Petropavlovsk : Notice of Publication of Annual Report

Operational Risks

Risk

Description and potential impact

Mitigation

1. Factors which impact output such as:

i) Weather and

ii) Failure of equipment or services

i) The Group's assets are located in the Russian Far East, which is an area that can be subject to severe climatic conditions. Severe weather conditions, such as cold temperatures in winter and torrential rain, potentially causing flooding in the region could have an adverse impact on operations, including the delivery of supplies, equipment and fuel; and exploration and extraction levels may fall as a result of such climatic factors.

ii) The Group relies on the supply and availability of various services and equipment in order to successfully run its operations. For example, timely delivery of mining equipment and jaw crushers and their availability is essential to the Group's ability to extract ore from the Group's assets and to crush the mined ore prior to

production. Delay in the delivery or the failure of mining equipment could significantly delay production and impact the Group's profitability.

i) Preventative maintenance procedures are undertaken on a regular and periodic basis to ensure that machines will function properly under extreme cold weather conditions; heating plants at operational bases are regularly maintained and operational equipment is fitted with cold weather options which could assist in ensuring that equipment does not fail as a result of adverse weather conditions.

Pumping systems are in place and tested periodically to ensure that they are functioning.

Management monitor natural conditions in order to pre-empt any disaster and in order that appropriate mitigating action can be taken expediently. The Group aims to stock several months of essential supplies

at each site.

ii) The Group has a number of contingency plans in place to address any disruption to services.

The Group has high operational standards and maintenance of equipment is undertaken on a regular basis. Equipment is inspected at the beginning and end of every shift and sufficient stocks of spare parts are available.

Equipment is ordered with adequate lead time in order to prevent delays in the delivery of equipment.

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Financial Risks

Risk

Description and potential impact

Mitigation

1. Lack of funding and liquidity to:

i) Support its existing operations;

ii) Invest in and develop its exploration projects;

iii) Extend the life and capacity of its existing mining operations; and

iv) Refinance/repay the Group's debt as it falls due.

If the operational performance of the business declines significantly the Company will breach one or more of the financial and production covenants as set out in various financing arrangements.

Adverse events or uncertainties affecting the gold price and/or the global financial markets could affect the Group's ability to raise new debt or refinance existing debt in the capital markets. It could also in future lead to higher borrowing costs.

The Group needs ongoing access to liquidity and funding in order to (i) refinance its existing debt as required, (ii) support its existing operations and (iii) invest in new projects and exploration. There is a risk that the Group may be unable to obtain the necessary funds when required or that such funds will be available on unfavourable terms. The Group may therefore be unable to develop and/or meet its operational or financial commitments.

The Group's borrowing facilities include a requirement to comply with certain specified covenants in relation to the level of net debt and interest cover. A breach of these covenants could result in a significant proportion of the Group's borrowings becoming repayable immediately. In the absence of refinancing the Group is forecast to breach certain covenants in its banking facilities at 31 December 2014.

As detailed in the Chairman's Statement on page 05 the Directors have developed a refinancing plan.

The cost-cutting programme has resulted in improved cashflow and reduced capital employed resulting in a 11% reduction in net debt as at 31 December 2013, year-on-year, to US$948m despite the significant decline in the gold price during the year.

The Group has adopted a strategy to focus on its core projects, thereby optimising its capital expenditure requirements and deleveraging its balance sheet. During 2013 the Group sold non-strategic alluvial assets for a total cash consideration of US$25m (see note 28) to the consolidated financial statements.

The Group continues to maintain its available cash with several reputable major Russian and international banks and does not keep disproportionately large sums on deposit with a single bank. Strong relationships are maintained between the Company and existing and potential equity and debt providers.

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2. The Group's results of operations may be affected by changes in gold and/or iron ore prices.

A sustained downward movement in the market price for gold or iron ore may negatively affect the Group's profitability and cash flow. The market price of gold is volatile and is affected by numerous factors which are beyond the Company's control. These factors include world production levels, global and regional economic and political events, international economic trends, inflation, currency exchange fluctuations and the political and economic conditions of major gold-producing countries. Additionally the purchase and sale of gold by central banks or other large holders or dealers may also have an impact on the market price.

The Executive Committee monitors the position on a regular basis and consults with the Board as appropriate.

Following the significant decline in the gold price in April 2013, the Board decided to continue and add to its 'hedging' positions. Further details of these arrangements are provided on page 63 in the Chief Financial Officer's Statement.

During 2013 the Board approved a cost cutting programme and carried out a strategic review of the Group's business plan. The strategic review resulted in the slow down of development of the POX Hub to process refractory ore, instead focussing on production from its existing facilities, which treat non-refractory material following the success of the Group's exploration programme which had identified additional new non-refractory reserves.

The cost cutting programme and the identification of this additional non-refractory ore has resulted in cost savings, a significant reduction in proposed capital expenditure for 2014 given the slow down  in the pace of the development of the POX project, increased cashflow and lower overall Total Cash Costs.

The Group intends to continue to minimise overhead costs and to operate and maintain low cost and efficient operations in order to

optimise the Group's returns.

In addition, if the investment in IRC approved by Shareholders in March 2013 (see note 27 to the Consolidated Financial Statements)

completes, the Group's holding in IRC will reduce to 40.49%. The Group's exposure to the iron ore price will therefore reduce accordingly.

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3. Currency fluctuations may affect

the Group.

The Company reports its results in US Dollars, which is the currency in which gold is principally traded and therefore in which most of the Group's revenue is generated. Significant costs are incurred in and/or influenced by the local currencies in which the Group operates principally Russian Roubles. The appreciation of the Russian Rouble against the US Dollar tends to result in an increase in the Group's costs relative to its revenues. In addition, a portion of the Group corporate overhead is denominated in Sterling. Therefore, adverse currency movements may materially affect the Group's financial condition and results of operations.

In addition, if inflation in Russia were to increase without a corresponding devaluation of the Russian Rouble relative to the US Dollar, the Group's business, results of operations and financial condition may be adversely affected.

The Group has adopted a policy of holding an optimum amount of cash and monetary assets or liabilities in non US Dollar currencies (mainly Russian Rouble) and operates an internal funding structure which seeks to minimise foreign exchange exposure.

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4. Funding may be demanded from

Petropavlovsk under a guarantee in favour of ICBC.

Petropavlovsk has provided a guarantee against a US$340 million loan facility provided to Kimkano-Sutarsky Mining and Beneficiation Plant LLC ('K&S') by ICBC to fund the construction of IRC's mining operations at the K&S mine. In the event that there was to be an event of default in relation to such loan, if K&S were not to pay all sums payable in respect of that loan, Petropavlovsk may be liable to repay all outstanding amounts under the terms of the guarantee.

The Group ensures constant monitoring of IRC's performance through (1) IRC presentations to the Petropavlovsk Board (2) attendance of IRC Chairman and CEO at Petropavlovsk Executive Committee meetings and (3) regular communication between the Group CFO and the IRC CFO.

Subject to the completion of the investment in IRC (see note 27 to the consolidated financial statements), an indemnity entered into by the Company and General Nice on 17 January 2013 will come into effect (the 'Indemnity'). Pursuant to the Indemnity, General Nice will, while the Indemnity remains in effect, indemnify the Company in respect of payments made by Petropavlovsk in respect of the ICBC guarantee or under the terms of a recourse agreement entered into between the Company, IRC and K&S on 13 December 2010 in proportion to their respective holdings in IRC. In addition, following the completion of the investment, General Nice and Minmetals have agreed to use their respective reasonable efforts to assist Petropavlovsk with the removal of the ICBC bank guarantee.

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5. Exploration for reserves can be costly and uncertain.

Exploration activities are speculative and can be unproductive. These activities often require substantial expenditure to: establish reserves through drilling and metallurgical and other testing, determine appropriate recovery processes to extract gold from the ore and construct or expand mining and processing facilities. Once deposits are discovered it can take several years to determine whether

reserves exist. During this time, the economic viability of production may change. As a result of these uncertainties, the exploration

programmes in which the Group is engaged may not result in the expansion or replacement of the current production with new reserves

or operations.

The Group's exploration budget is fixed for each asset at the start of each financial year depending on confidence in any previously received results. During 2013 the Group continued to focus its exploration

programme on areas at or close to its

existing operating mines and in particular, on finding new, non-refractory resources. As a result of its exploration programme the Group announced in December 2013 an increase of 5.7 million ounces of

non-refractory resources, estimated in

accordance with the Russian GKZ

Classification System. This figure included 0.56Moz of combined C 1 +C 2 categories, 1.82Moz in P 1 and 3.32Moz in P 2 . As these new resources are located in the areas

adjacent to existing processing facilities minimal capital expenditure will be required to develop them. These resources have now been partially converted into JORC Mineral

Resources and Ore Reserves. In addition the Group has identified further refractory mineral resources of approximately 7.2Moz estimated in accordance with the internallyused

Russian GKZ Classification System.

The Group is using modern geophysical and geochemical  exploration and surveying techniques. The Group employs a world class team of geologists with considerable

regional expertise and experience. They are supported by a network of fully accredited laboratories capable of performing a range of assay work to high standards.

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Health, Safety And Environmental Risks

Risk

Description and potential impact

Mitigation

1. Failures in the Group's health and safety processes and/or breach of Occupational Health & Safety legislation.

The Group's employees are one of its most valuable assets. The Group recognises that it has an obligation to protect the health of its employees and that they have the right to operate in a safe working environment.

Certain of the Group's operations are carried out under potentially  hazardous conditions. Group employees may become exposed to health and safety risks which may lead to the occurrence of work-related accidents and harm to the Group's employees. These could also result in production delays and financial loss.

Health and Safety management systems are in place across the Group to ensure that the operations are managed in accordance with the relevant health and safety regulations and requirements.

The Group has an established health and safety training programme under which its employees undergo initial training on commencement of  employment and take part in refresher training on a regular basis.

The Group continually reviews and updates its health and safety procedures in order to minimise the risk of accidents and improve accident response, including additional and enhanced technical measures at all sites, improved first aid response and the provision of further occupational, health and safety training.

The Group operates a prompt incident

reporting system to the Executive

Committee, the Health, Safety and

Environmental ('HSE') Committee and the Board. Unfortunately there were two fatalities during 2013 (2012: none). Both of these fatalities were reported immediately to the Chairman of the HSE Committee.

The incidents were investigated by the Russian authorities who have confirmed that no action will be taken against the Group as the Group was not found to be at fault for either of these accidents. The HSE Committee discussed each of the fatalities in detail to identify whether any actions

could be taken or further training provided to mitigate against any reoccurrence of a similar accident.

Board level oversight of health and safety issues occurs through the work of the HSE Committee.

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2. The Group's operations require the use of hazardous substances  including cyanide and other reagents.

Accidental spillages of cyanide and other chemicals may result in damage to the environment, personnel and individuals within the local community.

Cyanide and other dangerous substances are kept in secure storages with access limited to only qualified personnel, with access closely monitored by security staff.

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Legal and regulatory risks

Risk

Description and potential impact

Mitigation

1. The Group requires various licences and permits in order to operate.

The Group's principal activity is the mining of precious and non-precious metals which require it to hold licences which permit it to explore and mine in particular areas in Russia.

These licences are regulated by Russian governmental agencies and if a material licence was challenged or terminated, this would have a material adverse impact on the Group. In addition, various government  regulations require the Group to obtain permits to implement new projects or to renew existing permits. Non-renewal of a permit may cause

the Group to discontinue the  operations requiring the permit and the imposition of additional conditions may cause the Group to incur additional compliance costs.

There are established processes in place to monitor the required and existing licences and permits on an on-going basis and processes are also in place to ensure compliance with the requirements of the licences and permits. Schedules are presented to the Executive Committee detailing compliance with the Group's

licences and permits.

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2. The Group's mineral Reserves and Resources are estimates based on a range of assumptions.

The Group's Mineral Reserves and Resources are estimates based on a range of assumptions, including the results of exploratory drilling and an ongoing sampling of the ore bodies; past experience with mining properties; and the experience of the expert engaged to carry out the reserve estimates. Other uncertainties inherent in estimating Reserves include subjective judgements and determinations based on available geological, technical, contractual and economic information. Some assumptions may be valid at the time of estimation but may change significantly when new information becomes available.

Changes to any of these assumptions, on which the Group's Reserve and Resource estimates are based, could lead to the reported Reserves being restated. Changes in the Reserves and Resources could adversely impact the economic life of deposits and the profitability of the Group's operations.

The first stage of assurance of the accuracy of reserves and resources is by detailed analysis of geological samples in the Group's laboratories.

These laboratories are licensed by the Russian authorities and use multiple quality assurance and quality control procedures. These procedures include the use of 'standards', 'blanks' and 'duplicates' as well as cross checking a percentage of all samples analysed, in an independent laboratory in Ulan Ude, Republic of Buryatia, Russia.

The Resource and Reserve estimates for the hard-rock assets disclosed in the Company's 2013 Annual Report were prepared in accordance with the guidelines of the Joint Ore Reserves Committee of the Australian Institute of Mining and Metallurgy, Australian Institute of Geosciences and Minerals Council of Australia ('JORC Code') with the exception of the alluvial reserves and resources which were prepared in accordance with the Russian GKZ Classification System.

The preparation of these Group estimates followed methodology set out by Wardell Armstong International, independent experts within the mining industry.

The Group also engages the services of independent experts to review the Reserves and Resources statements for operating mines and development projects on a regular basis to provide additional external assurance.

In addition, the Company prepares its Reserves estimates based on gold prices which are lower than the current market price of gold.

In December 2013 the Group announced an increase of 5.7 million ounces of non-refractory resources, estimated in accordance with the Russian GKZ Classification System, as a result of the ongoing exploration programme. This figure included 0.56Moz of combined C1+C2 categories, 1.82Moz in P1 and 3.32Moz in P2. These new resources are located in the areas adjacent to existing processing facilities and they have now been partially converted into JORC Mineral Resources and Ore Reserves. Further work on the reclassification of these additional non-refractory resources is ongoing.

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3. The Group is subject to risks associated with operating in Russia.

Actions by governments or changes in economic, political, judicial, administrative, taxation or other regulatory factors or foreign policy in the countries in which the Group operates or holds its major assets could have an adverse impact on the Group's business or its future performance. Most of the Group's assets and operations are based in Russia.

Russian foreign investment legislation imposes restrictions on the acquisition by foreign investors of direct or indirect interests in strategic sectors of the Russian economy, including in respect of gold reserves in excess of a specified amount or any occurrences of platinum group metals.

The Group's Pioneer and Malomir licenses have been included on the list of subsoil assets of federal significance, maintained by the Russian Government ('Strategic Assets'). The impact of this classification is that changes to the direct or indirect ownership of these licences may require obtaining clearance in accordance with the Foreign Strategic Investment Law of the Russian Federation.

Fluctuations in the global economy may adversely affect Russia's economy. Russia's economy is increasingly dependent on global economic trends and is more vulnerable to market downturns and economic slowdowns elsewhere in the world, as well as to reductions and fluctuations in the prices of hydrocarbons and minerals.

To mitigate the Russian economic and banking risk the Group strives to use the banking services of several financial institutions and not keep disproportionately large sums on deposit with a single bank.

The Group seeks to mitigate the political and legal risk by constant monitoring of the proposed and newly adopted legislation to adapt to the changing regulatory environment in the countries in which it operates and specifically in Russia.

It also relies on the advice of external counsel in relation to the interpretation and implementation within the Group of new legislation.

The Group closely monitors its assets and the probability of their inclusion into the Strategic Assets lists published by the Russian Government.

This risk cannot be influenced by the management of the Company. However, the Group monitors changes in the political environment and reviews changes to the relevant legislation, policies and practices

4. The Group is subject to risks that may arise from the current political instability between Russia and the West, concerning Ukraine.

The political and economic turmoil witnessed in the region, including the developments in Ukraine have had and may continue to have a negative impact on the Russian economy, including weakening of the Russian rouble. The imposition by the United States, the European Union and other countries of sanctions, asset freezes, travel limitations and certain other measures against specified Ukrainian and Russian individuals and others have not had a direct impact on the Group's business but could do so in in the future if such tensions escalate and or further sanctions are imposed that affect our ability to deal with certain persons or the Russian economy or demand for our gold production is affected by any of the above factors. The financial markets are currently uncertain and volatile. These and other events may have a significant impact on the Group's operations and financial position, the effect of which is difficult to predict. The consequential increase in the perceived risk of investing in Russia could also be materially detrimental to the Group.

The Group has no assets or operations in Ukraine. The Group produces gold from its Russian mines and sells this gold to Russian licensed banks. The Board and Executive continue to closely monitor the position.

The Company maintains an ongoing dialogue with its Shareholders and potential investors.

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Human resources risks

Risk

Description and potential impact

Mitigation

1. The Group depends on attracting and retaining key personnel who have the requisite skills and experience to satisfy the specific requirements for the business. These skills include a good knowledge of the customs and practice in the mining industry in Russia, and for certain senior positions a considerable fluency in English and Russian may be required.

The Group's success is closely aligned to the experience, abilities and contributions of certain of its key senior managers. The Group's growth and profitability may be adversely impacted by the loss of the services of these key senior managers or its inability to attract additional highly-qualified and experienced people with the requisite skills.

Succession planning is an important item on the agendas of both the Nomination Committee and the Board.

Reviews of reward structures and incentive plans are carried out as appropriate in order to attract, retain and incentivise key employees.

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Sales to related parties

Purchases from related parties

2013

US$'000

2012

US$'000

2013

US$'000

2012

US$'000

Asian-Pacific Bank

Sales of gold and silver

-

1,484

-

-

Other

462

383

552

1,12 4

462

1,867

552

1,12 4

Trading transactions with other related parties

Insurance arrangements with Helios, rent and other transactions with other entities in which key management have interest and exercises a significant influence or control

101

121

10,045

10,085

Associates

344

4

-

-

445

12 5

10,045

10,085

Amounts owed by related parties

at 31 December

Amounts owed to related parties

at 31 December

2013

US$'000

2012

US$'000

2013

US$'000

2012

US$'000

Helios and other entities in which key management have interest and exercises a significant influence or control

1,955

1,3 86

2

584

Associates

132

485

144

824

Asian-Pacific Bank

9

2

-

-

2,096

1,873

146

1,408

2013(a)

US$'000

2012(a)

US$'000

Asian-Pacific Bank

46,505

14 ,054

2013

2012

US$'000

US$'000

Wages and salaries

10,279

14,763

Pension costs

534

549

Share-based compensation

5,472

6,519

16,285

21,831