", or the "Company" and, together with its subsidiaries, the "Group") today issues its Interim Results for the period from 1 January 2021 to 30 June 2021 ("H1 2021" or the "Period").

Denis Alexandrov, Chief Executive Officer, said:

"Petropavlovsk's financial performance in the first-half reflects the transitional period we are navigating as we shift to processing more refractory ore to supply our state-of-the-art POX plant with more of our own-mined reserves. In the first half of the year, own-mine production continued the downward trend that started in 2020, however we are now observing that trend reversing and expect higher production in the second half, supported by the recent launch of the Pioneer flotation plant. We therefore maintain our production guidance for the full year.

First-half revenue and EBITDA tracked the reduction in output and while costs did rise due, in part, to lower volumes, I am pleased to report that total cash costs for own-mined ore for the period were in the lower half of our guidance range. Furthermore, we generated cash flow from operations before changes in working capital of US$113.7 million in H1 2021, along with a net profit of US$ 48.9 million compared to a loss in the same period last year.

Looking ahead, with the Pioneer flotation plant set to unlock the potential of the mine's refractory reserves in the second half of the year, we will see the POX hub operating at closer to full capacity as the year progresses. We also continue to progress the Malomir expansion, which will further increase our capacity to produce refractory ore concentrate for the POX plant when completed in Q3 2022.

At Albyn, we continue to see the harder, more challenging ore from Elginskoye that now feeds the plant limits the throughput and recoveries we can achieve. Furthermore, based on our experience mining the deposit, we expect exploration drilling being conducted at Elginskoye this year to confirm the deposit contains more refractory ore than previously estimated. In light of this, we are currently studying options for adding flotation capacity to the Albyn hub, which would provide an additional source of concentrate for the POX hub.

We are currently in the final stage of the operational review my team and I began earlier in the year - the drafting of a new strategy and development plan for the Company that will help us realise the value of assets like Albyn and Elginskoye, support future production, and deliver improved returns to shareholders. I look forward to presenting this plan to stakeholders at our upcoming Capital Markets Day this autumn.

Financial Highlights

(a)   Since the 2020 annual report operating profit is presented from the perspective of group operations excluding the results of the associate, IRC. This is more representative of how the business is viewed following the classification of IRC as held for sale and this change in classification also been applied to the comparative period.

§ Gold sales were 187.1 koz in H1 2021, down 40% from 312.4 koz sold in H1 2020, which is consistent with the decrease in total gold production during the Period

§ Average realised gold price^♦[2]increased 9% to US$1,795/oz, with zero impact from the Company's hedging programme

§ Group revenue was US$351.9m, or 33% lower year-on-year, as the impact of lower sales was partially offset by higher gold prices and increased revenue from service divisions

§ Underlying EBITDA* was US$114.3m, or 41% lower, in line with the reduction in sale volumes, as higher gold prices were offset by an increase in total cash costs during the period

§ Profit for the period was US$48.9m or US$0.01 per share, compared to a loss of US$22m in the prior year, including some non-cash items

§ Total cash costs (TCC)^♦ for gold produced from own ore in H1 2021 were US$906/oz (13% higher year-on-year), well within the Company's 2021 cost guidance range, with the increase influenced mainly by lower grades and recoveries at the mines as well as some Rouble-denominated cost inflation and higher mining taxes where certain tax incentives expired

§ All-in sustaining costs (AISC)^♦ were 15% higher year-on-year at US$1,404/oz, reflecting the increase in TCC, higher administrative costs, and the decrease in physical ounces sold in H1 2021, partially offset by a decrease in capitalized stripping at Malomir and Pioneer

§ Capital expenditure* for the period was US$47.3m (21% lower vs US$59.6 in H1 2020) reflecting the deferral of some expenses to the second half of the year

Balance Sheet and Liquidity

§ Cash (unaudited) as of 30 June 2021 was US$36.5m (31 March 2021: US$7.5m, 31 December 2020: US$35.4m) including US$2.1m in transit (see note 15 to the Financial Statements)

§ Debt principal outstanding as of 30 June 2021 was US$573m (31 March 2021: US$538m, 31 December 2020: US$538m) with the increase due to use of the Gazprombank ("GPB") revolving credit facility for day-to-day working capital requirements

§ Interest-bearing gold prepays stood at US$37.1m as at 30 June 2021 (US$53.3m as at 31 March 2021, US$63.8m as at 31 December 2020), a net decrease of US$16.2m over the course of Q2 2021 and US$26.7m since the beginning of the year. The Company plans to fully settle the gold prepays by year-end

§ To replace the gold prepays and support day-to-day liquidity needs, the Group secured a c.US$54m (RUB 4 billion) increase in the limit of its revolving credit facilities ("RCF") with GPB, from c.US$68m (RUB 5 billion) to a total of c.US$122m (RUB 9 billion), along with a maturity extension from May 2022 to June 2026. At interest rates of 2.8 - 4.5%, the RCF is significantly lower cost than existing borrowings. The Company intends to further increase the credit limit under the RCF going forward to support liquidity

§ On 10 August 2021, the Company's wholly-owned subsidiary Petropavlovsk 2016 (the "Issuer") announced the final tender results of an offer to purchase for cash up to US$200m of the aggregate principal amount of its 8.125% guaranteed notes maturing 2022 (the "US$500m Notes"). The Issuer accepted for purchase an aggregate principal amount of validly tendered US$500m Notes totalling US$135,731,000.

§ On 28 July 2021, the Group secured a US$200m term loan (30 June 2023 maturity), which was used for the buy-back of US$135,731,000 of the US$500m Notes in accordance with the tender offer. The term loan interest rate is significantly lower than the 8.125% coupon on the US$500 Notes

Operational Highlights

§ H1 2021 gold production totalled 195.0koz, a decrease of 39% versus 320.6koz in H1 2020

§ Own mined gold production amounted to 158.3koz in H1 2021 (H1 2020: 213.7koz), with the 26% year-on-year decrease being primarily due to the switch to processing ore from the Elginskoye deposit at Albyn and preparations for the launch of the Pioneer flotation plant, which entailed a shift to mining refractory ore for stockpiling and a planned temporary shutdown of the processing plant in April

§ 3rd-party concentrate gold production decreased by 66% to 36.7koz in H1 2021 (H1 2020: 106.9koz) due to expected lower volumes of concentrate available for purchase and lower grades in the concentrates supplied

Note: Numbers may not add up due to rounding effect

Pokrovskiy Pressure Oxidation (POX) Hub

§ A total of 123kt of refractory gold concentrate was processed through the POX Hub in H1 2021, including 76kt from Malomir with an average grade of 28.5g/t and 38kt of 3rd-party concentrate with an average grade of 30.7g/t

§ The new flotation plant at Pioneer supplied 8kt of concentrate at an average grade of 21.9g/t to the POX Hub in May and June, with 5.5koz of gold recovered for the Period (95% recovery rate)

2021 Guidance

§ The Company affirms its 2021 full-year production guidance of 430 - 470koz of gold, comprising own gold production of 370 - 390koz and gold production from 3rd-party concentrate of 60 - 80koz

§ Total cash costs for own gold production for the year are also expected to be within the Company's guidance range of US$870 - 970 per ounce

§ Capital expenditure for the year is expected to be up to US$140m, consisting of sustaining and development capex of US$120m and exploration spend of c.US$20m

Responsible Business

§ Zero fatal accidents have occurred at Petropavlovsk's operations this year to date, neither among the Group's employees nor its contractors

§ An increase in the number of reported incidents and, consequently, LTIFR during the period is partially attributable to an improved reporting methodology implemented this year. The severity of reported injuries has decreased during the period, and we have seen a positive trend in the monthly reduction of injuries since the beginning of the year. The availability and in-depth analysis of robust data are the first steps towards improving health and safety reporting, in alignment with international best practices

§ A strengthened health and safety leadership team, led since April by Head of Health & Safety Roman Dertinov, has resulted in the drafting of a new and improved set of Fundamental Safety Rules, which have been approved by the Board of Directors and are now being rolled out across the Group to promote safer working practices

§ The Group is also implementing several new long-term injury prevention projects, including initiatives specifically aimed at addressing falls from height and electrical safety

§ Zero environmental incidents were reported in H1 2021

Note: Environmental incidents defined as moderate or serious

§ Due to recent severe flooding in the Amur region, the Company is carrying out daily environmental monitoring of local rivers and streams. No material environmental pollution has been identified

§ Attention is drawn to the update on principal risks and uncertainties presented later in this release

COVID-19 Update

§ No material COVID-19 outbreaks have occurred at our sites this year to date, and the Company continues to implement strict quarantine and safety measures across its operations

§ In Q2 2021, the Company launched an on-site vaccination programme at each of its mines, accompanied by a supporting informational campaign via corporate and social media and other communications channels

§ As of 23 August 2021, 47.3% of employees at the Group's operating subsidiaries have been fully vaccinated (2 doses) and an additional 32.4% have exhibited Covid antibodies

§ At the time of reporting, the Group's supply chains remain fully functional

Development and Exploration Update

Progress on Development Projects

§ On 31 May 2021, the Company launched the Pioneer flotation plant, with the capacity to process 3.6Mtpa of ore, thereby doubling the Group's total processing capacity for refractory gold ore from its own mines to 7.2Mtpa (including the existing Malomir plant)

§ The Pioneer flotation plant is expected to produce up to 60kt of flotation concentrate this year, and up to 100kt in 2022, reducing the Company's reliance on 3rd-party concentrate to feed the Pokrovskiy POX plant

§ The construction of a third line at the Malomir flotation plant progressed throughout H1 2021 and will add an additional 1.8Mtpa of flotation capacity upon completion in Q3 2022, bringing the total combined Group capacity to 9.0Mtpa

Exploration

§ Pioneer - A review of reserves is underway using updated parameters that better reflect prevailing gold prices. As a result, notable increases are expected in reserves of gold contained in refractory and non-refractory ore for both open pit and underground mining (excluding mining activities)

§ Malomir - Work in H1 2021 focused on the evaluation of high-grade ores in underground workings along the eastern flank of the Quartzitovoye deposit. Scattered older wells drilled in the area have exhibited grades of up to 20.2-28.4 g/t per 2.1-3.8 m

§ Osipkan - Exploration work on the northern, un-delineated section of the deposit, suitable for heap leaching, is being accelerated. Alongside poorer ores with grades of 0.7-1.3 g/t, drilling on the targeted area has revealed ore sections with visible gold and grades of up to 67.05 g/t per 1.7 m

§ Tokur - Exploration work at the site has been temporarily suspended

§ Albyn - Geologists are currently reviewing the potential for underground mining of an estimated 30 tonnes of un-delineated ore resources at depth below the depleted Albyn open pit

§ Elginskoye - Exploration drilling on the deposit planned for this year is nearing completion. The programme was designed to better delineate the deposit and new technological mapping of the drilled-out area has been completed. Metallurgical studies have found the ore responds well to processing by gravity-flotation

§ Unglichikanskoye - Technological studies of samples for processing via gravity-flotation are nearing completion

Corporate Events

§ On 12 July 2021, the Board of Directors appointed Mr. Evgeny Potapov as a non-executive director. Mr. Potapov was nominated by Uzhuralzoloto Group of Companies ("UGC"), the Company's largest shareholder, pursuant to the relationship agreement in place between the Company and UGC. Mr Potapov replaced Mr. Maxim Kharin, who resigned from the Board

IRC Update

§ Petropavlovsk is a major shareholder in IRC (31.1%), a Hong-Kong-listed producer and developer of industrial commodities. On 27 August 2021, IRC released its interim results for the six months ended 30 June 2021. The results are available to view on the IRC website at http://www.ircgroup.com.hk

§ Petropavlovsk continues to act as guarantor in relation to the obligations of IRC Limited's subsidiary K&S under two loan facility agreements with Gazprombank. IRC continues to pay down the debt in line with the repayment schedule. In addition, K&S made an early repayment of US$20m to GPB in July and US$30m in August. Therefore, the outstanding loan principal amount as of the end of August 2021 amounted to c.US$143.5m.

Webcast and Conference Call

The Company's CEO Denis Alexandrov and CFO Danila Kotlyarov will host a webcast followed by a Q&A session to present the Company's financial results today at 09:00 BST / 11.00 MSK. The webcast can be accessed via the following link:

https://webcasting.brrmedia.co.uk/broadcast/6115521dc97de6636c2d913d

Alternatively, phone users can listen to the webcast and participate in the Q&A session via the following dial-in numbers:

When prompted, please use the following confirmation code: 8000181

About Petropavlovsk

Petropavlovsk PLC (LSE: POG. MOEX: POGR) is a major integrated Russian gold producer with JORC Resources of 19.50Moz Au which include Reserves of 7.16Moz Au. Following its IPO on the Alternative Investment Market (AIM) in 2002, Petropavlovsk was promoted to the London Stock Exchange in 2009, where today it is a Premium Listed company and a constituent of the FTSE 250, FTSE 350 and FTSE All Share indices. The Company's shares also trade on the Moscow Exchange and are a constituent of the RTS Index and MOEX Index.

The Company's key operating mines (Pioneer, Malomir and Albyn) and its Pokrovskiy Pressure Oxidation (POX) Hub are located in the Amur Region in the Russian Far East. Petropavlovsk has produced a total of c.8.5Moz of gold since operations began in 1994 and has a strong track record of mine development, expansion, and asset optimisation.

Petropavlovsk is one of the region's largest employers and one of the largest contributors to the sustainable development of the local economy.

For more information

Please visit www.petropavlovskplc.com or contact:

Cautionary note on forward-looking statements

This release may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward looking statements include all matters that are not historical facts. They appear in a number of places throughout this release and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the future price of gold, the Group's results of operations, financial position, liquidity, prospects, growth, estimation of mineral reserves and resources and strategies, and exchange rates and the expectations of the industry. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances [outside the control of the Group. Forward-looking statements are not guarantees of future performance and the development of the markets and the industry in which the Group operates may differ materially from those described in, or suggested by, any forward- looking statements contained in this release. In addition, even if the development of the markets and the industry in which the Group operates are consistent with the forward looking statements contained in this release, those developments may not be indicative of developments in subsequent periods. A number of factors could cause results and/or developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, demand, supply and prices for gold and other long-term commodity price assumptions (and their effect on the timing and feasibility of future projects and developments), trends in the gold mining industry and conditions of the international gold markets, competition, actions and activities of governmental authorities (including changes in laws, regulations or taxation), currency fluctuations (including as between the US Dollar and Rouble), the Group's ability to recover its reserves or develop new reserves, changes in its business strategy, any litigation, and political and economic uncertainty. Except as required by applicable law, rule or regulation (including the Listing and Disclosure Guidance and Transparency Rules), the Group does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Past performance cannot be relied on as a guide to future performance. The content of websites referred to in this announcement does not form part of this announcement.

Financial Review

Note: Figures may not add up due to rounding

Financial Highlights

(a)   Calculation of Total Cash Costsu ("TCC") is set out in the section Hard rock mines below.

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

(c)   Since the 2020 annual report operating profit is presented from the perspective of group operations excluding the results of the associate, IRC. This is more representative of how the business is viewed following the classification of IRC as held for sale and this change in classification also been applied to the comparative period.

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

(e)   US$125 million convertible bonds due on 03 July 2024 at amortised cost.

(f)    Outstanding principal amount of revolving credit facility with Gazprombank. 

Revenue

Group revenue during the period was US$351.9 million, 33% lower than the US$522.7 million achieved in H1 2020.

Revenue from hard rock mines during the period was US$335.8 million, 34% lower than the US$512.3 million achieved in H1 2020. Gold remains the key commodity produced and sold by the group, comprising 95% of total revenue generated in H1 2021. The physical volume of gold sold from hard rock mines decreased by 40% from 312,354 oz in H1 2020 to 187,064 oz in H1 2021, incl. 26% decrease of own gold production primarily due to the switch to processing ore from the Elginskoye deposit at Albyn and preparations for the launch of the Pioneer flotation plant, which entailed a shift to mining refractory ore for stockpiling and a planned temporary shutdown of the processing plant in April and 66% decrease in 3rd-party gold production to 36.7koz in H1 2021 (H1 2020: 106.9koz) due to expected lower volumes of concentrate available for purchase and lower grades in the concentrates supplied. The average realised gold price¨¨ increased by 9% from US$1,640/oz in H1 2020 to US$1,795/oz in H1 2021. The average realised gold price¨ was not affected by hedge arrangements in H1 2021 and H1 2020. There were no sales of silver in H1 2021 and H1 2020.

Revenue generated as a result of third-party work by the group's in-house service companies was US$16.2 million in H1 2021, a US$5.8 million increase compared to US$10.4 million in H1 2020. This revenue is substantially attributable to sales generated by the group's engineering and research institute, Irgiredmet, primarily through engineering services and the procurement of materials, consumables and equipment for third parties, which comprised US$14.9 million in H1 2021 compared to US$9.0 million in H1 2020.

Cash flow hedge arrangements

In March 2020 the group has entered into a number of gold option and currency option contracts, in both cases structured as zero cost collars where the company purchased a put option and sold a call option, in order to increase certainty in respect of a proportion of its operating cash flows.

Zero cost collars for the underlying aggregate of US$42 million (US$7 million per month) with a RUB:USD exercise price of RUB75.00 for put options and a RUB:USD exercise price in the range of between RUB90.65 and RUB100.00 for call options matured during H1 2021 and resulted in US$0.6 million net cash settlement received by the group. Zero cost collars for the underlying aggregate of US$42 million (US$7 million per month until December 2021) with a RUB:USD exercise price of RUB75.00 for put options and a RUB:USD exercise price in the range between RUB90.65 and RUB100.00 for call options were outstanding as at 30 June 2021.

Zero cost collars for the underlying aggregate of 21,000 oz of gold (3,500 oz of gold per month) with an exercise price of US$1,600/oz for put options and US$1,832/oz for call options matured during H1 2021 and resulted in US$(0.3) million net cash settlement paid by the group. Zero cost collars for the underlying aggregate of 21,000 oz of gold (3,500 oz of gold per month until December 2021) with an exercise price of US$1,600/oz for put options and US$1,832/oz for call options were outstanding as at 30 June 2021.

The aforementioned contracts did not qualify for hedge accounting under IFRS 9. Accordingly, there was no adjustment to the average realized gold price in H1 2021 and H1 2020 for the effect of net settlement under these arrangements.

Corresponding fair values for gold and currency option contracts are disclosed in note 16 to the group's consolidated interim financial statements for the six months ended 30 June 2021.

Underlying EBITDA

(a)   Including US$32.0 million fair value gain from re-measurement of the conversion option of the convertible bonds
 (H1 2020:US$(122.2) million fair value loss from re-measurement of the conversion option of the convertible bond) and US$ (31.6) million fair value loss on the agreement for the sale of stake in IRC.

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

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

Hard rock mines

During this period, hard rock mines generated Underlying EBITDA¨ of US$145.0 million compared to US$205.1 million Underlying EBITDA¨ in H1 2020.

Total Cash Costs¨ for hard rock mines increased from US$983/oz in H1 2020 to US$1,020/oz in H1 2021.

The increase in Total Cash Costs from own material from US$800/oz in H1 2020 to US$906/oz in H1 2021 primarily reflects the effect of lower grades and recoveries of non-refractory ore processed at Albyn plant as the result of switching to processing of ore from the Elginskoye deposit as the main source of non-refractory ore starting from 2021 which replaced the depleted Albyn pit, as well as the impact of the Pioneer flotation plant launching to produce refractory concentrate for further processing at the POX Hub, lower grades of refractory ore processed at Malomir, lower recoveries of non-refractory ore processed at Pioneer, the impact of inflation of certain Rouble denominated costs, and the effect of mining tax rates as set out below. This effect was partially mitigated by the effect of higher grades of non-refractory ore processed at Pioneer and Malomir, and the effect of higher recoveries of refractory ore processed at Malomir, as well as by the effect of Rouble depreciation.

Total Cash Costs from 3rd parties concentrate increased from US$1,380/oz in H1 2020 to US$1,639/oz in H1 2021. Total Cash Costs from 3rd parties concentrate are directly dependent on gold price which has increased in H1 2021.

The decrease in physical ounces sold from 312,354 oz in H1 2020 to 187,064 oz in H1 2021 resulted in US$(82.3) million decrease in the Underlying EBITDA¨.The increase in TCC¨ contributed to a further US$(6.8) million decrease in the Underlying EBITDA¨. This effect was partly offset by the increase in the average realised gold price¨ from US$1,640/oz in H1 2020 to US$1,795/oz in H1 2021 with US$29.0 million effect on Underlying EBITDA¨.

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

The Rouble depreciated against the US Dollar by 7% in H1 2021 compared to H1 2020, with the average exchange rate for the period of 74.31 Roubles per US Dollar in H1 2021 compared to 69.42 Roubles per US Dollar in H1 2020, somewhat mitigating the effect of Rouble denominated costs inflation.

Refinery and transportation costs are variable costs dependent on production volume. Mining tax is also a variable cost dependent on production volume and the gold price realised. The Russian statutory mining tax rate is 6%. Under the Russian Federal Law 144-FZ dated 23 May 2016 that introduced certain amendments to the Russian Tax Code, taxpayers who are participants in Regional Investment Projects ("RIP") have the right to apply the reduced mining tax rate provided certain conditions are met. JSC Pokrovskiy Rudnik and LLC Malomirskiy Rudnik applied full mining tax rate in H1 2021 and H1 2020, LLC Albynskiy Rudnik applied 1.2% mining tax rate in H1 2020 and full mining tax rate in H1 2021, resulting in US$18.4 million mining tax expense in H1 2021 compared to US$15.2 million mining tax expense in H1 2020.

(a) Including staff redundancies costs US$0.3 million in H1 2021 due to enhancing operational governance and improving management structure.

All-in Sustaining Costs and All-in Costs

AISC¨ increased from US$1,220/oz in H1 2020 to US$1,404/oz in H1 2021. The increase in AISC¨ reflects increase in TCC¨ explained above as well as higher central administration expenses and the decrease in physical ounces sold in H1 2021 with an aggregate of sustaining capital and exploration expenditures and sustaining lease remaining at approximately the same level as in H1 2020. This effect was partly offset by the decrease in capitalized stripping expenditure during the period at Malomir and Pioneer.

AIC¨ increased from US$1,325/oz in H1 2020 to US$1,514/oz in H1 2021, primarily reflecting the increase in AISC¨ explained above. The start of operations at the Elginskoye deposit resulted in the decrease of capital expenditure with Elginskoye project being considered as sustaining in 2021. This effect was mainly offset by the decrease in physical ounces sold in H1 2021 with an aggregate of non-sustaining capital expenditures related to Pioneer flotation plant, 3rd flotation line at Malomir, capitalized stripping expenditure in respect of refractory ore at Pioneer and non-sustaining exploration expenditures remaining at approximately the same level as in H1 2020.

c

(a)   Including staff redundancies costs US$0.8 million in H1 2021 due to enhancing operational governance and improving management structure.

Corporate and other

Corporate and other operations contributed US$(32.2) million to Underlying EBITDA¨ in H1 2021 compared to US$(23.0) million in H1 2020. Corporate and other operations primarily include central administration function, result of in-house service companies and the group's share of results of its associate IRC.

The group has corporate offices in London, Moscow and Blagoveschensk, which together represent the central administration function. Central administration expenses increased by US$8.9 million from US$20.7 million in H1 2020 to US$29.6 million in H1 2021, including staff redundancies costs US$0.8 million in H1 2021 due to enhancing operational governance and improving management structure.

Results of associate

The group's share of profit generated by IRC is US$1.2 million in H1 2021 (H1 2020: US$1.8 million). Following re-classification of 29.9% interest in IRC as assets held for sale, the group recognised a US$34.9 million reversal of write-down to adjust the carrying value of net assets of disposal group to fair value less costs to sell in H1 2021. IRC contributed US$1.5 million to the group's Underlying EBITDA^u in H1 2021 (H1 2020: US$10.5 million).

Impairment review

Impairment of mining assets

As at 30 June 2021 and 30 June 2020, the group undertook a review of impairment indicators of the tangible assets attributable to its gold mining projects and supporting in-house service companies. Detailed calculations of recoverable amounts, which are value-in-use calculations based on discounted cash flows, were prepared which concluded no impairment was required as at 30 June 2021 and 30 June 2020.

Impairment of exploration and evaluation assets

As at 30 June 2021 and 30 June 2020, the group performed a review of its exploration and evaluation assets and concluded no impairment was required.

Exploration and evaluation assets in the statement of financial position primarily relate to the areas adjacent to the existing mines.

Financial income and expenses

Investment and other finance income 

(a)   Interest income on bank deposits.

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

Interest expense

Interest expense for the period comprised of US$20.9 million of effective interest on the Notes, US$2.0 million of effective interest on the Convertible Bonds, US$2.1 million of interest on prepayments on gold sale agreements, US$0.3 million of interest on finance lease and US$0.1 million of interest on bank loans (H1 2020: US$21.0 million of effective interest on the Notes, US$6.5 million of effective interest on the Convertible Bonds, US$6.3 million of interest on prepayments on gold sale agreements and US$0.3 million interest on finance lease).

As the group continued with construction of Pioneer flotation plant, 3rd flotation line at Malomir, these projects met eligibility criteria for borrowing costs capitalization under IAS 23 "Borrowing Costs" with US$1.6 million of interest expense capitalized within property, plant and equipment (H1 2020: US$1.0 million of interest expense was capitalized within property, plant and equipment in relation to flotation line at Pioneer).

Net other finance gains/(losses)

Net other finance gains for the period totaled US$4.7 million compared to US$(98.9) million of net other finance losses in H1 2020. Key elements of other finance gains and losses this period include:

-   US$32.0 million fair value non-cash gain from re-measurement of the conversion option of the convertible bonds, reflecting the increase in the underlying share price of the Company;

-      US$3.9 million net fair value gain on gold and currency option contracts;

-      US$0.4 million gains on other items;

-      US$(31.6) million fair value non-cash loss on the agreement for the sale of stake in IRC.

Net impairment reversals/ (impairment losses) on financial instruments

In H1 2021, the group recognised a US$0.6 million decrease in the provision for expected credit losses under Gazprombank guarantee arrangements (H1 2020:  US$1.3 million of provision for expected credit losses).

Taxation

The group is subject to corporation tax under the UK, Russia and Cyprus tax legislation. The statutory tax rate for H1 2021 was 19% in the UK and 20% in Russia.

The tax charge for the period primarily related to the group's gold mining operations and is represented by a current tax charge of US$17.3 million (H1 2020: US$25.1 million) and a deferred tax charge, which is a non-cash item, of US$3.0 million (H1 2020: US$13.4 million). Included in the deferred tax charge in H1 2021 is a US$3.2 million credit (H1 2020: US$23.7 million charge) from the effect of foreign exchange which primarily arises because the tax base for a significant portion of the future taxable deductions in relation to the group's property, plant and equipment are denominated in Russian Roubles, whilst the future depreciation charges associated with these assets will be based on their US Dollar carrying value.

The effective tax rate was also affected by expenses that are not taxable/deductible for tax purposes which primarily relate to fair value gains/losses on re-measurement of the conversion option of the Convertible Bonds and reversal of write-down/write-down of investment in IRC to fair value less costs to sell, effect of tax losses for which no deferred income tax asset was recognized which primarily related to interest expense incurred in the UK and Russian withholding tax on intercompany dividends.

During the period, the group made corporation tax payments in aggregate of US$21.2 million in Russia (H1 2020: corporation tax payments in aggregate of US$28.5 million in Russia).

Earnings per share

Basic profit per share for H1 2021 was US$0.01 compared to US$(0.01) basic loss per share for H1 2020.

The total number of Ordinary Shares in issue as at 30 June 2021 was 3,957,270,254 (30 June 2020: 3,312,825,822).

Financial position and cash flows

(d) Including US$47.3 million Capital Expenditure^u (H1 2020: US$59.6 million).

Key movements in cash and Net Debt^u

(e) Including US$2.1 million interest paid in relation to advance payments from Gazprombank. 

Capital Expenditure ¨

The group invested an aggregate of US$47.3 million in H1 2021 compared to US$59.6 million in H1 2020. The key areas of focus in this period were on Pioneer and Malomir flotation and development to support the mining at Elginskoye. The group capitalised US$1.6 million of interest expense incurred in relation to the group's debt into the cost of the Pioneer flotation and Malomir 3rd line flotation (H1 2020: US$1.0 million of interest expense incurred in relation to the group's debt into the cost of the Pioneer flotation).

(a)   Including US$2.0 million of development expenditure in relation to Pioneer Underground project to be sustaining capital expenditure for the purposes of calculating AISC^ and AIC^.

(b)   Including US$11.4 million development expenditure in relation to the Pioneer Flotation project (US$10.7 million of expenditure in relation to flotation and US$0.7 million of expenditure in relation to hydrotechnical storage facilities) to be non-sustaining capital expenditure for the purposes of calculating the AISC^ and AIC^.

(c)   Including US$0.6 million of development expenditure in relation to Malomir Underground project to be sustaining capital expenditure for the purposes of calculating AISC^ and AIC^.

(d)   Including US$2.3 million of development expenditure in relation to Malomir 1st and 2nd lines Flotation (US$2.3 million of expenditure in relation to hydrotechnical storage facilities) to be sustaining capital expenditure for the purposes of calculating AISC^ and AIC^.

(e)   Including US$5.7 million of development expenditure in relation to Malomir 3rd line Flotation to be non-sustaining capital expenditure for the purposes of calculating AISC^ and AIC^.

(f)    Including US$2.6 million of exploration expenditure in relation to Elginskoye project, US$0.6 million of development expenditure in relation to road between Elginskoye and Albyn processing facilities and US$6.0 million of development expenditure in relation to hydrotechnical storage facilities for Elginskoye project to be sustaining  capital expenditure for the purposes of calculating AISC^ and AIC^.

Foreign currency exchange differences

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

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

The Rouble recovered by 2% against the US Dollar during H1 2021, from RUB73.88: US$1 as at 31 December 2020 to RUB72.37: US$1 as at 30 June 2021. The average period-on-period depreciation of Rouble against the US Dollar was approximately 7%, with the average exchange rate for H1 2021 being RUB74.31: US$1 compared to RUB69.42 : US$1 for H1 2020.The Group recognised foreign exchange losses of US$0.7 million in H1 2021 (H1 2020: US$26.7 million gains) arising primarily on Rouble denominated net monetary liabilities (including advance payments received from Gazprombank and Sberbank under gold sales agreements).

Corporate activities

Guarantee over IRC's external borrowings

The group historically entered into an arrangement to provide a guarantee over its associate's, IRC, external borrowings, the ICBC Facility ('ICBC Guarantee'). Under the terms of the arrangement the group was entitled to receive an annual fee equal to 1.75% of the outstanding amount.

In March 2019, IRC refinanced the ICBC Facility through entering into a US$240 million new facility with Gazprombank ('Gazprombank Facility'). The facility was fully drawn down during the year ended 31 December 2019. The outstanding loan principal was US$194 million as at 30 June 2021. A new guarantee was issued by the group over part of the Gazprombank Facility ('Gazprombank Guarantee'), the guarantee mechanism is implemented through a series of five guarantees that fluctuate in value through the eight-year life of the loan, with the possibility of the initial US$160 million principal amounts guaranteed reducing to US$40 million within two to three years, subject to certain conditions being met. For the final two years of the Gazprombank Facility, the guaranteed amounts will increase to US$120 million to cover the final principal and interest repayments. If certain springing recourse events transpire, including default on a scheduled payment, then full outstanding loan balance is accelerated and subject to the guarantee. Under the Gazprombank Guarantee arrangements, the guarantee fee receivable is determined at each reporting date on an independently determined fair value basis, which for the six months ended 30 June 2021, 30 June 2020 and year ended 31 December 2020 was calculated at the annual rate of 3.07% by reference to the average outstanding principal balance under Gazprombank Facility. The guarantee fee charged for the six months ended 30 June 2021 was US$3.1 million, with corresponding value of US$3.4 million after reversal of provision for expected credit losses (30 June 2020: US$3.4 million, with corresponding value of US$3.2 million after provision for expected credit losses; 31 December 2020: US$6.7 million, with corresponding value of US$6.3 million after provision for expected credit losses).

The following assets and liabilities have been recognised in relation to the ICBC Guarantee and Gazprombank Guarantee as at 30 June 2021 and 31 December 2020:

(a)   Classified as «held for sale» and presented separately in the statement of financial position as at 30 June 2021 and 31 December 2020.

Potential disposal of interest in IRC

During the period, the group has continued to explore disposal options for the interest in IRC and further engaged with several parties to dispose of the equity holding and release the group's obligation to guarantee IRC's external debt under the Gazprombank Facility (note 21). Following negotiations with several interested parties the directors resolved to approve the potential disposal of 29.9% investment in IRC. In the opinion of the directors it is highly probable this disposal to be completed within 12 months after the reporting date and accordingly, 29.9% investment in IRC together with the financial guarantee contract were considered to be a disposal group held-for sale under IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" as at 30 June 2021.

Tender offer to purchase up to US$200 million maximum tender amount of outstanding US$500 million 8.125 per cent Guaranteed Notes

On 13th July 2021 the Company announced that its wholly-owned subsidiary, Petropavlovsk 2016 Limited announced the launch of its offer to purchase for cash up to US$200 million aggregate principal amount of its 8.125 per cent Guaranteed Notes due 2022.

Tender offer is financed via Gazprombank loan facility with a total limit of US$200 million, that was consequently entered in July 2021 with an interest rate significantly lower than the Notes. Gazprombank loan repayment schedule is US$66 million in December 2022, US$66 million in March 2023 and remaining balance in June 2023.

On 10 August 2021,  Petropavlovsk 2016 Limited announced the final tender results‒ US$135,731,000 aggregate principal amount of the Notes were validly tendered.

Going concern

Please refer to the note 2 to the group's consolidated financial statements for the six months ended 30 June 2021.

2021 Outlook

Production outlook is on track to meet the full year target of 430 - 470koz of gold in 2021. The group expects own metal TCC in 2021 to be in the range of US$870 - US$970/oz, excluding third-party concentrate as the pricing of concentrate depends on highly volatile gold price.

Principal Risks and Uncertainties

The Group is exposed to a variety of risks and uncertainties which could significantly affect its business and financial results. A detailed review of the key risks facing the Group is set out in the Principal Risks section on pages 68 to 75 of the 2020 Annual Report, which is available on the Group's website, http://www.petropavlovskplc.com. This also includes a description of the potential impact of such risks on the Group together with measures in place to manage or mitigate against each specific risk where this is within the Group's control.

The nature of the principal risks and uncertainties facing the Group for the remainder of the current financial year remains substantially unchanged. An update on these risks and events in H1 2021 relevant to them, including any new or emerging factors within the context of existing risks, is set out below.

There may be additional risks unknown to the Group and other risks, currently believed to be immaterial, which could turn out to be material. These risks, whether they materialize, individually or simultaneously, could significantly affect the Group's business and financial results. The Group will continue to monitor internal and external areas of uncertainty and threat closely as well as remain vigilant on internal controls and incorporate any further developments as part of the full-year assessment of principal risks and uncertainties.  Without limiting the generality of the foregoing, an extensive independent environmental review to be conducted in H2 2021 could potentially uncover additional risks that the Group will need to address.

Below is indication of events relevant to our principal risks that have occurred during the first six months of 2021:

Operational risks

·      3rd-party concentrate gold production decreased in H1 2021 due to lower volumes and grades of concentrate available for purchase;

·      The Pioneer flotation plant was commissioned in May 2021, with an expected capacity of 60kt of concentrate in 2021 and 100kt in 2022.

·      Anomalous torrential rains led to flooding in some parts of Amur region causing some logistical issues and interruption to production, all of which were minor in effect. 

·      Inflation in Russia in June 2021 reached 6.5% per annum, affecting some of the Company's supplies, none of which was critical.

The Company has also identified the risk of lowering production performance due to processing new types of ore as an emerging operational risk for the business. In H1 2021, the Company began processing ore from Elginskoye. The ore mined at Elginskoye is of a lower grade than that previously mined from the Albyn deposit, and, as a result recovery rates and mill grinding capacity may be reduced, resulting in operational under-performance and higher cost. As announced in April 2021, exploration and metallurgical surveys are underway at Elginskoye to complete full-scale mapping of the deposit and may result in updates to the Company's production plans. The Company continues to expect to meet its production forecasts for 2021.

Financial risks

·   The Company completed the partial buy-back of its U.S.$500m 8.125% guaranteed notes due in 2022, purchasing c.US$136m of the outstanding U.S.$500m Notes using the proceeds of a term loan facility with Gazprombank which matures some six months later than and bears interest at a lower rate than that payable in respect of the U.S.$500m Notes. 

·    The property insurance previously maintained by the Company in respect of its facilities expired in the first half of 2021 and was not automatically renewed due to concerns that the insurance had not been procured at market rates. The Company is in the course of tendering for the provision of property and other insurances and expects this process to be completed and the real assets insured in September 2021. In the interim, there remains a risk that, in the event that an event occurs at one of the facilities the costs of which might have been expected to be recoverable from its insurers, such costs will be borne by the Company without recourse to insurance. All insurances mandated by law in Russia are in place.

Country and regional risks

·     In June 2021, KPMG LLP published its interim report pursuant to 'Resolution 19' identifying several potential issues with transactions involving the Company with an estimated value of US$157 million. These issues include transactions with potentially undisclosed related parties and likely conflicts of interest.

Sustainability risks

·    The Company published its 2020 sustainability report in July 2021, highlighting key sustainability initiatives across the business.

·     No fatal accidents and zero environmental incidents were reported in H1 2021. The Group has strengthened its health and safety and environmental teams through the employment of new field specialists aiming to bring best practice and expertise.

·    No material COVID-19 outbreaks took place at the Company's operations in H1 2021. As of 30 June 2021, 28% of employees at the Group's operating subsidiaries have been fully vaccinated (47.3% at 23 August 2021).  Nonetheless, the risk posed by the Covid-19 pandemic remains high.

The Company continues to monitor its principal risks. 

Director's Responsibilities Statement

We confirm that to the best of our knowledge:

§ The condensed set of consolidated interim financial statements has been prepared in accordance with UK-adopted IAS34 "Interim Financial Reporting" as required by DTR4.2.4R

§ The interim management report includes a fair review of the information required by DTR4.2.7R (indication of important events during the first six months and their impact on the condensed set of financial statements and a description of principal risks and uncertainties for the remaining six months of the financial year); and

§ The interim management report includes a fair review of the information required on related party transactions as required by DTR4.2.8R

By order of the Board,

31 August 2021

Independent Review Report to Petropavlovsk PLC

Report on the condensed consolidated interim financial statements

Our conclusion

We have reviewed Petropavlovsk plc's condensed consolidated interim financial statements (the "interim financial statements") in the Interim financial report of Petropavlovsk plc for the 6 month period ended 30 June 2021 (the "period").

Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

·      the condensed consolidated balance sheet as at 30 June 2021;

·      the condensed consolidated statement of profit and loss and condensed consolidated

·      statement of comprehensive income for the period then ended;

·      the condensed consolidated statement of cash flows for the period then ended;

·      the condensed consolidated statement of changes in equity for the period then ended; and

·      the explanatory notes to the interim financial statements.

The interim financial statements included in the Interim financial report of Petropavlovsk plc have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The Interim financial report, including the interim financial statements, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the Interim financial report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the Interim financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the Interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

MHA MacIntyre Hudson

Chartered Accountants

London

31 August 2021
 

Condensed Consolidated Interim Financial Statements and

Notes to the Condensed Consolidated Interim Financial Statements

PETROPAVLOVSK PLC

Condensed Consolidated Statement of Profit or Loss

Six months ended 30 June 2021

PETROPAVLOVSK PLC

Condensed Consolidated Statement of Comprehensive Income

Six months ended 30 June 2021