28 March 2012

Annual Results for the year ended 31 December 2011

Petropavlovsk PLC ("Petropavlovsk" or the "Company", or together with its subsidiaries "the Group") today issues its audited annual results for the period ended 31 December 2011 (the "Period"). 

FINANCIAL SUMMARY

*       Previous year numbers restated to reflect deduction of co-product (silver) revenue.

NOTES

Underlying EBITDA is the profit for the period before financial income, financial expenses, foreign exchange gains and losses, fair value changes, taxation, depreciation, amortisation and impairment. Reconciliation of profit for the year and underlying EBITDA is set out in note 37 to the financial statements.

Impairment charges are those detailed in note 6 to the financial statements.

Adjusted earnings per share (basic) before impairment charges is profit for the period attributable to equity holders of Petropavlovsk PLC before these impairment charges divided by the weighted average number of Ordinary Shares during the period.

Total attributable gold production, as stated throughout this document, is comprised of 100% of production from the Group's subsidiaries and, where applicable, the relevant share of production from joint ventures and other investments. Figures for the comparative period are restated accordingly. No attributable ounces are included in the Group's production figures from its c.1.1% interest in Rusoro Mining Ltd. The Company's direct and indirect interest in Pokrovskiy Rudnik (the holder of the Group's Pokrovskiy and Pioneer interests) is 98.61%. Cumulative gold production, as stated throughout this document, consists of gold physically recovered and gold in circuit. Accordingly, gold produced in the year consists of gold recovered during the period and adjusted for the movement in gold still in circuit. 

FINANCIAL HIGHLIGHTS

n  Group revenue of US$1.3 billion - more than double the 2010 Group Revenue (US$612 million), due to a 52% increase in gold sold, a 29% increase in the average realised gold sale price and a 374% increase in IRC's revenue;

n  Group total cash costs for hard-rock assets of US$586/oz, represent a 7% increase compared to 2010, despite a 22% decrease in processed grades at Pokrovskiy and Malomir and strong inflationary pressures. This has been achieved as a result of increased efficiencies of operations, economies of scale, implementation of cost control measures and improved grades of ore mined and processed at Pioneer;

n  Total cash costs per ounce at Pioneer decreased by 3% due to increased capacity and economies of scale and improvement in grades processed;

n  Cash costs for alluvial production totalled US$1,167oz; 2011 alluvial production amounted to 14% of the Group's total gold output,  compared to 16% in 2010;

n  The Group's average realised gold price increased by 29%, from US$1,253/oz in 2010 to US$1,617/oz in 2011;

n  Underlying EBITDA for the period was US$597.1 million, a substantial 205% increase on 2010;

n  Earnings per share of US$1.24 increased more than ten times versus the 2010 figure, due to a 1066% increase in net profit for the period attributable to shareholders of Petropavlovsk  from US$19.8 million in 2010 to US$230.9 million in 2011;

n  During 2011, the Group carried out a review of its existing exploration and evaluation projects and recognized an impairment charge of US$42.1 million against certain mineral properties which are not considered economical;

n  Adjusted earnings per share before impairment changes of US$1.46 increased almost four times versus the 2010 figure, again reflecting the increase in net profit for the period attributable to shareholders of Petropavlovsk PLC;

n  On 7 February 2012, the Group disposed of its interest in the wholly-owned subsidiary Sever-Chrome for a total cash consideration of US$7.8 million;

n  On 27 March 2012, the Board of Directors resolved to recommend a final dividend of ?0.07 per share which is expected to result in the payment of ?13.2 million;

n  Net debt as at 31 December 2011 was US$787.3 million reflecting the increased capital expenditure during the year;

n  As at 31 December 2011, the Group had committed but undrawn loan facilities of US$462.6 million in aggregate, including US$333.0 million available under an IRC facility;

n  In March 2012 the Group entered into a new US$200 million 6 year loan facility with a Russian Bank.

RESERVES AND RESOURCES

n  There was a significant uplift in the Group's JORC Code (2004) compliant Mineral Resources and Ore Reserves;

n  Proven and Probable Ore Reserves have increased by 11% to 10.2Moz, compared to 9.1Moz reported in March 2011;

n  Measured and Indicated Mineral Resources increased by 12% to 14.4Moz (inclusive of Resources upgraded to the  Reserves category) compared to estimates reported in March 2011, and a further 10.2Moz of Inferred Mineral Resources were identified;

n  Total Mineral Resources increased by 6%, from 23.1Moz of gold at an average grade of 0.98g/t Au in 732Mt of mineralised material to an estimated 24.6Moz of gold at an average grade of 0.97g/t Au in 790Mt of mineralised material;

n  Group non-refractory Proven and Probable Ore Reserves increased by 40% from 3.7Moz to 5.1Moz;

n  Grades of the newly-discovered Reserves are at a higher than average grade for the Group, enabling it to maintain similar grade levels in its Reserves estimate, in spite of the depletion of high-grade material;

n  The increase in Reserves and Resources was achieved despite a depletion of c.650,000oz of reserves as a result of 2011 production;

n  The increase in Ore Reserves is attributable to the successful exploration programme conducted by the Group during 2011 at its principal assets, predominantly at Pioneer, Visokoe, Albyn and Malomir, as well as an evaluation of Probable Ore Reserves at Visokoe in the Krasnoyarsk region;

n  The Mineral Resources and Ore Reserves update has been prepared by the Group in conjunction with external experts; the Ore Reserves were independently audited by mining consultants Wardell Armstrong International ("WAI"). With the exception of Albyn and Visokoe where current estimates use  a gold price of 1,200$/oz, both 2011 and 2012 estimates were completed using a US$1,000/oz long-term gold price;

n  In addition, the Group holds Reserves and Resources at its alluvial projects, which are classified in accordance with the Russian Classification System. 

OPERATIONAL AND DEVELOPMENT HIGHLIGHTS

n  Total attributable gold production for 2011 amounted to 630,100oz, a 24% increase   compared to 2010 (506,800oz);

n  Following the successful ramp-up of the second crushing and grinding line at Malomir in July 2011, Malomir's plant capacity increased by 33% in Q3 2011 compared to H1 2011, to 80,000t/month; further improvements and expansion at the sorption section in Q1 2012 are expected to lead to a further increase in capacity up to 180,000t/month;

n  Following its successful commissioning in November 2011, the plant at Albyn has been ramping up steadily; it is expected that the plant will be working at full capacity by the end of Q3 2012;

n  Following the decision to bring forward the commissioning of the second 1.8Mtpa resin-in-pulp ("RIP") processing line at Albyn and the commissioning of a fourth 2.0Mtpa processing line at Pioneer, work has been commenced and carried out for both lines which are scheduled to become operational in H2 2012;

n  Test work on refractory bulk samples from Pioneer and Malomir is on-going at the Blagoveschensk metallurgical test plant, modelling detailed parameters for the future POX plant. A comprehensive programme of training the future workforce for the pressure oxidation ("POX") hub is underway at the metallurgical testing plant;

n  The manufacturing of the main autoclave equipment for the POX plant is on schedule under the supervision of Outotec (Finland) Oy ("Outotec") and the Group, with the first equipment expected on site during Q2 2012;

n  Work on the foundations for the POX plant at Pokrovskiy and the construction of the flotation line at Malomir remains on schedule for commissioning at the end of 2012.

2012 PRODUCTION PLAN AND OUTLOOK

n  The Group's attributable gold production for 2012 is currently estimated at 680,000oz, representing an increase of c.8% over the total attributable gold production for 2011;

n  In line with Group policy to provide conservative guidance, the estimate of 680,000oz does not fully provide for the expansions of the Pioneer and Albyn mines scheduled for H2 2012, nor for gold in flotation concentrate scheduled to be produced at Malomir's flotation plant scheduled for commissioning at the end of 2012. The Group's management has no reason to believe that the commissioning and ramp-up will not run as scheduled;

n  It is expected that Group production will, as usual, be weighted towards the second half of the year, due to a planned increase in the attributable alluvial production, coupled with increased production from heap leach operations, both of which are seasonal, and to the bigger contribution from Albyn mine which is being ramped up to full capacity through Q1 and Q3 2012.

2013 - 2016 GOLD PRODUCTION OUTLOOK

n  The Group continues to review its production schedule for the period 2013 - 2016 in light of the latest additions to the reserves base at the main producing assets to optimise grades scheduling;

n  The Group expects some changes to previous estimates; significant production growth is expected to be achieved due to a substantial increase in capacities;

n  It is expected that four smaller scale projects - Visokoe (Krasnoyarsk region), Tokur (Amur region), Verkhne-Aliinskoye (Chita region) and Novogodnee Monto (Yamal region) - will commence production during this period, thus improving the current base case medium-term production schedule.

CAPITAL EXPENDITURE

n  In 2011, the Group spent a total of US$544 million of development and maintenance capex (excluding IRC). During the year, the Group accelerated expansion of the Pioneer and Albyn projects and also brought forward construction of the sorption circuit expansion at Malomir  as a result of the discovery of additional non-refractory material;

n  Approximately US$100 million was spent on on-going exploration work, mainly at the Pokrovskiy, Pioneer, Malomir and Albyn projects. This work yielded a significant increase in Group Reserves and Resources;

n  Capital expenditure for the development and maintenance of gold projects in 2012 is expected to be  US$354 million with exploration capex at approximately US$60 million;

n  Going forward, the Group expects a significant decrease in its capital expenditure programme for gold operations with US$175 million and US$84 million to be spent in 2013 and 2014 respectively. The majority of this budget is intended to finalise the stage 2 expansion of the POX hub, to allow the processing of refractory material from Pioneer which is scheduled to commence in 2015.

2011 EXPLORATION HIGHLIGHTS AND LICENCE ACQUISITIONS

n  Pioneer

-     New zones of both high grade non-refractory and refractory mineralisation have been identified within the NE Bakhmut trend;

-     Significant high grade non-refractory resources and reserves were established through additional metallurgical testing of the material previously classified as refractory.

n  Pokrovskiy and Flanks 

-     Exploration at Pokrovskiy focused on upgrading Inferred Resources to the Measured and Indicated categories and into JORC compliant ore Reserves;

-     The Zheltunak satellite deposit was explored allowing mining to start in Q3 2011. 

n  Malomir

-     There has been an increase in both resource size and confidence in the resource estimate for Quartzitovoye;

-     Several new zones of both refractory and non-refractory mineralisation were identified  north of Ozhidaemoye and Malomir Central, as well as a new zone near the Quartzitovoye operating open pit;

-     Metallurgical tests established a non-refractory oxide and a transitional cap over the main Malomir Central ore body, which is expected to provide an additional source of ore for the RIP plant.

n  Albyn

-     In-fill drilling completed in 2011 allowed an increase in 2010 project resources estimates from 1.8Moz  to 2.24Moz;

-     Promising results were obtained from the nearby Elginskoye area, where an extensive Albyn style mineralisation has been identified.  

n  Taldan and Osezhinskaya

-     Exploration at the Burinda deposit within the Taldan licence has resulted in an estimated 340koz in Inferred Resources;

-     A significant gold as well as an Ag-Cu-Mo anomaly was identified over the granite-porphyry intrusion.

n  Krasnoyarsk region

-     The increase in Visokoe Mineral Resources from 2.0 to 2.5Moz;  a maiden ore Reserve of 1.2Moz has been established;

-     A new zone of mineralisation has been discovered and evaluated at Olenka;

-     Several promising gold-arsenic geochemical anomalies with lengths of up to 7km were identified within the Troeusovskaya area.  

n   Chita region

-     Measured and Indicated Resources are currently being estimated at the Verkhne-Aliinskoe gold deposit, bringing the asset to a pre-production stage.

n  Yamal region

-     Additional Inferred Resources were established at the Petropavlovskoye deposit, elevating the total asset resource above 1Moz;

-     Zones of gold mineralisation were discovered at the Sob-Kharbeyskaya licence, where work only started in 2011.

n  New licences

-           The Nimanskaya licence area, located 90km south of Albyn, was acquired by the Group in June 2011; the licence shows extensive historical placer mining operations and is estimated to be an exploration target of 2-3Moz potential.

n   Licence review

-             During 2011, the Group carried out a review of its existing exploration and evaluation projects and recognized an impairment charge of US$42.1 million against certain mineral properties which are not considered economical.

2012 OPERATIONS UPDATE

Good performance from Group operations sees overall gold production on budget to date.

n  Pioneer production is ahead of budget, showing a 10% uplift in grade versus budget (2.1g/t versus a budget of 1.9g/t) and  86% recovery;

n  Malomir production is on target in spite of mining lower grades at the beginning of the year and lower recoveries, after an improvement in grades at the end of the quarter compensated for it;

n  The ramp up of the first stage at Albyn progressed more slowly than expected due to a temporary shortage of power and water. The second processing line is under construction and expected to be commissioned earlier than planned and should allow the project to catch up with the production budget;

n  At Pokrovskiy mine the push back of the south wall of the main pit continued on schedule and high grade ore will be mined from the main pit in Q4 2012;

n  Total production from all mines is in line with the target for Q1 2012.

IRC HIGHLIGHTS 

Petropavlovsk is an indirect 65.6% shareholder in IRC. IRC is a producer and developer of industrial commodities, with operations in the Far East of Russia and North Eastern China. IRC is quoted on the Stock Exchange of Hong Kong Limited. Further information about IRC, and the IRC 2011 Annual Report, can be found on the IRC website, www..ircgroup.com.hk.

n  Production targets were exceeded at the Kuranakh Mine, generating a US$20 million segmental profit and producing its first one million tonne of iron ore concentrate;

n  4.7 times increase in revenue from 2010 to US$122.2 million;

n  K&S construction advancing with funding in place. Material from the K&S project has been tested by a number of steel mills, all confirming that the material is of good quality and paving the way to a potentially diverse customer base;

n  Ore Resources increased by 16% to 1,345 million tonnes; ore Reserves increased by 24% to 801 million tonnes;

n  The first draw-down from the Industrial and Commercial Bank of China ("ICBC") project finance facility should ensure that IRC is funded for significant near term growth;

n  Production commenced at the Steel Slag Reprocessing Plant in North-Eastern China;

n  800,000 tonnes of iron ore concentrate and 63,500 tonnes of ilmenite concentrate were produced in 2011;

n  IRC forecasts good production growth in 2012 and firm prices, targeting annual production of 820,000 tonnes of iron ore and 125,000 tonnes of ilmenite concentrates respectively.

CHAIRMAN'S STATEMENT

Results

This is the first Annual Report in which we can measure our financial success in billions of dollars: we more than doubled our total revenue to US$1.3 billion in 2011. Our EBITDA of US$0.6 billion was three times greater than last year's and our fully diluted earnings per share increased to US$1.23, some 11 times more than the previous year. The operating cash flow at US$0.3 billion is seven times higher than 2010.

In order to achieve this we moved record volumes of material, processed record amounts of ore and sold record amounts of gold at record prices.  At the same time we managed to maintain control of operating costs; with total cash costs for hard rock gold production at US$586 per ounce rising by 7%, which is less than input cost inflation of approximately 20%. Total cash costs, including alluvial production which is more dependent on energy, rose by 9% to US$662 per ounce. This cost control is all the more remarkable because it was achieved in spite of a 22% decrease in average grades processed at the Pokrovskiy and Malomir RIPs. At Pokrovskiy - our maturing mine - in addition to the decrease in grades we had a 75% increase in the stripping coefficient but the cost per tonne of ore produced declined by 2% due to reduced overheads.

Our success can be explained in part by economies of scale, since we are now using much bigger equipment at Pioneer, our flagship operation, but I believe that a far more significant explanation is the fact that we are continuing to optimise the way we use such large scale equipment. The learning process involved a comprehensive review of operations followed by the development of a new planning and scheduling regime as well as better operating practices and these have borne fruit. Following implementation of the programme, the daily volumes of mining works at Pioneer increased by 20% and we managed to increase volumes of total material mined by 61% year on year. Indeed, we have now caught up with all the waste stripping that fell behind schedule in 2010. The operating crews and their management deserve our thanks for their enthusiasm for the new regime and I hope that this can be replicated throughout the Group and carried on in future years.

A tighter hold on operational expenditure, staff numbers and wage levels was also a major contributor to our success. Having said that, our hard-working and loyal employees are still well rewarded when compared to other operations in the Amur Region. All senior management also participate in our long-term incentive scheme which is tightly connected to key performance indicators based on our strategy.

Most importantly, tight cost control and high gold price during the year have yielded record operating cash flows which, together with our substantial borrowing powers, allow us to complete our expansion programme. 

To complement this background of operating success, we added a further 1.5Moz to our JORC Mineral Resources in spite of a depletion of 0.65Moz and we commissioned one new mine and two new processing lines. These in themselves are remarkable achievements and as usual were accomplished in-house, with minimal external assistance.

From this operating base we expect to produce 680,000 ounces of gold in 2012.

I am sure that you will be as grateful as I am to management and staff for making this possible.

Share price performance and dividend  

It both saddens and perplexes me that the price at which the Company's shares change hands on the Stock Exchange reflects neither the achievements set out above nor the great potential that the Group has to continue to develop and grow its business.

I must assume that the market is placing a far higher discount on mining assets in Russia than I, after about 30 years of involvement with Russia, deem necessary. I also think that there are lasting impressions of the difficulties we encountered in 2010 that are hard to improve and that only successive years of successful operations can achieve.

It is my belief that people who invest in gold mining companies on the basis of their net present value do so on a mistaken assumption, unless they get to share in the cash stream.

For this reason, I have always been a strong advocate of a progressive dividend policy and, as soon as the capital expenditure demands from our exceptional growth abate, I hope that we will be able to be among those at the forefront of dividend payment in our sector. In the meantime I am glad that we have been able to increase the total dividend for the year by 20% to ?0.12 per share. I am conscious though that this does not yet match the exceptional growth in our after-tax earnings as much of our cash flow is still being ploughed back into the Group's development.

The move to pressure oxidation process

In spite of our success this year, we still need to take account of the changes occurring in the mining environment that are likely to affect us and to look to our future, based on these observations. Most notable of these changes is the decline in the number of new discoveries of gold of significant quality and, in particular, the reduction in the number of new, easy to treat, oxide - as opposed to refractory - deposits that are being found. Nowhere is this more true than in Russia and is something of which we have been aware for some time.

For this reason we invested substantially in the scientific evaluation of alternative methods of treating the harder-to-recover refractory gold that is much more plentiful in Russia. At the same time we continued, within our total exploration effort, the evaluation of the refractory gold occurrences that we had in our own portfolio of gold reserves and resources.

The result of this work - both metallurgical and geological - was the choice of pressure oxidation as the most effective method of releasing and recovering the large amounts of gold contained in our refractory deposits.

It is worth noting that pressure oxidation technology is not new. After all, it is what Mother Nature does all the time; the main difference being that we must do in a few hours what she does in a few million years. The process itself, which is also not new to the industry, having been operated by other gold companies for more than 50 years and for many years in the base metal industry in the former Soviet Union, is straightforward. The gold-bearing ore is heated to 225 degrees centigrade in a pressure vessel containing pure oxygen at 35 times normal atmospheric pressure; the heat coming from the oxidation of the sulphur to which the gold particles are bound.

The prospect of doing so much extra work might seem daunting but, by using a simple flotation concentration process, we can separate a high proportion of gold-bearing material from the waste and by use of this method we only need to pressure oxidise a very small fraction of the ore. Accordingly, there is a cost saving compared to normal ore processing, where all the ore is treated. This counteracts to some extent the expense of pressure oxidation itself.  In contrast with comparable processing methods, pressure oxidation also has a low impact on the environment.

Our two main sources of refractory gold are Malomir and Pioneer and we decided that the most effective way to recover this was to do the concentration on site and to bring the highly charged product to a processing hub at Pokrovskiy. Here we have the existing accommodation facilities, skilled labour, laboratories, smelting and storage facilities, a power supply and other logistical advantages. In addition, Pokrovskiy is located close to an excellent source of lime, which is needed to neutralise the sulphuric acid that is a by-product of the process.

A further advantage of the Pokrovskiy hub site is its proximity to the Trans-Siberian Railway. This is important for the medium term future because, by building facilities capable of producing flotation concentrate at the many Soviet-era gold mines along the route of the westbound line, we would have access to otherwise unprocessed reserves left over from previous operations.

Pressure oxidation is, in our view, the way forward for the gold mining industry both in Russia and worldwide, and we are very proud of our achievements.  These are now complemented by our association with Outotec, a leading and established global provider of process solutions for the mining industry, with whom we have signed contracts for the development and implementation of our pressure oxidation plans.. It is expected that the first gold from pressure oxidation will come from the Pokrovskiy hub in 2014.

New projects

The shift to refractory processing is, I am pleased to say, not the only thing in our future. The ores at our recently opened mine at Albyn are easy to process and we are already building the second stage of the processing facility there.

Elginskoye. Some 15 kilometres away from Albyn, we have had some promising intersections from a new gold discovery at Elginskoye. Although not sufficiently explored to be classed as reserves or resources, this deposit is generating considerable interest amongst our exploration teams who believe it has the potential to bring transformational changes to the Albyn project.

Nimanskaya. In June 2011, the Group won the auction for an exploration and extraction licence for the 308km² Nimanskaya area, located in the Khabarovsk region, some 90km south of Albyn. The area is well-known for producing more than 4 million ounces from alluvial gold mining since 1874, with 80% of the historical production coming from a 14x12km area covered by our licence. Work completed by our predecessors between 1994 -1998, identified mineralisation along 8km strike and up to 5km width, with grades ranging from 0.2 - 0.3g/t to 20 g/t. Our predecessors's specialists envisaged potential for a 2Moz-4Moz resource at an 1.0-2.0g/t average grade.

Visokoe Exploration work in 2011 proved 1.2Moz non-refractory gold reserves at Visokoe, our most advance asset in Krasnoyarsk region. In addition, we have two other promising early stage licences on Yenisey Ridge, also in Krasnoyarsk region which has been the No 1 gold producing region in Russia for more than a decade and hosts Polyus's Olimpiada mine.

With a favourable geological setting and numerous indications of extensive gold mineralisation found within the area we have high expectations of good results from exploration work planned for 2012.

Exploration

Exploration is key to our business and this year our success in increasing our total reserves and resources from 23.1Moz to 24.6Moz notwithstanding a 650,000oz depletion, is testament to the good work that the exploration teams have done. From an economic point of view it is good to know that so many of the new ounces are within production distance of our existing plants, are mostly non-refractory and are of higher grade than the average life-of-mine grades nearby.

IRC

Great things too have been achieved by our iron ore subsidiary, IRC: a maiden operating profit - something that they should be rightfully proud of - and success in undertaking the development of Kimkanskoye and Sutarskoye which will, I believe, bring us a major stake in a major supplier of one of the raw materials most needed in China.

Management

Dr Pavel Maslovskiy, our Chief Executive Officer, our founder and my business partner became a Senator and Member of the Federation Council of Russia (the Upper House of the Russian Parliament). For this reason he has retired from his executive role with the Group but remains as our unpaid Honorary President and we are grateful for the continuing advice and support that he will give us. 

Sergey Ermolenko, who has been at Pavel Maslovskiy's right hand since the Group was founded in 1994, has kindly agreed to take over the Chief Executive Officer role and I welcome him as a Director of the Company. 

Brian Egan, our Chief Financial Officer, has decided to return to his native Ireland and thus to leave us  shortly after the publication of the Annual Report.  Brian has done an excellent job both at Aricom and with Petropavlovsk and we will miss his input. 

Andrey Maruta, who has previously served as Finance Director, Russia, has kindly agreed to replace Brian Egan as Chief Financial Officer. Before the merger with Aricom plc in 2009, Andrey Maruta used to served as Chief Financial Officer of Peter Hambro Mining Plc.

Non-Executive Directors

Dr David Humphreys joined us in August 2011 as a non-executive director to replace Peter Hill-Wood, who retired in May 2011. David has already made a valuable contribution to the Board with his extensive relevant experience in the global mining industry through his work for mining companies and as a consultant and academic.

Rachel English joins the Board with effect from today and is a superb addition to the Board. The wealth of knowledge and experience she has amassed in the global energy sector, in particular her first-hand experience of developing projects in challenging business environments into profitable enterprises, is invaluable. I believe that her appointment will bring a new perspective to the Board as the Group moves into the next phase of its future development.

Challenges

The year end, and the consequent publication of the Annual Report, is a waypoint in the course that I and the Board must navigate for the benefit of the shareholders, the staff and other stakeholders. Economic uncertainties, inflation, gold price volatility, the prospect of sovereign default, threats of war, political unpredictability and many other turbulent events combined this year to make navigation a challenging task.  The impact of external pressures on our business in 2011 shows, once again, the importance of having a clear course to steer and, at the same time, planning both to take advantage of the opportunities presented and to take precautions against the unexpected buffetings and inclement weather along the way. 

I am glad to note that we have reached this year's waypoint with record results but I do not foresee any diminution in the challenges that beset us last year.

Full delivery of the pressure oxidation process remains a major implementation challenge but I believe that the extensive scientific research work that has already been carried out and our involvement with Outotec do much to manage risks involved with the project..

Our capital expenditure programme has been, and remains extensive and encompasses pressure oxidation, construction of the first processing line at Albyn and the bringing forward of the second processing line at Albyn, the fourth processing line at Pioneer and the flotation plant at Malomir. For this reason the level of our net debt is relatively high, which to an extent is opportunistic in order to take advantage of the current high price of gold.  Managing our treasury and the leveraged exposure to the gold price is another major challenge.

The road ahead

2012 has started well for the Group and the prospects for the US dollar price of gold, in my opinion, remain good.. I say this because I believe that there is little sign of a lasting solution to the financial turmoil that marked the previous year.

I remain confident that we will have another year of continued production growth.

Finally, I should like to thank you, as shareholders, for the confidence that you place in our management and, above all, to thank our executives and staff for the truly magnificent contribution they have made.

Peter Hambro,

Chairman

PRESENTATION

There will be a presentation of the Petropavlovsk 2011 FY results followed by a question and answer session on March 28^th at 11.00 (BST) *

To watch a webcast of presentation, please log onto www.petropavlovsk.net.

To ask a question, please dial:

UK Toll Number          + 44 20 7075 6551

US Toll Number          + 1 631 638 5256

RU Toll Number          + 7 499 270 0354

Participant PIN Code:  543099#

The conference call may include information relating to the shares and convertible bonds.

ENQUIRIES

RESERVES AND RESOURCES (in accordance with the JORC Code (2004))

The Group maintains its commitment to report its Mineral Resources and Ore Reserves in accordance with the JORC Code (2004). While the Russian Classification System for reporting reserves and resources remains in use within the Russian legal environment, forming the basis of the Group's accountability to the Russian state, Group reporting on reserves and resources at its hard rock assets to investor audiences is carried out in accordance with the JORC Code (2004).

The Group's in-house specialists, in co-operation with external independent advisers, prepared an update of Group gold Mineral Resources and Ore Reserves in accordance with the JORC Code (2004) as at 01/01/2012, which was published on 23/02/2012 and is available on the Company's website (www.petropavlovsk.net). The Ore Reserve statement was audited by independent technical consultants WAI, whilst the mineral resource statement was prepared by the Group internally.

A summary of the Group's gold Ore Reserves and Mineral Resources as at 1 January 2012 in accordance with the guidelines of the JORC Code (2004) is shown below. The estimates were completed following an extensive exploration programme conducted by the Group during 2011.

Summary of Mineral Resources in accordance with the JORC Code (2004) for hard rock gold assets

Notes

n  Mineral Resources are reported inclusive of Ore Reserves

n  Contained Gold represents estimated contained metal in the ground and has not been adjusted for metallurgical recovery

n  Numbers may not add up due to rounding

Summary of Ore Reserves in accordance with the JORC Code (2004) for hard-rock gold assets

Notes

n  Numbers may not add up due to rounding

Proven and Probable Ore Reserves, in accordance with the guidelines of the JORC Code (2004), increased by 11%, from 9.1Moz of gold at an average grade of 1.17g/t Au to 10.25Moz of gold at an average grade of 1.13g/t Au. The increase in Ore Reserves is attributable to the successful exploration programme conducted by the Group during 2011 at its principal assets, predominantly at Pioneer and Albyn, as well as to the evaluation of Probable Ore Reserves for Visokoe, in the Krasnoyarsk region of Russia. With the exception of Albyn and Visokoe the new Ore Reserve estimate was completed using a long-term gold price of US$1,000/oz. Reserves for Albyn and Visokoe were estimated using a gold price of US$1,200/oz.

Total Mineral Resources have increased by 6%, from 23.1Moz of gold at an average grade of 0.98g/t Au, to 24.6Moz of gold at an average grade of 0.98g/t Au, in 732Mt of mineralised material. Of the 24.6Moz, 14.4Moz are Measured and Indicated and 10.2Moz are Inferred Mineral Resources. The reported uplift in Ore Reserves and Mineral Resources has been achieved notwithstanding depletion of about 650koz of gold through production at the Pokrovskiy, Pioneer and Malomir mines during 2011.

OPERATIONS AND DEVELOPMENT REPORT

Pokrovskiy

During 2011, Pokrovskiy produced 91,800oz of gold - a planned decrease compared to 2010, due to the decrease in grades processed as the mine approaches the end of its mining life. The mining operations were carried out mainly at two pits: the main pit at the Pokrovka-1 deposit and a second pit at the Pokrovka-2 satellite deposit. In 2011, mining also commenced at a further satellite deposit at Zheltunak.

In terms of mine capacity, 1.78Mtpa of ore were processed at the RIP plant and 0.8Mtpa of ore at the heap leach facilities, slightly outperforming design capacity. 2011 production from Pokrovskiy's heap leach operations accounted for approximately 16.5% of the total annual production of the mine.

Costs

In 2011, the total cash cost per ounce at the Pokrovskiy mine increased by 35% to US$759/oz, from US$561/oz in 2010. This was in line with the Group's expectations as the increase was due to the lower grades of ore mined and processed, a higher strip ratio, and input cost inflation. The year-on-year decrease in grades processed through the mill was 40% and the strip ratio increased by 75%. However, the increase in costs was mitigated significantly following the implementation of efficiency improving measures at operations resulting in a 2% decrease in  costs per tonne mined and processed compared to the previous year.

Outlook

Total production from Pokrovskiy in 2012 is expected to be 68,000oz, as mining progresses to the lower grade areas of the deposits.

Exploration at Pokrovskiy has indicated sufficient quantities of non-refractory material available for processing until the beginning of 2017.

By 2013, the Group is planning to install a POX facility at the Pokrovskiy site to process flotation concentrate from Malomir and Pioneer. After 2013 the RIP plant is expected to be gradually converted to work as an integrated part of a POX hub, whilst remaining low grade reserves will be treated through heap leach operations.

Exploration is continuing at other parts of the Pokrovskiy  area which may result in the discovery of additional resources, providing a possible further extension to the life of the mine.

Pioneer

Pioneer currently processes non-refractory ore only. Mining at Pioneer in 2011 was conducted using open-pit methods from eight pits. The majority of ore, approximately 98%, is processed at the on-site 4.6Mtpa RIP plant. Cyanide heap leaching was used to treat remaining lower-grade ore. 

During 2011, Pioneer produced 359,100oz of gold, a 56% increase on 2010, representing more than half of the Group's total production for the year. This strong overall performance in 2011 followed a series of measures to improve on-site efficiencies at Pioneer, which were implemented following a comprehensive review in Q1 2011. During 2011, daily mining volumes increased by approximately 20%, offsetting inflationary pressures on cash cost of production at the mine.

31.6 million m³ of material was moved during 2011, an increase of 61% on 2010 (19.6 million m³). This increase reflects the contribution of both the final additions to the mining fleet, which were delivered at the beginning of 2011, and changes to the organisation of on-site mining works. Due to the volume of stripping work conducted during 2011, the backlog of stripping accumulated at the end of 2010 was fully cleared.

The increase in production at Pioneer also reflects the scheduled mining and processing of higher grades during Q3 2011, and the full contribution of the third RIP processing line, commissioned in April 2010.

During 2011, small scale heap leach operations were carried out at Pioneer, processing 405,000 tonnes of ore at an average grade of 0.7g/t Au, recovering a total of 8,100oz of gold. It is planned that heap leach operations will be significantly expanded in 2012, processing about 1.4Mtpa of ore.

The Board is pleased to report that management restructuring at Pioneer completed in 2011 has resulted in a significant strengthening of operational efficiency.

Costs

Total Cash Costs at Pioneer decreased by 3% in 2011 to US$530/oz, compared to US$549/oz in 2010, despite on-going pressure from input costs, inflation and a strong rouble. This improvement was achieved due to a series of measures implemented by the management team in response to problems which occurred at the mine in 2010. During 2011, the mine management team continued to implement these measures, delivering further cost savings and increased profitability. Total cash costs also benefited from the increase in grades processed during 2011, partially reflecting good exploration results during the year.

Outlook

Following the success of the 2011 exploration programme, which resulted in a significant increase in non-refractory reserves at the mine, the Group decided to bring forward the expansion of Pioneer's production capacity to Q3 2012, with the commissioning of a fourth 2.0Mtpa RIP processing line. Originally scheduled for 2014, this expansion will significantly improve the Group's production output in both the short and medium-term. The fourth RIP milling line will consist of one 7.5mx2..5m SAG mill and two 4.0mx6.0m ball mills. The new milling line will have a design capacity of 2.0Mtpa, taking Pioneer's overall design capacity, including its heap leaching facility, to 7.6Mtpa.

The 2012 production target at Pioneer is 286,000oz, reflecting the scheduled processing of lower-grade material. However, this target does not fully include the planned milling expansion at Pioneer. 

The current reserves of non-refractory material at the project are expected to support production until 2016. It is anticipated that the processing of refractory ore will commence in 2015, following the installation of a flotation unit at Pioneer. The resulting flotation concentrate will then be transported approximately 40km, using all-weather roads, to be processed at the Pokrovskiy POX hub.

Malomir

The feasibility study proposes a two-stage development:  initial smaller scale production of non-refractory material, followed by large scale mining operations and the commissioning of a flotation plant. Flotation concentrate will be taken to the Pokrovskiy POX hub for further processing. Currently, only non-refractory ore is being processed at an on-site 1.7Mtpa RIP plant.

In 2011, Malomir produced 88,500oz of gold, showing a significant increase on 2010. The increase in production followed the successful 2011 expansion programme which saw the commissioning of the second milling line in July 2011, resulting in a 33% increase in Malomir's plant capacity to 80,000t/month in Q3 2011, compared to H1 2011. Improvements and expansion at the sorption section in Q1 2012 allowed for a further increase in capacity up to 180,000t/month.

A slight decrease in recovery rates during 2011 was caused by the dilution by refractory material bordering the non-refractory zones, resulting in the processing of refractory ore within the blend through the mill. In order to prevent losses, the tailings from the processing of the ore were stored separately for future re-processing.

Costs

In 2011, total cash costs at Malomir increased by 30%, from US$473/oz in 2010 to US$615/oz in 2011. This increase was the result of a significant (30%) decrease in grades processed and input cost inflation. However, the increase in costs was lower than the combined effect of these two factors, due to a number of efficiencies and improvements to mining operations which were implemented on site. This included the optimisation of mining and handling operations and a significant increase in mining and processing capacities. Costs also benefited from economies of scale after the plant's expansion. In spite of strong inflationary pressures which were present throughout the year, the team managed to decrease costs per tonne of ore mined and processed by 13%. 

Outlook

Malomir's 2012 production target of 118,000oz represents a 33% increase on 2011 production. This increase reflects the full-year contribution of the second RIP milling line, successfully commissioned in July 2011 and the effects of the sorption line expansion completed in Q1 2012. The average grade processed is expected to decline slightly as the commissioning of the second RIP processing line has allowed the mine to process lower grade material at similar cost levels to 2011.

The Group anticipates the commissioning of a flotation plant at Malomir by the end of 2012. The resultant flotation concentrate will be stockpiled on site for processing at the POX hub at Pokrovskiy in 2013, after it is commissioned.

The 2012 production target for Malomir excludes gold in flotation concentrate, which is scheduled to be produced following the commissioning of the flotation plant. In its earlier plans, the Group was intending to process this concentrate at a third-party facility, however, after evaluating this option in more detail, it was concluded that a better return could be achieved by processing the concentrate in the Group's own POX plant in 2013. This change of plan was also supported by an increase in non-refractory reserves at Malomir and Pioneer, which should enable the Group to reach the same levels of production without entering into costly contracts for toll treatment of the concentrate.

POX Hub

In 2006, the Group began an extensive testing programme to examine the technological properties of the refractory mineralisation at Pioneer and Malomir, in order to devise the most efficient treatment method. More than three hundred tests, ranging from a scoping stage bench-scale trial to closed-cycle pilot plant experiments, have enabled Group specialists and external technical advisers to complete the design of a hydrometallurgical processing "hub", which will be one of the largest and most advanced of its kind in Russia. 

After examining all of the technical, infrastructural and logistical aspects in a detailed evaluation of several development options, the Group decided to centralise the processing of refractory concentrates at its Pokrovskiy site, which it envisages will act as a regional pressure oxidation and metallurgical processing hub. The hub at Pokrovskiy will be supplemented by two flotation plants at Malomir and Pioneer: concentrates produced at these plants using flotation technology will be transferred to Pokrovskiy for treatment and gold recovery.

Following its own extensive in-house research and test work, in Q4 2010 the Group commissioned Outotec, the global leader in the manufacture of minerals and metals processing technology, to assist the Group with the preparation of the technical design for the POX plant at Pokrovskiy and the flotation plants at Malomir and Pioneer.

The design of the hub will enable flotation concentrates from Malomir and Pioneer to be processed in the same POX plant located at Pokrovskiy. The plant will consist of six pressure oxidation vessels, four of which will process the flotation concentrate from Malomir and two which will process the flotation concentrate from Pioneer. The POX plant is designed to process 600kt of concentrate per annum at full capacity. This additional capacity, the modular nature of the plant and the logistical advantages of Pokrovskiy's location will also facilitate the treatment of concentrate from other mines. 

Permitting

PHM Engineering, the Group`s Moscow-based in-house technical services subsidiary, is at an advanced stage in preparing construction plans and documentation to fulfil Russian technical regulations and to facilitate the permitting process.

Logistics

Based on manufacture and delivery lead times, Outotec split equipment for the POX hub and the two flotation plants into 4 categories. This has allowed the Group to develop the optimal schedule of manufacturing and shipping contracts. Outotec is acting as the principal developer, overseeing and controlling the quality of the equipment and the delivery schedule execution.

To guarantee the timely and safe delivery of all essential equipment, the Group commissioned INTOTEC Group ("INTOTEC"),  a highly experienced and reputable Russian shipping company which has been providing transport services to the Group. INTOTEC will also be responsible for liaising with the relevant Russian authorities for timely and efficient custom clearances. The documentation required to facilitate this is already at an advanced stage.

All large equipment, such as autoclave vessels and receivers, were sized and designed taking into account the transport limitations of the Russian rail system, and will therefore meet all necessary requirements and technical regulations. The permitting process required for the transport of oversized cargo from the Vladivostok port to Pokrovskiy is now at an advanced stage and will be completed in time to comply with the construction schedule.

Smaller items will be delivered by road by INTOTEC, using approximately 450 containers and 60 lorries. A temporary storage area the size larger than a football pitch is being prepared at the site to accommodate the cargo during the construction phase.

The first flotation equipment has been cleared by Russian customs and arrived at the Malomir site in March 2012.

Quality Control and Assurance

Leading manufacturers have been commissioned by Outotec to provide the key equipment for the Pokrovskiy POX hub and the two flotation plants, including Shanghai Morimatsu for autoclave vessels and high pressure pipe lines, LOTERIOS S.p.A (Italy) for pressure pipe lines, DSB S?urebau GmbH (Germany) for titanium inner gear and autoclave linings, Outotec for flotation, filtration, control and automation equipment, Feluva  Pumpen GMBH (Germany) for acid resistant high pressure slurry pumps, MOGRAS Industries (USA) for valvesand Red Mountain Energy Corp for the oxygen plant.  Although internal quality control at these manufacturers is to be of a very high standard, the Group undertakes further regular inspections using in-house and Outotec specialists. In addition, NDE Group was commissioned to provide on-going independent monitoring on all key equipment. NDE Group is a large, reputable international firm which, among other services, provides vendor assessments and independent quality assurance to a wide range of industries. The first checks on the high pressure pumps are being undertaken in March 2012.

Staff Hiring and Training

Recognising that human resources are key to the success of such a large-scale project, the Group launched a specialist training programme in preparation for the commissioning of the POX plant. This comprehensive programme provides training for future plant engineers and operators at the Group's unique pilot autoclave plant facility in Blagoveschensk, which is equipped with the control and automation system of an industrial autoclave plant. Over the last year, the Pokrovskiy Mining College has also been running a course for future POX technicians and skilled workers.

The Group was successful in securing the services of Evgeniy Kudrin as Technical Director of the Pokrovskiy POX plant. Mr Kudrin was the Deputy Director for Production and Operations at the Nadezhdinskiy plant in Norilsk which is of comparable size and uses similar technology to the Pokrovskiy POX plant. Mr Kudrin accordingly has first-hand technical and managerial experience of running such a plant.  

Pilot test plant

The Group's move towards POX processing has been supported by six years of intensive research including four years of work conducted by Prof. Schneerson and his team at the Gidrometallurgiya R&D centre. Their extensive laboratory work was supplemented and tested by bulk sampling at the Group's unique metallurgical pilot plant located in Blagoveschensk.

During 2011, the Group continued tests of Malomir and Pioneer samples at the pilot plant. Encouraging results were received for Malomir using carbon flotation to remove organic carbon and minimise pregrobbing effect. Group specialists where able to establish flotation parameters and regimes enabling removal of the majority of the carbon with only a 2.8% gold recovery into the carbon concentrate. Flotation gold recovery to the sulphide concentrate was between 86.8 and 88.7%. Sulphide concentrate was subjected to pressure oxidation in the Group's pilot autoclave and to cyanidation. These tests indicated stage recovery of 89-92%, resulting in overall recovery from 79 to 81%.

Additional tests on Pioneer samples resulted in 85-92% gold recovery from flotation concentrate. Subsequent pressure oxidation and cyanide leaching showed stage recovery of up to 98% and average 86% overall gold recovery.

The blend of the Malomir and Pioneer concentrates was also subjected to pressure oxidation and cyanide leach tests, resulting in the stage recovery of 91%. 

The pilot plant test results confirmed the previously developed mathematical model of the autoclave oxidation process at the future Pokrovskiy plant. Semi-industrial pressure oxidation tests also provided sufficient pulp material for representative thickeners and filtration tests  showed better than previously expected results.

On-site preparation work at Pokrovskiy has begun. Flotation plants at Malomir and Pioneer together with a hydrometallurgical circuit at Pokrovskiy will start processing refractory ores at the beginning of 2013. 

Albyn

Albyn was commissioned in November 2011, slightly ahead of the Group's planned commissioning date of mid-December 2011. This was achieved despite the logistical challenges faced by the team, due to the remoteness of the project, which is located in the far North-East of the Amur region, approximately 836km (by road) from the Pokrovskiy mine, and the severe weather conditions experienced during the period of commissioning and ramp-up. 

Mining at Albyn is conducted by open-pit methods. On the basis of the results of extensive test work, the Group designed an on-site 1.8Mtpa RIP plant for the treatment of ore. The plant is scheduled for further expansion in H2 2012, which should double its current capacity.

The current processing facilities consist of one 7.5m x 2.5m SAG mill, two 4.0m x 6.0m ball mills and a sorption and desorption circuit with 400m³ tanks. Following its commissioning, the RIP plant at Albyn produced 1,100oz of gold during the remaining weeks of 2011. This was ahead of the Group's estimate, reflecting the timely commissioning of the mine.

Costs

As the project will continue to ramp up during 2012 and another line is planned for commissioning, cash costs are expected to be somewhat higher than average for the life of the project. Due to the earlier commissioning and the continued construction of infrastructure elements including power lines, a significant amount of electricity is currently being generated by diesel generators. Electricity produced by diesel generators is relatively expensive and negatively affected operating costs. All mining equipment on site is also currently powered by diesel. Due to the high stripping coefficient, it is expected that total cash costs per tonne of ore mined at Albyn in 2012 will be in line with those at Malomir.

Outlook

The Group expects the Albyn plant to ramp up to its full operating capacity from the beginning of April 2012. Work on connecting the plant to the electricity grid is expected to be finalised during H1 2012. The diesel generators will then be used as a stand-by emergency power supply unit, which is considered essential for reducing operational risk for such a remote site.

Following successful exploration work in 2011, Albyn's reserves and resources base significantly increased and a decision was taken to bring forward the expansion of the plant to H2 2012 from the original plan of 2014. Work on laying the foundations for this project has started.

The capacity of the second RIP milling line is expected to be similar to the first, and it is expected that by the time both milling lines are fully ramped up, the total capacity of the Albyn plant will be approximately 3.6Mtpa.

In 2012, the Group is targeting production of 116,000oz for Albyn. This target takes a conservative view of the ramp-up of the processing plant and does not fully provide for increases resulting from the commissioning of the second milling line in H2 2012.

Tokur

A small-scale operation involving the mining and re-processing of historical low-grade waste dumps was commissioned in 2009. The material is washed through a sluice to recover the free gold and to remove clay and dirt, preparing it for the next stage of X-ray separation. At this stage, the ore is put through a sorting machine which uses an X-ray analyser to separate ore from waste, upgrading it to a c.4g/t Au pre-concentrate.

During 2011, approximately 400oz of gold were recovered at the Malomir RIP plant from Tokur pre-concentrate.

After the successful completion of the feasibility study at the end of 2011, the Group's specialists started work on the design of the future processing plant at Tokur. It is expected that the Tokur plant will be commissioned in H2 2014.

Krasnoyarsk region projects

The Krasnoyarsk region is one of Russia's most prospective mining areas and the location of world-class gold, nickel and other mineral deposits. Group assets include the significant Visokoe non-refractory deposit, currently at a pre-production stage, as well as the Troeusovskaya and Verkhnetisskaya exploration licences. All three assets are located on the Yenisei Ridge, which has been a key area for the Russian gold mining industry for decades.

The Visokoe site is located approximately 50 km north-west of the village of Teya and 70km north-west of Severo-Yeniseyskiy, with its long history of mining of the Sovetskoe gold deposit. Mineralisation at Visokoe is confined within a single large bulk zone 40-70m thick and with a strike length of 1.7km. The zone has been traced to a depth of approximately 440m without any indications of narrowing out.  With its low strip ratio, Visokoe is well suited for low-cost and highly productive open-pit mining.

Exploration and other technical work completed at Visokoe during 2011 enabled the Group to define JORC Ore Reserves and to significantly improve its mineral resource position. Group specialists are finalising the development plan for this asset, considering processing either through a RIP plant or heap-leach operations. This work is expected to be finalised during the course of 2012. The first production from Visokoe deposit is currently scheduled for H2 2013.

Troeusovsksya and Verkhnetisskaya are two adjacent exploration licences with a combined area of over 1,000km², located approximately 50-70km south of Visokoe and 70-80km west of Severo-Yeniseyskiy.

The Group is exploring the possibility of developing all of the assets in this area as one cluster due to their synergies.

Petropavlovskoye, Novogodnee Monto, Yamal Region

In the Yamal region, the Group holds licences for the Petropavlovskoye and Novogodnee Monto gold deposits, as well as the early stage Sob-Kharbeiskaya exploration licence, approximately 40km west from Petropavlovskoye. The Zapadnoe chromite deposit was successfully sold at the beginning of 2012.

Petropavlovskoye and Novogodnee Monto are two adjacent ore bodies located alongside the Obskaya-Bovanenkovo rail line, which connects them to the Russian National rail network and to the Labitnangi port on the Ob River. Since their acquisition in 2004, the Group has completed extensive exploration and other essential technical work here, progressing Petropavlovskoye and Novogodnee Monto from greenfield sites to projects at an advanced stage of pre-development.

In addition to significant JORC gold reserves and resources, Novogodnee Monto holds c.3Mt of high grade magnetite iron ore and substantial reserves of industrial aggregates within the host un-mineralised waste rock. Metallurgical tests have proved gold to be non-refractory and amenable to direct cyanidation.

In 2011 quarrying began at the site, with the material processed through the mobile crushing and screening plant, producing saleable aggregate products. Sales contracts have now been signed and the first aggregate sales were carried out in Q1 2012. 

The Group is continuing to develop the Petropavlovskoye and Novogodnee Monto deposits towards gold production and is currently in the process of finalising the optimal processing flow sheets and a development plan. It is currently expected that the first gold production will commence here in 2014.

Chita region projects

The Group holds three prospective assets in the Chita region, of which the most advanced,   the Verkhne-Aliinskoye high-grade deposit, is currently at a pre-development stage. Work at the other two licence areas, Kulinskoye and Bukhtinskaya, is less advanced, but already reflects the great exploration potential of the region.

The Verkhne-Aliinskoye deposit is situated 30km west of the town of Baley, a well-known historical gold mining centre. It is a high-grade, narrow vein deposit potentially suitable for underground mining. The deposit is hosted within a monzonite intrusion and comprises a large number of quartz-sulphide veins with a strike length of up to several hundred metres. 

Through exploration and comprehensive technical work, Verkhne-Aliinskoye has been developed to an advanced pre-production stage, with total JORC resources of 0.74Moz of gold at 6.25 g/t, including 0.27Moz in the Measured and Indicated categories. The deposit is underexplored, with many of the veins open both along strike and down dip.

The mineralisation at Verkhne-Aliinskoye varies in composition between refractory and non-refractory, with the majority being non-refractory and amenable to cyanide recovery from flotation concentrate.

The Group is considering two development options: the treatment of the concentrate at the future Pokrovskiy POX hub or the on-site processing of the flotation concentrates. Verkhne-Aliinskoye is at an advanced stage in the permitting process and management is working on an optimal mine plan for the asset.

ALLUVIAL OPERATIONS

Following the acquisition of Omchak in 2010, the Group operates a number of subsidiaries exploiting alluvial gold deposits in the Amur, Magadan and Yakutia regions of Russia.

In 2011, the contribution of alluvial operations to the Group's output was 89,600oz, equating to approximately 14% of the Group's overall gold production for the year. This share is expected to decrease with the increase of production from hard rock deposits.

The majority of 2011 production came from the Group's principal alluvial operations located in the Amur and Magadan regions. In 2011, 36,170oz of gold was produced in the Amur region and 49,707oz in Magadan region. A smaller operation in Yakutia (Uduma) contributed 3,685oz of production.

In 2012, the Group is planning to produce 92,000oz of gold from alluvial operations.

Alluvial total cash costs

2011 total cash costs for the Group's alluvial operations were US$1,167/oz - 36% higher than in 2010 (US$861/oz). This figure was broadly in line with expectations, as alluvial mining typically requires more costly overheads than hard rock mining. A large proportion of costs at these operations is attributable to diesel, which has increased by 36% year-on-year.

2011 EXPLORATION REPORT AND LICENCE ACQUISITIONS

2011 was a very successful year for exploration, particularly at Pioneer, Malomir and Albyn in the Amur region, at Visokoe in the Krasnoyarsk region and at Petropavlovskoye in the Yamal region.

Pioneer

In 2010, the Group acquired the larger Alkagan-Adamovskaya licence area surrounding the Pioneer deposit, as geological interpretation suggested that the high-grade NE Bakhmut trend may continue into this new licence area. This concept has now been confirmed by the 2011 exploration programme, which identified a further extension of the NE Bakhmut ore body, including a new high-grade pay shoot. The zone contains both refractory and non-refractory mineralisation, and is yet to be fully evaluated.

Several other zones of mineralisation containing both refractory and non-refractory material were also identified.. These include the Zvezdochka zone and a new zone south-east of NE Bakhmut.. The latter zone was discovered late in 2011 and is yet to be fully understood and evaluated.

Further exploration and interpretation of the drilling results were completed for Nikolaevskaya, allowing classification of Measured, Indicated and Inferred category JORC Resources and also a JORC-compliant Ore Reserve evaluation for this zone. There is also an indication of potential new undiscovered zones south of Nikolaevskaya, as well as north of NE Bakhmut. Exploration of these areas is on-going.

The Group is continuing active exploration within areas surrounding the Pioneer deposit. Several geochemical anomalies were discovered in 2011, although the Group is waiting for further geological results.

Exploration in 2012 will focus within the area south and south-west of Nikolaevskaya as well as north and north-east of current Pioneer pits at the occurrences known as Alkaganskiy, Zakritiy and Opytniy.

Pokrovskiy

Exploration at Pokrovskiy focussed on upgrading Inferred resources into the Measured and Indicated categories at Pokrovka- 2, as well as expanding resource size and proving ore body extensions. 

At Zheltunak, an ore body located some 20km north-east from the Pokrovskiy deposit, exploration identified JORC-compliant Mineral Reserves and Ore Resources suitable for processing using the existing RIP plant at Pokrovskiy. This discovery was included in the Group's 2012 Reserves and Resources estimate and open-pit mining has already commenced at the site.

Malomir

Drilling at the areas surrounding, and adjacent to, the Quartzitovoye and Malomir Central open pits, as well as north of Ozhidaemoye deposit, has identified several further zones of refractory and non-refractory mineralisation.

These new findings were only partly reflected in the Group's 2012 Reserves and Resource estimate as both the exploration programme and interpretation of results obtained during 2011 are still on-going. The findings include Zone 26, north of the Malomir Central open pit, and the Kanavinskaya zone located north of Ozhidaemoye.

Mineralisation at Kanavinskaya is currently estimated to the Inferred category to be 11Mt at 0.7g/t. However, preliminary metallurgical tests indicate that mineralisation is non-refractory and could add 250koz to the RIP Resource inventory. The current Resource estimate for Zone 26 adds approximately 60,000oz to the refractory Resource, including 800kt at 0.95g/t Indicated and 1,400kt at 0.77g/t Inferred.

During 2011, further zones of mineralisation north-west of the operational Quartzitovoye open pit were identified.. These zones are expected to be non-refractory, but due to their location within the blasting safety zone, exploration has been progressing at a slower pace.

However, the Group expects to include these zones in future mineral Reserves and Resources statements. 

At the Quartzitovoye high-grade ore body, new assay results resulted in improvements in both the resource size and the confidence of the estimate. The main Quartzitovoye high-grade ore body is still open to depth, indicating the potential to extend the size of the Resource down dip.

Albyn

The 2011 exploration programme at Albyn and the surrounding area was very successful.

A comprehensive programme of trenching and in-fill drilling at Albyn resulted in an increase in Measured and Indicated Resources from 1.2Moz to 1.7Moz. The total Resource, including the Inferred category, was also upgraded from 1.8Moz to 2.2Moz.

Further mineralised zones were identified west of the main ore body, where both flat dipping and steep high-grade narrow vein structures were explored. In the central area of the deposit, mineralisation was defined by drilling to a depth of 400m from the surface, with the gold grade increasing with depth. The Group has yet to establish where this mineralisation will begin to narrow.

At Kharginskoye, an extension of the Albyn licence area acquired in 2010, exploration identified several "Albyn-style" zones of mica-feldspar metasomatites with elevated gold grades. Exploration in this area will continue in 2012, when more conclusive results will be reported.

At Elginskoye, a new 325km² licence area, located 15km west of the Albyn plant and acquired by the Group in November 2010, the exploration programme yielded its first positive results.

The area has extensive gold placers which were mined during Soviet times. The primary source of these placers has not yet been traced. The geology of the area is similar to Albyn and the exploration results received during 2011 have confirmed the presence of an Albyn style mineralisation, the extent of which is yet to be ascertained.

During 2011, the first trenching and drilling was completed at the Grozovoye and Elginskoye prospects, the two historically better explored targets within the licence area. At Grozovoye, a shallow dipping mineralised zone with an exposed width of 100m was identified and sampled. Significant trenching and drill intersections include: 39m at 1.25g/t Au (trench K-430-1), 11.9m at 1.18g/t Au (drill hole C-430-32) and 1m at 17.8g/t Au (trench K-414-1).

A further shallow-dipping mineralised zone with a visible thickness of 100-150m was also identified at the Elginskoye prospect. Trench intersections received to date include: 44.3m at 1.45g/t Au, 18.5m at 1.42g/t Au, 27m at 2.44g/t Au and 2.3m at 4.23g/t Au. Drill hole intersections include: 17m at 2.01g/t Au and 9.8m at 1.36g/t Au (all thicknesses are apparent). 

Exploration at the Elginskoye licence area remains at an early stage, with further promising targets due to be tested in 2012. These include a large (approximately 10km long) geochemical gold anomaly identified during the 2011 work. Group geologists believe that this area could become a significant addition to the main reserves and resources base of the Albyn mine.

Taldan and Osezhinskaya

The Taldan and Osezhinskaya licence areas are located in the western part of the Amur region in close proximity to each other. Taldan is situated approximately 150km by road from Pokrovskiy and 4km from the town of Taldan, which itself is situated on the Trans-Siberian railway. The Osezhinskaya area was acquired in 2010 and is located 20km west of the town of Taldan.

In 2011, the Group completed preliminary exploration work at the Burinda deposit, which is located within the Taldan licence area. An Inferred gold Resource of 0.34Moz was identified, with mineralisation open to depth.

In 2011, early stage exploration also started at the nearby Osezhinskaya licence area. Historical geochemical work had identified a large gold anomaly over a granite-porphyry intrusion located on the east side of the licence area. This intrusion is believed to be the source of gold placers, which are wide spread in the river valley on the west flank of the granite. A strong Ag-Cu-Mo anomaly was identified north of the gold anomaly, which may indicate the presence of a copper porphyry style mineralisation.

During 2012, the Group intends to continue exploration of Osezhinskaya. Based on 2012 results, the Group will re-evaluate further exploration plans at both Taldan and Osezhinskaya.

Osipkan

The Group finished its preliminary exploration at Osipkan in 2011. The results indicated the presence of modest-sized non-refractory mineralisation containing 200,000-400,000oz in non-refractory gold at an average grade approximately 1.0g/t which could be amenable for simple heap-leach processing. Preliminary tests showed heap leach recovery of 60%, although fine grinding increases recovery to 90%. The mineralised zone has wide exposure at the surface and is suitable for open-pit mining.

Sagur-Semerotakskaya

Exploration results at Sagur-Semertakskaya included several high grade intersections (up to 1.5m at 15.9g/t and 1..0m at 11.0g/t ), which indicate that this area is prospective for the discovery of a modest to small size narrow vein target for potential underground extraction. The Group is evaluating options to develop this asset further..

Krasnoyarsk region

In the Krasnoyarsk region, the Group has continued successful exploration at its significant non-refractory Visokoe deposit, as well as at the Troeusovskaya and Verkhnetisskaya licence areas. 

Drilling and trenching completed at Visokoe upgraded the size of and increased confidence in the mineral resource estimate. Measured Mineral Resources were classified for the first time and the total Mineral Resources increased from 1.8Moz to 2.5Moz of gold. Geological results indicated that there is currently potential to increase mineral resources further. The Group also completed sufficient technical work to estimate a maiden Probable Ore Reserve for Visokoe (1.2Moz in 33.8Mt of ore at 1.13g/t Au). 

At Troeusovskaya, a large (995km²) licence located about 60km to the south of Visokoe, the Group identified a number of promising gold occurrences, including several significant gold-arsenic geochemical anomalies up to 7km in length. The presence of gold as well as arsenic, together with the overall favourable geological setting, indicates the potential to discover "Olimpiada-style" gold mineralisation. Olimpiada is a world-class gold deposit situated approximately 70km east of Troeusovskaya. The largest geochemical anomaly identified at Troeusovskaya to date is yet to be tested. Significant intersections obtained from the site in 2011 include 2.2m at 4.8g/t Au and 10m at 1.9g/t Au, with individual samples of up to 8g/t Au. Work remains at an early stage and further results will be reported in 2012.

The limited trenching and drilling work completed on the Olenka ore body within the Verkhnetisskaya licence identified a new mineralised structure with a strike in an east-west direction. Similar structures are well known locally as a potential host of economic mineralisation. The latest results are being evaluated and the exploration programme is being adjusted to reflect these findings. The current resource estimate of 540koz of Inferred Resources at Olenka will be updated during 2012 to incorporate these new discoveries.

Yamal region

In the Yamal region, the Group continued its exploration programme at the Petropavlovskoye gold deposit and also started early-stage prospecting at the Sob-Kharbeiskaya licence area, which was acquired in 2010. 

At Petropavlovskoye, the Group re-evaluated drilling results from the Novogodnee Monto gold and iron ore body, estimating an additional Inferred category Resource of 0.26Moz of gold, as well as 3Mt of high-grade by-product iron ore at an average grade of 46% Fe_(tot).  Further gold mineralisation was also identified and explored north and south of the Petropavlovskoye main mineralised zone, adding approximately 0.1Moz of gold in the Inferred category to the project's mineral inventory. The total JORC-compliant Mineral Resource estimate for the Group's Yamal region assets has now increased to more than 1Moz of gold.

Preliminary exploration results from the Sob-Kharbeiskaya licence area were promising, identifying a zone of gold mineralisation with potentially economic grades. Exploration at Sob-Kharbeiskaya remains at an early stage and is scheduled to continue into 2012.

New Exploration Licences

In June 2011, the Group won the auction for the 308km² Nimanskaya exploration and extraction licence area, located in the Khabarovsk region, some 90km south of Albyn. The area is well-known for extensive alluvial gold mining, which started here in 1874.. It is estimated that between 4Moz to 5Moz of gold were recovered from the area, with 80% of the historical production from a 14x12km area within the licence.

Work completed by the Group's predecessors between 1994 and 1998 identified several zones of mineralisation along an 8km strike of up to 5km in width.  Grades ranging from 0.2g/t to 20g/t of gold were identified in samples. The Group's predecessors concluded that the area has the potential for a resource of between 2Moz and 4Moz at an average grade of 1.0-2.0g/t Au.

GOLD PRODUCTION OUTLOOK 2012

The Group currently estimates total attributable gold production for 2012 at 680,000oz, including c.588,000oz from the Pokrovskiy, Pioneer, Malomir and Albyn mines and c. 92,000oz from the Group's alluvial operations. This estimated production represents an 11% increase compared to the 2011 attributable gold production.

2012 production is expected to ramp-up towards the second half of the year with c.40% of annual gold output to be produced in H1 2012. The expected increase in the second half is attributable to the expansion of Pioneer and Albyn plants, which are scheduled for H2 2012 and, full contribution from the first Albyn processing line which has been ramped-up throughout Q1 2012. Second half production will also benefit from alluvial and heap leach operations, which are seasonal and contribute mostly to the second half of the year production.

Expansions at Albyn and Pioneer, which are expected to be completed during H2 2012, are not fully reflected in the 2012 target, as part of the Group's new conservative approach to forecasting its production output.

GOLD PRODUCTION OUTLOOK 2013-2016

The Group continues to review its production schedule for the period 2013 - 2016 in light of the latest additions to reserves base at the main producing assets to optimise grades scheduling.

The Group expects some changes to the previous estimates; significant production growth is expected to be achieved due to a substantial increase in production capacities.

It is also expected that four smaller scale projects - Visokoe (Krasnoyarsk region), Tokur (Amur region), Vekhne-Aliinskoye (Chita region) and Novogodnee Monto (Yamal region) - will commence production during this period thus improving the current base case medium-term production schedule.

CAPITAL EXPENDITURE

In 2011, the Group spent a total of US$544 million of development and maintenance capex on its gold projects. The key area of focus was the development of the expansion of Malomir and its preparation for the refractory stage of operations, commissioning of the Albyn mine, expansion of the Pioneer and Albyn plants and the development of the Pokrovskiy POX hub.

The Group has also spent US$100 million on on-going exploration works, mainly at the Pokrovskiy, Pioneer, Malomir and Albyn projects. This work yielded a significant increase in Group Reserves and Resources.

Capital expenditure for the development of gold projects in 2012 is expected to be US$354 million. Approximately 30% of this budget will be spent on contract payments for the equipment for the future POX plant, and approximately 30% is allocated for the expansion of the Pioneer and Albyn plants. The 2012 capex also provides for the construction of a flotation plant at Malomir.

Exploration capex for 2012 is approximately US$60 million, which is planned to be spent mainly at the existing operating sites, with a focus on Pioneer and Albyn.

Going further, the Group expects a significant decrease in its capital expenditure for gold projects with US$175 million and US$84 million to be spent in 2013 and 2014 respectively. The majority of this budget is purposed to finalise the second stage of expansion of the POX hub to allow processing of refractory material from Pioneer commencing from 2015.

CASH COSTS

Group total cash costs for hard rock deposits in 2011 were US$586/oz, with total cash costs for alluvial projects of US$1,167/oz. The marginal 7% increase in cash costs for hard rock operations, against strong input cost inflation and the decrease in grades processed at Pokrovskiy and Malomir was achieved through comprehensive cost control, implementation of a number of efficiencies at every level of the mining operations, economies of scale from increased capacities at operations and the improvement in grades at Pioneer.

The Pokrovskiy mine saw the most significant, 35%, increase in total cash costs in 2011, the result of lower processing grades, input cost inflation and the increase in stripping ratio. This was offset by a 3% decrease in total cash costs at Pioneer, caused by improvements to mining works, leading to an increase in grades processed and mined.

Compared to 2010, diesel costs increased by 36%, which created significant upwards pressure, particularly on mining and handling costs, where fuel constitutes c.19% of the total cost. 2011 electricity costs were up 17% year on year, which also significantly affected production costs as electricity accounts for almost a quarter (23%) of total RIP processing costs.

Inflation on consumables prices varied from a 2% increase in the cost of chemical reagents to an 85% increase in the cost of explosives.

The Group was successful in controlling wage inflation, which was up by only 6% against much higher levels around the world.

Cash costs outlook

In 2012, the Group expects some increase in the cash cost of production, in line with somewhat lower grades scheduled to be processed and with operating cost inflation. Continuous expansions of scale at Group operations and an increase in their efficiency is expected to somewhat mitigate those negative effect, as successfully demonstrated in 2011.

2012 OPERATIONS UPDATE

A good performance from Group operations will see gold production on budget at the end of the first quarter. Despite an exceptionally cold period in January, Pioneer has made an impressive start to the year. The tonnes processed were in line with the budget but with a 10% uplift in grade versus the budgeted number (2.1g/t v's a budget of 1.9g/t) and an 86% recoveries, which was higher than expected. The fourth processing line is under construction and expected to be commissioned in Q3 2012.

Malomir's production was marginally below budget due to lower grades mined and a lower recovery rate but by the end of the quarter the scheduled grade profile was achieved and it is expected that the mine will catch up with its schedule of production in Q2 2012. An expansion of the sorption circuit was completed in March taking the plant processing capacity to 180,000 tonnes per month.

The ramp-up of the first stage at Albyn progressed slower than expected due to a shortage of power and water, but the second processing line is under construction and expected to be commissioned two months earlier than budgeted and to allow catch up with the target.

At Pokrovka, the push back of the south wall of the main pit continued on schedule and high grade ore will be mined from the main pit in Q4 2012. Overall production from all mines is in line with the target for Q1 2012.

CORPORATE UPDATE

DIVIDENDS

As the Company grows, and subject to the availability of distributable reserves, the Directors intend to pursue a dividend policy which reflects the Group's cash flow and earnings, while maintaining an appropriate level of dividend cover and taking into consideration further funding relating to the development of Group activities.

On 27 March 2012, the Board of Directors resolved to recommend a final dividend of ?0.07 per share, which is expected to result in the aggregate payment of ?13.2 million. Subject to shareholder approval at the Annual General Meeting on 31 May 2012, the final dividend is proposed to be paid on 26 July 2012 to the shareholders on the register at the close of business on 29 June 2012.

The Board considers that the proposed dividend level is appropriately covered and is consistent with the Group's development spending.

CHANGES TO EXECUTIVE DIRECTORSHIPS

In December 2011, following his appointment as Senator and Member of the Federation Council of Russia, Dr Pavel Maslovskiy relinquished his role as CEO, in line with Russian legislation, and was replaced by Sergey Ermolenko. Mr Ermolenko was one of the members of the Group's founding management team who previously held the position of General Director of Management Company Petropavlovsk.

In order to retain Senator Maslovskiy's knowledge and experience, the Board conferred on him the title of Honorary President. In this capacity, which is not remunerated, Senator Maslovskiy is able to advise the new CEO and also attend, but not vote at, meetings of the Board. Mr Martin Smith, who was previously holding the position of Technical Director, was appointed Deputy CEO to Mr Ermolenko.

The Chief Financial Officer, Brian Egan, has taken the decision to step down from his position following the publication of the Annual Report, due to his relocation to Ireland. Andrey Maruta,who has previously served as Finance Director, Russia, will replace Mr Egan as Chief Financial Officer.

Dr Alya Samokhvalova joined the Board as Strategic Director in addition her long-standing role as Group Head of External Communications.

CHANGES TO NON-EXECUTIVE DIRECTORSHIPS

In January 2011, Dr Graham Birch assumed the role of Senior Non-Executive Director.

In August 2011, Dr David Humphreys joined the Board as a non-executive director to replace Peter Hill-Wood who retired in May 2011. Dr Humphreys has extensive relevant experience in the global mining industry through his work for mining companies and as a consultant and academic. He was Chief Executive at Norlisk Nickel, Russia's largest mining company from 2004 to 2008.  He was previously with Rio Tinto for eighteen years, the last eight of these as the company's Chief Economist. Prior to joining Rio Tinto, Dr Humphreys worked for nine years in the UK government service, for six of these as an advisor on minerals policy.

Rachel English joins the Board with effect from 28 March 2012.  Ms English has over 25 years' international experience in blue-chip companies, with responsibilities spanning finance, strategy, planning, business development, and mergers and acquisitions. She is currently a non-executive director of Kuwait Energy Plc, Global Carbon Capture and Storage Institute Ltd, the Audit Committee of the Department for International Development, and NHS London.. She is also a non-executive director of Helios Social Enterprise, which she founded with former Scottish Power, BP and Shell senior executives to develop renewable energy access projects in rural sub-Saharan Africa. She was formerly Chief Financial Officer at Gasol Plc and, prior to that, Senior Corporate Strategist at BG Group Plc. She has also held senior positions with British Energy Plc, Entergy Inc and Shell Gas & Power.  Ms English is a graduate of the University of Oxford and a Fellow of the Institute of Chartered Accountants in England and Wales.    

POST-YEAR END EVENTS

On 7 February 2012, the Group disposed of its interest in the wholly-owned subsidiary Sever-Chrome for the total cash consideration of US$7.8 million.

In March 2012 the Group entered into a new US$200 million 6 year loan facility with Russia Bank.

IRC

2011 was a landmark year for IRC as it achieved many key milestones and grew closer to its vision of being a Sino-Russian industrial commodities champion. It was IRC's first full-year in production since listing.  Although still in a ramp-up phase, production at the Kuranakh Mine exceeded targets. Development activities at the K&S project advanced to plan and budget during the year, putting that operation on track to bolster production by an additional 3 million tonnes of high-quality iron ore concentrate in the near-term. Finally, IRC's extensive exploration portfolio continued to add value, both at brownfield and greenfield sites.

2011 Highlights

n  800,000 tonnes of iron ore saleable product  at the Kuranakh Mine

n  First shipments of ilmenite to Russian, Chinese and international clients

n  First drawdown of project debt facility to fund the K&S Project

n  Commencement of construction of K&S Processing Plant

Kuranakh

The Kuranakh Mine came into production in 2010, becoming IRC's first producing mine. The operation covers 85km² and comprises the Kuranakh and Saikta deposits, an on-site crushing and screening plant and the nearby Olekma Processing Plant. The final products, an iron ore concentrate with a 62.5% iron (Fe) content and an ilmenite concentrate with 48% titanium dioxide content (TiO2), are directly loaded onto railcar wagons for transportation on the Baikal Amur Mainline and Trans-Siberian railways to IRC's customers. 

Production

In October 2011, the mine achieved full production capacity for iron ore concentrate at an annualised 900,000 tonnes per annum in October. This resulted in a significant increase in production for the year, to a total 800,000 tonnes, 7% higher than the targeted production. Full annual capacity of ilmenite concentrate is targeted during 2012. During 2011, production did, however, increase to 63,500 tonnes, 22% ahead of the 52,000 tonne target. Based on current reserves, the life-of-mine is estimated at 15 years, with opportunities to extend this further.

Financial Performance

During 2011, Kuranakh generated revenues of US$110.4 million. Cash costs for the year averaged US$66.2 per tonne. Longer-term production costs are currently forecast, at approximately US$60 per tonne as the ilmenite circuit ramps up. Transportation costs for Kuranakh iron ore concentrates to Suifenhe, on the Chinese-Russian border, averaged US$43.8 per tonne in 2011. It is anticipated that rail freight rates will reduce in the mid to long-term.

2012 Targets

During 2011, Kuranakh achieved its full production capacity. The target for iron ore concentrate production for 2012 is 820,000 tonnes (62.5% Fe grade content). During 2012, the ilmenite circuit will continue to ramp-up to an annualised capacity of 160,000 tonnes, and therefore 2012 production is targeted at an intermediate level of 125,000 tonnes. Production increases should work towards improving unit and total costs.

K&S

K&S is an advanced stage development project, which is currently on track to be commissioned in 2014, with an initial annual production capacity potential of 3.2 million tonnes of high-grade iron ore concentrate. The operation comprises the twin deposits of Kimkan (the "K") and Sutara (the "S"). The former is currently being mined by open-pit methods, with ore being stockpiled for processing. At full production, it is anticipated the deposits will be mined sequentially, producing on average 10 million RoM tonnes per annum at an average grade of 35% Fe. The K&S processing plant will be located between the two deposits. Construction began in 2010 and is due for completion in mid-2014. It is being funded through a project finance facility provided by the ICBC and is being built by China National Electric Engineering Company Limited ("CNEEC") with supervision from IRC..

K&S is well situated, close to the Trans-Siberian railway which provides a direct route to the market. Furthermore, the recently upgraded main east-west federal highway is located close to the mine site. In addition to transport access, K&S also enjoys excellent electricity and water supplies.

In August 2011, IRC announced the favourable findings of a mine optimisation study for K&S, showing potential to nearly double production estimates from 3.2 to 6.1 million tonnes per annum by accelerating production from the Sutara deposit. IRC is completing a detailed feasibility study in 2012 to decide on the final method to optimise the long-term mine plan.

Costs

Long-term production costs at the K&S operation are currently forecast at US$33 a tonne of iron ore concentrate. The current cost of rail freight to Suifenhe on the Chinese Russian border is approximately US$20 per tonne.

Garinskoye

Garinskoye is an advanced exploration project that covers 11.2km². In terms of resources, Garinskoye is the largest project in the IRC portfolio. Currently undergoing final geological investigation and mine planning, the project is targeting construction and first production from 2015. Adjacent to the project, IRC has exploration licences covering over 3,500km² of ground. 

Exploration activities at Garinskoye advanced well during 2011. Based on the results of geological modelling, the concept of a two-stage development of Garinskoye could be considered. This could involve a DSO style operation by mining the higher-grade ore first. This option is currently being studied.

Exploration

In addition to its three main mining assets, IRC also has significant other exploration opportunities, notably in and around the three main assets. In 2012, IRC total attributable resources grew by 16% to 1,345 million tonnes of iron ore. More importantly, group attributable iron reserves grew by 24% to 801 million tonnes.

Forward-looking statements

This release may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this release and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the Group's results of operations, financial position, liquidity, prospects, growth, strategies and expectations of the industry.  

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the development of the markets and the industry in which the Group operates may differ materially from those described in, or suggested by, any forward-looking statements contained in this release. In addition, even if the development of the markets and the industry in which the Group operates are consistent with the forward-looking statements contained in this release, those developments may not be indicative of developments in subsequent periods. A number of factors could cause developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in law or regulation, currency fluctuations (including the US dollar and Russian rouble), the Group's ability to recover its reserves or develop new reserves and to implement its expansion plans and achieve cost reductions and efficiency measures, changes in its business strategy or development, political and economic uncertainty.  Save as required by the Listing and Disclosure and Transparency Rules, the Company is under no obligation to update the information contained in this release.

Past performance cannot be relied on as a guide to future performance.

Basis of reporting reserves and resources

Mineral Resource and Ore Reserve estimates for the Group's hard rock deposits are reported in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves as prepared by the Joint Ore Reserves Committee of the Australian Institute of Mining and Metallurgy, Australian Institute of Geosciences and Minerals Council of Australia ("JORC Code (2004)").

PETROPAVLOVSK PLC

Consolidated Income Statement

For year ended 31 December 2011

PETROPAVLOVSK PLC

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2011

PETROPAVLOVSK PLC

Consolidated Balance Sheet

At 31 December 2011

^(a)        Prepayments for property, plant and equipment previously reported within current assets as prepayments for property, plant and equipment were reclassified to non-current assets to ensure a better presentation of the Group's consolidated assets that are expected to be realized within more than twelve months after the reporting period (note 2.3)

These consolidated financial statements for Petropavlovsk PLC, registered number 4343841, were approved by the Directors on 27 March 2012 and signed on their behalf by

Peter Hambro                                     Brian Egan

Director                                                Director