Petropavlovsk : Final Results

28 April 2016

Annual Results for the Year Ended 31 December 2015 and Production Update for Q1 2016

Petropavlovsk PLC ('Petropavlovsk' or the 'Company', or together with its subsidiaries the 'Group') today issues its audited annual results for the year ended 31 December 2015 (the 'Period') and a production update for the period from 1 January to 31 March 2016.

Principal Developments

n Petropavlovsk agrees Joint Venture ('JV') with LLC GMD Gold ('GMD Gold') to finance the completion of the construction and commissioning of the Company's Pressure Oxidation (POX) Hub project allowing it to monetise refractory gold reserves, with minimal additional capital expenditure subject to shareholder approval

n Agreement to acquire Amur Zoloto LLC ('AZ') gold mineral assets in Russia's Far East in all-share transaction subject to shareholder approval

n Petropavlovsk has today separately issuedtwo announcements on this. Please refer to the separate press releases for further details

n Group plans to begin underground mining at Pioneer in 2016 and commence ore processing in Q1 2017 with production forecast to contribute up to c.130,000oz - 180,000oz high margin ounces annually

n Investment agreement with the Russian Ministry of Far East Development involving provision of c.RUB5.5 billion (an equivalent of c.US$75 million as at 31 December 2015) funding towards the construction of an electricity power line in the North-East of the Amur Region of Russia, during the period 2015 - 2019, upon completion, the Group will get access to the enhanced capacity of the power supply infrastructure in the region which will allow a further development of Albyn and Malomir mines and their adjacent areas

n Main bank providers supportive of strategy and talks are ongoing to revise maturities and relax banking covenants due to relaxation being required at the next measurement date, 30 June 2016.

n 2015 highlights:

o Production of 504,100oz of gold

o 13% reduction in TCC to US$749/oz

o Net debt down 34% to c.US$610 million

n Q1 2016 highlights:

o Gold production of 92,100oz

o Gold sales of 101,000oz at average price of US$1,164/oz

o Estimated unaudited net debt of US$596 million

n 2016 outlook:

o Production of between 460,000-500,000oz reflecting Group's focus on cost reduction and operational efficiency

o Estimated TCC of c.US$700/oz and c.US$570 million net debt

n 2017-2020 outlook:

o A long-term, 10-20% annual increase in Group production, and a sustained increase in profitability at the current gold price, assuming successful completion of the proposed transactions.

Peter Hambro, Chairman of Petropavlovsk, said:

'2015 was a year of significant change and development for Petropavlovsk and marked the beginning of our strategic transformation. We are focused on ensuring that the Group is positioned to provide sustained profitability and generate meaningful cash flow, giving investors leverage to the price of gold by producing high-margin ounces at sustainable levels.

The enhanced strategy was developed following the successful refinancing that we accomplished in Q1 2015. The refinancing not only substantially reduced our leverage, it also helped ease and rebalance our debt maturity schedule for the period up to 31 December 2015. Looking ahead, the Company is in advanced constructive talks with its bank lenders regarding a further covenant relaxation, for the period to the end of 2017, and the Board is confident that this will be achieved ahead of the next test in June 2016. Importantly, the implementation of our enhanced strategy is expected to continue to improve the Company's investment profile, addressing the interests not only of our debt holders, but of our equity holders as well.

Our enhanced strategy entails a fundamental shift away from the aspiration to achieve the maximum levels of production as a first priority. Instead we will focus on growing the margin and improving free cash flow - without compromising the long term sustainability of our mines.

Whilst we are still focusing on deleveraging, we have developed additional strategic objectives:

First, in order to access the embedded value of the Group's refractory reserve base we are accelerating the POX Hub's development, under the critical condition that this will not increase Group debt levels. As we have announced separately today, we are delighted to have entered into an agreement with GMD Gold to finance the development of the POX Hub. This agreement could be truly transformational for the Group, unlocking the considerable refractory gold resources of the Group and securing a substantial increase in mid-term production.

Secondly, we have revised our approach to development in order to maximise returns to shareholders at this point in the economic cycle. Historically our core competency has been in greenfield exploration and taking projects from initial discovery into production. Looking ahead, we have adjusted our strategy to target accretive acquisitions, which will improve the quality of our portfolio on a free cash flow per ounce basis, and bring immediate cash flow benefits, offer short and long-term growth potential, and have synergies with our existing operations. We are very happy to report that we are making a significant progress in implementing this strategic objective. As separately announced today, we have entered into an agreement to acquire Amur Zoloto, an established gold company with production and development assets in the Khabarovsk Region in the Far East of Russia.

Thirdly, we have launched a comprehensive programme of exploration and development of our existing projects in order to maximise their net present value (NPV). This programme envisages increases in the quality and quantity of our mineral resources not only through exploration of flanks and satellite deposits of our producing mines but also by introducing new methods, in particular underground mining, to maximise production margins and optimise production schedules.

Having successfully reduced debt during 2015 by some US$300 million to US$610 million, the Group's main debt providers are supportive of our plans, which are being carried out in close consultation with them. As part of this, we are in advanced discussions with Sberbank and VTB to agree on new terms of the debt maturities and relaxation of financial covenants.

I am pleased to report that over the past year we have made significant progress in implementing and developing our strategic objectives, which is discussed in further detail in our CEO report. Now, we are looking forward with excitement and confidence into 2016 and beyond to the realisation of our strategic vision.'

2015 Financial Highlights

n Annual gold sales of 481,884oz

n Positive contribution from hedging activities of US$20/oz to the average realised gold price of US$1,178/oz (2014: US$1,331/oz) resulting in US$9.4 million addition to gold revenue

n A 13% reduction in Total Average Cash Costs per ounce ('TCC/oz') to US$749/oz (2014: US$860/oz) due to a continuing cash optimisation programme and Rouble devaluation

n Further reductions in All-In Sustaining Costs ('AISC') and All-In Costs ('AIC'): a 10% reduction in AISC to US$874/oz (US$972/oz in 2014) and a 14% reduction in AIC to US$932/oz (US$1,087/oz in 2014)

n Low Rouble price inflation reinforced by the 59% average depreciation of the Rouble against US dollar significantly improved cost profile

n A further 20% reduction in central administration costs to US$30.4 million (2014: US$38.2 million)

n A c.66% reduction in total capital expenditure for gold division to US$32.6 million (2014: US$96.8 million) in line with our guidance

n 12% decrease in total interest costs (before capitalisation) following the debt refinancing

n A further decrease of US$43.5 million in working capital reflecting the efforts undertaken by the Group to optimise the working capital structure and effect of rouble depreciation

n Underlying EBITDA of US$173 million (2014: US$252 million), including US$53.5 million benefit from decrease in TCC/oz

n Loss from continuing operations of US$190.5 million (2014: US$182.2 million)

n Net cash flow from continuing operations of US$111 million (2014: US$168.8 million)

n Net debt as of 31 December 2015 of US$610 million, down 34% from US$930 million as at 31 December 2014.

Operational and Exploration Highlights

n Full year 2015 production of 504,100oz of gold reflects the Company's revised strategy

n A 24% yoy reduction in TCC/oz (US$625/oz vs. US$818/oz) at Pioneer - the main source of the Group's production output

n A 10% reduction in TCC/oz at Albyn compared with 2014 (US$747/oz vs. US$830/oz) - the backbone of the Group's future production expansion

n 26% to 35% decrease in mining costs per m and processing costs per 1 tonne of ore at each of the Group's mines

n The Group re-evaluated its Ore Reserves using a conservative US$1,100/oz long term gold price assumption, reaffirming the robustness of the estimate; the re-evaluation resulted in a small write-off of marginal ounces estimated previously using US$1,250/oz gold price;

n Successful exploration identified c.1Moz of additional non-refractory JORC* Mineral Resource, more than offsetting resource mine depletion.

n Note

*The Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves ('the JORC Code') is a professional code of practice that sets minimum standards for Public Reporting of minerals Exploration Results, Mineral Resources and Ore Reserves.

Strategic Review

n Successful refinancing in March 2015 strengthened the balance sheet and decreased the Group's debt

n Revised strategy puts focus on maximising operating margins and free cash flows

n Strategy revision resulted in the plan to accelerate the Group's development and growth without further strain of the balance sheet via:

o Unlocking the value of the Group's refractory mineral resource and reserve base - the Group announced today that it has entered into an agreement with GMD Gold, with a view to entering into a JV to develop the POX Hub. Under the agreement, GMD Gold - a mining company associated with Novoangarskiy and Gorevskiy mining and beneficiation plants - will provide the equivalent of US$120 million, which the Group estimated is required to complete the POX Hub

o Development of brownfield exploration and introduction of new mining methods, eg. underground operations, with first underground production expected in 2017

o Accretive acquisitions of assets with short to medium term cash flow benefits and growth potential - the Group announced today that it has entered into an agreement to acquire Amur Zoloto, an established gold company with production and development assets in the Khabarovsk Region in Far Eastern Russia

o Optimised capital allocation to facilitate the Group's growth and development.

Development of Underground Mining Operations

n In 2015, the Group carried out an engineering study on underground development at Pioneer and Malomir supported by Russian and international experts, and confirmed that both underground projects are technically viable and profitable, with the potential to contribute high margin ounces to the Group's production schedule within 12 - 16 months

n In February 2016, a pre-feasibility study by an independent consultant concluded that underground mining should be technically feasible and economically viable at Pioneer's North East Bakhmut and Andreevskaya and Malomir's Quartzitovoye deposits

n The full feasibility study is expected to complete in 2016 when, subject to obtaining usual permits, underground access can be gained

n The Group is planning to start preliminary underground mining at Pioneer in 2016 and in 2019 at Malomir

n The Group estimates pre-production capital costs for Pioneer underground mine at c.US$9 million

n The Group estimates that the Pioneer underground mine will contribute up to 130,000oz-180,000oz of annual production, whilst Quartzitovoye at Malomir is expected to contribute c.53,000oz per annum.

Banking facilities

n The Group is in ongoing negotiations with its main bank debt providers - Sberbank and VTB - to agree on new debt maturities and relaxation of financial covenants ahead of the next measurement date, 30 June 2016

n Very good progress with both banks has already been achieved and a 3-month debt repayment holidays have already been granted to allow extra time for the Group and the lenders to agree on the new terms.

Corporate Highlights

n Refinancing plan completed on 18 March 2015, consisting of:

o A pre-emptive Rights Issue, raising US$235 million

o A new, five-year US$100 million convertible bond

o US$310.5 million Existing Bonds settled

n Reduction in the size of the Board of Directors to three executive Directors and four Non-Executive Directors to reflect the Company's current market capitalisation

n As part of the Group's strategy to focus on its core producing assets, the Group is expected to dispose of assets of LLC Ilyinskoye - a holder of the Visokoe depositand Verhnetisskaya GRK CJSC. Total proceeds will amount to US$20 million to be paid in July 2016. A US$32.5 million impairment charge has been recorded against associated exploration assets

n The Group also disposed of its 95.7% interest in OJSC ZDP Koboldo, a high-cost alluvial operation located in the Amur region, for c.US$17.5 million plus reimbursement of VAT consideration

IRC

Operational

n 1,114,153 tonnes of iron ore concentrate and 193,236 tonnes of ilmenite concentrate were produced, ahead of IRC's 2015 production targets by c.24% and c.21% respectively

n Kuranakh to be moved to care and maintenance while the Group focuses on K&S

n K&S is fully funded for completion and hot commissioning timetable with CNEEC has been agreed with production expected in H2 2016.

Financial (stand-alone consolidated financial statement of IRC)

n Underlying loss excluding impairments significantly reduced by 49% to US$28.9 million

n In line with industry peers, asset impairments were made due to negative movements in commodity prices

n US$480 million non-cash impairment was made in 2015, mainly relating to K&S and Kuranakh

n C.35% reduction in site operating expenses and a 39% reduction in administrative expenses

n US$50 million successfully raised via an Open Offer (4 offer shares for every 15 existing shares held at a subscription price of HK$0.315 each), reducing Petropavlovsk's stake in IRC from 45.39% to 35.83%

n Year end 2015 cash position of US$58 million

n China National Electric Equipment Corporation ('CNEEC')has agreed to payment terms that allow outstanding construction payments to be deferred

n Following extensive discussions between the Industrial and Commercial Bank of China (ICBC) and IRC, waivers have been granted, subject to fulfilment of certain conditions, from the obligation by IRC to maintain a cash deposit of c. US$26 million with ICBC during the period 20 June 2016 to 30 June 2018 inclusive

n The waiver from the obligations of IRC and Petropavlovsk to comply with certain financial covenants will be effective immediately upon fulfilment of the conditions precedent, up to and including 31 December 2017

n IRC is now working with all parties involved to ensure that all conditions are fulfilled.

Q1 2016 Highlights

n Gold production of 92,100oz,in line with the Group's revised strategy of focusing on higher margin ounces (Q1 2015: 112,800oz)

n Gold sales of 101,000oz (Q1 2015: 110,600oz)

n Average realised gold sales price of US$1,164/oz, 4% lower than in the comparative period (2015: US$1,217/oz)

n Estimated consolidated net debt as at 31 March 2016 of c.US$596 million (unaudited), c.US$14 million lower than 31 December 2015, in line with the Group's previous guidance and reflecting the Group's continued focus on cost reduction and operational efficiency.

*totals may not add up due to rounding

2016 Outlook

n Production in a range of 460,000-500,000oz for the full year. This target reflects the Group's new strategy with its focus on production of high-margin ounces at optimal levels of cash flows and doesn't include potential additions from the planned deal with Amur Zoloto

n Total capital expenditure for gold projects in 2016 of c.US$70 million (c.US$10 million exploration programme and c.US$60 million development and maintenance), mainly focused on development of the POX Hub (which is now expected to be financed by GMD Gold -the partners in newly formed JV) and of underground mining operations

n The Group expects a decrease in its total average cash costs of production in 2016 to c.US$700/oz due to its further cost-cutting programme

n In line with the Group's strategy of debt reduction, net debt is expected to decrease to c.US$570 million by the end of 2016 assuming an average gold price of US$1,200/oz for the remainderof 2016 and excluding any effect of acquisition of Amur Zoloto

2017-2020 Outlook

n Assuming successful completion of the proposed transactions, the revised plan provides for a long-term, 10-20% annual increase in Group production, and a sustained increase in profitability at the current gold price

n Ongoing exploration programme to further expand and enhance non-refractory and refractory mineral resource base and to improve the current base-case production schedule

n Annual maintenance capex of c.US$10 million and exploration expenditure of approximately US$15 million in the years 2017 and 2018

n The Group is planning to commence underground mining at Pioneer in 2016 and 2017 and to ramp it up to 130,000oz per annum in 2019. Group specialists estimate that further exploration may identify sufficient resources to support underground production up to 200,000-300,000oz per annum or higher

n Development of non-refractory satellite deposits at the Albyn mine (mainly Afanasevskaya and Unglichikan deposits) to increase production from the Albyn plant

n A significant uplift in current c.3.0Moz JORC Resources estimate at the Elginskoye deposit is expected to enlarge the mineral base for the Albyn RIP plant

n Under its prospective JV, the development of the POX Hub is expected to contribute to the Group's total output commencing from 2018.

Financial Results2015 Summary

Notes:

Figures may be rounded.

(a) Calculation of TCC is set out in the section Hard-rock mines operations below.

(b) The Group disposed its alluvial operations in April 2015. The comparative data for the year ended 31 December 2014 was restated accordingly to ensure comparability.

(c) AISC and AIC are calculated in accordance with guidelines for reporting all-in sustaining costs and all-in costs published by the World Gold Council. Calculation is set out in the section All-in sustaining costs and all-in costs below.

(d) Reconciliation of loss for the period and underlying EBITDA is set out in note 35 to the consolidated financial statements.

(e) Including US$15.1 million received under investment agreement with the Russian Ministry of Far East Development

(f) US$100 million convertible bonds due 2020 at amortised cost (31 December 2014: US$310.5 million convertible bonds due on 18 March 2015 at amortised cost).

Note: Figures may not add up due to rounding

Chief Executive's Statement

Strengthening our Balance Sheet

In 2015, we focused on further strengthening our balance sheet by decreasing our outstanding debt and adjusting its maturity schedule. Operational performance together with the refinancing and sale of our non-core assets generated cash during 2015 that enabled the Group to significantly reduce its net debt by US$320 million to US$610 million at the end of 2015, with repayment to our main lenders in line with the maturity schedules. It remains our medium term objective to reduce net debt to a ratio of not more than 1.5 EBITDA allowing for a balanced development of the Group and its further growth.

The Group is in discussions with its principal lenders to amend the maturity profile and revise certain covenants associated with its banking facilities.

Focusing on Cash Generation and Free Cash Flow Margin

Cost control is a critical pillar of our cash-generating strategy and the Group made further considerable progress in this area during the year. We achieved a 13% decline in hard-rock TCC per ounce, on top of a 12% decline in TCC during 2014. In total, this brings cumulative cost reductions to 23% between 2013 and 2015.

We have also delivered a sustainable step reduction in other costs, regardless of which metric is looked at - operating costs, overheads, capital expenditure or exploration. Of these the most impressive is a 20% decrease in our central administration costs, on top of a 17% reduction in the previous year due to the systematic and careful work of our team. At US$874/oz, our all-in sustaining costs for 2015 represent a 10% drop from US$972/oz in 2014, and our all-in costs fell 14% to US$932/oz over the same period.

Besides our ongoing cash optimisation programme, a number of other factors were key to achieving this:

§ Moving away from marginal mining at various operations

§ Restructuring and rightsizing our corporate, regional and operational structures, including an 11% reduction in our workforce

§ Rationalising and prioritising capital expenditure and deferring non-essential capital, whilst preserving the sustainability of our mines

§ General cost savings driven by ongoing business process re-engineering

§ A comprehensive programme of procurement optimisation

§ Outsourcing

§ Implementing new cost-saving technologies.

These efforts are continuing and will do so throughout 2016, with a view to protecting and further increasing the Group's margins in the current low gold price environment. Effective cost management will also prove beneficial to our margin when the gold price eventually recovers.

Protecting Long-Term Sustainability

To ensure our business has a strong future and that we achieve a maximum value from our producing assets, we have prioritised continued exploration and development of our underground and surface ore bodies. At the same time we have carried out further exploration activities at the flanks and satellites of our existing mines.

During 2015, our brownfield exploration delivered c.100,000oz of non-refractory reserves and c.1, 000, 000oz of resources compensating the resource depletion in 2015 production. We expect the new ounces to become part of our production output in the near future.

We have also proved that the Elginskoye deposit, which was considered as an additional resource base for the Albyn mine, is a much more sizeable deposit than expected and is currently evaluated at c.3.0Moz of reserves and resources. Whilst production planning is at an initial stage it is scheduled to become a source of ore to feed the Albyn plant, and we expect to be able to develop it into a significant standalone project in the future. The project economics are going to be substantially improved by a recent state grant to the Group of an equivalent to c.US$100 millionfunding to develop a local electric power line allowing a substantial expansion of both Albyn and Malomir.

Another way of unlocking shareholder value without substantial investment is revising the production schedules of our existing ore bodies to optimise further development and increase production margins.

For example, several ore columns at Pioneer are high-grade and remain open at depth, offering potential for significant resource and reserve expansion. Until recently, exploration at Pioneer was targeting exclusively open pit resources and reserves - these high grade intersections have not been followed up by deeper drilling in a down-dip direction.

In 2015 we completed extensive exploration targeting deeper high grade mineralisation at Pioneer and Malomir. The results of this have been extremely encouraging permitting us:

n to carry out an engineering study on underground development at Pioneer and Malomir, confirming that both underground projects are technically viable and profitable

n to conclude a pre-feasibility study by an independent consultant for Pioneer's North East Bakhmut and Andreevskaya and Malomir's Quartzitovoye deposits

The full feasibility study is expected to complete in 2016 and underground mining is expected to start in 2016 at North-East Bakhmut and in 2018 at Quartzitovoye. Currently our specialist estimate pre-production capital cost for Pioneer and Malomir underground mines as c.US$25-30 million with total contribution from both mines up to c.130,000oz - 180,000oz. Initial resources for underground mining estimated via surface drilling in excess of 0.4Moz at an average c.8.3g/t would justify commencement of first underground working and to continue exploration and reserves definition with the use of underground drilling which is expected to further increase reserves for underground mining.

The Group has carried out a surface exploration programme establishing enough mineral resources to justify the development of underground mining operations. The detailed exploration and active project development are scheduled to commence this year.

Unlocking value from our Refractory Reserves

I am pleased to report that the Group has made substantial progress in this area and has entered into a conditional agreement to create a joint venture with GMD Gold, an operator in the Krasnoyarsk region founded by reputable industry players, to complete development of the processing plant for treatment of refractory gold ores and concentrates. GMD Gold has an operation that produces refractory concentrate and has been seeking a way to extract gold from these assets.

The JV, a toll-treatment alliance, stands to unlock the value embedded in the Group's refractory resources enabling Petropavlovsk to increase total gold production by a target of 30 - 50% by 2020.

Under the terms of the agreement, Petropavlovsk will contribute to the JV some existing assets and the property rights as required to establish the POX Hub - a hydrometallurgical facility for processing refractory gold ores and concentrates - in return for a 49% equity stake in the JV. Our collaborator GMD Gold will contribute the equivalent of US$120 million in exchange for 51%, becoming an owner and operator of the POX Hub. The hub is expected to start production in 2018.

GMD Gold is associated with Novoangarskiy and Gorevskiy mining and metallurgical plants, which are established enterprises in Russia. The plants are involved in the treatment of lead-zinc ores from the Gorevsky deposit (one of the world's largest polymetallic deposits), are owners of licences for the gold and antimony deposit of Udereyskoye in the Krasnoyarsk region, and own licences for the Bagbora and Bogolubovskoye refractory gold deposits.

In order to start refractory concentrate production for the POX Hub, Petropavlovsk will need to invest an estimated U$30 - US$40 million to complete and expand the existing flotation plant at Malomir to 5.6Mtpa. Flotation and POX commissioning is set to contribute an additional 200,000-300,000oz (depending on quality of the concentrate) of yearly output to the Group's gold production at TCC levels similar to the Group's current costs of production.

This project will enable us to unlock the value of our refractory mineral resource base without causing any additional strain to our balance sheet. Any profits, arising at JV level will be shared on a 50:50 basis.

With the current refractory reserve and resource base of 9.31Moz (including 3.95Moz of JORC reserves at Malomir and Pioneer), we expect the prospective JV to unlock a significant value for our shareholders and ensure sustainable production from refractory assets for at least 20 years with excellent growth potential.

The POX Hub design allows for separate and simultaneous processing of refractory concentrates with a wide range of metallurgical properties. In line with the agreement, if necessary the POX Hub could be used as a processing base for third parties on an off-take agreements basis.

In addition, once the POX Hub is operational, Petropavlovsk will sell to GMD on market terms an amount of concentrate for processing constituting at least 25% of the POX Hub throughput capacity.

Petropavlovsk's new strategy has a direct bearing on our approach to growth. Not only does it mean that we must scrutinise every dollar spent on this, it defines the quality of the assets that we seek to acquire. As a result, we have adopted an active portfolio management approach. This requires ongoing assessment of our existing assets and potential targets for acquisition, as well as identifying and disposing of projects not aligned with Group objectives, with a view to improving the quality of our overall portfolio.

As a result of the above and in line with our new strategic objective of growing organically as well as through accretive acquisitions, we are happy to announce that we have announced an agreement to acquire Amur Zoloto (AZ), a leading gold mining company in the Russian Far East that has clear synergies with Petropavlovsk. The acquisition promises to increase the quality and quantity of our mineral resource base, and will enable us to increase production. It would be paid for in shares and therefore would not increase Group debt.

We are excited to be connecting with such reputable mining partners and look forward to working together as the projects progress.

Divestment of Non-Core Projects

The Group's strategy is to focus on its core producing assets in the short-term. For this reason, Petropavlovsk did not allocate significant capital expenditure for its non-core projects, although we frequently review ways to realise value from these assets.

In line with this plan, in 2015, we finalised the sale of our non-core high cost alluvial gold deposits through the sale of Koboldo - the holder of our alluvial licences in the Amur Region, allowing us to focus on new and existing high margin assets.

We are also planning to dispose of assets of LLC Ilyinskoye - a holder of the Visokoe depositand Verhnetisskaya GRK CJSC.The total consideration amounts to US$20 million, expected to be paid in July 2016. AlthoughUS$32.5 million of impairment charges have been recorded against associated exploration and evaluation costs for these assets, we consider that this disposal is a successful implementation of our enhanced strategy allowing us to focus on our priority projects.

Our Strategic Priorities for 2016

During the current financial year, Petropavlovsk will continue to build on the strategies it has implemented over the last two years. The five strategic priorities for 2016 reflect this continued focus:

§ Improving cash flow and margins: making money at current prices through further decrease in TCC/oz to c.US$700/oz and Capex at c.US$70 million in line with the previous year

§ Improving our balance sheet: further Net debt reduction to c.US$570 million and completion of restructuring of the debt to our senior lenders

§ Providing medium-term sustainability: development of underground mining at Pioneer and further brownfield exploration

§ Unlocking long-term value: creation of the proposed JV for the development of the POX Hub

§ Growth through acquisitions: progress Amur Zoloto acquisition as well as identifying other producing or brownfields assets with the potential to accelerate the unlocking of value for all stakeholders

Beyond 2016

The sustainability of our business is ensured by understanding the linkages between all of the inputs and outputs of our operations. This enables us to maximise the benefits for all stakeholders and reduce the risks to the business.

The new strategic objectives support our long-term vision for Petropavlovsk, a leading Russian gold mining company with highly profitable and sustainable gold production. We expect that implementing these strategic objectives will ensure a long-term, 10-20% annual increase in Group gold production, and a sustained increase in profitability at the current gold price. Depending on success of the deals announced today this forecast may substantially improve.

Pavel Maslovskiy, CEO

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Chief Financial Officer's Statement

- FINANCIAL HIGHLIGHTS

(a) Calculation of total cash costs ('TCC') is set out in the section Hard-rock mines operations below.

(b) The Group disposed its alluvial operations in April 2015. The comparative data for the year ended 31 December 2014 was restated accordingly to ensure comparability.

(c) All-in sustaining costs ('AISC') and all-in costs ('AIC') are calculated in accordance with guidelines for reporting all-in sustaining costs and all-in costs published by the World Gold Council. Calculation is set out in the section All-in sustaining costs and all-in costs below.

(d) Reconciliationof loss for the period and underlying EBITDA is set out in note 35 to the consolidated financial statements.

(e) Including US$15.1 million received under investment agreement with the Russian Ministry of Far East Development.

(f) US$100.0million convertible bonds due on 18 March 2020 at amortised cost (31 December 2014: US$310.5 million convertible bonds due on 18 March 2015 at amortised cost).

Note: Figures may not add up due to rounding

Revenue

Physical volumes of gold production and sales

Group revenue during the period was US$599.9 million, 31% lower than the US$865.0 million achieved in 2014.

Revenue from hard-rock mines was US$568.7 million, 28% lower than the US$786.9 million achieved in 2014. Gold remains the key commodity produced and sold by the Group, comprising 95% of total revenue generated 2015. The physical volume of gold sold from hard-rock mines decreased by 18% from 588,231 ounces in 2014 to 481,884 ounces in 2015. The average realised gold price decreased by 11% from US$1,331/oz in 2014 to US$1,178/oz in 2015. The average realised gold price was above the average market price of US$1,160/oz, reflecting the positive effect of hedge arrangements.

Hard-rock mines sold 68,075 ounces of silver in 2015 at an average price of US$15/oz, compared to 190,573 ounces in 2014 at an average price of US$19/oz.

Revenue generated as a result of third-party work by the Group's in-house service companies contributed US$31.2 million to group revenue in 2015 compared to US$39.5 million in 2014. This was primarily attributable to sales generated by Group's engineering and research institute, Irgiredmet of US$28.6 million in 2015 compared to US$34.1 million in 2014, principally from engineering services and the procurement of materials, consumables and equipment for third parties.

Cash flow hedge arrangements

In order to increase certainty in respect of a significant proportion of its cash flows, the Group continued its hedging arrangements through gold forward contracts.

Forward contracts to sell an aggregate of 178,449 ounces of gold matured during the year and contributed US$12.6 million to cash revenue (2014: US$42.3 million from forward contracts to sell an aggregate of 364,253 ounces of gold).

Forward contracts to sell an aggregate of 71,551 ounces of gold at an average price of US$1,116 per ounce were outstanding as at 31 December 2015.

In October 2014, the Group also purchased a number of gold put options for an aggregate of 150,000 ounces of gold with a strike price of US$1,150/oz as part of a downside protection strategy. The option contracts mature over the period from January 2015 to June 2015. The aggregate premium paid was US$4.8 million.

Forward contracts and a US$3.2 million decrease in options fair value contributed US$20/oz to the average realised gold price.

The Group constantly monitors gold price and hedges some portion of production for periods of up to 12 months as considered necessary.

Forward contracts to sell an aggregate of 37,850 ounces of gold at an average price of US$1,116 per ounce are outstanding as at 28 April 2016.

Underlying EBITDA and analysis of operating costs

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

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

Hard-rock mines

During 2015, hard-rock mines generated underlying EBITDA of US$206.9 million compared to US$277.5 million underlying EBITDA in 2014.

Total cash costs for hard-rock mines decreased from US$860/oz in 2014 to US$749/oz in 2015, primarily reflecting the effect of cost optimisation measures undertaken by the Group in response to the declining gold price environment and scheduled decrease in grades processed as well as the positive effect of Rouble depreciation. The decrease in the average realised gold price from US$1,331/oz in 2014 to US$1,178/oz in 2015 and the decrease in physical ounces sold resulted in US$124.1 million decrease in the underlying EBITDA. This effect was partially mitigated by the reduction in the total cash costs which had a net US$53.5 million positive contribution to the underlying EBITDA in 2015.

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

Compared with 2014 there was no significant inflation of Rouble denominated costs, in particular, electricity costs in Rouble increased by up to 1% (decreased by up to 37% in US Dollar terms), the cost of chemical reagents increased by up to 6% (decreased by up to 50% in US Dollar terms), consumables prices increased by up to 2% (decreased by up to 37% in US Dollar terms) and cost of diesel decreased by up to 1% (decreased by up to 38% in US Dollar terms). The impact of low Rouble price inflation was reinforced by the 59% average depreciation of the Rouble against the US Dollar, with the average exchange rate for the period going from 38.4 Roubles per US Dollar in 2014 to 61.30 Roubles per US Dollar in 2015.

Refinery and transportation costs are variable costs dependent on the production volume. Mining tax is also a variable cost dependent on production volume and the gold price realised. The mining tax rate is 6%.

(a) Excluding deferred stripping

(b) The Group disposed its alluvial operations in April 2015. The comparative data for 2014 was restated accordingly to ensure comparability.

(a) The Group disposed its alluvial operations in April 2015. The comparative data for 2014 was restated accordingly to ensure comparability.

All-in sustaining costs and all-in costs

AISC decreased from US$972/oz in 2014 to US$874/oz in 2015, reflecting the reduction in TCC as well as lower central administration expenses and sustaining capital expenditure related to the existing mining operations.

AIC decreased from US$1,087/oz in 2014 to US$932/oz in 2015, reflecting the decrease in all-in sustaining costs explained above, decrease in exploration expenditure and decrease of capital expenditure related to new projects, which was limited to fulfilling existing contractual commitments relating to POX.

(a) The Group disposed its alluvial operations in April 2015. The comparative data for 2014 was restated accordingly to ensure comparability.

(b) Refractory ore stockpiles to be processed at the POX Hub.

Corporate and other

The Group has corporate offices in London, Moscow and Blagoveschensk which together represent the central administration function. Central administration expenses decreased by US$7.8 million from US$38.2 million in 2014 to US$30.4 million in 2015, primarily reflecting depreciation of the Rouble against the US Dollar.

During 2015, other operations contributed US$(34.1) million to the underlying EBITDA vs. US$(35.7) million in 2014.

Impairment review

The Group undertook an impairment review of the tangible assets attributable to the gold mining projects and the supporting in-house service companies and concluded no impairment was required as at 31 December 2015.

The forecast future cash flows are based on the Group's current mining plan. The other key assumptions which formed the basis of forecasting future cash flows and the value in use calculation are set out below:

(a) Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 10.1% (2014: 11.8%)

Impairment of exploration and evaluation assets

The Group performed a review of its exploration and evaluation assets and recordedthe following impairment charges:

- Taking into consideration the alternative means for realising value from the Visokoye asset through a sale, and referring to the indicative aggregate consideration from the potential buyer of US$20 million for the Visokoe asset and equity investment in Verkhnetisskaya Ore Mining Company, a US$32.5 million impairment charge has been recorded against associated exploration and evaluation costs previously capitalised within exploration and evaluation assets;

- US$4.0 million impairment charges were recorded against associated exploration and evaluation costs previously capitalised within intangible assets following the decision to suspend exploration at various license areas, located in the Amur region; and

- A further US$0.9 million impairment charge was recorded against exploration and evaluation assets in Guyana.

Impairment of ore stockpiles

The Group assessed the recoverability of the carrying value of ore stockpiles and recorded impairment charges/ reversals of impairmentas set out below:

Interest income and expense

The Group earned US$1.0 million interest income on its cash deposits with banks.

Interest expense for the period was comprised of US$13.6 million effective interest on the Convertible Bonds and US$57.7 million interest on bank facilities (2014: US$25.4 million and US$55.2 million, respectively). During 2015, no interest expense was capitalised as part of mine development costs within property, plant and equipment (2014: US$13.4 million).

Other finance gains

Taxation

The Group is subject to corporation tax under the UK, Russia and Cyprus tax legislation. The average statutory tax rate for 2015 was 20.25% in the UK and 20% in Russia.

The tax charge for the period arises primarily in relation to the Group's precious metals operations and is represented by a current tax of US$31.8 million in 2015 (2014: US$34.5 million) and a deferred tax charge, which is a non-cash item, of US$17.1 million (2014: deferred tax charge of US$133.4 million). Included in the deferred tax charge in 2015 is a US$40.3 million foreign exchange effect which primarily arises because the tax base for a significant portion of the future taxable deductions in relation to the Group's property, plant and equipment are denominated in Russian Rouble whilst the future depreciation charges associated with these assets will be based on their US$ carrying value.

During the period, the Group made corporation tax payments in aggregate of US$32.9 million in Russia (2014: corporation tax payments in aggregate of US$34.0 million in Russia).

Loss per share

Basic loss per share for 2015 was US$0.07 compared to US$0.94 basic loss per share for 2014. The key factor affecting the basic loss per share was the increase of weighted average number of Ordinary Shares from 196,423,244 for 2014 to 2,657,332,030for 2015.

The total number of Ordinary Shares in issue as at 31December 2015 was 3,300,561,697 (31 December 2014: 197,638,425).

Discontinued operations and investment in associate - IRC

On 7 August 2015, IRC completed an Open Offer resulting in the issue of 1,295,976,080 shares. The Group did not subscribe for the Offer Shares to which it was entitled and the Group's interest in the share capital of IRC was diluted to 35.83%. With other significant shareholder blocks in place following the completion of the Open Offer and despite the Group's continuing guarantee of IRC's facility with ICBC, the Group is no longer considered to be exercising de facto control over IRC and, accordingly, IRC ceased being a subsidiary of the Group and is recognised as an associate to the Group from 7 August 2015.

IRC share price was HK$0.35 as at 7 August 2015 and the gain from disposal of IRC was US$0.7 million.

During the period to 7 August 2015, IRC generated US$10.7 million operating losses. The Group also recorded a further US$96.6 million write-down to adjust the carrying value of IRC's net assets to fair value less costs to sell, based on IRC's share price of HK$0.35 as at 7 August 2015, and reflects the change in the market share price of IRC shares.

With effect from 7 August 2015, the Group accounts for IRC as an associate under the equity accounting method as required by IAS 28 'Investments in Associates and Joint Ventures'. Under this method, the fair value of the Group's interest in IRC on 7 August 2015 of US$99.6 million became the deemed historical cost of the associate, which was recognised within the investments in associate line as a single amount following de-recognition of the separate 'asset held for sale', 'liability held for sale' and 'non-controlling interest' at that date.

During the period from 7 August 2015 to 31 December 2015, the Group recognised its 35.83% share of IRC loss for the period as a loss from an associate of US$60.4 million, including US$49.7 million attributed to a further impairment of K&S Project.

Financial position and cash flows

Key movements in cash and net debt from continuing operations

(a) Including US$15.1 million received under investment agreement with the Russian Ministry of Far East Development

The decrease in working capital reflects the efforts undertaken by the Group to optimise the working capital structure and effect of Rouble depreciation, including:

- an aggregate US$11.6 million decrease in ore stockpiles primarily due to the partial processing of ore stockpiles at Pioneer, Pokrovskiy and Malomir which contributed US$3.2million, US$5.0 million and US$6.3 million, respectively, partially offset by the increase in ore stockpiles at Albyn (US$2.9 million);

- US$24.2 million decrease in store and spare parts and construction materials

As at 31 December 2015, there were no undrawn facilities available to the continuing operations.

Capital expenditure

The Group invested an aggregate of US$32.6 million on its gold projects compared to US$96.8 million invested in 2014. The key areas of focus this year were on fulfilling existing contractual commitments in relation to the POX Hub project, expansion of tailing dams at Pioneer and Albyn and ongoing exploration related to the areas adjacent to the ore bodies of the Group's main mining operations.

Foreign currency exchange differences

The Group's principal subsidiaries have a US Dollar functional currency. Foreign exchange differences arise on 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 depreciated by 30% against the US Dollar during 2015, from RUB56.26 : USD1 as at 31 December 2014 to RUB72.88 : USD1 as at 31 December 2015. The average year-on-year depreciation of the Rouble against the US Dollar was approximately 59%, with the average exchange rate for 2015 being RUB61.30 : USD1 compared to RUB38.44 : USD1 for 2014.

As a result of the significant volatility of the Russian Rouble, the Group recognised foreign exchange losses of US$12 million in 2015 (2014: US$31.3 million) arising primarily on Rouble denominated net monetary assets.

The Refinancing

On 2 February 2015, the Group announced a proposed Refinancing which was completed on 18 March 2015. The Refinancing consisted of the following:

- Rights issue pursuant to which 3,102,923,272 new Ordinary Shares were issued at subscription price of £0.05 per Ordinary Share as set out below:

- 2,114,460,594 Ordinary Shares were issued for cash consideration raising £105.7 million (equivalent to US$156.2 million) gross cash proceeds

- 988,462,678 Ordinary Shares were issued in exchange for the Existing Bonds as part of settlement of the Existing Bonds (please refer to the details set out below)

- Issue of the new convertible bonds:

On 18 March 2015, the Group issued US$100 million convertible bonds due on 18 March 2020 (the 'New Bonds'). The New Bonds were issued pursuant to the completion of the exchange offer of the Existing Bonds as set out below.

The New Bonds were issued by the Group's wholly owned subsidiary Petropavlovsk 2010 Limited and are guaranteed by the Company. The New Bonds carry a coupon of 9.00% payable quarterly in arrears and are convertible into redeemable preference shares of Petropavlovsk 2010 Limited which are guaranteed by and will be exchangeable immediately upon issuance for Ordinary Shares in the Company.

The conversion price has been set at £0.0826 per Ordinary Share, subject to adjustment for certain events, and the conversion exchange rate has been fixed at US$1.5171: £1. The New Bonds were admitted to listing on the Official List of the UK Listing Authority and admitted to trading on the Professional Securities Market of the London Stock Exchange on 18 March 2015.

- Settlement of the Existing Bonds:

The Existing Bonds with a par value of US$310.5 million as at 31 December 2014 (note 20) were settled as follows:

- Bank Waivers:

The Group obtained waivers and relaxation of certain financial covenants for the period until 31 December 2015, inclusive.

The aggregate transaction costs of US$42.8 million, out of which US$7.8 million were paid as at 31 December 2014, were primarily allocated to equity (US$33.4 million) and to the New Bonds (US$5.1 million).

Disposal of alluvial operations

On 16 April 2015, the Group entered into a conditional Sales and Purchase Agreement relating to the sale of its 95.7% interest in JSC ZDP Koboldo ('Koboldo'). The disposal was completed on 22 April 2015.

Koboldo is an alluvial gold operation located in the Amur region in the Far East of Russia and represents an alluvial operations business segment. The net assets of Koboldo were written down to fair value based on the indicative cash consideration as at 31 December 2014. Accordingly, the disposal did not result in significant gains or losses on disposal in 2015.

Disposal of investments in associates

On 7April 2015, the Group entered into a Share Purchase Agreement to sell its 25% interest in JSC ZRK Omchak ('Omchak') for a total cash consideration of US$1 million.

Investment agreement with the Russian Ministry of Far East Development

On 14 December 2015, the Group entered into an investment agreement with the Russian Ministry of Far East Development (the 'Investment Agreement'). The Investment Agreement involves provision of RUB5.5billion (an equivalent to c.US$75 million as at 31 December 2015) funding towards the construction of the electricity power line in the North-East of the Amur Region of Russia, where the Group's Albyn and Malomir mines and adjacent licence areas are operated, during the period 2015 - 2019. The funds are advanced to the Group and then should be transferred to the joint-stock company Far East Grid Distribution Company ('DRSK'), who is to engage a contractor to build the relevant power supply infrastructure. The Group's responsibility under the Investment Agreement will be to monitor the progress and to report to the Russian Ministry of Far East Development. The Group will be taking ultimate responsibility for the construction of the power line. Upon completion, the Group will get access to the enhanced capacity of the power supply infrastructure in the region. Under the terms of the Investment Agreement, the Group has certain capital commitments, including further development of Albyn and Malomir mines.

As at 31 December 2015, the Group received RUB1.1billion (an equivalent to US$15.1 million) funds under the Investment Agreement.

POX JV

On 27 April 2016, the Group entered into an agreement with LLC GMD Gold ('GMD Gold') to set up a new enterprise whereby the Group will contribute the existing POX Hub assets (note 13) and GMD Gold will provide US$120 million finance towards completion of the POX Hub development. Upon completion of the POX Hub development, each party will have the right to use the 50% capacity of the POX Hub. This transaction will require shareholder approval.

Acquisition of Amur Zoloto

On 28 April 2016, the Group entered into a contribution agreement to acquire 100% share in the LLC Amur Zoloto, a gold company with production and development assets in the Khabarovsk Region in the Far East of Russia. Upon completion, consideration for the transaction will be satisfied by the issue of new ordinary shares in the Company. This transaction will require shareholder approval.

Going concern

The Group monitors and manages its liquidity risk on an ongoing basis to ensure that it has access to sufficient funds to meet its obligations. Cash forecasts are produced regularly based on a number of inputs including, but not limited to, forecast commodity prices and impact of hedging arrangements, Group mining plan, forecast expenditure and debt repayment schedules. Sensitivities are run for different scenarios including, but not limited to, changes in commodity prices, cost inflation, different production rates from the Group's producing assets and the timing of expenditure on development projects. This is done to identify risks to liquidity and covenant compliance and enable management to develop appropriate and timely mitigation strategies. The Group meets its capital requirements through a combination of sources including cash generated from operations and external debt.

The Group performed an assessment of the forecast cash flows and covenant compliance in relation to bank facilities for the period of 12 months from the date of approval of the 2015 Annual Report and Accounts. As at 31 December 2015, the Group had sufficient liquidity headroom and complied with related financial covenants. The Group's projections demonstrate that although the Group expects to have sufficient working capital liquidity over the next 12 months, these projections indicate that, unless mitigating actions can be taken, there will be insufficient liquidity to meet its debt repayment schedule on 20 June 2016 and a breach of certain financial covenants, being leverage and interest service ratios, within the bank facilities as at the next measurement date, being 30 June 2016, is likely to arise.

In view of the above, the Group is in negotiations with its principal lenders with a view to obtaining satisfactory modifications and temporary waivers regarding the existing covenants ahead of the testing period and the current repayment schedule ('Debt Restructuring'). The Group has received written comfort from their principal lenders intending to support the Debt Restructuring. If an agreement with the Group's principal lenders in relation to the Debt Restructuring cannot be reached, and as a result a covenant breach and/ or missed debt repayment occurs, this would result in events of default which, through cross-defaults and cross-accelerations, could cause all other Group's debt arrangements to become repayable on demand.

The Group has guaranteed the outstanding amounts IRC owes to ICBC. The outstanding loan principal was US$276.25 million as at 31 December 2015. The assessment of whether there is any material uncertainty that IRC will be able to repay this facility as it falls due is another key element of the Group's overall going concern assessment. The Directors of IRC have forecast that certain financial covenants under the ICBC facility are likely to be breached at the next testing date of 30 June 2016 and IRC will not have sufficient liquidity to facilitate a debt repayment of US$21.5 million due on 21 June 2016, which will cause the related facility to become immediately due and payable. However, IRC has obtained from ICBC approved waivers of the financial covenants until and inclusive of 31 December 2017, conditional, among others, on approval of the Debt Restructuring by the Group's principal lenders, a result of which is that approval of the Debt Restructuring must be completed and approved by 20 June 2016 to facilitate IRC's debt repayment schedule being met.

The risk that the Group will be unable to achieve appropriate mitigating actions prior to 20 June 2016 or secure an appropriate relaxation or amendment of its financial covenants in order to avoid a breach of covenants is a material uncertainty which may cast significant doubt upon the Company's ability to continue to apply the going concern basis of accounting.

Nevertheless, after making enquiries and considering the uncertainties described above, the Directors have a reasonable expectation, after taking into account the aforementioned factors, that the Group will have adequate resources to continue in operational existence for the foreseeable future, being at least the next 12 months from the date of approval of the 2015 Annual Report and Accounts. Accordingly, they continue to adopt the going concern basis of accounting in preparing these consolidated financial statements.

2016 Outlook

The Group is on track to achieve 2016 production guidance of 460-500Koz. The Group's operating cash expenses are substantially Rouble denominated. The Group expects its total average cash costs of production in 2016 to be c.US$700/oz at current exchange rate. Net debt is expected to decrease to c.US$570 million by the end of 2016, assuming an average gold price of US$1,200/oz for the remainder of 2016.

2015 Operational Report

Pioneer

Performance in 2015

In 2015, Pioneer produced 231,400oz, equating to approximately 46% of the Group's total gold production for the year (2014:c.263,000oz).

Mining

In line with the long term plan, in the first half of the year the majority of ore produced by mainly the Alexandra and Vostochnaya pits was low-grade whilst a large-scale expansion of the Andreevskaya pit commenced at the beginning of the year was expected to expose the high-grade reserves for extraction in the second half of the year. These reserves were reached only by the beginning of Q4 which has delayed the production of high-grades. Other high-grade ore during the year was mined at the North East Bakhmut and Nikolaevskaya pits. During Q4 the reconciliation data from blast-hole drilling confirmed that the average grades at the Andreevskaya zones exceed the JORC Reserve and Resource grade for this area.

Processing

The Pioneer plant worked steadily throughout the year with H1 head grades through the Pioneer plant averaging at 1.1g/t increasing to 2.0g/t in H2. The process plant recovery throughout the year varied between 82% and 87%, with an average of 85%.

To treat the high-grade material coming from Andreevskaya in H2effectively, the process plant parameters had to be modified. This included blending the high-grade ore with large volumes of low-grade material and extending the leaching time at the plant up to 22 hours, compared to the usual period of 14-16 hours which has accounted for an increase in volume of the gold in circuit.

The heap-leach operations commenced in Q2 and were carried out until early October. Low-grade ore from stockpiles and from Alexandra (less than 0.8g/t) was used to feed the heap leach.

Costs

For the year ended 31 December 2015, TCC/oz for Pioneer were US$625/oz, a c.24% reduction compared with 2014 (US$818/oz), in spite of a 16% decrease in grades processed through the mill, a slight decrease in recovery rates and some inflation of Rouble-denominated costs.

Cost-reduction was a focus at Pioneer throughout the year. Significant progress was already achieved in H1 2015 and continued in H2. The improvement in costs was as a result of ongoing cost-optimisation measures and the average year-on-year depreciation of the Rouble against the US Dollar of 59%.

Outlook

The 2016 plan for Pioneer is based on the Group's new strategy of cash flow optimisation. It provides for a similar production profile through cost reduction measures. In 2016, Pioneer is expected to produce c.205,000oz of gold, equating to approximately 43% of the Group's total production for the year. All production from the mine is expected to come from non-refractory open pit ore sourced mainly from Alexandra and Andreevskaya deposits.

To grow Pioneer's production in the medium term, mining of high-grade ore is planned using underground mining methods, particularly at North East Bakhmut and Andreevskaya. The Group is at an advanced stage of exploration for underground mining and preparation of mine design and necessary permitting is well under way. First production from underground mining is planned in 2017 with production rates up to c.130,000oz of gold per year.

In the longer term, in order to process the mine's large reserves of refractory ore, the Group is planning to construct a flotation plant at Pioneer, which will convert the refractory ore into flotation concentrate. This would then be sent for processing to the POX Hub, once completed. Currently first production from the refractory ore at Pioneer is planned in 2019. Based on today's reserves and resources Pioneer's life of mine is estimated at approximately 13 years.

Albyn

Performance in 2015

In 2015, Albyn produced approximately 157,600oz, equating to approximately 31% of the Group's total gold production for the year. Albyn was the Group's largest mine in terms of total mass moved during 2015, at approximately 37 million cubic metres (2014: c.30 million cubic metres). Albyn's entire reserve base is non-refractory.

Mining

Mining was generally focused on the main pit in H1, though some stripping was carried out at the east pit. In H2, the pilot processing of ore from a new satellite pit, Afanasevskaya was successfully carried out, but further production was deferred in order to maximise the Albyn mine's profitability.

The original plans for the year were adjusted so that main ore body and satellite ores were no longer blended in response to tests showing that doing so was depressing processing recovery rates. This adjustment had a positive effect on recovery rates in the second half of the year compared to the beginning of 2015 (90.8% in Q1).

Processing

The process plant recovery rate remained high throughout the year and averaged 93%, which placed downward pressure on costs. All Albyn's current Ore Reserves are suitable for processingthrough the mine's operational RIP plant.

Costs

Albyn is one of the Group's largest producing mines and as such has been a key target for cost reduction. Total cash costs at Albyn for the year were US$747/oz, an approximate 10% decrease compared with 2014 (US$830/oz). This was achieved in spite of a 14% increase in the stripping ratio compared with the previous year and some inflation of Rouble-denominated costs. The costs improvement was a result of a combination of several factors: a 14% increase in grades processed through the mill, a slight improvement in recovery rates, the cost-optimisation programme and Rouble devaluation.

Outlook

In 2016, exploration is mainly planned at the Elginskoye area, where in-fill drilling should allow the Group to evaluate additional reserves by converting Inferred into Measured and Indicated Resources. Below the Albyn and Unglichikan pits, we plan to evaluate the extent of high-grade mineralisation that may be suitable for underground mining.

In 2016, Albyn is expected to produce c.170,000oz of gold equating to approximately 35% of total production for the year. The Group plans to mine and process high-grade ore from Unglichikan starting from 2017.

The life of mine currently envisaged in the Group's long-term production plan is approximately 13 years. Large areas adjacent to the mine remain under-explored and Group geologists consider Albyn to be highly prospective for further, significant gold discoveries.

Pokrovskiy

Performance in 2015

In 2015, Pokrovskiy, together with its satellite operation at Burinda, produced approximately 56,000oz, equating to approximately 11% of the Group's total gold production (2014: c.64,200oz). The focus of operations was site maintenance for its future POX Hub role.

Mining

During the year overburden stripping was concentrated on the upper benches of the northwest extension of the Pokrovka 1 pit, from where the majority of the medium-grade ore was produced. Low-grade ore was produced from the lower benches. High-grade ore was mined and transported from the satellite pit at Burinda throughout Q1 and some low-grade ore came from stockpiles.

In Q1, higher-grade ore (c.2g/t) was also discovered at deeper levels in the Pokrovka 3 pit, and this was mined during H2 2015. The mining of medium-grade ore recommenced at the Zheltunak satellite pit in April and continued the rest of the year. Plans for other satellite deposit Vodorazdelniy, were made.

Processing

Head grades through the Pokrovskiy plant averaged 1g/t, and the recovery averaged 84%. The Pokrovskiy heap-leach pads operated from April to October with a recovery rate of 60.6%.

*Including Burinda

Costs

For the year ended 31 December 2015, TCC/oz at Pokrovskiy were US$871/oz, in line with 2014 (US$885/oz), in spite of a 10% decrease in the average grades processed through the mill and some inflation of Rouble-denominated costs. This was achieved due to the success of the Group's cost-optimisation programme and the 59% averagedepreciation of the Rouble against the US Dollar.

Outlook

The Group continues to review its plans for Pokrovskiy in line with the ongoing development of the POX Hub. Future production at the Pokrovskiy mine depends on the POX project's timing. Currently it is envisaged that the Pokrovskiy mine will continue to process non-refractory gold at the current capacity until the POX Hub is commissioned. After the POX Hub's commissioning only the heap-leach facilities will remain to treat non-refractory ore.

The Group expects to resume the development of the POX Hub in 2016 following signing of the JV agreement with GMD Gold. It is expected currently that the first production from the POX Hub will be in 2018, with the plant achieving its full capacity in 2019.

Production from Pokrovskiy in 2016 is expected to be in the range of c.40,000oz, constituting approximately 8% of the Group's total production for the year.

Malomir

Performance in 2015

In 2015, Malomir produced approximately 59,100oz (compared with 82,200oz in 2014) equating to approximately 12% of the Group's total gold production for the year.

Mining

In line with our focus on optimal production and cash cost optimisation, during the year our operations focused on the Quartzitovoye and Magnetitovoye areas, whilst work at others was rescheduled. Mining at other, smaller pits that went ahead in H1, prompted by challenges seen in mining at the Magnetitovoye zone, did not prove to be cost efficient due to the distance between them and the plant. We therefore changed our plan to move mining of some reserves to later years - mainly those at distant satellite deposits. This adjustment means the pits can be mined in a timely manner whilst Malomir is developed into a main producer of refractory concentrate for the future POX Hub. In view of this large scale development, we are focused on producing steady cash flows to maintain the mine and preserve its machinery.

Processing

The average recovery rate at the resin-in-pulp ('RIP') plant during the year was 67%. The majority of Malomir's reserves and resources are refractory, requiring flotation and pressure oxidisation for efficient gold recovery. Therefore, processing recovery is scheduled to increase once POX Hub is operational and majority of Malomir production is switched from RIP to flotation.

Costs

2015 total cash costs/oz for Malomir were US$1,092/oz in line with the previous year (2014: US$1,031/oz), in spite of a 32% decrease in processed grades and some inflation of Rouble-denominated costsdue to the cost-optimisation programme and a 59% average depreciation of the Rouble against the US Dollar. Cash costs at Malomir are affected by the scattered positioning of multiple deposits and high stripping coefficients.

Outlook

It is expected that Malomir will produce c.65,000oz in 2016, equating to approximately 14% of the Group's total production for the year, in line with management's focus on optimal production and cash cost optimisation. In the medium to long-term the plan is to develop Malomir into a main producer of refractory concentrate for the POX Hub.

Reflecting a weaker gold price environment and changes in market conditions, development of the POX Hub project was slowed down in 2013, but as a result of signing of the binding agreement with GMD Gold to provide the finance to complete the construction and commissioning of the POX Hub the project is going to re-commence this year.

To boost Malomir's production in the medium term, mining of high-grade ore is planned using underground mining methods - particularly that at Quartzitovoye-1. The Group is at an advanced stage of exploration for underground mining and preparation of mine design and necessary permitting is well under way. First production from underground is planned in 2019 with production rates up to c.60,000oz of gold per year.

Future production will rely on remaining lower grade non-refractory reserves, refractory reserves and high grade resources for potential underground extraction identified in 2015.

The mine life currently envisaged in the Group's long-term production plan is in excess of 15 years. This includes production from non-refractory reserves until 2023, with refractory processing commencing from 2018 onwards.

Exploration Report / Reserves and Resources Update

In line with the approach adopted in previous years, the Group reports its Mineral Resources and Ore Reserves in accordance with JORC Code. The assets are subdivided into 'core' and 'non-core' projects. 'Core projects' refers to the Group's four operational mines: Pokrovskiy, Pioneer, Malomir, Albyn and all their satellites. Mineral Resource and Ore Reserve estimates for these assets have been audited by independent mining consultantsWardell Armstrong International ('WAI') in accordance with JORC Code (2012).

The Group considers its 'non-core' projects to be assets with potential to be developed into production at some point in future, though they are not located near current processing facilities. These include Tokur (Amur Region), Visokoye (Krasnoyarsk) and Yamal assets (the Petropavlovskoye and Novogodneye Monto deposits). Mineral Resources and, where appropriate, Ore Reserves for these projects have not changed since 2011. These estimates have not been updated and therefore reported in accordance with JORC Code (2004 - the current version at the time of the estimates). The estimates were reviewed and signed off by WAI in March 2011 (Yamal, Tokur) and February 2012 (Visokoe).

The tables below provide a summary and an asset-by-asset breakdown of Mineral Resources and Ore Reserves.

Note: Figures may not add up due to rounding

A summary of gold Ore Reserves for the Group's Core Projects (which comprise Pioneer, Pokrovskiy,Malomir, Albyn and Burinda) is provided in a separate table below. These Reserves are included in the table above and are not additional.

Note: Figures may not add up due to rounding

Group total Mineral Resources for Core and Non-Core Projects are presented in the table below.

Note: Mineral Resources are reported inclusive of Ore Reserves. Figures may not add up due to rounding

In addition to the mineral resources potentially suitable for open pit extraction, Group estimates high grade Mineral Resource potentially suitable for underground mining at Pioneer and Malomir. The estimate totals 0.42Moz (c.1,675kt at 7.8g/t) with a detailed breakdown provided below.

Asset-by-asset breakdown of Ore Reserves

Notes:

(1) Group Ore Reserves statements are prepared by WAI; Pokrovskiy, Pioneer, Malomir and Albyn reserves are prepared in April 2016 in accordance with JORC Code 2012; Visokoe Ore Reserves prepared in January 2012 in accordance with JORC Code 2004; Tokur Reserves are prepared in 2010 in accordance with JORC Code 2004

(2) Ore Reserves estimations are for open pit extraction. Pokrovskiy, Pioneer, Malomir and Albyn areas are reported within economical pit shells using a $1,100/oz gold price assumption. Visokoe has been based on a $1,250/oz gold price assumption and Tokur has been based on a $1,000/oz gold price assumption, together with the operating costs assumptions relevant at the time of the estimates.

(3) Reserve cut-off grade for reporting varies from 0.3 to 0.9g/t Au, depending on the asset and processing method;

(4) Figures may not add up due to rounding.

Asset-by-asset breakdown of Mineral Resources

Notes:

(1) Mineral Resources include Ore Reserves

(2) Mineral Resources for Pokrovskiy, Pioneer, Malomir and Albyn are audited by WAI in accordance with JORC Code 2012 in April 2015 with a further review of changes in April 2016; Mineral Resources for Visokoe, Tokur and Yamal are reviewed by WAI in 2011, 2010 and 2010 respectively in accordance with JORC Code 2004

(3) The cut-off grade varies from 0.30 to 0.35g/t depending on the type of mineralisation and proposed processing method

(4) Mineral Resources for the Core Projects including Pokrovskiy, Pioneer, Malomir and Albyn are constrained by open-pit shells at a US$1,500/oz long term gold price. For these areas where Mineral Resources for underground mining are evaluated (Andreevskaya and North East Bakhmut at Pioneer, Quartzitovoye at Malomir) open pit Mineral Resources are constrained by the pit designs used to define Ore Reserves. Mineral Resources for Visokoe are constrained by a conceptual open pit shell at a long-term gold price assumption of US$1,800/oz; Tokur and Yamal Mineral Resource have no open pit constraints.

Notes:

(1) Mineral Resources for potential underground extraction were audited by WAI in accordance with JORC Code 2012 in April 2016

(2) Cut-off grade is 1.5g/t is used to report Mineral Resource for potential underground mining.

(3) Mineral Resources reported for the potential underground extraction have been defined as those below the pit designs used in the Ore Reserve estimate.

Pioneer

During 2015, exploration at Pioneer continued to pursue two main objectives:

- Find and explore further non-refractory resources for potential open pit mining

- Explore deeper lying non-refractory resources that are suitable for eventual underground extraction.

In line with the first objective, in 2015 work was carried out principally at the Alexandra area (Alexandra, Shirokaya and Brekchievaya zones) where a significant amount of in-fill drilling was completed. This drilling improved confidence in the Alexandra Mineral Resourceand Ore Reserveestimates. In addition, exploration identified high grade intersections in drill hole C-8909, c.500m north from the Alexandra Zone: 2.3m at 7.97g/t and 2.1m at 17.5g/t. The extent, morphology, true thickness and orientation of this high grade mineralisation is unclear and the area warrants follow up drilling. Drilling at the Brekchievaya Zone resulted in the discovery of a new orebody and in a small increase in non-refractory mineral resources.

Exploration targeting 'open pit' resources also continued in the south side of Pioneer licence area, south of the Nikolaevskaya zone. Re-interpretation of the geophysical survey revealed several anomalies that are in good correlation with the known Pioneer gold-bearing structures. Exploration drilling completed during 2015 intersected mostly low-grade mineralisation; the best intersections include 9.9m at 1.63g/t, 27.9m at 0.56g/t (both drill hole C-2409), 67m at 0.60g/t (drill hole C-2422) and 31.1m at 0.97g/t (drill hole C-2400) and 39.3m at 0.77g/t. Although some of the mineralisation discovered is oxidised and non-refractory, the significant proportion of the deeper primary material is expected to be refractory. Nevertheless, Group geologists expect this area to be prospective for the discovery of high grade non-refractory resources and exploration is expected to continue here into 2016.

The Group made a significant progress in exploring deeper extensions of the Andreevskaya and North East Bakhmut high-grade pay shoots. The Andreevskaya East pay shoot was confirmed further down to c.285m below the surface, which is c.95m below the expected depth of open pit mining there. The mineralisation was drilled at approximately 20 by 20m centres, modelled and included into the Group JORC Mineral Resource and Ore Reserve statements. It remains open below this depth. Another pay shoot has been confirmed at depth of up to 210m below the surface (and c.40m below the expected depth of the open pit mining) at the Andreevskaya West area by 2 drill holes (true thickness of c.1.4m at 10.65g/t, C-5606 and true thickness of c1.1m at 62.7g/t, C-5607).

At North East Bakhmut, the Group completed 30 drill holes that intersected high-grade mineralisation as deep as 370m below the surface and c.145m below the existing open pit (North East Bakhmut No3). The best intersections include 7.2m at 35.2g/t, 19.8m at 7.92g/t and 9.4m at 86.26g/t. The pay shoot is still open in a down-dip direction with the last intersection received in Q1 2016 at 2.0m and 5.15g/t. There remains potential for high grade discoveries at North East Bakhmut Nos 1, 2 and 5.

Pay shoot No 1 (Bakhmut) was intersected by 11 drill holes and traced to an elevation of +40, approximately 160m below the existing pit. The thickness of drill intersections varies between 5.2 and 22.4m at a grade between 2.0 and 19.46g/t. The strike length of the pay shoot is up to 70m and, similar to the NE Bakhmut pay shoot, it is open in depth.

The Promezhutochnaya pay shoot is also located within the Bakhmut trend, close to conjunction with the Yuzhnaya zone. It is not as well explored as the first two pay shoots; nonetheless, it has been intersected by drilling c.240m below the existing open pit with an intersection width of 1.5m at 47.8g/t. Further drilling was undertaken on Pay Shoot No1 and Promezhutochnaya in Q1 2016. The assay results from this drilling are still pending.

Overall, the total Mineral Resources at Pioneer slightly decreased (by c.200,000oz), mostly due to mine depletion of c.280,000oz.

Pioneer total Ore Reserves decreased c.340,000oz, mainly due to mine depletion also due to application of a more conservative long term gold price assumption of US$1,100/oz.

New Sosnovaya licence

The new Sosnovaya licence covering the area north-east from Pokrovskiy and south-west from Pioneer was acquired at a government auction in December 2016. This new licence covers geological contact between Cretaceous granitoids and Jurassic host rocks, which is believed to be favourable for formation of gold deposits. The Sosnovaya licence joins the two sites (Pioneer and Pokrovkskiy) together and the Group now has control over entire length of the eastern segment (c.80km long) of this prospective contact. Preparation of the exploration programme for Sosnovaya is under way with the field work is expected to start later in 2016.

Albyn

An extensive in-fill drilling programme commenced at Elginskoye in 2015 in order to upgrade some of the large InferredResources to the Indicatedcategory, to increase Ore Reserves there subsequently and better define its high grade areas. This work is still in progress with the drilling scheduled to finish in Q2 2016. The partial results of this work have been reflected in the current mineral resources and reserves update, whilst all the results will be incorporated later in 2016 once the drill program is completed. This additional drilling will allow the Group to get formal approval for the Elginskoye reserves from Russian authorities (GKZ) and to obtain a full mining permit for the deposit.

In 2015, exploration work also continued at the Afanasevskoye deposit (west of the Albyn plant's Afanasevskoye licence). Podarochnoye, which is a principal known zone of mineralisation there, was drilled at 40 by 40m centres allowing estimates of Measuredand Indicatedmineral resource and Probable Ore Reserves in accordance with JORC Code 2012. Approximately 40,000oz (in 1,380kt of ore at c. 0.95g/t average grade) of Mineral Resource was estimated there, of which c.20,000oz (c.560kt at 1.23g/t) has been converted into Probablereserves. C.5,000oz of this reserve has been depleted during 2015.

Albyn's Mineral Resources increased by c.370,000oz despite depletion of c.170,000oz, giving a gross increase of c.540,000oz. The increase is mainly attributable to the evaluation of new Mineral Resources at the Albyn satellite deposits Unglichikan and Elginskoye.

Albyn's Ore Reserves decreased slightly by c.30,000oz despite the depletion. The gross increase taking depletion into account is c.140,000. The increase is mainly at Elginskoye, Unglichkanskoye and Afanasevskoye satellite deposit. Group specialists envisage the extensive drilling program together with the comprehensive technical studies currently being undertaken by the Group on Elginskoye should result in the evaluation of additional JORC Ore Reserve in excess of 1.0Moz.

Pokrovskiy

Voderazdelniy

In 2015, exploration resumed at the Vodorazdelniy prospect, situated c.2km south-east from the Pokrovskiy processing plant. Vodorazdelniy has been known for some years but was a low priority due to its low grade. Drilling completed in 2015, together with exploration results from before 2011, allowed estimation of the Mineral Resources and Ore Reserves there in accordance with the JORC Code 2012. Though low-grade, Vodorazdelniy is expected to extend Pokrovskiy's non-refractory operational life.

Zheltunak East, 'Suhoi' Zone

Drilled in H1, the Zheltunak East 'Sukhoi' zone displayed patchy mineralisation mainly within zones of silicification, with quartz veinlets and minor breccia. High-grade intersections were found in two adjacent boreholes (80m apart) at a depth of 25m each, showing an 8m thickness at 6g/t Au. It is possible that these two intersections represent the same thrust surface as in the Cross (Cryest) zone. If so then this should be confirmed by some limited, shallow (less than 50m depth) infill drilling between these two holes, as well as drilling on adjacent sections.

Pokrovskiy's mineral resources increased by c.130,000oz with the depletion offset by new additions at Vodorazdelnoiy.

Ore Reserves decreased by only c.30,000oz, despite mine depletion of c.69,000oz.

Malomir

The key areas of exploration at Malomir during 2015 were Berezoviy (earlier in the year) and the deeper extensions of No. 55, the high-grade Quartzitovoye orebody, for potential underground mining. Exploration was also carried out at Razlomniy (south side of the Pogranichnaya license) but with no significant results to report.

At Berezoviy, the Osenneye zone - the principal zone of mineralisation in that area discovered to date, was subject to detailed exploration and trial mining. Exploration was finalised, resulting in c.22,000oz being included in the Mineral Resource statement and c.17,000oz being added to its Ore Reserves. Some of this material has subsequently been mined and depleted. Exploration at the other mineralised zones within the Berezoviy area - Zapadnaya and Uspenskaya, to date has only resulted in the discovery of scattered mineralisation that is not continuous and could not be included into a formal JORC Resource estimate. Exploration there has been paused whilst the exploration targets are re-evaluated and the further exploration program is re-considered. Results of the exploration completed at the Razlomniy area in 2015 were also below expectations. Exploration there has stopped until the exploration concept and targets are re-evaluated considering 2015 results. All of these other zones are treated as low priority.

In H2 2015, deep drilling commenced to explore deeper extensions of the high-grade ore body 55 (Quartzitovoye deposit). Four drill holes were completed by the end of 2015 with the exploration continued in Q1 2016. These drill holes intersected high-grade mineralisation as deep as 150m below the expected depth of the final pit at this zone. The selected intersections interpreted as extensions of the ore body 55 are c.14.5m at c.6.7g/t (drill hole 900-1) and c.2.8m at c.38.3g/t (drill hole 900-4). Other significant intersections, currently interpreted as belonging to smaller sub-parallel satellite structures and/or apophysis, include 2.7m at 36.2g/t (drill hole 900-4). The quoted intersections used a 1.5g/t cut-off grade and true thickness. At a cut-off grade of 1.0 g/t, intersections in 900-4 are joining in a single interval of c.20m (true thickness) at c.7.7g/t. The resource model indicates that Quartzitovoye has c. 266,000oz of gold in high grade resources (c.7.4 g/t, c.1,116kt of ore) below the final open pit. This resource is potentially suitable for underground mining and still open in a down-dip direction, as well as along the strike. A pre-feasibility study of underground mining at Quartzitovoye is under preparation and Group specialists expect to estimate and report JORC Ore Reserve of 200-300koz here during 2016.

Malomir's total Mineral Resources increased by c.120,000oz mostly due to success of exploration at Quartzitovoye

Malomir Ore Reserves decreased by c.350,000oz due to a depletion of c.90,000oz of gold as well as due to the use of more conservative gold price assumption resulted in a write off of c.320,000oz of marginal refractory reserves, in line with the JORC Code 2012.

POX Hub

In 2010, Petropavlovsk decided to convert the Pokrovskiy mine into a regional hub for processing refractory concentrates. The Company currently has nearly 3.9Moz of JORC refractory reserves as at 31 December 2015 at its Malomir and Pioneer mines. The Group operations cannot process these reserves as the gold is trapped in sulphide minerals, such as pyrite or arsenopyrite. These 'lock in' the gold particles and make the ore resistant to cyanide-based processing and requires a different technological approach for treatment.

With the Pox Hub in place, ore would first be processed into high-grade flotation concentrate at on-site Malomir and Pioneer flotation plants, yielding to concentrate 3-5% of ore. It would then be trucked to Pokrovskiy and treated using pressure oxidation. This is a high temperature and pressure process whereby gold-bearing sulphides are exposed to extreme heat in a pressurised autoclave. The process would break down the sulphides present in the flotation concentrate, making the gold amenable to cyanide leaching using Pokrovskiy's RIP plant. The ultimate aim is to smelt gold into doré bars at an on-site facility.

At present, the Pokrovskiy POX plant, which is more than two-thirds completed, comprises of four autoclaves, installed in 2013. Each autoclave is 15m long and 4m tall, weighs 116.5t and has a volume of 66m. Having four separate autoclave vessels allows operations to be more flexible, as concentrates with different properties and sources can be separately processed at the same time, without compromising productivity or gold recovery. The design of the plant allows for further expansion of the plant's capacity by 30% by adding two more autoclaves.

It is expected that once commissioned, the POX Hub would be the largest of its kind in Russia, able to process up to 500,000t of flotation concentrate a year. The Group also estimates that it would be Russia's most technologically-advanced POX facility for processing gold, able to extract from a wide range of refractory ores. This would support long-term, sustainable gold production from Malomir and Pioneer. Given the scale of the POX Hub and the large amount of undeveloped refractory gold mineralisation in the Russian Far East, the hub opens a new dimension for the Group's future growth. In addition to the Group's current assets, the Hub could treat ores from deposits available for acquisition in the region, especially those with significant reserves and resources but abandoned during the Soviet era due to a lack of technology. There is also potential to process concentrate from third parties without access to such technology and expertise.

In order to conserve capital expenditure following the decline in the gold price, the Group decided to slow down the POX Hub's development. In 2014, development was conducted solely to fulfil existing contracts, and in 2015 only essential maintenance work took place.

Following devaluation of the Russian rouble the capital cost estimate required to finish POX project are currently estimated as US$120 million, significantly lower than previous estimates.

During 2015 the Group undertook negotiations with GMD Gold founded by reputable industry players in Russian mining sector on a potential partnership to finalise the development of the POX project. As was announced today these negotiations concluded in a JV agreement under which GMD Gold will provide finance to complete POX construction earning 51% stake in the newly formed JV. The JV will be a toll treatment enterprise where each party shares nominal 50% of the POX plant capacity to process their own refractory concentrates. However, the actual capacity used by each party can be negotiated depending on the party's needs. There is also a provision to take a third party refractory concentrates for the toll treatment. The agreement is subject of certain conditions and shareholder`s approval. The full details of the agreement will be published in the due course.

The POX Hub construction is expected to re-commence in 2016 and take approximately 18 months to complete. The two line at the Malomir flotation plant is more than 90% complete and is expected to be commissioned before the POX Hub is, in order to generate sufficient quantity of the concentrate for a sustainable start up. First gold production from the POX Hub is forecasted in 2018.

Following the successful JV negotiation, the Group is now considering investment into the expansion of the Malomir flotation plant, adding a third flotation line and expanding Malomir's refractory capacity to 5.6Mt of ore a year. It is estimated this expansion will require between US$30 and US$40 million of capital expenditure in 2016. The expansion, together with the commissioning of the POX Hub, is set to add an additional 200,000-300,000oz (depending on quality of the concentrate) of yearly output to the Group's gold production schedule at TCC levels similar to the Group's current costs of production.

Underground Mining

In 2014, Group geologists began to evaluate the opportunity to maximise the value of the Pioneer and Malomir deposits by developing underground mining operations. As a result of this evaluation, the Group identified two areas at Pioneer potentially suitable for underground mining - Andreevskaya and North East Bakhmut, as well as the Quartzitovoye deposit at Malomir and the Pokrovka 1 deposit at Pokrovskiy.

Preliminary estimates by Group specialists at the time indicated that an underground mine at Pioneer could potentially have a high economic return at a gold price above US$800/oz. This lead to a decision to intensify exploration of high grade resources potentially suitable for underground mining.

Significant progress has been made since beginning of 2015 in developing the high grade non-refractory resources at Pioneer and Malomir for underground production:

- Pioneer's North East Bakhmut and Andreevskaya and Malomir's Quartzitovoye deposits have all been defined as priority for underground mining development

- Substantial JORC Mineral Resources have been established there, whilst JORC Ore Reserve estimates are well under way

- Significant upside potential beyond estimated JORC resources proved at these areas as well as at other areas of the Pioneer, Malomir and Albyn mines; further exploration is scheduled to unlock this potential

- A pre-feasibility study has been completed and detailed technical underground mine design for North East Bakhmut and Quartzitovoye is in preparation

- Construction of the underground mine is expected to start in August 2016 at Pioneer, with first production in Q1 2017.

Following extensive exploration works at these areas, results of which are stated below, the Group has developed an underground mining development strategy based on the following criteria:

a) Underground development deemed economically viable on a standalone basis at any continuation of the ore bodies already mined by open pits,providing the reserves within 90m below the bottom of the open pit are not less than 35,000oz at 4g/t average grade or better

b) A specialised contractor to be employed for the Group's underground mine development

c) Exploration of the continuing ore bodies at the depth of 80-140m below the base of a pit should be carried out from the surface, with any deeper horizons explored from the underground workings as appropriate.

The development plan for underground mining details the following stages:

· Stage 1 - Pioneer, North East Bakhmut, pit No 3

· Stage 2 - Pioneer, Andreevskaya

· Stage 3 - Malomir, Quartzitovoye-1

A specialist group of employees with 15-30 years' experience in underground mining and development was formed to cover this area of focus. A Russian engineering organisation PiterGorProject has been chosen as the design contractor for the project. The design work for the North East Bakhmut underground mine is expected to be completed in May 2016 and that for Quartzitovoye-1 in August 2016. A tender process has identified three reputable candidates that could potentially be our contractors for the underground construction. It is expected that construction will start at North East Bakhmut in August 2016, with first production in Q1 2017. Meanwhile, exploration will be carried out from the underground workings in order to fully evaluate reserves and resources for underground development.

In 2015 the Group carried out geological exploration for the high-grade non-refractory ores 80-120 m below the bottom of the existing pits at Malomir and Pioneer. The scope of exploration work was based on proven data for high-grade zones (ore columns), where the upper horizons were mined in an open cast fashion.

Exploration there will continue into 2016. Further drilling on down dip extensions is expected to continue from within the underground workings. We plan to complete deep drilling from the surface during 2016 and to estimate enough ore reserve to justify starting underground operations at Quartzitovoye. Further exploration is expected to continue by drilling from underground.

The initial estimates based on the pre-feasibility study evaluate total pre-production capital costs to develop North East Bakhmut at Pioneer at c.US$9.0 million (at RUB64:US$1 exchange rate). These costs include design and geotechnical works, on surface mine infrastructure and preparatory works, power supply infrastructure, underground access and other capital development.

The main mining parameters at North East Bakhmut are currently estimated as follows:

North-East Bakhmut

· Mining method - sublevel open stoping

· Mining losses - 1.04%

· Dilution - 11.43%

· Annual production rate - 200 kt

· Mining cash cost - 1,474.4 RUB/t

Underground mining is expected to contribute up to c.130,000oz - 180,000oz high margin ounces annually to the Group's production output.

2015 exploration results related to underground development

Pioneer

At the Andreevskaya East ore zone below the bottom of the existing pit (+80m level) continuing mineralisation was observed: two ore bodies of a 40-55m strike length with 90m extent in a down-dip direction (down to a -10m level), explored by 5 drill holes at a 30x40m grid. These were categorised as C2 (under the Russian classification system) and estimated at 27kt with an average grade of 31g/t and a gold content of 27,000 oz, (at a thickness of 3.0m). The zone remains open to depth. Further exploration of these payshoots is currently planned from underground workings once they are developed.

At the Andreevskaya Central ore zone 7 separate drill holes were drilled below the bottom of the pit at a of 30 to 60 by 80m grid. Two of the boreholes identified high grade mineralisation (1.9m at 10.65g/t and 1.2m at 62.67g/t) at +120m and +100m levels, which is 50m below the base of the existing pit. In addition, three drill holes identified the following intersections: 1.2m at 10.67g/t, 7.0m at 12.98g/t, 4.0m at 16.7g/t. Preliminary estimates suggest Central Zone resource of 47kt at 18g/t average containing c.26,000oz of gold. The average thickness of the mineralised zone is 3.0m and it is still open to the depth. The 2016 plan includes exploration drilling on proposed strike extensions of this payshoot from the surface.

According to the preliminary assessment under the JORC Code the total resources for the Andreevskaya zone comprise (M+I+I) c.90 kt at an average grade of16.5g/t, containing c.50,000oz of gold.

At the North East Bakhmut ore zone, Sub-pit 3 mineralisation has been explored by 23 drill holes at 40 by 20 and 60 by 20m centres to an elevation of -70m or 140m below the existing open pit. Further drilling completed in Q1 2016 proves that the mineralisation extends further down at least 100m where a single drill hole intersected two zones 1.0m at 10.0g/t and 2.0m at 5.15g/t. An estimate prepared in accordance with the Russian GKZ classification suggests C2 category resource of 360kt of ore at a 13.8g/t average grade containing c.158,000oz of gold. The average thickness is estimated as 4.2m, allowing for low cost and productive mechanised mining methods. The maiden JORC estimate resulted in a combined Measured+Indicated+Inferred estimate of 408kt at an average grade of 7.8g/t containing c.100,000oz of gold.

At the Bakhmut ore zone, six deep drill holes were completed to explore known pay shoot No1 to an elevation of 0 to +20m or 110-130m below the open pit. Gold grades here are showing a downward trend: intersections at +20m elevation range between 0.5 to 1.3m in thickness at an average grade between 3.4 to 8.0g/t. At a 0m elevation only low grade mineralisation with the grades between 1.04 and 1.15g/t was found in these drill holes. We plan to drill two more holes here to verify these results, intersecting mineralisation at a -60m elevation. In addition an internal estimate based on 8 drill holes at a 30 by 20m centres grid suggests there is a potentially suitable for underground extraction resource of c.140kt of ore with an average grade 13.9g/t containing c.62,000oz of gold

Exploration was also carried out on projected pay shoot No 2 within the Bakhmut zone. The pay shoot is situated 160m to the east from pay shoot No 1. Nineteen drill holes were drilled here intersecting a thick zone of argillisation and stockwork quartz mineralisation with a thickness of up to 100m, within which up to five narrower high grade sub-parallel zones potentially suitable for underground extraction were identified. A preliminary estimate using only 80% of the assays, suggests a resource of c.500kt at an average grade of 5.0g/t containing c.80,000oz of gold. The estimated average thickness is 6.8m. Mineralisation is still open in down dip direction below the elevation of -20m as well as to the east. In the western direction at a cut-off grade of 0.4g/t mineralisation joins pay shoot No1 separated from the later by an area of low grade mineralisation with thickness between 21.2 and 75.3m grading between 1.1 to 1.56g/t. Using a cut-off grade of 0.4 g/t the Group estimates resources below the open pit of c. 320,000oz at an average grade of 2.2g/t within a stockwork orebody measuring 380 by 140m and on a vertical projection with an average thickness of 35.2m.

Malomir

Quartzitovoye

To date 23 drill holes were drilled outside the open pit targeting high grade resources at a nominal drill grid 100 by 40 to 140 by 40m. High-grade mineralisation at a cut-off grade of 1.7 g/t was explored 170m below the open pit to an elevation of +160m and it remains open in down dip direction. Up to 5 sub-parallel grade zones have been identified grading from 1.96 to 81.57g/t, with thickness varying between 0.6 and 12.9m. Zones are up to 200m in strike length. Using only 85% assays (with the 15% that are still pending), internal estimate suggests a C2 category resource of 810 k t of ore with an average grade of 7.7g/t containing c.200,000oz of gold. A corresponding JORC estimate, audited by WAI, is 1,116kt at an average grade of 7.4g/t containing c. 266,000oz of gold.

IRC

IRC is a producer and developer of industrial commodities and was the Group's former Non-Precious Metals Division, prior to its listing on the Stock Exchange of Hong Kong Limited (stock code 1029). The Group currently holds a 35.83% stake in IRC.

Kuranakh

In 2015, Kuranakh produced 1,114,153 tonnes of iron-ore concentrate, up 10% from the previous year, with a 62.5% iron (Fe) content and 193,236 tonnes of ilmenite concentrate, up 8% from the previous year, with 48% titanium dioxide content.

In December 2015, IRC announced its decision to move Kuranakh to care and maintenance due to the low iron-ore and ilmenite price environment. Despite efforts to reduce costs at the mine, IRC decided that it would be most economical to focus its resources on K&S.

K&S

Phase One K&S is expected to be able to produce 3.2 million tonnes of iron-ore concentrate with a 65.8% iron (Fe) content, once completed and at full capacity.

In October 2015, IRC reported that CNEEC - its main contractor for the development of K&S, had notified IRC that there would be a further delay to the project's commissioning. IRC later signed an agreement with CNEEC and was advised that the K&S operational plant will be handed over by 30 June 2016.

Since December 2015, IRC had been in discussion with its project lender, ICBC, regarding waivers to maintain cash deposits at ICBC's debt service reserve account, and to comply with certain financial covenants. On 19 April 2016, the waivers were granted, subject to the fulfilment of certain conditions precedent.

Garinskoye

Garinskoye remains an attractive, low-cost, large-scale, direct shipping ores (DSO-style) green-field project. Due to the depressed commodities environment and capital constraints, IRC did not develop it in 2015, but continues to monitor market conditions for future opportunities.

Investment in IRC

In January 2013, IRC entered into conditional agreements for a US$238 million subscription for new IRC Shares by General Nice Development Limited ('General Nice'), a member of a group of companies that collectively is one of the largest Chinese iron-ore importers, and Minmetals Cheerglory, a wholly-owned subsidiary of China Minmetals Corporation. Liquidity constraints have resulted in General Nice, to date, completing c.80% of its planned investment. Investment from Minmetals Cheerglory can only occur once the subscription by General Nice has been completed.

Although full completion of the investment from General Nice and Minmetals has been delayed, General Nice has agreed to commence paying interest on the outstanding investment amount of US$38 million from December 2014 onwards, although no interest payments have been made by General Nice to IRC as at 31 December 2015.