OREANDA-NEWS. On December 23, 2008 JSC “Polymetal” (LSE, MICEX, RTS: PMTL) (“Polymetal” or the “Company”), released its US GAAP consolidated financial statements, reviewed by independent accountants, for the six months ended June 30, 2008, which are available on the Company’s website at www.polymetal.ru, reported the press-centre of Polymetal.

In 1H 2008 gold sales grew by 32% on the back of 20% hike in production. Silver sales grew 1% to 8.4 million ounces after production increased by 11%. Discrepancy between production growth and sales growth is largely attributable to inventory fluctuations which are expected to even out for the full year.

1H 2008 was the first period in Polymetal’s public history when financial results were not affected by hedging arrangements with all forward sales of silver completed by the beginning of the year.

Revenues almost doubled and the Company swung to substantial net income with high profitability margins and robust cost performance on mine level.

Net debt remains to be at reasonable levels with liquidity position being sufficient to continue with crucial growth projects.

“Financial results for the first six months of 2008 amply demonstrate excellent fundamentals of our business,” said Vitaly Nesis, CEO of Polymetal, commenting on the results. “Tremendous improvement in profitability and very competitive cost position will definitely allow us to weather the financial crisis and capitalize on the re-emergence of gold as the safe-haven investment of choice”.

REVENUES
In the 1H 2008, revenues grew by 86% from US139.0 million to US258.8 million with healthy sales volume growth supplementing significant increases in average realized metal prices. Average realized gold price rose 38% to US914/oz, largely in line with the market. Average realized silver price rose 90% to US17.1/oz due to the sales at below-market prices under forward sales contracts having been fully discontinued.

COST OF SALES
 
Costs of sales increased by 15% from US104.4 million to US119.8 million or, without taking into account third-party metal purchases in the 1H 2007, by 24%.

Costs of materials, consumables, and services grew 24% from US42.3 million to US52.3 million as prices for many consumables and energy tariffs increased, ruble strengthened while physical volumes of mining and processing increased. Personnel costs increased by 9% from US21.6 million to US23.6 million as productivity improvements (mostly thanks to outsourcing and plant automation) and reduced headcount counteracted significant increases in average wages. Royalties almost doubled on the back of production growth and increases in metal prices. Changes in depreciation and other costs were not material.

GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
General, administrative, and selling (“GA&S”) expenses almost trebled from US20.7 million to US58.8 million, mostly as a result of the non-cash employee stock option compensation expense of US31.9 million.

Following the IPO in February 2007, the controlling shareholder granted 5.5 million shares of Polymetal (representing 1.76% of the Company’s share capital) to fund the employee stock option program through which employees received a right to purchase shares for the nominal price of approximately US0.04 per share in equal installments in February 2008, February 2009, and February 2010.

Following the change of control event in June 2008, all of the options became fully vested and the shares under the program were distributed to participants. As a result, full value of these option contracts is included in GA&S for the period as mandated by relevant accounting rules.

Without taking into account the stock option plan, GA&S expenses grew by 62% from US16.6 million to US26.9 million driven mostly by above-inflation increases in salaries as well as rising rents and utility bills.