OREANDA-NEWS. On May 06, 2009 JSC “Polymetal” (LSE, MICEX, RTS: PMTL) (“Polymetal” or the “Company”), released its US GAAP audited consolidated financial statements for the year ended December 31, 2008, which are available on the Company’s website at www.polymetal.ru, reported the press-centre of Polymetal.

Revenues increased by 63% and exceeded US500 million first time in the Company’s history

Adjusted EBITDA grew by 161% to US192.6 million as revenue growth far outpaced increases in operating costs

The Company reported a narrower net loss of US15.7 million as the bottom line was influenced by several non-recurring items (option expense, impairment charges) and substantial foreign exchange losses

Cash costs at all mines calculated on co-product basis remain in the bottom half of the global cost curve with Company-wide total cash cost per ounce of gold equivalent amounting to US472/ounce

Net debt remains manageable at 1.6x Adjusted EBITDA with liquidity position being sufficient to continue with crucial growth projects

“Financial results for 2008 demonstrate excellent fundamentals of our business in the face of the global financial crisis,” said Vitaly Nesis, CEO of Polymetal, commenting on the results. “Significant improvement in operating profitability and competitive cost position will definitely allow us to proceed with the aggressive expansion program and capitalize on the re-emergence of gold as the safe-haven investment of choice”.

REVENUES
In 2008, revenues grew by 63% from US308.8 million to US502.7 million with healthy sales volume growth supplementing significant increases in average realized metal prices. Average realized gold price rose 24% to US871/oz. Average realized silver price rose 67% to US14.7/oz, more than silver market prices due to the sales at below-market prices under forward sales contracts having been fully discontinued.

Silver accounted for US255.2 million or 51% of revenues while gold accounted for US243.8 or 48% of revenues. Other revenues, mostly from third-party contracts of Polymetal Engineering, stood at US3.7 million or less than 1% of total sales.

COST OF SALES
Total cash operating costs grew from US217.8 million (excluding purchase of metal from a third party) to US247.9 million or by 14%, largely in line with domestic inflation and despite significant increases in the physical amounts of material mined (including waste which amounted to 22.6 Mt vs. 20.5 Mt in 2007) and processed as well as in meters of underground development (14.2 kilometers in 2008 vs. 11.5 kilometers in 2007). After taking into account purchases of metal from a third party in 2007, cash operating costs increased by only 4%.

Costs of consumables and spare parts increased by 6% from US92.6 million to US97.9 million as the Company aggressively managed its purchasing activities and reduced usage ratios of key processing chemicals.

Labor costs (including social security tax) increased by 5% from US55.0 million to US58.0 million. Such small increase can largely be attributed to depreciation of the national currency (all wages and paid in roubles); headcount reductions, particularly in the second half of 2008; and energetic drive to outsource auxiliary functions and operations. Costs of services increased by 26% from US44.1 million to US55.5 million, mostly driven by significant increases in energy tariffs, transportation tariffs as well as by growth in outsourcing services and tonnages of ore hauled by contractors.

Mining tax increased by 64% on the back of production growth and increases in metal prices.  Depreciation decreased by 16% in line with an 18% decrease in volumes of ore mined (the Company calculates depreciation on a unit-of-production basis).

Work-in-process metal inventory continued to grow, but at a slower pace than in 2007 as the Company continued to stockpile ore at Voro and Dukat, but started to draw on stockpiles at Khakanja. At Khakanja the Company wrote down the value of low-grade ore stockpile to zero as there can presently be no assurance that this ore can be profitably processed in the future.

As a result of all of the above, cost of sales increased by 18% from US254.6 million to US\\$300.7 million or, without taking into account third-party metal purchases in 2007, by 28%.

GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
General, administrative, and selling (GA&S) expenses more than doubled from US42.3 million to US90.1 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 84% from US31.7 million to US58.2 million driven mostly by above-inflation increases in salaries, increases in employee headcounts at development projects as well as rising rents and utility bills. Other GA&S also grew substantially, representing increased headquarters costs such as consulting fees, directors’ compensation, and insurance.

OTHER OPERATING EXPENSES
Other operating expenses increased by 32% from US27.4 million to US36.2 million. Exploration costs rose from US2.0 million to US11.1 million as all investment in greenfield exploration on properties not containing any JORC-compliant resources was expensed immediately, including some costs previously capitalized. Voluntary social payments increased from US4.4 million to US7.7 million as new municipalities were added to the program in conjunction with the development of Kubaka and Albazino. Other taxes (mostly property tax) increased as Company’s asset base expanded. The Company also realized non-cash loss on disposal of certain fixed assets of US4.6 million.

OTHER INCOME STATEMENT ITEMS
Interest expense increased by 64% from US12.6 million to US20.7 million as interest rates spiked in Q3 and Q4 while net debt increased. Loss from investment in JVs of US8.4 million represents the amount of exploration expenditures borne by the JV with AngloGold Ashanti (“AGA”) and written off as they have not resulted in the estimation of JORC-compliant resources or reserves. Exchange losses of US44.5 million were in contrast to exchange gains of US11.4 million in 2007 as ruble depreciated sharply in the Q4.

Income tax expense increased to US18.6 million from US6.0 million as pre-tax income went from the loss of US16.8 million to the profit of US2.0 million. The effective income tax rate was substantially above the statutory rate of 24% as a significant portion of costs in the period was not tax deductible, most importantly the stock option expense.

As a result of the above, the Company reported net loss before extraordinary items of US17.0 million compared with net loss of US22.8 million for 2007. Extraordinary gain of US0.8 million was recorded in the period as a result of Kubaka acquisition. The gain is due to the fair value of the assets acquired exceeding the purchase price. Full net loss for 2008 was US16.2 million.

ADJUSTED EBITDA
Adjusted EBITDA increased from US73.7 million to US192.6 million with increases in metal prices and sales volume growth being partially offset by increased costs of sales and particularly GA&S.

CASH COSTS
Domestic inflation in Russia in general and domestic price of diesel fuel in particular were the key drivers of cash costs per ounce of metal produced at each of the operations. Given a relatively long work-in-process cycle, particularly at Dukat and Lunnoe, and seasonality of supplies to Khakanja, ruble depreciation and the resulting decrease in dollar costs was not felt until Q1 of 2009.

Dukat and Lunnoe cash costs per ounce and tonne milled grew in parallel by 23% and 28% respectively with diesel fuel costs at Lunnoe and labor inflation in the Far East being the most important factors behind the increase.

Voro demonstrated excellent cost performance with cash cots per tonne milled flat year-on-year. This was achieved thanks to scale efficiencies after the completion of Stage 1 of CIP plant expansion as well as due to consistent and successful efforts to reduce headcount by implementing mine-wide outsourcing programs. Grades at Voro remained stable and cash cost per ounce remained essentially flat in line with cash cost per tonne milled.

Despite a 29% improvement in gold grades at Khakanja (silver grades declined by 34%), cash costs per ounce at the mine grew as expensive diesel purchased in 2007 and 2008 was expensed in the period and this lead to a significant cost increase with fuel accounting for almost 50% of total cash costs.

Overall, despite significant weakening of precious metals prices in 2H of 2008, Polymetal managed to maintain robust operating margins at every operation. The Company expects very significant cost declines in 2009 as ruble depreciation will have very favorable impact on costs given that 75-80% of operating costs are denominated in rubles.

CASH FLOWS
Cash flow provided by operating activities grew from negative US2.8 million to a healthy US80.8 million.

Capital expenditures decreased slightly from US115.7 million to US112.5 million as the Company continued to invest in the construction of the new mine at Albazino while spending on Dukat expansion and Voro expansion was largely completed in 1H of 2008.

In 2008 the Company spent US22.0 million on acquisition of subsidiaries, most importantly to buy Kubaka and Degtyarskoye, but also to pay the remaining deferred consideration for acquisition of a minority stake in Dukat from Pan American Silver in the amount of US2.3 million.

This compares with US18.3 million spent in 2007 to partially pay the conditional delayed payment for Dukat acquisition. Investment in the JV with AngloGold Ashanti (“AGA”), including payment for the acquisition of 50% stake in assets previously fully owned by AGA, amounted to US27.4 million. As a result of the above cash used by investing activities increased from US128.8 million to US164.0 million.

The excess of cash used by investing activities over cash provided by operating activities amounted to US83.2 million compared with US131.6 million in 2007. This gap was funded by cash inflows from financing activities of US83.1 million compared with US129.7 million in 2007. Cash at the end of 2008 was effectively unchanged at US4.1 million compared with US5.0 million at the end of 2007.

NET DEBT
Net debt during the period increased by 41%. In December 2008, the Company converted approximately 50% of its debt portfolio from US Dollars into Russian roubles. Although interest rates on rouble loans are higher than those on dollar loans, the overall effect of this conversion was positive due to rouble depreciation.