Petropavlovsk PLC

+44 (0) 20 7201 8900

Maitland

+44 (0) 20 7379 5151

Operational Risks

Risk

Description and potential impact

Mitigation

Change from 2014

1. The Group is dependent on production from its operating mines in order to generate revenue and cash flow and comply with the production and sales covenants in certain of its borrowing facilities.

Factors which may impact the level of production include:

Severe weather conditions

and

Availability and failure of equipment or services

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

The Group relies on the supply and availability of various services and equipment in order to successfully run its operations. For example, timely delivery of mining equipment and jaw crushers and their availability is essential to the Group's ability to extract ore from the Group's assets and to crush the mined ore prior to production. Delay in the delivery or the failure of mining equipment could significantly delay production and impact the Group's profitability.

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

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

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

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

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

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

Þ

No change

2. Failure to execute various construction and development projects including the completion and the commissioning of the Pressure Oxidation (POX) Hub and the underground mining project

The Group's long-term strategy relies on the successful completion of various projects including the successful commissioning of POX and the implementation of the underground mining project. Failure to deliver these projects within the agreed budget and timeframes may have an adverse impact on the Group's growth plans and its future profitability.

Failure to deliver these projects would also reduce the Group's ability to extract value from high quality Reserves, but difficult to extract, gold at Malomir.

An active maintenance program has been on-going, since the Board's decision in May 2013, to defer the start-up of the POX Hub, to preserve equipment at completed sections of the plant and to keep facilities on standby so that full scale development could be recommenced in the future.

The POX Hub will be delivered together with an excellent team of specialists. The Group has a pilot plant in Blagoveshchensk where it has previously undertaken bulk sample testing.

As detailed in the Strategic report, the Board has approved a joint undertaking with a reputable industry player to complete construction of the POX Hub and provide the processing plant for refining refractory gold ores and float concentrates extracted by both parties. This is subject to shareholder approval.

An engineering study was carried out on underground mining at Pioneer and a detailed proposal prepared. Based on the initial results of the study, these projects are expected to be highly profitable. The Group will continue to work with professional and reliable consultants as necessary to ensure that the underground project can be delivered within the agreed budget and timeframes.

The Executive Committee and the Board will closely monitor these projects.

N

New risk

3. The Group's activities are reliant on the quantity and quality of the Mineral Resources and Ore Reserves available to it.

Exploration activities are speculative, time-consuming and can be unproductive. In addition, these activities often require substantial expenditure to establish Reserves through drilling and metallurgical and other testing, determine appropriate recovery processes to extract gold from the ore and construct or expand mining and processing facilities. Once deposits are discovered it can take several years to determine whether Reserves exist. During this time, the economic viability of production may change. As a result of these uncertainties, the exploration programmes in which the Group is engaged in may not result in the expansion or replacement of the current production with new Reserves or operations.

The Group is using modern geophysical and geochemical exploration and surveying techniques. The Group employs a world class team of geologists with considerable regional expertise and experience. They are supported by a network of fully accredited laboratories capable of performing a range of assay work to high standards.

The Group's exploration budget is fixed for each asset at the start of each financial year depending upon previous results. In 2015, the Group continued to focus its exploration programme at or close to its four existing operating mines and in particular, on finding new, non-refractory resources. 2015 exploration results were reviewed by independent mining experts Wardell Armstrong International.

Significant progress has made towards developing Ore Reserves for underground mining from Q3 2015. An engineering study was carried out by external consultants during the year on Pioneer underground mining. Based on the initial results of the study the Board expects that these projects will be highly profitable with the potential to contribute high-margin ounces to the Group's production schedule.

As detailed in the Strategic Report, the Board has approved a joint undertaking with a reputable industry player to complete construction of the POX Hub, which will provide the processing plant for refining refractory gold ores and float concentrates extracted by both parties. This is subject to shareholder approval.

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No change

4. The Group's Mineral Reserves and Ore Resources are estimates based on a range of assumptions.

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

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

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

These laboratories have the capacity to conduct assaying, metallurgical testing and sample analysis to establish the gold grade, mineralogical composition and geotechnical properties of the ore.

The Mineral Resource and Ore Reserve estimates included in this Report for the Group's four principal gold deposits located in the Amur region, Far East Russia, prepared in accordance with the guidelines of the JORC Code (2012) were reviewed and signed-off by Wardell Armstrong International ('WAI') in April 2016. WAI is an independent consultancy that has provided the mineral industry with specialised geological, mining, and processing expertise since 1837.

WAI has considerable knowledge of the Group's assets located at Malomir, Albyn, Pioneer and Pokrovskiy, having previously been the Independent Technical Engineer reporting Mineral Resources and Ore Reserves on an annual basis. In addition, WAI completed a comprehensive independent review of all gold exploration assets held by the Group in 2011 and again in 2014. As part of the 2015 review,

WAI conducted a detailed assessment at each of the Group's mines.

In addition, the Company has adopted a gold price assumption of US$1,100/oz for Ore Reserve estimates, which is lower than the current market price, broker forecasts, and assumptions used by some of the Group's peers.

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No change

Financial Risks

Risk

Description and potential impact

Mitigation

Change from 2014

1. Lack of funding and liquidity to allow the Group to:

i. Support its existing operations;

ii. Invest in and develop its exploration projects;

iii. Extend the life and capacity of its

existing mining operations; and

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

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

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

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

The Group's borrowing facilities include a requirement to comply with certain specified covenants in relation to the level of net debt and interest cover. A breach of these covenants could result in a significant proportion of the Group's borrowings becoming repayable immediately.

The Refinancing was completed on 18 March 2015 and secured the immediate future of the Group.

Net debt was reduced from US$930 million at the start of 2015 to c.US$610 million as at 31 December 2015, as forecast, due to the

Refinancing and focus on financial discipline and cash optimisation.

The Group is in advance negotiations with VTB and Sberbank (the 'Senior Lenders') to extend and revise the maturity of its existing bank debt and to obtain relaxation of certain financial covenants.

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

Details of the IRC financial related risk are provided on page [•].

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Increased risk

2. The Group's results of operations may be affected by changes in the gold price

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

The Executive Committee monitors the gold price and influencing factors on a daily basis and consults with the Board as appropriate.

The Executive and the Board review the Group's hedging position on a regular basis. During 2015, the average realised gold price achieved by the Group of

US$1,178oz included US$20oz as a result of hedging.

During 2015, the Board decided to curtail production from marginally profitable sources of gold.

The successful cost-cutting programme, together with the continued weakness of the Rouble against the US Dollar, enabled the Group to achieve TCC/oz of US$749/oz during 2015.

The new strategy of the Group envisages an increase in production of high-margin ounces in the short-term and ensures sustainability of production in the medium to long-term, whilst continuing to focus on cash cost optimisation.

As at 28 April 2016, the Group had outstanding forward contracts totalling 37,850oz of gold at an average price of US$1,116oz.

Þ

No change

3. Currency fluctuations may affect the Group

The Group reports its results in US Dollars, which is the currency in which gold is principally traded and therefore in which most of the Group's revenue is generated. Significant costs are incurred in and/or influenced by the local currencies in which the Group operates, principally Russian Roubles. The appreciation of the Russian Rouble against the US Dollar tends to result in an increase in the Group's costs relative to its revenues, whereas the depreciation of the Russian Rouble against the

US Dollar tends to result in lower Group costs relative to its revenues.

In addition, a portion of the Group corporate overhead is denominated in Sterling. Therefore, adverse currency movements may materially affect the Group's financial condition and results of operations.

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

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

The Russian Rouble also exhibits a high positive correlation with crude oil prices as Russia exports a large quantity of crude oil and is dependent on export revenues related to crude oil prices. As a consequence and due to other factors currently affecting the

Russian economy, the outlook for the Russian Rouble remains weak.

The Group's operations benefitted from the continuing weakness of the Russian Rouble during 2015 and it is expected that it will continue to benefit during 2016, although crude oil prices may increase.

Þ

No change

4. IRC Related risks

Funding may be demanded from Petropavlovsk under a guarantee in favour of ICBC

The Company has a 35.83% interest in IRC, a Hong Kong Listed iron ore producer.

Petropavlovsk has provided a guarantee against a US$340 million project loan facility provided to K&S by ICBC to

fund the construction of IRC's iron ore mining operation at K&S, of which c.US$276.25 million was outstanding at 31 December 2015. This loan is supported by Sinosure, the Chinese export credit insurance agency. In the event that K&S was to default on its loan, Petropavlovsk may be liable to repayment of the outstanding loan under the terms

of the guarantee and other Group indebtedness may become repayable under cross-default provisions

However, under the terms of the

Company's banking facilities with VTB and Sberbank, the Company is unable to provide any funds to IRC without the prior consent of these lenders.

On 19 April 2016, IRC announced that ICBC had granted waivers in respect of IRC's project finance facility with ICBC, including obligations to maintain certain cash deposits with ICBC, and the obligations of IRC and Petropavlovsk to comply with certain financial covenants. The waiver from the obligations of IRC and Petropavlovsk to comply with certain financial covenants will be effective immediately upon fulfilment of certain conditions precedent and up to and including 31 December 2017. Effective immediately upon fulfilment of the conditions precedent, ICBC has also granted IRC a waiver from the obligations to maintain cash deposits of c.US$26 million with ICBC during the period from 20 June 2016 to 30 June 2018 (both dates inclusive).

IRC's K&S facility is expected to be fully commissioned by the end of June 2016. Once commissioned K&S is expected to generate an operating margin even in the current lower price iron ore environment to generate sufficient cash to meet its borrowing obligations.

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No change

5. IRC's results of operations may be affected by changes in the iron ore price

The market price of iron ore can be volatile. Iron ore prices continued to decline during 2015. The iron ore price at the end of 2015 remained weak. The spot price of benchmark 62% iron content delivered to the Chinese port of Quingdao ended 2015 at US$43 per tonne although the iron ore price has recently seen an increase. The global oversupply of the raw material persists whilst the appetite of China, the largest bulk commodities consumer in the world, is getting smaller as its economy has entered into a 'new normal' of slower growth pace.

The IRC Board announced on

14 December 2015 that it had decided that the Kuranakh mine should be put on temporary 'care and maintenance.'

The hot commissioning of the second and final phase of crushing and screening facilities at K&S has completed allowing production of pre-concentrate. The processing plant is scheduled for handing over to IRC, from the contractor, by the end of June 2016. The processing plant will upgrade pre-concentrate to IRC's premium high grade 65.8% Fe concentrate for commercial sales. Once commissioned K&S is expected to generate an operating margin even in the current depressed iron ore markets.

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No change

Health, Safety And Environmental Risks

Risk

Description and potential impact

Mitigation

Change from 2014

1. Failures in the Group's

health and safety

processes and/or breach of

Occupational Health &

Safety legislation.

The Group's employees are one of its most valuable assets. The Group recognises that it has an obligation to protect the health of its employees and that they have the right to operate in a safe working environment. Certain of the Group's operations are carried out under potentially hazardous conditions. Group employees may become exposed to health and safety risks which may lead to the occurrence of work-related accidents and harm to the Group's employees. These could also result in production delays and financial loss.

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

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

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

The Group operates a prompt incident reporting system to the Executive Committee and the Board. There was one fatality during 2015 (2014: three). This fatality was reported immediately to the Chairman and to the Health, Safety and Environmental ('HSE') Committee. The incidents in both 2015 and 2014 were investigated by the Russian authorities who have confirmed that no action will be taken against the Group as the Group was not found to be at fault for any of these accidents. The HSE Committee discussed each of the fatalities in detail to identify whether any actions should be taken or further training provided to mitigate against any reoccurrence of a similar accident.

The HSE Committee received a report from the General Director of Malomir, regarding the fatality in 2015, this included details of all actions and training that was undertaken at the plant following the fatality to ensure that a similar type of accident does not happen.

Details of any fatality or major accident are discussed by senior managers and HSE Officers across the Group to ensure that training is applied Group-wide.

In addition, the 2016 Annual Bonus Scheme for the Executive Directors and Executive Committee has been designed by the Remuneration Committee to recognise the importance of HSE issues.

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No change

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

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

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

During the year an employee died as a result of an accident involving cyanide poisoning. This accident, the first in the Group's history to involve cyanide, was investigated thoroughly by the authorities and the Company was not found to be at fault. An internal investigation also took place involving mine management and specialists in order to ascertain the reasons for this fatality, which arose from the employee conducting unauthorised works. As a consequence of the internal investigations further raining has been provided to all relevant employees at the Group's mines and additional procedures have been implemented to prevent a further accident occurring.

Legal and regulatory risks

Risk

Description and potential impact

Mitigation

Change from 2014

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

The Group's principal activity is the mining of precious and non-precious metals which require it to hold licences which permit it to explore and mine in particular areas in Russia. These licences are regulated by Russian governmental agencies and if a material licence was challenged or terminated, this would have a material adverse impact on the Group. In addition, various government regulations require the Group to obtain permits to implement new projects or to renew existing permits.

Failure to comply with the requirements and terms of these licenses may result in the subsequent termination of licenses crucial to operations and cause reputational damage. Alternatively, financial or legal sanctions could be imposed on the Group. Failure to secure new licences or renew existing ones could lead to the cessation of mining at the Group's operations or an inability to expand operations.

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

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No change

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

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

Group's assets and operations are based in Russia.

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

The Group's Pioneer and Malomir

licences have been included on the list of subsoil assets of federal significance, maintained by the Russian Government

('Strategic Assets'). The impact of this classification is that changes to the direct or indirect ownership of these licences may require obtaining clearance in accordance with the Foreign Strategic Investment law of the Russian Federation

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

The Group seeks to mitigate the political and legal risk by constant monitoring of the proposed and newly adopted legislation in order to adapt to the changing regulatory environment in the countries in which it operates and specifically in Russia. It also relies on the advice of external counsel in relation to the interpretation and implementation within the Group of new legislation. The Group closely monitors its assets and the probability of their inclusion into the Strategic Assets lists published by the Russian Government.

The Company's Articles of Association include a provision which allows the Board to impose such restrictions as the Directors

may think necessary for the purpose of ensuring that no ordinary shares in the Company are acquired or held or transferred to any person in breach of Russian legislation, including any person having acquired (or who would as a result of any transfer acquire) ordinary shares or an interest in ordinary shares which, together with any other shares in which that person or members of their group is deemed to have an interest for the purposes of the Strategic Asset Laws, carry voting rights, exceeding 50 per cent. (or such lower number as the Board may determine in the context of the Strategic Asset Laws) of the total voting rights attributable to the issued ordinary shares without such acquisition having been approved, where such approval is required, pursuant to the Strategic Asset Laws.

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

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No change

3. The Group may be subject to risks arising from the political uncertainty within Russia.

Financial and economic sanctions imposed in 2014 by the United States and the EU on certain businesses and individuals in Russia increased political tensions and economic instability. In February 2016, the European

Parliament passed a resolution which made it clear that EU economic restrictions against Russia will remain in place until Crimea is returned to Ukrainian rule.

In response to the sanctions Russia enforced certain import restrictions on Russian companies in respect of products supplied from countries that have imposed sanctions, which have a negative impact on Russia's economy, which could have a material adverse effect on the value of investments relating to Russia and on the Group's business, results of operations and financial condition. The perceived risk of investing in Russia could also be detrimental to the Group.

The Group has no assets or operations in Ukraine. The Group produces gold from its Russian mines and sells this gold to

Russian licensed banks. The Board and Executive continue to monitor the position.

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

Þ

No change

Sales to related parties

Purchases from related parties

2015

US$'000

2014

US$'000

2015

US$'000

2014

US$'000

Asian-Pacific Bank

Other

575

503

113

201

575

503

113

201

Trading transactions with other related parties

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

1,182

294

5,716

10,317

Associates

IRC Limited and its subsidiaries

49

-

1,152

-

JSC ZRK Omchak and its wholly owned subsidiary LLC Kaurchak

2

80

-

-

1,233

374

6,868

10,317

Amounts owed by related parties

at 31 December

Amounts owed to related parties

at 31 December

2015

US$'000

2014

US$'000

2015

US$'000

2014

US$'000

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

1,328

2,864

450

151

Asian-Pacific Bank

-

6

-

-

Associates

IRC Limited and its subsidiaries

2,023

-

1,233

-

JSC ZRK Omchak and its wholly owned subsidiary LLC Kaurchak

-

85

-

-

3,351

2,955

1,683

151

Amounts owed by related parties

at 31 December

Amounts owed to related parties

at 31 December

2014

US$'000

2013

US$'000

2014

US$'000

2013

US$'000

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

2,864

1,955

151

2

Associates

85

132

-

144

Asian-Pacific Bank

6

9

-

-

2,955

2,096

151

146

2015

US$'000

2014

US$'000

Asian-Pacific Bank

3,208

52,253

2015

2014

US$'000

US$'000

Wages and salaries

7,231

9,453

Pension costs

357

586

Share-based compensation

280

2,346

7,868

12,385