Download 2004 Annual Report - Polymetal

Annual report2004St. Petrsburg1

2004 ANNUAL REPORT CONTENTSFinancial highlightsMission and strategy2004 Key eventsCEO’s statementProject management and corporate structureMineral reserve baseProduction resultsFinancial resultsActivities at production facilities:Dukat depositLunnoye depositVorontsovskoye depositKhakanjinskoye depositGeological surveys and explorationEngineering services: Polymetal EngineeringGlobal positioningCorporate governanceEnvironmental policy and health and safetyHuman resourcesBoard of DirectorsManagementAppendix #1Consolidated financial statements and report of independent auditorsfor the years ended December 31, 2004 and 2003Appendix #2Production costs by Gold Institute StandardsContact information2 Polymetal annual report 2004

Annual Report2004St. Petersburg3

4 Polymetal annual report 2004Пафосноефото

FinancialhighlightIndicator Meas. unit 2004 2003 2004/2003Au production th. oz. 212 137 54,7%Ag production th. oz. 17 287 11 762 47,0%Au sales th. oz. 213 129 65,6%Ag sales th. oz. 17 301 9 839 75,8%Au sales revenue th. USD 85 959 45 921 87,2%Ag sales revenue th. USD 117 965 45 609 158,6%Total sales revenue th. USD 204 487 92 357 121,4%Income from mining operations th. USD 111 637 36 557 205,4%Operating profit th. USD 95 560 26 759 257,1%EBITDA th. USD 100 523 30 453 230,1%EBIT th. USD 88 014 23 567 273,5%Profit before taxation and minority interests * th. USD 61 975 17 250 259,3%Net profit th. USD 83 583 13 468 520,6%Capital expenditures th. USD 29 595 46 660 (36,6%)Total assets th. USD 541 250 364 460 48,5%* from continuing operationsSource:Consolidated financial statements according to US GAAP standards for 2004 and 2003; auditor:PricewaterhouseCoopersFinancial highlight5

Mission& StrategyMission:To be a renowned leader in precious metals’ production, by combining Western managerial strategies withstate−of−the−art Russian technology and professional staff.Strategy:Expand the mineral reserve base:additional surveys of flanks and deeper horizons at existing deposits;intensive additional surveys and transfer of mineral resources to reserves at the following deposits:Fevralskoe, Kuzeevskoe, Aprelkovsko−Peshkovskiy ore knot;long−term, wide−scale programs for geological surveys of the Dukat ore knot and the Okhotsk Region.Efficient and dynamic development of existing companies:comprehensive and strict control over production expenses;implementation of advanced technologies;modernization and expansion of production facilities through capital expenditures.Responsibility toward society, business partners and employees:intensive focus on protecting the environment and individuals’ health;complete transparency and accountability;steady, long−term development of staff potential.6 Polymetal annual report 2004

2004Key eventsFebruarynew management team hired for processing companies;Marchfor the first time in Russia, the company obtained licenses for direct export of gold and silver and began exporting pre−cious metals;Marchan agreement was signed between Polymetal Engineering and Copper Technology LLP for developing a project at the50 Year Oktyabrya copper pyrite deposit (Kazakhstan);Aprilcompany reorganization − managerial and engineering companies were formed as part of Polymetal Group − improvingoverall efficiency;Maya 23 million USD syndicated short−term, pre−export loan, organized by Standard Bank London (GB);Julystage I of the ore mining and processing plant at the Khakanjinskoye deposit reached its project capacity;Augustan agreement was signed between Polymetal Engineering and Mikhailovsky GOK for designing a concentrating mill;Novemberstage II of the processing plant at the Vorontsovskoye deposit was launched (for primary ore processing);November20% of the shares of Magadan Silver (the Dukat deposit) was acquired from Pan American Silver, thus increasing ourownership share to 100%;Decembera long−term 105 million USD syndicated financing was received. The financing was organized by Standard Bank London(GB), Hypo− und Vereinsbank (Germany) and Soci t G n rale (France);Decemberfinalized unified organizational structure for all subsidiaries. Polymetal Management Company became the sole mana−gerial company for all mining and exploration companies.2004 Key events7

Chief ExecutiveOfficer’sStatementTo: shareholders, colleaguesand partners2004 was an outstanding yearfor Polymetal, marked by numer−ous significant achievementsin production and finance. Ourmanagement system underwentqualitative changes. We receivedinternational financing and intro−duced numerous technologicalinnovations, and we continued tobuild our highly professional man−agement team.One of the most significantachievements of the past yearwas the creation of a new orga−nizational structure, operatingfrom a single corporate hub. Thisnew structure increases produc−tion facilities’ efficiency and con−tributes to the company’s trans−parency. Our long−term, strategicgoal is to create the leading miningcompany in Russia by combiningWestern managerial strategieswith cutting−edge Russian tech−nology and professional local staff.Last year marked a key periodin our company’s development.Polymetal completed construct−ing the last large, first generationproject on−schedule and on−bud−get. Successfully launching StageII at the Vorontsovskoye depositand reaching the project capacityat Stage I of the Khakanjinskoyedeposit allowed our company toenter a new stage in its develop−ment.The principal goals for Polymetalover the coming three years areexpanding our mineral reservebase, increasing production ef−ficiency and strengthening ourstaff’s potential. Successfullymeeting these targets will pro−vide a strong foundation for thenext stage of the company’s de−velopment, including our mid−termgoal of doubling precious metalsproduction by 2010 (comparedto reported figures for 2004).Last year, the company demon−strated significant achievementsin production, finance and organi−zational restructuring. As a re−sult, the company demonstratedthe best growth dynamics in theindustry for 2004. Gold produc−tion rose by 55% and silver pro−duction increased 47%, comparedwith 2003. The company occupiesa strong position as one of theworld’s leading silver producersand a top Russian gold producer.Despite the high level of inflationin Russia and a nominal increasein the ruble exchange rate, thecompany succeeded in increas−ing its production and decreas−ing its total cash costs below theglobal average. Total cash costsdecreased from $2.30/oz Ag in2003 to $1.77/oz Ag in 2004 atthe silver mines (Dukat and Lun−noye), and fell to $201/oz Au atthe Khakanjinskoye gold mine. Theonly facility that experienced anincrease in total cash costs (upto $257/oz) was the Vorontsovs8 Polymetal annual report 2004

koye gold mine. This cost increasecan be attributed to expeditedstripping works. However, the to−tal cash costs at all of the miningassets of the company remainedbelow the global average. In 2005,we see additional possibilities forlowering cash costs even further.In 2004, Polymetal was the firstcompany in Russia to launch itsown export of precious metals,which allowed us to effectivelybrand ourselves on the marketand develop an international cred−it history. The high level of trustfrom international financial institu−tions was illustrated when a poolof foreign banks headed by Stan−dard Bank London (GB) arranged alarge−scale, long−term syndicatedloan facility for our company. Thisarrangement was recognized byTrade Finance magazine as theDeal of the Year.Comprehensive reorganizationduring the previous period allowedus to create a transparent andmobile managerial structure −better able to effectively addressthe needs of the company andchanging conditions in the globalprecious metals market. Verti−cal integration, with a unified andcentralized managerial and tech−nological center, allows for highlyefficient project management andresults in a well−run organization.By separating the research andscientific center into a subsidiary,we were able to quickly createRussia’s leading engineering com−pany focused in the area of prac−tical and fundamental project de−sign at the deposits. In 2004, theengineering company successfullycompleted projects with severallarge third−party mining and met−allurgy companies.We have already set a number ofhighly ambitious goals for 2005:to increase gold production to 9tons and silver production to 550tons − allowing us to strengthenour position on the Russian goldmarket and become one of thefive top silver producers in theworld. At the same time, throughefficient use of new technologies,we are planning to continue de−creasing cash costs.Another no less important goal forus is to increase the company’slong−term mineral reserve base.In 2005, we expect reserves toincrease by 12 tons of gold and500 tons of silver (these increas−es will cover the following year’sproduction).In 2005, we will continue to takecomprehensive steps to optimizethe debt portfolio of the companyand to attract long−term financ−ing from international capital mar−kets − effectively lowering interestrates and extending credit peri−ods.In the next year, Polymetal will con−tinue to work to ensure that all ofour operations comply with inter−national standards. We are plan−ning to complete recalculating andauditing our mineral reserve basein accordance with JORC interna−tional standards. In addition, weare upgrading our environmentalpractices, industrial security andlabor, health and safety to meetinternational standards, in partic−ular those set by the World Bank.Achieving these ambitious, globalgoals is only possible because ofPolymetal’s professional employ−ees. We have formed a dedicatedteam capable of efficiently imple−menting the most complex proj−ects in the mining industry. Main−taining and developing this teamis a key to the company’s futuresuccess.On behalf of the company’s man−agement, I express my gratitudeto all of the employees of Polymetalfor their high−quality work and toour shareholders and partnersfor their support of us throughoutour development. It is my utmostbelief that through the combinedefforts of the entire team, we willcontinue to strengthen our posi−tion as the most efficient companyin the precious metals market.V. Nesis,CEOMNPO Polymetal OJSCChief Executive Officer’s Statement9

Projectmanagementand CorporateStructureICT (Investments. Construction.Technologies) Group is the mainstockholder of MNPO (Interre−gional Scientific and ProductionAssociation) Polymetal OJSC. Asof January 1, 2005, ICT CJSCowns 99.999% of MNPO Polymet−al OJSC’s capital stock (549,994shares).As of December 31, 2004, thecapital stock of MNPO PolymetalOJSC was 55 million rubles rep−resented by 550,000 shares ofcommon stock.MNPO Polymetal OJSC is a verti−cally integrated holding company,with the strategic goal of efficient−ly managing projects for develop−ing Russian gold and silver ore de−posits. The company is comprisedof MNPO Polymetal OJSC whichoperates as the fundholder formining and exploration companiesin six Russian regions, PolymetalManagement Company whichmanages projects and PolymetalEngineering Company which pro−vides engineering services to af−filiate and third−party companies.In addition, the holding includesservice, logistics, transport andtrading companies.Polymetal Management Companymanages four mining and four ex−ploration companies. The companyalso holds nine licenses for explor−ing and producing gold, silver andadditional co−product metals inthe Sverdlovsk, Magadan, Sakha−lin and Chita regions, and theKhabarovsk and Krasnoyarsk ter−ritories.The corporate structure of theholding allows for transparent op−erations and maximizes produc−tion efficiency. The structure alsooffers the flexibility to create jointventure projects within a singleaffiliate. In addition, the corporatemodel also enables structural as−sets to be bought and sold withoutchanging the overall structure ofthe holding.The diversity of geographical op−erations enables the company toaccumulate valuable experience inexploring deposits in different cli−matic zones and to utilize variousmethods of geological surveys,mining and processing of ore. Theextensive area of exploration andsurvey leads to continuous growthin the mineral reserve base, whichwill ensure steady productiongrowth and positive key financialsin the coming decades.Note:* Repurchase rights of up to 97%, ** placed up for sale in 200510 Polymetal annual report 2004

MineralResourcesVladimir T. Ryabukhin,Deputy CEO for MineralResourcesPolymetal holds nine licenses forproducing precious metals andengaging in geological surveys andexploration of gold and silver de−posits in various Russian regions.Based on our current productioncapacity and our mineral reservebase, we will be able to continueproduction at all deposits for atleast the next 15 years. The qual−ity of our mineral reserve base willallow for production volumes tobe significantly increased. We alsoanticipate − based on geologicalsurveys and estimates − that ourmineral reserve base will continueto expand.Mineral Base under JORC Code classification standardsNote:Tonnage(Kt)GradeContentAu (g/t) Ag (g/t) Au (Koz) Ag (Koz)Ore ReservesProvedDukat 1 763 1,3 679,6 74 38 530Lunnoye − − − − −Arylakh − − − − −Vorontsovskoye − − − − −Khakanjinskoye − − − − −Yurievskoye − − − − −Subtotal 1 763 1,3 679,6 74 38 530ProbableDukat 13 802 1,0 511,9 456 227 135Lunnoye 853 2,6 373,8 70 10 256Arylakh 1 366 0,9 524,8 41 23 040Vorontsovskoye 8 558 5,1 7,1 1 402 1 964Khakanjinskoye 6 118 5,2 229,1 1 016 45 060Yurievskoye 235 18,0 13,0 137 98Subtotal 30 932 3,1 309,3 3 122 307 553Total Ore Reserves 32 695 3,0 329,2 3 196 346 083Mineral ResourcesMeasuredDukat 1 594 1,6 835,8 83 42 823Lunnoye − − − − −Arylakh − − − − −Vorontsovskoye − − − − −Khakanjinskoye − − − − −Yurievskoye − − − − −Subtotal 1 594 1,6 835,8 83 42 823IndicatedDukat 13 093 1,2 617,7 522 260 027Lunnoye 755 3,1 453,6 75 11 004Arylakh 1 459 1,3 673,8 59 31 605Vorontsovskoye 15 021 4,1 6,7 2 003 3 224Khakanjinskoye 5 165 6,8 298,8 1 121 49 610Yurievskoye 241 19,4 14,1 151 109Subtotal 35 734 3,4 309,5 3 932 355 580Total 37 327 3,3 332,0 4 014 398 402InferredDukat 2 200 1,2 517,9 82 36 636Lunnoye 3 760 1,8 460,0 216 55 613Arylakh 138 1,2 804,8 5 3 567Vorontsovskoye 4 728 4,4 5,9 665 904Khakanjinskoye − − − − −Yurievskoye 103 11,5 13,7 38 46Subtotal 10 930 2,9 275,4 1 006 96 766Total Mineral Resources 48 257 3,2 319,2 5 021 495 168calculations are based on the following cut−off grades: Dukat − 50 g/t Ag for open−pit and 125 g/t Agfor underground operations; Lunnoye − 125 g/t Ag for open−pit and 162.5 g/t Ag for underground operations; Ary−lakh − 200 g/t Ag for open−pit and 250 g/t Ag for underground operations; Khakanjinskoye − 2 g/t Au eq.; Yurievskoye– 3.5 g/t Au eq.; Vorontsovskoye – 1.4 g/t Au for oxidized ore, 2.3 g/t Au for primary ore.calculations are based on the following precious metals prices: Au − 350 $US/oz., Ag − 6 $US/oz.total figures in the table may differ from summary calculated figures as a result of numbers being rounded.Mineral Resources11

Resources at most deposits (ex−cept for Arylakh and Yurievskoye)were calculated based on condi−tions reflecting economic andcost indicators from the Sovietperiod (1970s–1990s) and will berevised in the near future to ac−count for current conditions.Currently, underground mining istaking place at the Dukat deposit.The company plans to begin un−derground mining at the Lunnoyeand Khakanjinskoye deposits.Au and Ag reservesAg reserves mln. ozNote:figures for Lunnoye include its satellite deposit Arylakh and for Khakanjinskoye the Yurievskoye deposit isincludedResources in exploration fieldsExploration company Area Au Resources (tons)Imitzoloto Aprelkovsko−Peshkovski ore knot 120Yenisey Mining and Geological Company Annenski field/Kuzeevskoye 100Aurum Reftinskaya zone/Fevralskoye 60Okhotsk Mining and Geological Company Khakanjinskoye 10Note:Resources at these fields are estimated based on Russian standardsDuring the past year, togetherwith SRK Consulting (a leadinginternational company), an inter−national geological audit was com−pleted for all assets under themanagement of Polymetal. Basedon this report, a comprehensive,long−term economic model fordeveloping the company’s assetswas designed.In 2005, Polymetal reevaluatedits mineral reserve base in ac−cordance with the JORC Interna−tional Code.12 Polymetal annual report 2004

Igor V. Venatovsky,First Deputy CEOYury E. Malakh,Deputy CEO forMaterialand Technical SuppliesProductionReviewIn 2004, the company demon−strated significant productiongrowth.Polymetal production assetsThe reported period marked akey chapter in the company’sdevelopment. Existing plantsreached their project capacities.An ore mining and metallurgyplant was opened at the Khakan−jinskoye deposit and Stage IIof the Vorontsovskoye depos−it was launched. As a result,Polymetal achieved its productiontargets for 2004. Next year willbe the first year that all the mainproduction plants will operate attheir project capacities.Company Region Deposit Ore Production methodMagadan SilverSilver TerritoryOkhotsk Mining andGeological CompanyNorthern Urals GoldMagadanRegionMagadanRegionKhabarovskDistrictSverdlovskRegionDukatLunnoyeKhakanjinskoyeVorontsovskoyevein zones and veins of quartz sulfide, quartzchloride adularia, and quartz rodonitevein zones and veinsof quartz carbonate and rodonitequartz gold and silver oreswith manganeseoxidized (loose) ores and primary goldsulfide vein impregnated oresopen−pit and undergroundminingopen−pit mining and under−ground mining from 2007open−pit mining and under−ground mining from 2009open−pit miningOre production rose by 57%compared to 2003 and reached2,688,000 tons. Ore process−ing was 2,142,000 tons, a 30%increase from 2003. The ratioof ore produced by open−pit andunderground mining in 2004 wasrelatively unchanged from 2003figures (85 and 87% respectively).However, in coming years, with thestart of underground mining atthe Lunnoye and Khakanjinskoyedeposits, ore production from un−derground mining will increase.The launch of the Khakanjinskoyedeposit helped increase goldproduction by 55% comparedto 2003. Production reached212,000 oz. Silver productiongrew by 47% compared to 2003and was 17,300,000 oz, primarilybecause of the Dukat and Lunnoyedeposits.Indicator Meas. unit 2004 2003 2004/2003Total rock mined m 3 7 883 880 6 070 892 29,9%including stripping m 3 6 536 454 5 244 559 24,6%Ore minedOpen−pit miningNote:2003 production takes into account the Barun−Kholba deposit (sold in 2004).m 3 1 262 588 826 333 52,8%th. tons 2 687 823 1 716 425 56,6%m 3 1 114 636 742 186 50,2%th. tons 2 296 114 1 492 255 53,9%Underground miningm 3 147 952 84 147 75,8%th. tons 391 709 224 170 74,7%Ore processed th. tons 2 141 635 1 653 813 29,5%Au production th. oz. 212 137 54,7%Ag production th. oz. 17 287 11 762 47,0%Au sold th. oz. 213 129 65,6%Ag sold th. oz. 17 301 9 839 75,8%2shipment of finished products (cement gold and silver and in Dore bars) from production facilities to refineriesProduction Review13

Vitaly V. Savchenko,Head of Productionand TechnologyDepartmentIgor O. Shnel,Head of TechnologicalDepartmentGennady A. Filianin,Head of Analytical ControlDepartmentAu productionYury A. Motorny,Head of InfrastructureConstruction DepartmentAg productionVladislav A. Kolosov,Chief SurveyorFurther growth will be ensured by increasing production at the Vorontsovskoyedeposit (Stage II) and the Khakanjinskoye deposit.14 Polymetal annual report 2004

Sergey A. Cherkashin,CFOSalesFinancialReviewIn 2004, Polymetal demonstratedrapid growth of key financials andproduction figures. Gold salesgrew by 66% − from 129,000oz. to 213,000 oz.; silver sales in−creased by 76% − from 9,800,000oz. to 17,300,000 oz. In 2005,the company anticipates furthergrowth in sales volume.Total sales revenue for 2004was $204.5 million, which markeda 121% increase compared with2003. This increase was due toboth an increase in precious met−als sales and a rapid rise in theaverage sale price. Revenue fromgold sales was $86 million (an 87%increase compared with 2003),silver revenue reached $118million − a 159% increase. Othersales (for co−product metals) ac−counted for $800,000.The company’s income from min−ing operations grew by 205% andreached $111.6 million. Becauseof this dramatic growth, operatingprofit showed a 257% increasefrom $24.1 million to $95.6 million(the best dynamics in the Russianindustry).In 2004, EBITDA figures grew by230% and reached $100.5 mil−lion. The profit before taxation andminority interests grew by 259%and reached $62 million. And ac−cording to last year’s results,Polymetal’s net income rose to$83.6 million − a 520% increase.Revenue from sales and operating profitThroughout its history, Polymet−al’s sales have shown a consistentupward trend due to continued ex−pansion of the company’s produc−tion plants. In 2003, the launch ofa plant at the Khakanjinskoye de−posit contributed to greater goldsales and increased production atthe Dukat and Lunnoye depositshelped raiseincrease silver sales.The high growth dynamic is alsodue to favorable conditions in theglobal precious metals market.The average London PM gold Fix in2004 increased from $363.4/ [$]/oz. to $409.7/oz. − a 12.8% rise.The London PM silver Fix demon−strated a 36.7% increase, grow−ing from $4.88/oz. to $6.67/oz.3shipment of metal from refineries to banks and direct export.Financial Review15

Pavel D. Orta,Head of Precious Metals’Sales DepartmentAu salesmln. $USth. ozIn 2004, the company’s averagesales price for gold grew from$356/oz. to $403.6/oz. (an 11%increase) and from $4.6/oz. to$6.6/oz. (a 48% increase) for sil−ver, compared with 2003.mln. $USAg salesth. ozmln. $USmln. ozSince the growth in silver produc−tion outpaces that of gold, thecompany’s sales breakdown ischanging as well. In 2004, 59% ofthe total sales volume was fromsilver (compared to 49% in 2003).As a result of the dynamic growthin silver production and the sharpincrease in silver prices, the per−centage of total revenues fromgold fell from 4951% in 2003 to41% in 2004.mln. ozmln. $USmln. $USRevenue from sales structureIn earlier periods, a larger volumeof gold than silver was sold. In2005, when the Khakanjinskoyedeposit and Stage II of the miningand metallurgy facility at the Vo−rontsovskoye deposit reach theirproject capacities, the volume ofsilver and gold sales will be approx−imately equal.Revenue from sales16 Polymetal annual report 2004

Denis G. Pavlov,Head of TreasuryDepartmentStanislav Y. Kalaidin,Head of Planning& BudgetingDepartmentAu sales structureVorontsovskoyeDukatmln. $USLunnoeBarun KholbaKhakanjinskoyeNote:The Borun − Holba deposit sold in 2004Ag sales structureDukatmln. $USLunnoeKhakanjinskoyeIn 2003, Polymetal obtained a li−cense from the Russian Ministryof Economic Development andTrade to directly export gold (andin March 2004, the company ob−tained a license for direct silverexports). Prior to receiving theselicenses, all sales of precious met−als were limited to the local Rus−sian market . Since then, the com−pany has exported gold and silverdirectly to Switzerland, the UnitedKingdom and the United ArabEmirates (beginning in Decemberof 2003). Polymetal is currentlyworking on expanding the numberof countries that it exports to. Ac−cording to 2004 results, exportsaccounted for 7% of gold salesand 25.2% of silver sales.Production costsAs a result of significant growthin 2004 production, productioncosts also increased from $55.8million to $92.9 million. This 66%growth was in line with the 69% in−crease in equivalent gold produc−tion. Cost increases were uneven.Tax payments (excluding profittax) grew by 56% and amortiza−tion costs increased by 92%, (dueto the launch of new productionplants). Costs of raw and othermaterials were up 33% comparedto 2003 figures. In 2003, severalfacilities were put into operationand at that stage productionlagged behind monetary expendi−tures. However, in 2004 produc−tion increased more rapidly thanmaterial expenditures. Thus, perunit costs declined. Total operat−ing costs (excluding personnelcosts) grew by 67% and reached$64.5 million.Personnel costs (salaries) grewby 33%. This can be attributedto two factors − the launch of theKhakanjinskoye deposit and thesystem of directly linking salariesto production volumes at the fa−cilities.As a result, the expenditurebreakdown at Polymetal changed.The proportion spent on materi−als and spare parts decreasedfrom 49% in 2003 to 38%in 2004, and the portion forProduction costs17

Alexander I. Kazarinov,Chief Accountantservices decreased from 18 to11%, primarily because of thetransfer of some auxiliary func−tions to subcontractors. At thesame time, amortization costsincreased from 9 to 17% of to−tal costs and total taxation grewfrom 3 to 13% compared to theOperating costsIn 2004, the company activelytook steps to decrease the costfigures for 2003. The percent−age of salaries as a share of totalcosts was constant at 21%.These changes − both in totalcosts and in the breakdown ofcosts − are a result of produc−tion plants reaching their projectof producing precious metals. Be−cause all of Polymetal’s produc−tion facilities are either focusedon gold or silver production (withcapacities. Since precious metalsmining is a material− and cost−in−tensive industry, most costs arefixed−cost expenditures. Thus, in−creasing production leads to low−er per unit production costs.the other precious metal as a co−product), total cash costs werecalculated based on Gold InstituteStandards .Company Deposit UnitTotal cash costs2004 2003 2004/2003Northern Urals Gold Vorontsovskoye $US/oz Au 221 130 70,1%Okhotsk Mining and Geological Company Khakanjinskoye $US/oz Au 114 − −Magadan Silver, Silver Territory Dukat, Lunnoye $US/oz Ag 1,68 2,55 (34,1%)Notes:for the Vorontsovskoye and Khakanjinskoye deposits, silver is a co−product;for the Dukat and Lunnoye deposits, gold is a co−product;production of precious metals at the Dukat and Lunnoye deposits is a single technological process.The above figures are calculated for both deposits together;in 2003, only mining took place at the Khakanjinskoye deposit, no metal was produced.4In 2004, the Russian inflation rate was 11.7%, the US dollar grew 5.6% compared to the ruble exchange rate; theaverage annual London PM Fix price for gold was $409.7/oz. (up 13%), and the average annual London PM Fix pricefor silver increased 37% to $6.67/oz.5See full calculations and methodology in Appendix 1The company was able to main−tain cash costs at or below theglobal average at all of its produc−tion plants. In 2004, the averageglobal cash costs grew by 13%and reached $253/oz. Duringthis same period, the averagegold price grew from $363/oz. to$409/oz. It should be highlightedthat Polymetal has significantlydecreased production costs overa several year period when theglobal trend has been toward ris−ing costs.Total cash costs at the Vo−rontsovskoye deposit in 2004grew by 154% (compared to2003) and reached $257/oz. Au.This significant increase in cashcosts is due to rising operatingcosts at the deposit, because ofintensive stripping and explosivework for obtaining primary ore forthe new plant. In addition, during2004, gold production declinedat the deposit. Polymetal plans toreduce its cash costs at this de−posit during the coming year.In 2004, total cash costs at theKhakanjinskoye deposit totaled$201/oz. Au. Gold production be−gan in 2004, and the companyplans to reach its target projectcapacity by the end of the firsthalf of 2005. At the same time,we estimate significantly loweringtotal cash costs by decreasingproduction processing costs andincreasing production efficiency(through improved recovery ratesand metal production volumes).18 Polymetal annual report 2004

At the Dukat and Lunnoye depos−its − the key silver production fa−cilities of the company − total cashcosts fell to $1.77/oz. Ag, a 23%decrease compared to 2003results. At the same time, aver−age global cash costs for silverincreased by 11% and reached$2.36/oz. The impressive resultsat Dukat and Lunnoye can be at−tributed to technological innova−tions that optimized the produc−tion process and lowered metallosses during production. Basedon results from the reported pe−riod, Polymetal’s silver productionfacilities were among the mostprofitable primary silver mines inthe world.The company sees further possi−bilities to lower production costs,for example, by optimizing techno−logical processes (through mini−mizing the use of reagents) andby decreasing metal lost duringprocessing and shipping.Capital expendituresIn 2004, Polymetal continued toinvest in developing its productionplants. The total value of property,plants and equipment was $256.7million, a 25.7% increase com−pared to 2003. The period from2003 to 2004 can be character−ized as a period of active invest−ment in construction. The valueof buildings and additional struc−tures grew 2.2 times due to thelaunch of new production plants.The number of facilities underconstruction declined as differentprojects were launched.Property, plants and equipment valuemln. $USIn 2003, the Khakanjinskoye de−posit was launched and the Dukatdeposit reached its project ca−pacity. In 2004, the Dukat depositincreased its production capacity.Polymetal continued financing theCapital Expendituresfacilitiesfinal stages of construction atthe Khakanjinskoye deposit. How−ever, the greatest percentage ofcapital expenditures was devotedto the construction and launch ofStage II at the Vorontsovskoyedeposit. 2004 capital expendi−tures were $29.6 million (a 37%decrease compared to 2003 fig−ures) − a result of the companypassing the peak of expenditures.mln. $USLunnoyeDukatKhakanjinskoye(Stage I)Vorontsovskoye(Stage II)Capital expenditures19

Sergey L. Roslyakov,Head of CorporateFinance DepartmentBeginning in 2005, capital expen−ditures will primarily be focused onmaintaining and expanding existingproduction plants. In addition, therewill be expenditures targeted atincreasing production efficiency. In2005, capital expenditures will de−crease by at least two times com−pared to the reported period.Debt profilePolymetal is actively restructur−ing its debts, focusing on extendingloan periods and lowering effectiveinterest rates.In April 2004, the company enteredthe international financial market− attracting a seven month, pre−export loan from Standard BankLondon (GB). The $23 million creditwas insured by precious metals ex−ports.At the end of 2004, Polymetal re−ceived a $105 million long−termsyndicated financing from a pool ofinternational financial institutions,including Standard Bank London(GB), Hypo und−Vereinsbank (Germa−Net debt structureny) and Societe Generale (France).This arrangement was awardedDeal of the Year by Trade Financemagazine (GB).Attracting syndicated funds al−lowed us to continue to develop ourprimary silver production facilities− Lunnoye and Dukat. 20% of thefunds were focused on this project.The remainder of the credit (80%)was used to restructure our cur−rent loan obligations. In addition,this international financing was thekey to increasing loan periods forthe company. In 2003, only 47% ofdebt (including capital lease liabili−ties) wasere long−term. In 2004,because of the international cred−its, long−term loans accounted for74% of the total debt.In 2004, 44% of capital lease liabili−ties were long−term. In general, thecompany’s capital lease liabilitiesdecreased by 8% to $35 million,compared to 2003. The company’slong−term financial liabilities are pri−marily three−year credits and five−year loans.During the reported period, theportion of capital lease liabilitiesand loans (bonds and inter− grouploan arrangements) were virtuallyunchanged compared with 2003.The portion of credits from Russianbanks, however, decreased signifi−cantly from 56% to 21%, and debtsto international creditors appearedon the books.13%31%56%10%39%30%21%Russian bankcreditsInternational bankcreditsLoansCapital leaseliabilitiesIn 2005, Polymetal will continue toactively work to change the struc−ture, loan period[[s,]] and effectiveinterest rates of its obligations. Weare planning to increase the volumeof long−term liabilities to interna−tional creditors and lower the vol−ume of short−term liabilities to Rus−sian creditors. This shift in the debtportfolio will lower the cost of debt.In 2005, Polymetal plans to place$100 million in Credit Link Notes(CLN) with international investorsat an estimated annual interestrate of 9%. The money from theemission of the CLNs will be usedto transfer relatively expensive,short−term debt to longer−termdebt and to pay back the company’sthree−year bonds. As a result, al−most 100% of Polymetal’s debt willbe long−term and 50% of its fundswill be from the international finan−cial market.Increasing debt during 2004was[were] due to continued invest−ment in production development. In2004, total liabilities to creditorsand bond holders (including capitallease liabilities) grew by 16% andreached $354 million compared to2003 figures. Credits account forthe largest portion of total liabilities(51%), which is approximately equalto the figure for 2003.20 Polymetal annual report 2004

ProductionfacilitiesoverviewProduction facilities overview21

DukatdepositThe Dukat deposit is Polymetal’slargest production facility. In2004, both open−pit and under−ground mining took place at thedeposit.Gold production at the Dukat de−posit grew by 9.6% in 2004 andreached 24,300 oz.[.] During thesame period, silver production in−creased by 39.7% to 12,100,000oz. Ore mined using open−pit andunderground mining was up 39.1%and reached 839,500 tons, com−pared with 2003; and ore pro−cessing increased to 762,800tons (39% growth).Technological and business in−novations allowed us to dramati−cally decrease total cash coststo $1.77/oz. Ag (a 23% drop). Ac−cording to 2004 results, the Du−kat and Lunnoye deposits wereamong the largest primary silvermines in the world (holding 3rd and10th place, respectively). In addi−tion, these two deposits had thelowest production costs amongleading global silver mines.In 2004, capital expenditures re−mained high, due to ongoing mod−ernization efforts. In 2005, weplan to substantially reduce capi−tal expenditures and to targetthese expenditures at maintainingand expanding existing facilities.Future periods, however, will againrequire significant expendituresdirected at constructing Stage IIof the plant.During 2004, the companyreached its project capacity(processing 750,000 tpa of ore))using both open−pit and under−ground mining. The company alsoupgraded its operations throughimplementing the following proj−ects:completion of 980 m. level forunderground mining operations,including all main structuresand service systems;reserves of ore zones XVI, XV,and VIII at floor level were pre−pared and mining of these zonesbegan;construction and stripping ofnew 930 m level began in under−ground mines to prepare for fu−ture ore mining;reconstruction and prepara−tion of 860 m concentrationfloor to be used for locomotivehaulage;stripping and open−pit miningwork began at ore zone XIII in pit[quarry] #1;creation of a transitional onemonth ore supply at the orestorage facility of the plant.In 2004, Polymetal engaged in in−tensive research and collabora−tion with VNIMI (All−Russian Sci−entific and Research SurveyingInstitute) to optimize productionsystems, stabilize pit [quarry] wallsand address a range of other rel−evant mining issues.The company steadily increasedproduction and improved the re−liability of operations at the plant.To increase the capacity of theconcentrate filtering facility, avacuum filter was installed[,] and22 Polymetal annual report 2004

Victor R. Wulfert,Managing DirectorVictor M. Ivanov,Chief GeologistGennady V. Kachaev,Head of the Plantto ensure stability, a set of pumpswas reconstructed. Utilizing newreagents at the flotation facilitydecreased the total cost of re−agents and increased the recov−ery rate. The company estimatesthat the recovery rate will contin−ue to increase, as we implementnew technological innovations,such as[.] intercycle sand flotationand gravitational impregnation atthe plant.In 2005, open−pit mining inpits[quarries] #1 and #4 and un−derground mining at the 980 m,930 m and 860 m floors will takeplace. During the following years,we plan to complete the construc−tion and launch of the new 930 mfloor level. We will also continueto reconstruct the Tsentralnayaadit, adit #10, and the 860 m floor.In addition, open−pit mining will be−gin at the Eeeastern zone of thedeposit in pit [quarry] #4.In 2005, the company will designand implement measures aimedat increasing production capac−ity to 850,000 tpa of ore in theshort−term and to 950,000 tpaof ore in the longer−term. We alsoplan to thoroughly modernize theunderground mining facilities andthe plant, using state−of−the−arttechnology.In 2005, the company plans tobegin a project to construct asecond parallel ore grinding facil−ity. One step in this process is toacquire an additional wet grindingmill, which will increase output andstabilize operations at the plant.To expand the company’s mineralreserve base, Polymetal will en−gage in active geological survey−ing of nearby ore manifestationsand small deposits. In addition, thecompany is planning to acquireseveral mining facilities in the vicin−ity of Dukat. We are also consider−ing the possibility of constructingStage II of the plant for process−ing ore from satellite deposits andsorted spoil piles of lean ore left bythe state enterprise “Dukat GOK”(the company formerly operatingat the Dukat deposit).Indicator Unit 2004 2003 2004/2003Total rock mined m 3 1 486 686 871 573 70,6%including stripping m 3 1 080 387 642 054 68,3%Ore minedm 3 321 506 229 519 40,1%th. Tons 839 543 603 367 39,1%Au ave. head grade g/ton 1,4 1,5 (9,0%)Ag ave. head grade g/ton 601,6 738,9 (18,6%)including open−pit operationsm 3 173 554 145 372 19,4%th. Tons 447 834 379 197 18,1%Au ave. head grade g/ton 1,34 1,1 19,9%Ag ave. head grade g/ton 490,7 483,3 1,5%including underground miningm 3 147 952 84 147 75,8%th. Tons 391 709 224 170 74,7%Au ave. head grade g/ton 1,4 2,2 (35,1%)Ag ave. head grade g/ton 728,5 1 171,2 (37,8%)Ore processed th. Tons 762 798 548 385 39,1%Au ave. head grade g/ton 1,5 1,6 (10,6%)Ag ave. head grade g/ton 608,0 782,7 (22,3%)Au recovery rate % 68% 70% (2,8%)Ag recovery rate % 73% 69% 5,8%Au produced th. oz. 24,3 22,2 9,6%Ag produced th. oz. 12 076 8 646 39,7%Au sales th. oz. 22,1 20,2 8,9%Ag sales th. oz. 12 864 6 593 95,1%Total cash costs * $US/oz. Ag 1,68 2,55 34,1%Note:* Precious metals production at the Dukat and Lunnoye deposits is a single technological process. The above figuresare calculated for both deposits together. Silver is a co−product at the deposit. [This was into account during] Ccal−culations were based on Gold Institute StandardsDukat deposit23

LunnoyedepositLunnoye deposit grew 84.1%reaching 31,300 oz. Silver pro−duction increased 20.8% to3,700,000 oz., compared with2003. These production increas−es occurred despite a slight de−crease in mined ore (down 7.1%to 284,000 tons). The volume ofore processed at the plant grewby 4.5% and reached 257,000tons. Based on 2004 results, theLunnoye deposit was the 10thleading silver mine in the world.In 2004, extensive geological sur−veys of underexplored ore zonesand depths took place at the de−posit. Polymetal considers theLunnoye deposit to be a facilitywith a high potential for increasinggold and silver reserves.As mentioned above, total cashcosts at the Lunnoye and Dukatdeposits − which are part of asingle technological process − de−creased by 23% to $1.77/oz. Agin 2004, compared with 2003 re−sults. By optimizing technologicalprocesses, the company plans tolower cash costs even further in2005.A small−scale increase in theplant’s production capacity isplanned for 2005, in addition tomodernization aimed at improv−ing the recovery rate of preciousmetals. Capital expenditures willincrease in 2005. And beginningin 2006, there will be a significantincrease in capital expendituresto finance future projects, suchas the start of underground min−ing at the deposit.In 2004, open−pit mining opera−tions took place at the Lunnoyedeposit, using the southwesternand northeastern parts of thepit. A transportation scheme wasused to strip and mine the north−eastern part. The stripped orewas transported to the westernspoil heap. Some of the strippedore was used to construct a tail−ing impoundment. Difficult miningand geological conditions, coupledwith unstable operation of equip−ment (such as drills and shovels)because of severe climatic condi−tions, prevented us from complet−ing exploration of the pit in 2004.In 2005, the company intends tocontinue mining at two indepen−dent flanks − the high southwest−ern flank and the low northeast−ern flank.In 2004, numerous measureswere instituted at the plant toimprove technology, stabilize theplant’s operations, and improvetechnological indicators:the construction and launch ofa facility to deliver Dukat depos−it’s float concentrate to thetechnological process was fin−ished;the plant’s production capaity for processing raw materialswas increased to 40,300 tons/hour by modernizing the pump−ing facility and utilizing morepowerful engines;The company implemented a highlyefficient scheme for the joint pro−cessing of concentrates from theDukat deposit and the ore fromLunnoye deposit at Lunnoye’s fa−cilities. This process resulted in asignificant increase in the recov−ery rate. In 2005, the volume of sil−ver refined at the Kolyma Refinery24 Polymetal annual report 2004

Victor R. Wulfert,Managing DirectorAnatoly G. Staheev,Executive DirectorVyacheslav I. Zaitsev,Chief GeologistIn 2004, gold production at thewill increase significantly, which willallow us to create a complete andeconomically efficient cycle of pro−duction of precious metals fromgeological surveys to gold bars inone geographic region.During the next period, the com−pany plans to maintain the rate ofmining operations it achieved in2004, which will allow us to steadi−ly deplete the hilly part of the pit,provide the plant with ore withthe necessary head grade andmeet the planning parameters ofstripped and prepared reservesby the beginning of 2006. Thecompany will also analyze the pos−sibility of increasing the capacityof the plant to process concen−trate from the Dukat deposit andore from the Lunnoye deposit.In 2005, Polymetal Engineeringintends to finish preparing a fea−sibility study of the conditions forprocessing mineral resourcesproduced by underground miningand to design a project to pro−cess these minerals.In addition, measures for decreas−ing losses of precious metals andincreasing production capacity atthe plant are planned for 2005,including:implementing a computerized,automated information retriev−al system of the entire produc−tion process. This system willhave numerous positive effects,including: allowing us to improvecontrol and speed of managingthe ore processing, to minimizeprecious metals losses to wastetailings, to lower human error inthe production process and toreduce the number of technicalpersonnel;industrial field testing and implmentation of new mill linings toincrease the plant’s ore pro−cessing capacity and stabilizegrinding parameters ;reconstructing the MerrillCrow zone.The most significant step forPolymetal in regard to its silverproduction projects is to begin ex−ploring the Arylakh deposit (whichis in the proximity of the Lunnoyedeposit). The Arylakh deposit hasa relatively low capacity with a highaverage head grade of silver. Us−ing this deposit for mining and theexisting infrastructure at Lun−noye will have a dramatic syner−getic effect on the developmentof these two projects. In 2005,to begin developing the Arylakhdeposit, the company will startconstructing a roadway and pre−paring the production area of themine. The company will also engagein further geological surveys ofnear and far flanks at the Lunnoyedeposit.Indicator Unit 2004 2003 2004/2003Total rock mined m 3 917 390 833 581 10,1%including stripping m 3 802 365 709 849 13,0%Ore minedm 3 114 980 123 732 (7,1%)th. tons 283 999 305 615 (7,1%)Au ave. head grade g/ton 3,2 3,3 (3,8%)Ag ave. head grade g/ton 431,5 450,5 (4,2%)Ore processed th. tons 257 368 246 385 4,5%Au ave. head grade g/ton 3,7 3,2 15,6%Ag ave. head grade g/ton 499,3 453,4 10,1%Au recovery rate % 91% 92% (1,1%)Ag recovery rate % 90 89 1,1%Au produced th. Oz. 31,3 17,0 84,1%Ag produced th. Oz. 3 689 3 053 20,8%Au sales th. Oz. 32,8 13,4 144,8%Ag sales th. Oz. 3 247 3 172 2,4%Total cash costs * $US/oz. Ag 1,68 2,55 34,1%Note:* Precious metals production at the Dukat and Lunnoye deposits is a single technological process. The above figuresare calculated for both deposits together. Gold is a co−product at this deposit. [This fact was taken into accountduring] Ccalculations are based on Gold Institute Standards.Lunnoe deposit25

Vorontsovskoyedeposit2004 was a key year in the devel−opment of the Vorontsovskoyedeposit. The company is steadilytransitioning from mining oxidizedore to mining primary ore. Thistransition required constructinga primary ore processing plant(Stage II at the deposit). As a re−sult, the Vorontsovskoye depositbecame one of Russia’s leading de−posits that simultaneously minesand processes two types of oreusing different technologies.Plant #2 began operating at thebeginning of 2005. A significantshare of capital expenditures in2004 was due to the construc−tion of Stage II of the deposit,which will reach its project ca−pacity in 2005 and the purchaseof necessary equipment. Thecompany plans to reduce capitalexpenditures by more than fourtimes in the following year.According to 2004 results, goldproduction fell 15.2% to 78,000oz.; and silver production droppedby 10.3% to 56,700 oz. Theseproduction declines occurred de−spite a 10% increase in ore pro−cessing (to 909,000 tons). Theproduction decline was primarilydue to a 7% decrease in the aver−age head grade of gold. In 2005,the company estimates that goldproduction will increase by 58%and that silver production will riseby 75%.In 2004, the deposit had the high−est production cost among all ofthe company’s processing facili−ties − $257/oz Au. This indicator,however, was within the range ofaverage global production costs.The substantial 154% increasein total cash costs (from $101/oz. Au in 2003) was due to expe−dited stripping to provide ore forthe new processing plant to usein the future. Total cash costsalso increased because the com−pany needed to use drilling and ex−plosives methods in the pit whenit reached deeper rock bases. In2005, the company plans to loweroperating costs by 10 to 20%.In 2004, mining of oxidized ore atthe deposit continued; and in Q3−Q4, mining of primary ore started.Over the course of 2004, steadygrowth in mining rock and ore wasachieved and the productivity ofthe mining equipment grew sig−nificantly. It is important to notethat the volume of rock minedusing drilling and explosives grewsharply (a more than five timesincrease compared to 2003).Further lowering of the mine floorlevel will require increased use ofthese methods.In 2005, the company will addressa range of issues including how toincrease the amount of drilling andexplosives work, the launch of theUlba mix loader and another AtlasKopko drill and the constructionand opening of storage facilities.In addition, the fleet of pit dumptrucks and loading equipment willbe updated in 2005.In 2004, the company − based on arequest by the Administration ofthe Krasnoturyinsk Municipal Dis−trict − completed the recultivationof technogenic lakes in the miningareas near the Severny mine andthe Severopeschanskaya mine26 Polymetal annual report 2004

Andrey V. Novikov,Managing DirectorSergey N. Markov,Chief EngineerVictor V. Kozlov,Chief Geologistby the Vorontsovka settlement.The mined area was covered withstripped ore. We plan to completebiological recultivation in 2005and return the land to the Admin−istration of the KrasnoturyinskMunicipal District.In 2004, two methods of oreprocessing were used: oxidizedore was processed using heapleaching and primary ore was pro−cessed at the plant using the car−bon−in−pulp method.The plant for processing primaryore was launched in November2004 and was designed andequipped using the world’s mostadvanced technologies. Most ofthe machinery in the plant is im−ported. During the current, initialperiod of operation, set−up andlaunch work is occurring. Howev−er, ore processing will grow andby mid−2005, it is estimated thatthe plant will reach its project ca−pacity of 600,000 tpa of ore witha 81% gold recovery rate and a46% silver recovery rate.2005 targets for the plant in−clude: reaching project capacity,stabilizing the main productionprocesses and addressing theissue of semi−dry storage of tail−ings.Improving the technology forpreparing pile foundations forheap leaching and ore pelletizingin 2004 contributed to reduc−tions in production costs. Since2003, the company has beenpouring ore using a new stackerdesigned by our subsidiary engi−neering company. There has beena yearly increase in the volumeof ore poured in pile. In 2005, weplan to maintain ore pouring lev−els and process 800,000 tonsof ore through the heap leachingmethods. Actual recovery ratesfor precious metals closely matchthe expected rates and thus, al−low for efficient processing ofoxidized ore. Recovery rates forgold and silver are 80% and 36%,respectively. In addition, low pro−duction costs allow for process−ing off−balance oxidized ore. Thisprocessing will begin in 2005. TheVorontsovskoye deposit is one ofthe few deposits in the world thatutilizes the heap leaching methodyear−round.The company intends to develop aprogram for active geological sur−veys at the near and far flanks ofthe Vorontsovskoye deposit. Themineral reserve base will also beincreased by reviewing the cut−offgrades and by mining reservesbelow the current mining contourof the pit.Indicator Unit 2004 2003 2004/2003Total rock mined m 3 4 283 518 3 633 358 17,9%including stripping m 3 3 725 920 3 183 738 17,0%Ore minedm 3 557 598 449 620 24,0%th. Tons 953 728 752 660 26,7%Au ave. head grade g/ton 3,7 3,7 0,6%Ag ave. head grade g/ton 9,0 6,0 49,6%Ore processed th. Tons 908 749 827144 9,9%Au ave. head grade g/ton 3,6 3,9 (6,9%)Ag ave. head grade g/ton 8,9 6,7 34,0%Au recovery rate % 80% 80% 0%Ag recovery rate % 35% 35% 0%Au produced th. oz. 77,6 91,5 (15,2%)Ag produced th. oz. 56,7 63,2 (10,3%)Au sales th. oz. 82,7 95,3 (13,2%)Ag sales th. oz. 63,3 73,5 (13,9%)Total cash costs * $US/oz. Au 221 130 70%Note:* The calculations take into account that silver is a co−product at the Vorontsovskoye deposit (according to GoldInstitute Standards).Vorontsovskoye deposit27

KhakanjinskoyedepositThe Khakanjinskoye deposit be−gan operating in October 2003.And at the start of 2004, thefirst metal from this deposit wassent to the refinery. Results from2004 show, that gold productionwas 79,000 oz.[,] and silver pro−duction was 1,500,000 oz. Oremined reached 610,000 tons andore processed at the plant was212,000 tons, which is less thanhalf of the plant’s project capacity.The company plans to reach proj−ect capacity by mid−2005.Total cash costs in 2004 were$201/oz. Au. We anticipate that in2005 the Khakanjinskoye depositwill become our lowest cost pro−duction facility. Economic analy−sis indicates that after the plantreaches its project capacity, op−erating costs will decrease.The high level of capital expendi−tures in 2004 was due to mod−ernization projects at the plant.The company plans to significantlyreduce its capital expenditures in2005. However, future projects—− [,] including the launch of thesatellite Yurievskoye deposit andthe start of underground mining—− [,] will require significant addi−tional capital expenditures.2004 was the first full year ofoperation for the Khakanjinskoyedeposit (after its launch in Oc−tober 2003). In 2004, open−pitmining took place at the CentralZone (pit #1). During 2004, sig−nificant development − primarilyof infrastructure − occurred atthe deposit, including completingthe main mining work at pit #1 andbuilding a grid of service roads.And significantly, mining volumegrew substantially.By utilizing new, highly efficientimported machinery for shovel−ing and drilling, the mine was ableto reach its project capacity in2004. Additionally, the mine wasfully prepared for inspection bythe Russian National InspectionCommittee.According to preliminary data, thepit’s[quarry’s] monthly produc−tion capacity in 2005 will reach150,000 m3 of rock. Primarymining tasks at Khakanjinskoye in2005 will include upgrading theefficiency of equipment used fordrilling and explosives work, con−ducting detailed testing on thestability of the deposit’s sides andincreasing the final slope angle ofledges.During the first half of 2004, op−erations at the deposit focusedon startup and tuning work. Theseoperations allowed us to stabilizethe grinding facility and increaseoutput at the first grinding stageusing the new Outokumpu mill.These measures helped increasethe production capacity of the goldextraction plant to up to 30,000tons of ore per month.To increase the plant’s produc−tion capacity even further in2005, the company plans to re−construct the ore preparationfacility and the plant (crushing andgrinding processes). These steps28 Polymetal annual report 2004

Sergey G. Antipin,Managing DirectorSergey A. Egorov,Chief GeologistVladimir I. Fedorov,Head of the Plantwill allow us to process more than500,000 tpa of ore. And in the fol−lowing year − with the introductionof a third grinding stage − we planto increase production capacityto 600,000 tpa of ore. As part ofthe continuing process of improv−ing production and ensuring thatthe deposit is a world leader, thecompany plans to design a facilityfor the filtering and semidry stor−age of filter cakes from waste tail−ings.The company is also planning toincrease its mineral reserve baseby engaging in active geologicalsurveys in the near and far flanksof the Khakanjinskoye deposit andthe Okhotsk Region in general.Indicator Unit 2004 2003Total rock mined m 3 1 196 286 732 380including striping m 3 927 782 708 918Ore minedm 3 268 504 23 462th tons 610 553 54 783Au ave. head grade g/ton 7,2 6,3Ag ave. head grade g/ton 228,0 239,2Ore processed th. tons 212 720 31 899Au ave. head grade g/ton 13,3 10,6Ag ave. head grade g/ton 425,3 366,7Au recovery rate % 94% −Ag recovery rate % 49% −Au produced th. oz. 79,0 −Ag produced th. oz. 1 465 −Au sales th. oz. 75,8 −Ag sales th. oz. 1 127 −Total cash costs * $US/oz. Au 114 −Note:* The calculations take into account that silver is a co−product at the Khakanjinskoye deposit (according to GoldInstitute Standards). In 2003, only mining operations took place at the Khakanjinskoye deposit; no metal productionoccurred.Khakanjinskoye deposit29

GeologicalsurveyandexplorationGeological survey and explorationin 2004 focused on preparingreserves for mining at existingdeposits, expanding the mineralreserve base at operating miningfacilities in flanks and at deep lev−els and discovering new preciousmetals deposits. Successfullycompleting these tasks involvedusing geological methods, such asroute surveys, deep geochemicalexploration, hole boring and addi−tional probing techniques.In 2004, Polymetal carried out76,368,000 m of drilling for geo−logical survey and explorationutilizing high quality imported ma−chinery. Approximately 30% ofthe drilling was targeted at findingnew deposits.Preparing the reserves for min−ing at the existing mining facilitiesis carried out using the explora−tion services of the subsidiaries.This allows Polymetal to managethe quality of ore. Our success isillustrated by balanced results atthe different processing plants.Comparison of qualitative indicators for ore at the plantsOre minedOre processedDepositOre(th. tons)Au ave. headgrade (g/ton)Ag ave. headgrade (g/ton)Ore(th. tons)Au ave. headgrade (g/ton)Ag ave. headgrade (g/ton)Dukat 839,5 1,38 601,4 762,8 1,45 607,9Lunnoye 283,9 3,15 431,4 257,3 3,74 491,0Khakanjinskoye 610,5 7,15 227,9 212,7* 13,32 425,3Vorontsovskoye 953,7 3,71 9,04 905,9 3,61 8,91Note:* processing higher quality oreIn 2004, additional explorationaimed at transferring Polymet−al’s C2 category reserves tothe industrial C1 category tookplace at the company’s operat−ing deposits. As a result of theseactivities, 261,000 oz. of goldand 9,000,000 oz. of silver weretransferred to the C1 category.The reimbursement coefficientwas 1.2 for gold and 0.52 for sil−ver. These figures were the high−est in the industry in Russia.In 2004, increasing the mineralreserve base at mining facilitieswas accomplished by engaging inestimation and exploratory drillingat the flanks and deep floor levelsof operating deposits. Accordingto 2004 results, 232,000 oz. ofgold and 4,983,250 oz. of silverwere added to the C2 category.In 2004, Polymetal had the lowestcost figures for reserve growth −$25.5/oz. Au equivalent. (includingexploration costs). Taking into ac−count reserves transferred tothe C1 category through geologi−cal surveys, this figure was as lowas $11.1/oz. of Au equivalent.Listed below are summary re−sults for geological surveys thatoccurred at Polymetal’s subsid−iaries in 2004.30 Polymetal annual report 2004

Vorontsovskoye(Northern Urals Gold, Sverd−lovsk Region)In 2004, Polymetal continuedexploring resources at the Vo−rontsovskoye deposit in the con−tours of the operating pit. Overthe course of the year, by increas−ing the density of the explorationgrid, approximately 192,000 oz.of gold was transferred from theC2 category to the industrial C1category. Results from detaileddrilling support earlier estimatesof the amount of ore and qualita−tive characteristics of the goldmineralization in the C2 categoryblocks.In 2004, drilling exploration in thenear and far flanks [folds] of the de−posit of ore leads was completed[,]and the resources were enteredinto the P1 category. Accordingto preliminary data, balance re−servesresources are estimatedat 1,200–1,300 thousand tonsof ore (approximately [around]208,975 oz. of gold). Most of theseresources (85%) are oxidized ore.Processing of this ore will be usedto replenish ore for future heapleaching. Significant resourcesof low−grade ore (approximately1.9 million tons) with an averagegold head grade of 0.8 g/ton werefound in the southern flanks of thedeposit. The feasibility of process−ing these resources using heapleaching will be determined after afeasibility study and governmentalinspection, which are scheduledfor the end of 2005.Khakanjinskoye(Okhotsk Mining and GeologicalCompany, KhabarovskTerritory)At the same time that Polymetalengaged in open−pit mining op−erations at the Khakanjinskoyedeposit, the company began drill−ing work aimed at estimating thedeposit’s deeper levels to pre−pare reserves for Stage II of un−derground mining at the deposit.Exploration drilling revealed twonew ore leads in the contoursof which single highly productivemine intersections of up to 10−12 m with an average gold headgrade of up to 40 g/ton. Polymetalestimates that through contourdrilling C2 category reserves willincrease by 317,000 tons of ore,129,147 oz. of gold (with an aver−age head grade of 12.7 g/ton) and4,848,220 oz. of silver (with an av−erage head grade of 475 g/ton).Next year, the company intends tocontinue estimating deeper levelsat the Khakanjinskoye deposit andits far and near flanks [folds]. Weestimate that these operationswill yield approximately 321,500oz. of gold resources.Lunnoye and Arylakh(Silver Territory, MagadanRegion)In 2004, Polymetal explored theoperating pit at the Lunnoye de−posit and conducted additionalsurveys of resources in ore zoneIX (under the pit) to prepare themfor future mining. The explorationallowed for mining ore of planedquality for a one year period. Ad−ditional surveys of deeper levelsby drilling angled mines allowed673,000 tons of ore, 56,809 oz.of gold and 7,812,450 oz. of silverto be transferred to the C1 cate−gory of resources. Detailed explo−ration of C2 category blocks led tothe discovery of ore columns withhigher quality mineral resources.These ore columns will becomethe primary areas for future un−derground mining operations.Dukat(Magadan Silver, MagadanRegion)In 2004, geological surveys at theDukat silver deposit were in theorganizational stage. Limited drill−ing targeted local exploration foropen−pit and underground mining.Geological survey and exploration31

Other explorationand prospectingprojectsIn 2004, Polymetal carried out ex−ploration aimed at finding new oredeposits in other regions of theRussian Federation. Explorationwas carried out by the company’ssubsidiaries: Yenisey Mining andGeological Company, Aurum andImitzoloto.Kuzeevskoye(Yenisey Mining and GeologicalCompany, Krasnoyarsk Terri−tory)Prospecting work − focused ondiscovering gold deposits in theArchean Greenstone Belt of thesouthern part of the YeniseyMountain Ridge − began in 2004.In the licensed area of 11.2 km2,deep geochemical prospectingwas carried out (1,300 probes),56,000 m3 of trenches were bull−dozed, and 380 m of prospectingboreholes were drilled.These activities have yielded prom−ising geological results. Trenchesin one of the zones of the licensedarea revealed and tracked downtwo adjacent gold leads with hori−zontal lengths of 250 and 450 m,respectively. The capacities of therock bodies range from 1 to 7.0m with average gold head grade of2−25 g/ton. One of the ore bodieswas estimated based on a five deepborehole profile. A contiguous 250m gold mineralization was foundwith the following parameters: ca−pacity of 2.5 m and average headgrade of approximately 10 g/ton.2004 prospecting work indicatesresources in the area of approxi−mately 643,000 oz. of gold.Deep geochemical explorationof the contours of the licensedarea show four more ore bear−ing zones. Trenching and drillingof these zones is scheduled for2005. If the estimates are cor−rect, the licensed area shouldcontain a medium−large gold de−posit (approximately 1,607,500– 3,215,000 oz.).Aprelkovsko−Peshkovski ore knot(Imitzoloto, Chita Region)Prospecting in the licensed area(Aprelkovsko−Peshkovski ore knot,161 km2) is [are] focused on dis−covering gold porphyry type de−posits. Currently, geochemicalprospecting, geophysical explora−tion and cartographic drilling atthe most promising zone −– Taly— have been carried out. TheZabajkalsky Research Instituteestimated 10,931,000 oz. of goldresources at the Taly zone. Pros−pecting has revealed stockworktype contours in the area of thegold with a length of 1.5 km and awidth of over 500 m. The averagehead grade of gold in the stock−work is between 1−2 g/ton; andthe gold is distributed unevenly.The gold stockwork has not beencontoured either horizontallyor vertically. At present − basedon prospecting in the Taly zone− Imitzoloto estimates its mineralresource base at 3,858,000 oz.of gold. Prospecting work will con−tinue in the future.Fevralskoye(Aurum, Sverdlovsk Region)At the end of 2003, the companybegan prospecting work in thearea of the Reftinski zone. The Fe−vralskoye deposit, which had beenmined using claim sluicing meth−ods during the late 19th centuryto a depth of up to 20–40 m (thelevel of underground streams), islocated in the licensed area. Priorto 2003, deep floor levels of thedeposit had not been explored.As a result, Aurum undertook de−tailed drilling using a 50x30−50m grid on a 200x150 m piece todetermine prospecting possibili−ties. This work allowed us to de−termined industrial parametersand to obtain structural lithologi−cal listings of the gold lead. Gold re−sources in the detailed area are96,450 oz. with an average headgrade of 10 g/ton. Resources ofthe entire deposit are estimatedat 1,929,000 oz. of gold.32 Polymetal annual report 2004

Alexander V. Bulavin,Head of LicensingDepartmentOther geological sur−vey projectsIn 2004, the company continuedgeological surveying and explora−tion at promising sites in variousRussian regions. At the sametime, the company continuouslymonitors mineral resource condi−tions in Russia to single out poten−tially viable resource deposits.In 2005, Polymetal plans to con−tinue exploring and prospectingat drilling levels of 99,500 m andtrenching at 50,000 m3. Addi−tionally, the company will engagein geochemical prospecting. As aresult of these activities, we ex−pect to increase the gold stock inC1+C2 categories by 385,800 oz.and silver (in the same categories)by 16,075,000 oz.Geological survey and exploration33

Engineeringservices:PolymetalEngineeringValery N. Tsyplakov,Managing DirectorA key operating principle forPolymetal is to carry out thecomplete range of work at oredeposits − from geological sur−veys to gold bar production. Thecompany utilizes its own resourc−es at all stages. As a result ofthe company’s reorganization in2004, the scientific and researchinstitute that had been a divisionof Polymetal became a separate,specialized engineering company− Polymetal Engineering. In a rela−tively short period, Polymetal Engi−neering has established itself as amarket leader dealing with scien−tific and engineering issues at oredeposits throughout Russia.Polymetal Engineering special−izes in turnkey design of depositdeveloping projects that allow in−vestment schemes to be quicklyimplemented. During the past sixyears, Polymetal Engineering hasdesigned eight mining facilities invarious regions of Russia − thelargest of which were the Dukatdeposit and the mining and metal−lurgy operations at the Khakanjin−skoye, Vorontsovskoye and Lun−noye deposits. With the exceptionof the Dukat deposit (brown fieldwith massive reconstruction), allother investment projects havebeen green field.Polymetal Engineering carriesout cutting−edge scientific re−search. Based on results of thisresearch, it develops standardsand regulations, which are usedto [[develop]] design specificationsfor constructing ore enrichmentfacilities (at all stages of invest−ment projects).In 2004, Polymetal Engineeringsuccessfully fulfilled over 250 or−ders for comprehensive design atmain and auxiliary mining facilities,ore enrichment and mining andmetallurgy works. In addition, thecompany conducted over 90 stud−ies aimed at developing technolo−gies, expanding mineral reservebases at companies, improvingexisting technologies and findingnew reagents and processes.Developed computer networks,advanced CAD technologies,state−of−the−art 3D graphics pro−grams and the latest softwareallow the company to carry outreal−time design and immediatelyshare information with all partici−pants in the design process, in−cluding the client. These technolo−gies facilitate high−quality work,quick project turnaround andsatisfied clients − no matter howcomplex the task.All development planning and is−suing of project specifications iscarried out in strict accordancewith the real needs of the newlyconstructed, reconstructed oroperating facilities. To ensure this,we use various hi−tech programsto form a detailed design schedulethat is agreed upon by the partiesand meets their individual require−ments.Polymetal Engineering carried outa variety of projects at facilitiesmanaged by Polymetal, includingstarting−up and fine−tuning equip−ment (plant #2 at the Vorontsovs−koye deposit and the[,] plant at theKhakanjinskoye deposit), testingtechnical parameters of heapleaching, conducting industrialtests of new reagent methods(plant at the Dukat deposit) andlowering reagent consumption.In 2004, Polymetal Engineering’sprincipal customers remainedcompanies managed by Polymet−al. However, in the past year, thecompany has begun offering its in−novative design [and construction]services to third−party firms.34 Polymetal annual report 2004

Dukat depositconducting a feasibility study ofpermanent exploration condi−tions for estimating the min−eral reseve base at the Dukatdeposit, which will allow for deci−sions about economically viableore mining under current condi−tions;creating technological solutionsfor ore processing that allowedfor a complete processing cycleat the Dukat deposit and theproduction of Dore bars;Lunnoye depositredesigning [reconstructingon]of the Dukat Settlement−Lun−noye Deposit road, which will en−able uninterrupted, year−roundtransportation between thesetwo deposits (even during sea−sonal floods);creating [designing] specificadesign of a basic warehouse forstoring chemical reagents atthe plant and designing an oxy−gen production facility that willlower auxiliary costs;redesigning [constructing] dry−ing and filtering facilities at theplant to increase equipment ef−ficiency and plant reliability;studying and making prelimi−nary technological specificationsfor the plant reconstruction toincrease gold production by 10%and silver production by 5%;tions for the slag recycling facil−ity at the plant’s smelting shop.This project will increase therecovery rate of precious met−als from slag when processingcementates into Dore bars;redesigning rec[constructinonofg] portions of the plant’s mainbuilding, which will minimize pro−duction losses in the combinedevaluating the possibility of pro−ducing precious metals fromcurrent and discarded tailingsat the plant. The study con−firmed the technical possibilityof additional production throughtraditional methods such asimpregnation and hydrometal−lurgy, as well as by heap leach−ing. Depending on the particularmethod used, silver productioncan be increased by 54 to 75%.processing of ore from the Lun−noye deposit and concentratefrom the Dukat deposit;creating a strategy to increaseproductivity at the gold extrac−tion plant by 20%, with esti−mates indicating the possibilityof increasing productivity up to360,000 tpa of oreKhakanjinskoye depositconducting a feasibility study ofproducing and processing sil−ver−manganese concentrate atthe Khakanjinskoye plant;designing specifications for reconstructing the ore process−ing facility that makes the tech−nological scheme more univer−sal and, as a result, increasesproductivity;drawing up specifications forreconstructing the grindingfacility at the plant’s main build−ing. This project will constructand launch an additional grindingline at the operating facility andincrease ore processing by atleast 20%;developing [creating] a projectfor utilizing the brushwood stor−age facility at the Khakanjinskoyeplant from 2004 to 2006. Thisproject will significantly improveoperational safety at the stor−age facility.Engineering services: Polymetal Engineering35

Gennady N. Larionov,Head of DesignDepartmentAlexander S. Aleksanin,Deputy ManagingDirectorBoris V. Aksenov,Head of TechnologicalResearchDepartmentVorontsovskoye depositdeveloping [constructing] Stage IIof the [a] mining and metallurgyfacility at the Vorontsovskoyedeposit;designing [constructing] an orepreparation facility for pro−cessing primary ore using thecarbon−in−pulp method. Projectdesign was carried out simul−taneously with construction.Design technology, previouslyadopted by the company, de−creased the construction timeof the ore enrichment facility byone year and allowed for miningand processing 600,000 addi−tional tons of primary ore;designing a project for reconstructing [pairing] a facility thatwill improve repair work qual−ity and minimize non−productioncosts;technological study of processing off−balance oxidized ore atthe Vorontsovskoye deposit,which allowed additional produc−tion of metal from off[non]−bal−anced ore in 2004;modelling of heap leaching fromtwo layers of rock. This modelprovided initial data to designtwo−level stacks without usingany additional premises for thispurpose. It also allowed for ad−ditional gold leaching from previ−ously used stacks with minimalproduction costs;In the past year, the companybegan working with third−partyclients. Today, it is the leadingcompany in Russia for designing[and constructing] solid mineralresource projects.Mikhailovsky GOK(Ore Enrichment Works; MGOK)In 2004, the company designedthe flotation shop of the crush−ing and enrichment facility at theMikhailovsky GOK (one of Russia’sleading iron ore processing com−panies). The project increasediron content in the concentrateto 70% and reduced silicon oxidesto less than 3%. This was the firsttime that this technology wasused at a Russian production facil−ity.50 Year Oktyabryadeposit (Kazakhstan)During 2004, Polymetal Engineer−ing estimated the efficiency of ex−ploration efforts at the 50 YearOktyabrya copper pyrite deposit(Kazakhstan).The project was completed in acondensed time period and the cli−ent was kept well−informed aboutintermediate progress [results.This allowed for optimizing miningoperations, in relation to currentproduction costs, determiningthe optimal production capacity ofthe facility for processing ore intocopper concentrates and select−ing appropriate mining and trans−portation equipment. The projectreport contained detailed infor−mation and well−formulated sug−gestions that allowed the clientto optimally structure its financialresources, quickly prepare andsign contracts for designing andconstructing the enrichment fa−cility and purchasing mining andtransportation equipment.Syrybmet depositIn 2004, the company studied thecapacity of tin ore at the Syryb−met deposit to create ore−dress−ing technology. The company pre−pared specifications for designingthe plant at the deposit with aproduction capacity of 1,000,000tpa of ore.The professionalism of scientistsat Polymetal Engineering enablesthe company to carry out complexdesign and technological studiesin the areas of precious, ferrousand nonferrous metals. In addi−tion to the previously mentionedprojects, in 2004, the companyconducted more than 70 studiesaimed at developing technologies,expanding companies’ ore re−serves, upgrading existing tech−nologies and finding new reagentsand processes.36 Polymetal annual report 2004

GlobalpositioningIn 2004, world silver productionwas 634.4 mln. oz. (a 4% increasecompared with 2003). The mostsignificant contribution to growingglobal production came from pri−mary silver production mines thatincreased their production by 23.2mln. oz.Top 10 world silver producers, 2004 (mln oz.)CountryProductionMexico 99,2Peru 98,4Australia 71,9China 63,8Poland 43,8Chile 42,8Canada 40,6USA 40,2Russia 37,9Kazakhstan 20,6Source: GFMS, Silver InstituteAccording to 2004 results,Polymetal demonstrated themost rapid production growthamong leading silver producers.In 2004, Polymetal accounted for2.7% of global silver production.In Russia, silver productionreached 37.9 mln. oz., including21.4 mln. oz. from primary produc−tion. Polymetal remained Russia’sleading silver producer and ac−counted for 81% of the country’stotal primary production.Top 10 world silver producers, 2004 (mln. oz.)Company Country ProductionBHP Billiton Australia 49,7Industrias Penoles Mexico 44,5KGHM Polska Miedz Poland 43,2Grupo Mexico Mexico 19,4Kazakhmys Kazakhstan 17,7Polymetal Россия 17,3Barrick Gold Canada 17,3Rio Tinto plc. Great Britain 14,8Coeur d’Alene Mines USA 14,1Cia de Minas Buenaventure Peru 12,8Source: GFMS, Silver InstituteIn 2004, the Dukat and Lunnoye deposits strengthened their positions among the top 10 global silver produc−tion deposits.Global positioning37

Top−10 world primary silver mines in 2004 (mln. oz.).Deposit/Country Company ProductionCannington / Австралия BHP Billiton 45.91Fresnillo (Proano) / Мексика Industrias Penoles SA de CV 31.60Dukat / Russia Polymetal 12,06Uchucchacua / Перу Compania de Minas Buenaventura SA 9,83Greens Creek / США Kennecott Minerals/Hecla Mining Co 9,71Arcata / Перу Minas de Arcata SA 7,94Rochester / США Coeur d’Alene Mines Corp 5,67Imiter / Морокко Sociёtё Mёtallurgique d’Imiter 4,95Huaron / Перу Pan American Silver Corp 4,08Lunnoe / Russia Polymetal 3,70Source: GFMS, Silver InstituteAccording to figures from 2004,global gold production was 79.2million oz (down 5% from 2003).Russia is among the world’s topgold producing countries. In thelast year, Russia’s gold produc−tion (including co−production andsecondary production) increased2% and reached 5.8 million oz.Polymetal demonstrated themost dynamic growth figures forgold production (a 55% increase),and the company was Russia’ssecond largest gold producer.Top Russian gold producers in 2004th. ozBest dynamics in RussiaPolus Polymetal AmurTop world silver producers in 2004mln. ozBest dynamicsamong majorsPolymetalThe current level of development,along with continued investment inexploration and state−of−the−arttechnology, allows one to expectthat the company will maintain itsleading position in the Russian in−dustry.38 Polymetal annual report 2004

CorporategovernancePolymetal follows widely acceptedglobal corporate governancepractices in its financial and pro−duction activities. The companyalso strictly complies with normsand regulations stated in theCode of Corporate Governanceissued by the Federal Agency onFinancial Market of the RussianFederation.Corporate governance principlesin society are based on respect−ing the rights and legal interestsof all members of society. Effectivecorporate governance principlesshould also stimulate a company’sefficient operations, including in−creasing the value of its assets,creating new jobs and maintainingfinancial stability.Polymetal observes Russian andinternational business standardsand ethics. The company protectsthe rights of its shareholders,provides credible, complete, openand transparent information toconcerned parties and organizesmeetings of the Board of Direc−tors and shareholders. The com−pany strongly believes in adheringto environmental protection stan−dards (both Russian and interna−tional) and in meeting norms andrequirements dealing with thehealth, safety and social securityof its employees.Polymetal also actively collabo−rates with Russian regional au−thorities in planning and imple−menting social and economicdevelopment programs in theregions where the company oper−ates.Polymetal actively takes mea−sures to upgrade informationaltransparency for its sharehold−ers, investors and other interest−ed parties. The company preparesauditing reports in accordancewith US GAAP standards (auditor:PricewaterhouseCoopers), cer−tifies the quality of key businessoperations in accordance withISO−9001 standards and main−tains relations with investors andanalysts in domestic and interna−tional financial markets. The com−pany’s website provides detailedand relevant information about allaspects of the company’s activi−ties in both Russian and English.In 2004, Polymetal took steps toincrease business and technologi−cal efficiency and improve open−ness for investors. A key stepwas forming the holding company.The holding corporate structurewill maximize our ability to complywith international principles andimprove our efficiency in managingsubsidiary companies.A great deal of work was doneduring the reported period toensure that all aspects of thecompany’s operations comply withinternational standards. Polymet−al designed a long−term techni−cal−economic model for develop−ing its mining facilities. This modelwas approved during geologicalauditing carried out by the inter−national consulting company, SRKConsulting. Clifford Chance car−ried out a comprehensive juridicalauditing of all companies managedby Polymetal. Together with a spe−cialized international company,Polymetal is working on a detailedrisk management program.To minimize possible losses − dueto equipment malfunction or de−lay, fire at workplaces and otherrisk factors characteristic of themining industry − the company’ssubsidiaries have signed insur−ance contracts. These contractsinclude complete coverage fromwestern underwriters throughtwo leading global insurance bro−kers, AON (GB) and Marsh (GB).In the future, we plan to take nu−merous steps to reform ourecological standards and indus−trial and labor safety practicesto comply with internationalnorms, in particular with WorldBank standards. We also expectto complete recalculating thecompany’s mineral reserve baseaccording to international JORCclassifications in the near future.These measures are aimed ateffectively branding Polymetalamong potential strategic andportfolio investors, demonstrat−ing the transparency and attrac−tiveness of the company and cre−ating grounds for the company topotentially enter the internationalpublic market.Corporate governance39

Environmentalpolicyand healf andsafetyTatiana V. Kuleshova,Head of Environmental& Industrial SanitationDepartmentPolymetal strictly follows eco−logical guidelines when exploringprecious metals deposits. Thecompany monitors ecological pa−rameters at all stages − from fea−sibility studies and project designto the construction of mining fa−cilities to mine closures.Based on the results of care−ful environmental research andanalysis, Polymetal works to de−velop new, stricter limits for theaccepted disturbance to the envi−ronment caused by atmosphericpollution, sewage dumping into thewater supply and the placementof waste. Polymetal develops andimplements programs to monitorthe environment in areas in thevicinity of operating facilities. Thecompany also designs programsto control and minimize negativeenvironmental effects causedby these facilities. In addition,Polymetal engages in ecologicalstudies to develop innovative newmethods of waste treatment.Environmental protection depart−ments operate at all of the com−pany’s mining subsidiaries. Thesedepartments supervise their re−spective companies’ compliancewith ecological regulations. Theyalso cooperate with local govern−mental organizations.In the past year, subsidiary com−panies implemented programs tomonitor the environment in thearea of the mining and metallurgyfacility at the Khakanjinskoye de−posit, calculated and categorizedair pollution at the Lunnoye depos−it, corrected a project addressingwaste norms and limits on theirstorage at the Vorontsovskoyeand Lunnoye deposits and moni−tored maximum pollution norms atthe Dukat deposit. One of 2004’smain goals was to obtain a positiveresult from an ecological inspec−tion conducted by the RussianMinistry of Natural Resources forthe project of constructing a min−ing and metallurgy facility at theVorontsovskoye deposit (StageII). This positive result allowed usto quickly move forward with com−pleting construction and to beginthe startup and tuning of equip−ment at the end of the year.Monitoring the physical environ−ment and our facilities’ impact onit was carried out at all of Polymet−al’s sites, including geological sur−veying projects. We also moni−tored environmental effects forthird−party companies as part ofPolymetal Engineering’s projectdesign contracts (in particular,for Mikhailovsky GOK.In 2004, Polymetal, together witha specialized international con−sulting company, began preparingall necessary documentation andtaking steps to ensure that itsfacilities comply with internationalstandards in the areas of envi−ronmental protection, industrialsanitation norms and industrialsafety, according to World Bankrequirements.Improving industrial safety occursthrough better supervision of theproduction process and is imple−mented by the subsidiaries takingcomprehensive measures aimedat creating safe operating condi−tions at key production facilities.These steps should be two−fold− taking preventive measures tominimize accident and emergencyrisks and preparing workers, man−agement and the facility to be ableto quickly and effectively addressany emergency that does occur.40 Polymetal annual report 2004

Hazardous facilities at the depositsfacilitiesKhakanjinskoye Lunnoye Dukat VorontsovskoyePotentially hazardous facilities were registered in the Russian national registry and insured in accordance withapplicable laws.Industrial injuries at the depositsinjuriesPolymetaltotalKhakanjinskoyeLunnoye Dukat VorontsovskoyeBecause of active, preventive mea−sures taken by Polymetal (bothto minimize the risk of accidentsand emergencies and to quicklyaddress them), there has been asteady decrease in the numberof accidents and emergenciesduring the facilities’ operating his−tory.According to 2004 results, theaverage number of accidents de−creased by 1.2 times (8 accidents)compared with 2003.Environmental policy and healf and safety41

Humanresourcesand socialresponsibilityAlexander A. Zarya,Deputy CEOfor Internal MattersAlexander P. Sandalov,Human ResourcesDirectorUpgrading and maintaining thequalifications of it personnel isone of Polymetal’s key goals. Thecompany also works to activelysupport the regional economieswhere its operating facilities arelocated and to improve the stan−dard of living for people in theseareas. Polymetal’s rapid and im−pressive success can be attrib−uted in large part to its humanresources’ policy of forming ateam of dedicated professionalsfocused on achieving the compa−ny’s corporate goals and capableof finding solutions to complexproblems. To strengthen its posi−tion on the global precious metalsmarket, the company is consis−tently searching for the best pro−fessionals to fill available positions.Three simple words − partnership,development and openness − fullyexplain our human resources’policy.Improving organizationalstructureIn 2004, Polymetal’s structurewas revamped and separatemanagerial and engineering com−panies were created. All miningand geological survey and explo−ration were transferred underthe control of the managementcompany. This restructuring re−quired a thorough reevaluation ofdifferent departments’ roles andresponsibilities − both in the maincompany and in its subsidiaries.New organizational departmentswith new functions and responsi−bilities for their executives werecreated as part of the process oftransferring managerial controlto a single company − PolymetalManagement.An important part of this processwas delegating a greater degreeof administrative and economicresponsibilities to deputy per−sonnel managers. This processallowed for more efficiently ad−dressing key issues affecting thecompany’s staff and creating ad−ditional perks, such as organizingcompany cafeterias and guaran−teeing a healthy standard of livingfor its employees.Human resources policiesAs of December 31, 2004, thetotal number of employees atPolymetal was 4,352, which was4.5% lower than in 2003. Mana−gerial staff comprises 6.5% ofthe staff, while 83.4% of employ−ees worked at mining facilities (upfrom 80% in 2003) and 10.1%are employed at geological surveyand exploration companies in vari−ous Russian regions.Personnel in the company’s divisionsCompany Personnel (employees) % of the totalMining facilities 3 630 83,4%Exploration companies 439 10,1%Management company 170 3,9%Engineering company 102 2,3%Head office 11 0,3%Total 4 352 100%42 Polymetal annual report 2004

Personnel at mining facilitiesCompany Personnel (employees) % of the totalMagadan Silver 1 086 25%Northern Urals Gold 988 23%Okhotsk Geologic and Mining Company 814 19%Silver Territory 742 17%Other companies 722 16%Total for Polymetal 4 352 100%The prevailing number of the com−pany’s personnel are highly quali−fied specialists − 1,343 (36.9% ofthe total) – with specialized, highereducations. Twenty−seven employ−ees with Ph.D.’s are currently em−ployed in the company’s divisions.Approximately 60% of the staff atthe mining and exploration compa−nies are qualified workers.The company actively works toattract young specialists to spurthe development of its projects.Currently, 52.3% of Polymetal’semployees are younger than 40,and at Magadan Silver 63% ofmanagers, specialists, clerks andworkers are younger than 40years old.In 2004, the company’s laborproductivity grew significantlycompared to 2003 − 67% in goldproduction and 65% in silver pro−duction (for mining, labor produc−tivity in gold increased 64% androse 59% for silver).Human resources and social responsibility43

Labor productivity at mining facilitiesCompany2003 2004Au (oz./person) Ag (oz./person) Au (oz./person) Ag (oz./person)Magadan Silver 0,6 252 0,7 346Silver Territory 0,6 108 1,3 154Northern Urals Gold 2,9 2,0 2,4 1,8Okhotsk Geological and Mining Company − − 3,0 56,0Total at mining facilities 1,1 93 1,8 148Total for Polymetal * 0,9 75 1,5 124Note:* Including the personnel of the head, managerial, engineering and geological survey and exploration companiesThe company carries out short− ,mid− and long−term personnelplanning policies. The primaryregions for finding and attract−ing new employees to Polymetalare the Sverdlovsk, Magadan, Ir−kutsk and Chita Regions and theKhabarovsk and Primorski Ter−ritories. In 2004, the companydeveloped a unified PersonnelReserve database containing de−tailed information on more than700 managers and specialists.This database allows the companyto quickly select, replace and ro−tate personnel. Different methodsfor attracting highly qualified spe−cialists were used to help createthe Personnel Reserve database.The company has established rela−tions with regional departments ofthe Federal Employment Servicein Magadan, Irkutsk, Ekaterinburg,Tomsk and Khabarovsk and withother federal and regional em−ployment agencies. Through thisprocess, Polymetal contributesto the economic development ofRussian regions by creating jobsand helping to address the seri−ous issue of unemployment.44 Polymetal annual report 2004

Upgrading skillsIn 2004, the company was activelyinvolved in a program to improvethe skills of its employees at itssubsidiary companies. Altogether,1,097 employees (25.2% of the to−tal workforce) participated in vari−ous educational programs duringthe last year. Courses were heldat the Urals National Mining Acad−emy, Krasnoturyinsk IndustrialCollege, the Far East TechnologyCenter (Khabarovsk), KhabarovskEducational Center and other in−stitutions.As part of the program for up−grading skills, in 2004, the com−pany began creating its own edu−cational programs.Attracting youngspecialistsAttracting young, motivated indi−viduals to the company is vital forPolymetal’s future development.In 2004, the company launcheditsYouth, Professionalism, Careerprogram for students at institu−tions of higher learning and youngspecialists in the industry. Theprogram offers internships forthird, fourth and fifth year stu−dents at the company’s facilitiesand prepares these students forfuture employment at Polymetal.Over the course of the year, 44students from the St. PetersburgMining Institute, educational insti−tutions in Ekaterinburg, IrkutskNational Technical University, theNorthern International Universityand a number of other profession−al schools held internships at thecompany. The company conductedpresentations at leading Russianeducational institutions and invit−ed hundreds of young specialiststo join the company as interns oremployees. The program will con−tinue for several years and willimprove the company’s competi−tiveness by attracting young andtalented specialists to the compa−ny. By communicating and sharingtheir experience and knowledgewith established professionals atthe company, professional growthwill occur for all specialists.Social responsibilityDuring 2004, the company de−veloped numerous programs toimprove workers’ motivation andup workplace morale. Currently,steps are being taken to imple−ment the following programs:organizing hospital care andmedial examinations for employ−ees through contracts withSt. Petersburg medical institu−tions;providing full sets of summerand winter corporate clothingfor every employee;organizing summer vacationsfor employees’ children;organizing sports and recre−ational activities for employees(for example, company soccerteams and rental of sports fa−cilities).In 2004, Polymetal and its sub−sidiaries offered sponsorship andcharity to various organizations inthe regions in which they operate.The company is interested in fos−tering favorable social conditionsand upping living standards, notonly for its employees, but also forcitizens in the regions where thecompany’s facilities are located.We intend to continue to imple−ment large−scale sponsorship andcharity projects aimed at develop−ing infrastructure, sports, health−care and culture.In 2004, the company offered aidto kindergartens, schools andsports organizations to organizesports events. It also supportedindividual young athletes as partof the Second Sports Gamesfor Children. The company alsoengaged in programs for warveterans and the disabled and as−sisted regional hospitals and clin−ics. Polymetal, in cooperation withthe Government of the Sverd−lovsk Region, played an active rolein constructing a clinic at theSverdlovsk Regional Hospital. Thecompany also participated in thegovernment−organized Springsof the Urals program. In addition,Polymetal actively reconstructedinfrastructure in the Omsuk−chansk District of the MagadanRegion and helped organize cel−ebrations to recognize the 60thanniversary of victory in WWII.In 2004, companies managed byPolymetal spent approximately500,000 USD on charity andsponsorship activities.Human resources and social responsibility45

ExecutivesPolymetal Boardof DirectorsAlexey BOLSHAKOVChairman of the Board of DirectorsMr. Bolshakov is one of the founders of ICT Group and Polymet−al. He has extensive business and government experience inRussia. Beginning in 1991, he worked as the General Directorof RAO High−Speed Roadways (RAO VSM). And in 1994, Mr. Bol−shakov served as Deputy Prime Minister of the Russian Fed−eration. He has been Chairman of the Board of Directors ofPolymetal since 1998.Alexey GUDAITISMember of the Board of DirectorsMr. Gudaitis is one of the founders of ICT Group and Polymetal.In 1990, he worked as the Director of the Production Assosia−tion “Reserve” and in 1994, he became vice president at ICT.Since 1998, Mr. Gudaitis has been a member of Polymetal’sBoard of Directors. He holds a Ph.D. in technical sciences.Mikhail USHAKOVMember of the Board of DirectorsMr. Ushakov is one of the founders of ICT Group and Polymetal.Beginning in 1990, he served as the Commercial Director ofGP Metallurg. In 1993, he moved to ICT Group, where he hasheld a variety of executive positions. From 1996 to 2005, Mr.Ushakov worked as the Director of Strategic Planning at Balti−ysky Shipyard. In 1998, Mr. Ushakov was named a vice presi−dent of ICT and was appointed to the Board of Directors ofPolymetal.Vitaly NESISMember of the Board of DirectorsMr. Nesis graduated from Yale University in 1997. From1997–1999, he worked as an analyst at Merrill Lynch (USA)and from 1999–2000, he worked in the Moscow branch ofMcKinsey&Company. Mr. Nesis served as the Director ofStrategic Development at UAZ in 2000−2001. Before joiningPolymetal as its CEO, he worked as General Director of Vost−sibugol (Irkutsk).Konstantin YANAKOVMember of the Board of DirectorsFrom 1997−1998, Mr. Yanakov worked as the head of theDepartment of Shareholders’ Capital at Russian Credit Bank.And from 1998−1999, he was a department head at Metal−loinvest Holding. Before his appointment as Polymetal’s CFO in2003, Mr. Yanakov worked as vice president − manager of theMoscow branch and head of the Department for the Develop−ment of the Regional Network at MDM−Bank. He is currentlyemployed as the CFO at ICT Group.46 Polymetal annual report 2004

ManagementVitaly NESISCEOMr. Nesis graduated from Yale University in 1997. From1997–1999, he worked as an analyst at Merrill Lynch(USA) and from 1999–2000, he worked in the Moscowbranch of McKinsey&Company. Mr. Nesis served as theDirector of Strategic Development at UAZ in 2000−2001. Before joining Polymetal as its CEO, he workedas General Director of Vostsibugol (Irkutsk).Igor VENATOVSKIYCOOIn 1971, Mr. Venatovskiy began working as a hydro−engineer and later became the General Director ofKrasnokholmskgeologiya Production and Geological As−sociation of the General Department of the Ministryof Geology of the USSR. In 1995, he took part in orga−nizing Polymetal and he has served as the COO since2000. Mr. Venatovskiy has received numerous awardsincluding recognition as an Honorable Geologist of theUSSR, Laureate of the Biruni National Award in Scienceand Technology from the Republic of Uzbekistan and amedal for labor prowess.Sergey CHERKASHINCFOFrom 1993–1994, Mr. Cherkashin worked as a con−sultant at AT Kearney consulting company. He servedas the Deputy General Director for Economics at theTimashevsk Dairy Farm (Krasnodarsk District) from1994−1999. And he was employed as the Market−ing Director of the Ulianovsk Automobile Plant (UAZ)from 1999−2000. From 2001–2004, Mr. Cherkashinworked as the Deputy General Director for Economicsat the Volgograd Dairy Farm. Before his appointmentas CFO at Polymetal, he was the Director of the Depart−ment for Agricultural Machine−Building at InterpipeCorp. (Ukraine).Vladimir RYABUKHINDeputy General Director for Mineral ResourcesFrom 1970–1992, Mr. Ryabukhin held numerous scien−tific positions, including working as the Head Geologistat the Krasnokholmsk Production Geological Associa−tion (Tashkent). He discovered the Koscheka and Dzhan−tuar uranium deposits in the Kyzylkumskaya Province.From 1992–1998, he worked as the Head Geologist atNevskgeologiya (St. Petersburg). And since 1998, Mr.Ryabukhin has been employed at Polymetal.Alexander Zarya, Deputy General DirectorFrom 1991–1994, Mr. Zarya worked as the GeneralDirector of NPO Quartz (St. Petersburg) Beginning in1995, he organized the first gold production projectsof Polymetal − Bashkiria Gold Mining Company and theSouth Urals Gold Mining Company. He has worked atPolymetal since its inception.Yury MALAKHDeputy General Director for Materialsand Technical SuppliesFrom 1983–1990, Mr. Malakh worked at the KazanBranch of the Academy of Sciences of the USSR. From2000–2001, he was employed as the head of the De−partment of Information Technologies at Slavneft. Mr.Malakh worked as the Director of Tyazhpromeksportfrom 2001−2003. In 2003, by an order of the RussianDeputy Prime Minister, Mr. Malakh was appointed theRussian Co−Director for the Russian−EC Center forPower Industry Technologies. He holds a Ph.D. in phys−ics and mathematics.Yury DMITRIEVDeputy General Director for SecurityMr. Dmitriev served in Russia’s Armed Forces for 41years − 39 years in national security. He retired as aMajor General and the head of the Military Counterin−telligence Department for troops in the Far East Mili−tary Base. Mr. Dmitriev’s service was recognized withRed Banner and Red Star medals.Valery TSYPLAKOVPolymetal Engineering CEOFrom 1978–1988, Mr. Tsyplakov worked as an en−gineer, chief engineer and research fellow in the De−partment of Plasma Physics at the Moscow Instituteof Engineering and Physics. He worked at the Instituteof Physics in Aarhus, Denmark from 1986−1987. Andfrom 1988–1993, he was a research fellow, head of thelaboratory and department head at the USSR R&D In−stitute of Aviation Automatic Equipment. From 1993–2000, he worked as the leading specialist and DeputyGeneral Director for ICT−M. Since 2000, Mr. Tsyplakovhas been head of the Department for TechnologicalResearch and Deputy General Director for Design andTechnologies at Polymetal. He holds a Ph.D. in physicsand mathematics.Executives47

APPENDIX #1JOINT−STOCK COMPANY “ISPA “POLYMETAL”CONSOLIDATED FINANCIAL STATEMENTSAND REPORT OF INDEPENDENT AUDITORSFOR THE YEARS ENDED DECEMBER 31, 2004 and 200348 Polymetal annual report 2004

ZAOPricewaterhouseCoopers AuditSredny Pr., V.O., 36/40,St. Petersburg, 199004RussiaTelephone +7 (812) 326 6969Facsimile +7 (812) 326 6699Report of Independent AuditorsTo the Board of Directors and Shareholdersof Joint−Stock Company “ISPA “Polymetal”:In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of op−erations, cash flows and changes in shareholders’ equity present fairly, in all material respects, the financial posi−tion of Joint−Stock Company “ISPA “Polymetal” at December 31, 2004 and 2003, and the results of its opera−tions and its cash flows for the years then ended in conformity with accounting principles generally accepted inthe United States of America. These consolidated financial statements are the responsibility of the Company’smanagement; our responsibility is to express an opinion on these financial statements based on our audits. Weconducted our audits of these statements in accordance with auditing standards generally accepted in theUnited States of America. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement. An audit in−cludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made by management, and evaluating theoverall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.St. Petersburg, RussiaJuly 8, 2005Appendix #1: Consolidated financial statements49

JSC “ISPA “POLYMETAL”CONSOLIDATED BALANCE SHEETS(In thousands of U.S. Dollars, except as indicated)AssetsNotesAt December 312004At December 312003Cash and cash equivalents 4 1 353 1 925Prepayments to suppliers 5 268 2 717Related party receivables and prepayments 5 26 465 37 436Loans to related parties 6 5 867 4 174Loans to third parties 7 71 141 −Inventories 8 83 711 54 778Short−term VAT receivable 12 48 676 27 432Other current assets 11 22 958 1 661Total current assets 265 439 130 123Long−term investments and intangible assets, net 9 9 576 9 215Property, plant and equipment, net 10 256 662 204 117Long−term VAT receivable 12 3 770 15 538Deferred tax asset 24 5 803 5 467Total assets 541 250 364 460Liabilities and shareholders’ equityAccounts payable and accrued liabilities 13 20 417 15 397Accounts payable and promissory notes – related parties 14 4 028 1 647Short−term debt and current portion of long−term debt 15 51 318 114 621Short−term debt – related parties 16 42 156 39 471Tax payable 5 134 3 307Deferred tax liability 24 6 422 −Current portion of capital lease liabilities 19 19 467 20 228Total current liabilities 148 942 194 671Long−term capital lease liabilities 19 15 195 17 427Long−term debt 17 116 567 30 916Long−term debt – related parties 18 108 918 82 215Deferred tax liability 24 11 921 5 714Reclamation and mine closure obligation 20 4 430 4 830Total liabilities 405 973 335 773Minority interest 24 431 7 057Commitments and contingent liabilities 29 − −Shareholders’ equityShare capital (4 850 000 shares authorized at December 31, 2004 and 2003,par value Rubles 100 per share; 550 000 shares issued and outstandingat December 31, 2004 and 2003)21 6 397 6 397Additional paid−in capital 52 124 52 124Accumulated other comprehensive income (loss) 1 792 (3 841)Retained earnings (accumulated deficit) 50 533 (33 050)Total shareholders’ equity 110 846 21 630Total liabilities and shareholders’ equity 541 250 364 460Approved on behalf of the Board of Directors on July 8, 2005.Nesis V. .N., General DirectorCherkashin S. A., Finance DirectorThe accompanying notes are an integral part of these consolidated financial statements.50 Polymetal annual report 2004

JSC “ISPA “POLYMETAL”STATEMENT OF OPERATIONS(In thousands of U.S. Dollars, except as indicated)NotesYear endedDecember 312004Year endedDecember 312003Revenues 22 204 487 92 357Cost of sales 23 (92 850) (55 800)Income from mining operations 111 637 36 557Exploration expenses (554) (256)General, administrative and selling expenses (15 523) (9 542)Operating income 95 560 26 759Interest expense (29 223) (21 110)Capital lease finance costs 19 (5 541) (5 441)Other expenses, net (7 546) (4 395)Gain on partial disposal of interest in a consolidated subsidiary 28 − 13 850Exchange gains, net 8 725 7 587Income from continuing operations before income taxand minority interest61 975 17 250Income tax (expense) benefit 24 (11 277) 3 163Income from continuing operations before minority interest 50 698 20 413Minority interest (12 782) (642)Income from continuing operations 37 916 19 771Discontinued operationsLoss from operations of disposed subsidiary (1 884) (6 303)Gain on disposal of subsidiary 25 47 551 −Income (loss) on discontinued operations 45 667 (6 303)Net income 83 583 13 468The accompanying notes are an integral part of these consolidated financial statements.Appendix #1: Consolidated financial statements51

JSC “ISPA “POLYMETAL”CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands of U.S. Dollars, except as indicated)Year endedDecember 312004Year endedDecember 312003Cash flows from operating activitiesNet income 83 583 13 468Adjustments to reconcile net income to cash provided by operations:Depreciation and depletion 12 341 6 662Amortization of intangible assets 168 224Accretion of reclamation and mine closure obligation 665 581Gain on disposal of subsidiaries (47 551) −Gain on partial disposal of interest in a consolidated subsidiary − (13 850)Deferred income tax expense (benefit) 7 863 (3 221)Loss on disposal of property, plant and equipment 1 338 475Exchange gains, net (8 873) (8 868)Minority interest 12 782 642Changes in operating working capital, excluding cash and debt:Prepayments to suppliers (2 551) 1 644Related party receivables and prepayments 10 971 (7 084)Inventories (16 812) (12 211)VAT receivable (9 687) (16 972)Other current assets (21 297) 1 239Accounts payable and accrued liabilities 7 401 2 414Tax payable 1 625 (120)Net cash provided by (used in) operating activities 31 966 (34 977)Cash flows from investing activitiesAdditions to property, plant and equipment (29 595) (46 660)Purchase of additional shares in subsidiary (21 226) (296)Proceeds from disposal of interest in consolidated subsidiaries 10 890 20 787Prepayments for acquisition of third party promissory notes − (12 277)Loans made to third parties (31 117) −Repayment of loans made to third parties 9 670 −Loans made to related parties (12 783) (3 593)Repayment of loans made to related parties 10 766 −Net cash used in investing activities (63 395) (42 039)Cash flows from financing activitiesOrdinary shares issuance − 27 160Proceeds from short−term loans and borrowings 138 713 38 518Repayment of short−term loans and borrowings (202 913) (12 317)Proceeds from long−term debt 105 000 135 001Repayment of long−term debt (21 893) (145 952)Proceeds from short−term loans and borrowings – related parties 141 454 50 520Repayment of short−term loans and borrowings – related parties (141 999) (14 841)Proceeds from long−term debt – related parties 203 040 62 978Repayment of long−term debt – related parties (176 807) (38 971)Purchase of bonds − (8 093)Sale of bonds 6 520 −Lease payments (20 406) (15 689)Net cash provided by financing activities 30 709 78 314Exchange effects on cash balances 148 46Net (decrease) increase in cash and equivalents (572) 1 344Cash and cash equivalents, beginning of the year 1 925 581Cash and cash equivalents, end of the year 1 353 1 925Supplementary cash flow informationInterest paid, except for interest capitalized 33 230 16 843Income taxes paid 3 300 54Accounts receivable for subsidiary disposal 1 401 −Noncash additions to property, plant and equipment – capital lease 17 715 24 756The accompanying notes are an integral part of these consolidated financial statements.52 Polymetal annual report 2004

JSC “ISPA “POLYMETAL”CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(In thousands of U.S. Dollars, except as indicated)SharecapitalAdditionalpaid−incapitalAccumulatedothercomprehensiveincome (loss)Retainedearnings(accumulateddeficit)Totalshareholders’equityBalance atDecember 31, 20026 227 25 134 − (46 518) (15 157)Comprehensive income:Net income − − − 13 468 13 468Currency translation adjustment (includingincome tax expense of U.S. Dollar 2 296,charged to other comprehensive loss)− − (3 841) − (3 841)Total comprehensive income 9 627Share issue (50 000 shares with par valueRuble 100 per share)170 26 990 − − 27 160Balance atDecember 31, 20036 397 52 124 (3 841) (33 050) 21 630Comprehensive income:Net income − − − 83 583 83 583Currency translation adjustment − − 5 633 − 5 633Total comprehensive income 89 216Balance atDecember 31, 20046 397 52 124 1 792 50 533 110 846The accompanying notes are an integral part of these consolidated financial statements.Appendix #1: Consolidated financial statements53

JSC “ISPA “POLYMETAL”NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(In thousands of U.S. Dollars, except as indicated)NOTE 1BackgroundDescription of BusinessOpen joint stock company “Inter−regional Research and ProductionAssociation “Polymetal” (JSC “ISPA“Polymetal” or “the Company”) wasincorporated on March 12, 1998in the Russian Federation. TheCompany is engaged in gold andsilver mining and related activi−ties, including exploration, extrac−tion, processing and reclamation.Since incorporation, the Companyhas acquired a number of goldand silver mining properties in theRussian Federation, which requiresignificant investment to bring tocommercial production. The Com−pany has producing assets at Vo−rontsovkoye and Lunnoye fields,Dukat and Khakandjinskoye mines.The latter was brought into com−mercial production at the begin−ning of 2004.The majority shareholder of theCompany is ZAO ICT, which, to−gether with its subsidiaries formsthe ICT group.The Company’s ability to meetits obligations and maintain op−erations is contingent upon thecontinuing support of ICT group,the successful development andfuture profitable production of itsmining assets, the mining licensesbeing maintained in good stand−ing and the political, economic andlegislative stability in the RussianFederation.Liquidityand Capital ResourcesIn prior years the Company’smining assets were at the devel−opmental stage which required fi−nancing of its capital expenditureswith debt. At December 31, 2003,the Company had a working capi−tal deficit (calculated as the differ−ence between total current as−sets and total current liabilities).In 2004 the liquidity situationcaused by recurring working capi−tal deficit and lack of long−termfinancing was addressed by man−agement by means of the followingmeasures:In March 2004, the Companreceived a U.S. Dollar 23 millionshort−term loan from StandardBank London. At the date of is−suance of these consolidatedfinancial statements, this loanwas repaid,In December 2004, the Com−pany received a U.S. Dollar 105million long−term loan from Stan−dard Bank London (see Note17),In September – November2004, the Company receivedshort−term loans in totalamounting to U.S. Dollar 30 mil−lion from NIKoil Bank (see Note15),Renegotiation of the short−term debt to MDM−Bank total−ing U.S. Dollar 56 million andextending repayment termsto November 2004 – January2005. At the date of issuanceof these consolidated financialstatements, this loan was re−paid,In 2004, shares of Zun Hadaengaged in development of Ba−run−Kholba mine were disposedof. On 27 June and 28 June2005, Zun Hada repaid amounts(U.S. Dollar 49 397) due to theGroup companies (see Note 25).Composition of the GroupISPA “Polymetal” and its subsidiar−ies are collectively referred to as“the Group”.The structure of the Group as atDecember 31, 2004 included thefollowing significant mining subsid−iaries:Name of subsidiary Voting interest, %Effectiveownership interest, %ZAO Zoloto Severnogo Urala 99,95 83,33OAO Okhotskaya GGC 67,35 67,35ZAO Serebro “Territorii” 97,11 97,11ZAO GC Dukat 85,00 85,00ZAO Serebro Magadana 100,00 88,00ZAO Kurilskaya GGC 100,00 100,0054 Polymetal annual report 2004

The Group’s 100% interest in avariable interest entity is consoli−dated (see Note 3).Changes in the Group structureand voting and ownership interestin major production subsidiariesin 2003 and 2004 are discussedNotes 25 through 28.The company has the followingsignificant mining licenses: Vo−rontsovskoye field (Sverdlovsk re−gion), Lunnoye field and Dukat field(Magadan region), Khakandjinskoyefield (Khabarovsk region), Urjevs−koe field (Khabarovsk region).NOTE 2Summary of Significant Ac−counting PoliciesBasis of PresentationThe consolidated financial state−ments are presented in accor−dance with accounting principlesgenerally accepted in the UnitedStates of America (“U.S. GAAP”).ReclassificationsCertain reclassifications havebeen made to previously reportedbalances to conform to the cur−rent year’s presentation; suchreclassifications have no effecton net result of shareholders’ eq−uity.Use of estimatesThe preparation of consolidatedfinancial statements in confor−mity with U.S. GAAP requiresmanagement to make estimatesand assumptions that affect thereported amounts of assets, li−abilities, revenues and expenses,including discussion and disclo−sure of contingent liabilities. Man−agement’s estimates are made inaccordance with mining industrypractice. Significant areas requir−ing the use of management es−timates relate to determinationof mineral reserves, reclamationand environmental obligations,impairment of assets and valua−tion allowances for deferred taxassets. Actual results could differfrom such estimates.Reporting and functionalcurrencyThe Company’s functional cur−rency is the Russian Ruble. Themost of the Company’s sales rev−enues and purchases and certainfinancing agreements are settledin Russian Rubles. The U.S. Dollaris the reporting currency select−ed by the Group for purposes offinancial reporting in accordancewith U.S. GAAP.In November 2002, the Inter−national Practices Task Force(IPTF) concluded that the Rus−sian Federation ceased to be ahighly inflationary economy as ofJanuary 1, 2003. As a result, theCompany has determined thatits functional currency manage−ment uses the Russian Ruble tomanage the financial risks andexposures, and to measure itsperformance.Under FAS No. 52,revenues, costs, assets and li−abilities had been remeasured athistorical exchange rates prevail−ing on the transaction dates up toDecember 31, 2002. On January1, 2003, all non−monetary assetsand liabilities, monetary assetsand liabilities, equity items weretranslated into Rubles at the ex−change rate prevailing at thatdate. In accordance with the pro−visions of Emergency Issue TaskForce 92−8 consensus, Account−ing for the Income Tax Effects Un−der the FASB Statement No. 109of a Change in Functional Curren−cy When an Economy Ceases toBe Considered Highly Inflationary,deferred tax associated with thetemporary differences that arisefrom a change in functional cur−rency when an economy ceasesto be considered highly inflation−ary was reflected in translationadjustment within shareholders’equity at January 1, 2003.Starting from January 1, 2003,all non−monetary and monetaryassets and liabilities are trans−lated at exchange rates prevail−ing on the balance sheet date.Revenues, expenses, gains andlosses are translated into the re−porting currency using exchangerates prevailing at the respectivetransaction dates. Equity itemsare translated at historic ex−change rates. Translation adjust−ment, net of tax, is accounted foras part of cumulative translationadjustment component of share−holders’ equity.The exchange rates for one dollarwere Ruble 27.75 at December31, 2004, and Ruble 29.45 at De−cember 31, 2003 and January 1,2004.The Russian Ruble is not a convert−ible currency outside of the Rus−sian Federation and material ex−change restrictions and controlsexist relating to converting Rus−sian Rubles into other currencies.Appendix #1: Consolidated financial statements55

JSC “ISPA “POLYMETAL”NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(In thousands of U.S. Dollars, except as indicated)NOTE 2Summary of Significant Ac−counting Policies (continued)Within Russia, the daily foreign ex−change market determines theRussian Ruble to U.S. Dollar ex−change rate, with some interven−tion from the Central Bank of theRussian Federation. Future move−ments in the exchange rate be−tween the Russian Ruble and theU.S Dollar will affect the carryingvalue of the Group’s Russian Rubledenominated monetary assetsand liabilities. Such movementsmay also affect the Group’s abilityto realize non−monetary assetsrepresented in U.S. Dollar in theseconsolidated financial statements.Accordingly, any translation ofRussian Ruble amounts to U.S. Dol−lar should not be construed as arepresentation that such RussianRuble amounts have been, couldbe, or will in the future be convert−ed into U.S. Dollar at the exchangerate shown or at any other ex−change rate.Principles of consolidation.The consolidated financial state−ments include the operations of allentities in which the Group directlyor indirectly controls more than50 percent of voting power and allvariable interest entities for whichthe Group is determined to be theprimary beneficiary.Long−term investments overwhich the Company does not ex−ercise significant influence are ac−counted for at cost and adjustedfor estimated impairment.All intercompany transactions andbalances between group compa−nies have been eliminated.Variable Interest Entities are con−solidated if the Group is the prima−ry beneficiary in accordance withFASB Interpretation No. 46(R)(“FIN 46 (R)”).Comparative figuresCertain comparative figures havebeen restated to be consistentwith the current year presenta−tion.Cash and cash equivalentsCash and cash equivalents includecash and highly liquid investmentsthat are readily convertible toknown amounts of cash and with anoriginal maturity of three monthsor less at the date of purchase.InventoriesRaw materials, spare parts, sup−plies, ore and dor are valued atlower of cost and net realizablevalue, using the weighted averagecost method..Property, plantand equipmentProperty, plant and equipment in−clude the cost of development ofthe mining properties, the costsof acquisition or construction ofplant and equipment and capital−ized interest. Expenditures formajor improvements and renew−als are capitalized. The cost ofmaintenance, repairs, and replace−ment of minor items of propertyis charged to income as incurred.Interest directly attributable tothe acquisition or construction ofproperty, plant and equipment iscapitalized as a cost of the assetup to the time the asset is put intouse. All other interest is expensedas incurred. Gains and losses onthe disposal of assets are includedin the statement of operations inthe period of disposal.Mineral exploration costs are ex−pensed as incurred. When it hasbeen determined that a mineralproperty can be economically de−veloped as a result of establishingproven and probable reserves,the costs incurred to developsuch property, including costs tofurther delineate the ore body andremove overburden to initially ex−pose the ore body, are capitalized.Depreciation and depletion arecomputed using the units−of−pro−duction method based on theactual production for the yearcompared with total estimatedproven and probable reserves (inthousands of tons of mineral bear−ing ore).Leased property, plant and equip−ment meeting the criteria of fi−nance lease is capitalized; valued atthe lower of asset purchase priceand net present value of lease pay−ments. The corresponding part oflease payments is recorded as aliability. Amortization of capitalizedleased assets is computed usingthe units−of−production method.Property, plant and equipment areassessed for possible impairmentin accordance with SFAS No. 144Accounting for the Impairmentor Disposal of Long−Lived Assets.SFAS No. 144 requires long−livedassets with recorded values thatare not expected to be recoveredthrough future cash flows to bewritten down to current fair value.Fair value is generally determinedfrom estimated discounted futurenet cash flows.56 Polymetal annual report 2004

Deferred developmentexpendituresIn general, mining costs arecharged to operations as in−curred. However, certain of theCompany’s deposits require sig−nificant capital expenditures, suchas tunneling in preparation of anew mining area. These expendi−tures are charged to cost of pro−duction in the proportion that theamount of ore extracted bears tothe amount estimated to be ac−cessed by the preparation work.Unamortized balances of capital−ized development expenditureare expensed when the area thatthey cover is depleted, or deemedto be depleted by management.Reclamation and mine closureThe Company accounts for rec−lamation, site restoration andclosure obligations based on theprovisions of SFAS No. 143 Ac−counting for Asset RetirementObligations. When the liability is ini−tially recorded, the Company capi−talizes the cost by increasing thecarrying amount of the relatedlong lived asset. Over time, the li−ability is accreted to its presentvalue each period, and capitalizedcost is amortized over the usefullife of the related asset.Revenue recognitionIn accordance with the guidanceoutlined in Staff Accounting Bul−letin No. 101 Revenue Recogni−tion in the Financial Statements,and applicable precious metals in−dustry−specific guidance outlinedin Accounting Research BulletinNo.43 Restatement and Revisionof Accounting Research Bulletins,the Company recognizes revenueupon the delivery of refined goldand silver to customers.Income taxesDeferred income tax assets and li−abilities are recognized for futuretax consequences attributable todifferences between the financialstatement carrying amounts ofexisting assets and liabilities andtheir respective tax bases, inaccordance with SFAS No. 109Accounting for Income Taxes.Deferred income tax assets andliabilities are measured usingenacted tax rates in the yearsin which these temporary differ−ences are expected to reverse.Valuation allowances are providedfor deferred income tax assetswhen management believes thatit is more likely than not that theassets will not be realized.Contri−butions to local authoritiesInfrastructure expenditure, whichis required to be contributed tothe local authorities as a conditionof mineral license agreements, ischarged to statement of opera−tions as incurred.Comprehensive incomeSFAS No. 130 “Reporting Com−prehensive Income”, requires dis−closure of all changes in equityduring a period except those re−sulting from investments by anddistributions to the Company’sshareholders.Pension obligationsThe Company pays mandatorycontributions to the state socialfunds, which are expensed as in−curred.Recently issued accountingstandardsIn November 2004, the FASB is−sued SFAS No. 151, “InventoryCosts−an amendment of ARB No.43, Chapter 4,” which clarifies theaccounting for abnormal amountsof idle facility expense, freight, han−dling costs and wasted materialas current period costs. It alsorequires that allocations of fixedproduction overheads to thecosts of conversion be based onthe normal capacity of the produc−tion facilities. The Statement ap−plies to inventory costs incurredin the first fiscal year beginning af−ter June 15, 2005. Managementbelieves that the adoption of SFASNo. 151 will not have a material im−pact on the Company’s reportedfinancial position, net earnings orcash flows.In December 2004, the FASBissued SFAS No. 153, “Exchang−es of Non−monetary Assets anamendment of APB No. 29”. ThisStatement amends APB OpinionNo. 29, “Accounting for Non−mon−etary Transactions” to eliminatethe exception for non−monetaryexchanges of similar productiveassets and replaces it with a gen−eral exception for exchanges ofnon−monetary assets that do nothave commercial substance. ThisStatement is effective for fiscalyears beginning after June 15,2005. Management believes thatthe adoption of SFAS No. 153 willnot have a material impact on theCompany’s reported financial posi−tion, net earnings or cash flows.Appendix #1: Consolidated financial statements57

JSC “ISPA “POLYMETAL”NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(In thousands of U.S. Dollars, except as indicated)Certain accountingand reporting issuesin the mining industryIn March 2004 the Financial Ac−counting Standards Board rati−fied Emerging Issues Task ForceConsensus 04−02 (“EITF 04−02”),Whether Mineral Rights AreTangible or Intangible Assets,and Emerging Issues Task ForceConsensus 04−03 (“EITF 04−03”),Mining Assets: Impairment andBusiness Combinations. EITF 04−02 concludes that mining entitiesshould account for mineral rightsacquired as tangible assets. EITF04−02 allows inclusion of reservesbeyond the mining entity’s provedand probable reserves (“valuebeyond proved and probable”) indetermination of fair values of ac−quired mining properties for pur−poses of purchase price allocationin accordance with Statement ofFinancial Accounting StandardsNo. 141, Business Combinations.Both EITF 04−02 and 04−3 are ef−fective for first reporting periodbeginning after the Board ratifi−cation. Management is currentlyevaluating the impact that thesepronouncements may have on theCompany’s financial statements.Financial InstrumentsFair values.A financial instrument is definedas cash, evidence of an ownershipinterest in an entity, or a contractthat imposes an obligation to de−liver or right to receive cash oranother financial instrument. Thefair values of financial instrumentsare determined with reference tovarious market information andother valuation methods, as con−sidered appropriate. However,considerable judgment is requiredto interpret market data andto develop the estimates of fairvalue. Accordingly, the estimatespresented herein may differ fromthe amounts the Company couldreceive in current market ex−changes.The net carrying values of cashand cash equivalents, other short−term investments, accounts andnotes receivable, accounts andnotes payable and accrued liabili−ties, taxes payable and short−termdebt approximate their fair valuesbecause of the short maturitiesof these instruments.Long−term investments in un−quoted companies are valuedat their historical cost adjustedfor impairment, as appropriate.Management believes that thecarrying values of long−term in−vestments approximate their fairvalues.The fair value of the Company’slong−term debt was U.S. Dollar214 486 and U.S. Dollar 101 346,while the carrying value of such li−abilities was U.S. Dollar 225 485and U.S. Dollar 113 131 as of De−cember 31, 2004 and 2003, re−spectively.Credit risks.A significant portion of the Com−pany’s accounts receivable is bal−ance of VAT receivable from localtax bodies. Management believesthere is no significant risk of lossto the Company associated withrecoverability of these balances.Concentration risks.Management believes, that no sig−nificant concentration risk wasassociated with any cash and cashequivalents, accounts receivableand prepayments balances at De−cember 31, 2004.58 Polymetal annual report 2004

NOTE 3Variable Interest EntityStarting 2004 the Group oper−ated an entity which qualified forconsolidation into the Group as avariable interest entity (VIE) forwhich the Group is the primarybeneficiary. The entity’s primaryactivity is marketing of metalsproduced by the Group’s min−ing and production subsidiaries.Included within revenues in theconsolidated statement of opera−tions for the year ended Decem−ber 31, 2004 was U.S. Dollar 36612 representing third−partysales of gold and silver by the en−tity. Included within net income inthe consolidated statement ofoperations for the year ended De−cember 31, 2004 was U.S. Dollar4 584 net income of VIE. During2004 the entity provided guar−antees for certain of the Group’sshort−term debt facilities. None ofthese guarantees were outstand−ing at December 31, 2004 as therelated debt had been repaid infull prior to that date. Includedwithin loans to third parties in theconsolidated balance sheet at De−cember 31, 2004 was U.S. Dollar21 450 representing third−partyshort−term loans receivable is−sued by the entity.NOTE 4Cash and Cash EquivalentsThe Company maintains both Russian Ruble and U.S. Dollar bank accounts.December 312004December 312003Denominated in U.S. Dollars 68 54Denominated in Russian Rubles 1 285 1 871Total cash and cash equivalents 1 353 1 925NOTE 5Related party receivables and prepaymentsDecember 312004December 312003Prepayments to Daniz − 20 370Trade receivables from Nomos−Bank 25 785 15 974Other related party receivables and prepayments 680 1 092Total related party receivables and prepayments 26 465 37 436Nomos−Bank is an associate ofZAO ICT, the Company’s parent,and Daniz is a subsidiary of ZAOICT. The prepayments to Daniz atDecember 31, 2003 included aprepayment of U.S. Dollar 12 397for third party promissory notesreceived in 2004 and included inother current assets in the con−solidated balance sheet at De−cember 31, 2004.Appendix #1: Consolidated financial statements59

NOTE 6Loans to related partiesInterestrate %December 312004Interestrate %December 312003Aurum 1% 386 −Geotekhservice 1% 5 002 1% 3 835Other loans to related parties 0−1% 479 0−1% 339Total loans to related parties 5 867 4 174At December 31, 2004, Aurum was associate and Geotekhservice was under common control of ZAO ICT.NOTE 7Loans to third partiesInterestrate %December 312004Interestrate %December 312003Zun Hada 1% 49 397 −Teina 4% 21 450 −Other loans to third parties 1% 294 −Total loans to third parties 71 141 −Loans receivable from Zun Hada and Teina were repaid in 2005. Zun Hada was a subsidiary of the Group till December2004 (Note 25).NOTE 8InventoriesDecember 312004December 312003Raw materials, spare parts and supplies 41 771 33 723Ore 16 660 4 688Work in progress 2 791 5 205Dore 15 038 8 548Finished goods 7 451 2 614Total inventories 83 711 54 778NOTE 9Long−term Investments and Intangible Assets, netDecember 312004December 312003Long−term investments 7 222 6 804Intangible assets, net 2 354 2 411Total long−term investments and intangible assets 9 576 9 21560 Polymetal annual report 2004

Investments mainly represent or−dinary shares in Nomos−Bank, a re−lated party, (4.96% of total sharesissued), acquired in October 2001and accounted for at cost. Intangibleassets are primarily mineral rightsacquired by the Company upon pur−chase of subsidiaries. Accumulatedamortization of intangible assets wasU.S. Dollar 939 and U.S. Dollar 726 atDecember 31, 2004 and 2003, re−spectively.NOTE 10Property, Plant and Equipment, netDecember 312004December 312003Здания и подземные сооружения 73 107 32 911Машины и оборудование 90 463 51 845Транспорт и прочее 28 675 23 158Незавершенное строительство 102 964 110 915Стоимость 295 209 218 829Накопленный износ (38 547) (14 712)Итого основные средства, чистая сумма 256 662 204 117At December 31, 2004, of the to−tal cost of U.S. Dollar 295 209, U.S.Dollar 66 929 (of which Machinery &Equipment was U.S. Dollar 47 430 andTransport & other was U.S. Dollar 19499) related to capitalized leases (De−cember 31, 2003: U.S. Dollar 49 214,of which Machinery & Equipment wasU.S. Dollar 34 449 and Transport &other was U.S. Dollar 14 765).At December 31, 2004, of the totalaccumulated depreciation and deple−tion of U.S. Dollar 38 547, U.S. Dol−lar 15 116 (of which U.S. Dollar 10857 was attributed to Machinery &Equipment, and U.S. Dollar 4 259 toTransport & other) relates to capi−talized leases (December 31, 2003:U.S. Dollar 6 709, of which U.S. Dollar4 696 was attributed to Machinery& Equipment, and U.S. Dollar 2 013 toTransport & other).Included within construction in prog−ress were long−term deferred ex−ploration expenditures of U.S. Dollar5 283 and U.S. Dollar 7 710 at De−cember 31, 2004 and 2003, respec−tively.NOTE 11Other current assetsDecember 312004December 312003Deferred development expenditures 3 772 971Promissory notes from Severo−Zapad Invest Prom 12 397 −Promissory notes from Khantymansiyskiy Bank 1 630 −Other debtors 1 935 682Deferred expenditures 3 224 8Total other current assets 22 958 1 661NOTE 12VAT receivableDecember 312004December 312003Short−term VAT receivable 48 676 27 432Long−term VAT receivable 3 770 15 538Appendix #1: Consolidated financial statements61

Long−term VAT receivable at De−cember 31, 2004 and 2003 pri−marily represents VAT balancesresulting from capital expenditureswhich are not expected to be recov−ered within twelve months followingrespective balance sheet dates.Management believes that suchbalances are fully recoverable fromtax authorities at the time respec−tive capital assets qualify as put intooperation for VAT purposes.Short−term VAT receivable at De−cember 31, 2004 and 2003 re−lates to capital expenditures in fixedassets expected to be put into usewithin twelve months following re−spective balance sheet dates andVAT receivable from current op−erations.VAT claims are submitted to tax au−thorities on a monthly basis.The short term VAT receivable asat December 31, 2003 was mainlyrepaid by the tax authorities tothe Group in 2004. As at June 30,2005, of the amount of VAT receiv−able as at December 31, 2004 col−lected U.S. Dollar 7 373 and theCompany expects the balance to befully repaid during the second half ofthe year in due order.NOTE 13Accounts Payable and Accrued LiabilitiesDecember 312004December 312003Trade accounts payable 15 563 7 988Accrued interest payable to third parties 1 689 3 910Other accounts payable 3 165 3 499Total accounts payable and accrued liabilities 20 417 15 397NOTE 14Accounts Payable and Promissory Notes – related partiesDecember 312004Trade accounts payable to Geotekhservice 598Trade accounts payable to Press−Invest 1 653December 312003Other trade accounts payable 1 777 1 393Short−term promissory notes − 254Total accounts payable and promissory notes – related parties 4 028 1 647At December 31, 2004 Press−Invest was under control of ZAO ICT.NOTE 15Short−term Debt and Current Portion of Long−term DebtInterestrate %December 312004Interestrate %December 312003Khanti−Mansiiski Bank (U.S. Dollar) − 11% 7 500Khanti−Mansiiski Bank (RR) − 16% 7 639Alfa−Bank (U.S. Dollar) − 9,5% 40 000MDM−Bank (U.S. Dollar) − 11,5−12,5% 32 275NIKoil Bank (U.S. Dollar) 9% 30 000 −Current portion of long−term loans 21 318 27 207Total short−term debt and current portionof long−term debt51 318 114 62162 Polymetal annual report 2004

Loans from NIKoil Bank in total ofU.S.Dollar 30 000 are guaranteedby ZAO Inkas−Service and Severo−Zapadnaya Leasing Company LLCin amount of U.S. Dollar 6 984 (in−cluding pledged equipment in totalamount U.S. Dollar 1 164) and U.S.Dollar 18 054 (including pledgedequipment in total amount U.S. Dol−lar 3 009), respectively. Loans fromNIKoil Bank mature in November2005.Pledged to the loan agreement withNIKoil Bank property and equipmentof U.S. Dollar 5 535 at net book val−ue as at December 31, 2004.NOTE 16Short−term Debt – Related PartiesInterestrate %December 312004Interestrate %December 312003Nomos−Bank (RR) − 17−21% 19 471Nomos−Bank (U.S. Dollar) 9% 38 910 15% 20 000Linex (RR) 17,6% 3 246 −Total short−term debt– related parties 42 156 39 471NOTE 17Long−term DebtInterestrate %December 312004Interestrate %December 312003Standard Bank London (U.S. Dollar) LIBOR + 3,5−4,0% 105 000 −Magadan Region Administration (U.S. Dollar) 6% 5 856 6% 6 135MDM−Bank (U.S. Dollar) − 16% 26 525Bonds (RR) 17−19% 27 029 17−19% 25 463Less current portion of long−term loans (21 318) (27 207)Total long−term debt 116 567 30 916In March 2003 ISPA “Polymetal” issued 750 000 non−convertible bonds at par value of U.S. Dollar 27 029. The bondsmature in 2006. All bonds are issued and registered both as at December 31, 2003 and December 31, 2004. Inter−est on bonds amounting to 17−19% is paid semiannually.NOTE 17Long−term Debt (continued)Long−term debt is repayable as follows:December 31, 2004 December 31, 20031 to 2 years 52 667 −2 to 3 years 19 400 30 9163 to 4 years 19 500 −4 to 5 years 25 000 −116 567 30 916In December 2004 the Companyreceived the long−term loan totalingU.S. Dollar 105 000 from StandardBank London for the purpose of re−financing its debts and developmentof current operations. Loan shouldbe repaid in monthly installmentsstarting April 1, 2005 with the lastpayment being made in 2009. Ac−cording to the loan agreement withStandard Bank London the Groupshould meet certain financial andnon−financial covenants to avoidwithdrawal of loan facility.Appendix #1: Consolidated financial statements63

As at December 31, 2004, ISPA“Polymetal” pledged 23 443 shares(97.11% of the issued and out−standing share capital) of ZAOSerebro “Territorii”, 85 shares(85% of the issued and outstand−ing share capital) of ZAO GC Du−kat and 150 324 shares (83.33%% of the issued and outstandingshare capital) of ZAO Zoloto Sever−nogo Urala as collateral under theStandard Bank London facility. ZAOGC Dukat pledged 5 400 shares(80% of the issued and outstand−ing share capital) of ZAO SerebroMagadana as collateral under theStandard Bank London facility. Theaggregate carrying value of prop−erty, plant and equipment associ−ated with the subsidiaries whoseshares were pledged was U.S. Dollar137 309 at December 31, 2004.Borrowing from Magadan regionAdministration was guaranteed byNomos−Bank in amount of U.S. Dol−lar 5 856.NOTE 18Long−term Debt – Related PartiesInterestrate %December 312004Interestrate %December 312003Nomos−Bank (U.S. Dollar) − − 10%−13% 12 500Tant (RR) − − 17,6% 31 510Linex (RR) 14% 14 846 17,6% 38 205Accord−Invest (RR) 1−14,3% 83 082 −Recital (RR) 1,2% 10 899 −Investros (RR) 0% 91 −Total long−term debt – related parties 108 918 82 215NOTE 18Long−term Debt – Related Parties (continued)Long−term debt due to Related parties is repayable as follows:December 312004December 3120031 to 2 years 43 929 82 2152 to 5 years − −5 to 6 years 64 989 −108 918 82 215Interest expense for the year ended December 31, 2004 totaling U.S. Dollar 31 201 (2003: U.S. Dollar 23 594)includes U.S. Dollar 11 286 (2003: U.S. Dollar 10 774) interest accrued on loans provided by related parties.Note 19Long−Term Capital LeaseLiabilitiesThe Group entered into certainRussian Ruble denominated leas−es for machinery and equipmentand transport vehicles. The thirdparty lessors generally providepayment of taxes, maintenanceand certain other operating costsrelated to the leased property.Future minimum lease paymentsfor the assets under capital leas−es at December 31, 2004, are asfollows:64 Polymetal annual report 2004

Future payments under capital leasesYear ending December 312005 22 5822006 11 8492007 5 8452008 1 5642009 16Later years 11Total 41 867Less amount representing interest (@ 16%) (7 205)Total present value of minimum payments 34 662Less current maturities of capital lease liabilities (19 467)Long−term capital lease liabilities 15 195Equipment with a carrying value of U.S. Dollar 2 120 was pledged as collateral on the capital lease liability to OOOBaltisky LeasingNote 20Reclamation and Mine Closure ObligationMine closure obligations are recognized on the basis of existing project business plans as follows:DepositVorontsovskoyemineBarun−KholbaDukatLunnoyemineKhakandjinskoyemineReclamation and mine closure obligation atDecember 31, 2003805 1 018 1 512 770 725 4 830Revision in estimated cash flows (62) (80) (117) (60) 79 (240)Accretion of reclamation and mine closureobligation108 136 202 103 116 665Settlements − − − − − −Translation effects 52 67 99 50 48 316Disposal (1 141) (1 141)Reclamation and mine closure obligation atDecember 31, 2004903 − 1 696 863 968 4 430Barun−Kholba field is the deposit owed by ZAO Zun Hada, which was a subsidiary of the Group till December 2004(Note 25).TotalNOTE 21Shareholders’ EquityThe authorized share capital ofthe Company is comprised of 4850 000 of common shares (ofwhich 550 000 were issued andoutstanding as at December 31,2004 and 2003) with par valueRuble 100 and 100 000 seriesA preference shares (of which is−sued nil) with par value Ruble 100.In 2003 ISPA “Polymetal” issuedan additional 50 000 ordinaryshares for a price of Ruble 16000 per share.The structure of share capital of theCompany is as follows:Year of issuance Number of shares Exchange rate, U.S. Dollar/RR Share capital, U.S. Dollar2001 350 000 6,08 5 7522002 and subsequent 200 000 29,45 − 31,58 645Total 550 000 6 397Appendix #1: Consolidated financial statements65

Reserves available for distributionto shareholders are based on thestatutory accounting reports ofthe Company as a stand−alone en−tity, which are prepared in accor−dance with Regulations on Account−ing and Reporting of the RussianFederations and which differ sig−nificantly from U.S. GAAP. RussianNOTE 22Revenueslegislation identifies the basis of dis−tribution as net income. For 2004,the current year statutory re−tained earnings of ISPA “Polymetal”as reported in its annual statutoryaccounting report were RR 37 329thousand (unaudited). However, cur−rent legislation and other statutoryregulations dealing with distributionrights are open to legal interpreta−tion, consequently, actual distribut−able reserves may differ from theamount disclosed.At December 31, 2004, of the totalnumber of issued and outstandingshares 549 994 (99.999%) wereheld by ZAO ICT.Year ended December 312004Year ended December 312003Sales to third parties: Alfa−Bank 38 402 −Sales to third parties: MDM−Bank 95 389 57 303Sales to third parties: Standard Bank London 36 458 1 126Sales to related parties: Nomos−Bank 33 405 33 101Total Revenue from gold and silver sales 203 654 91 530Other sales 833 827Total Revenue 204 487 92 357Sales broken down by gold and silver were as follows:Thousand ouncesYear ended December 31 2004 Year ended December 31 2003KgThousandsof U.S. DollarThousand ouncesKgThousandsof U.S. DollarGold 213 6 639 85 959 129 4 008 45 921Silver 17 301 538 137 117 695 9 839 306 034 45 609Discounts from the London Met−als Exchange quotation on salesto banks for the year ended De−cember 31, 2004, totaling 4 417U.S. Dollar (2003: U.S. Dollar 2847) for gold and 3 053 U.S. Dol−lar (2003: U.S. Dollar 2 924) forsilver sales were netted againstthe amount of sales.NOTE 23Cost of salesYear ended December 312004Year ended December 312003Operating costs (excluding staff costs) 45 593 25 032Staff costs 17 919 13 500Total operating costs 64 512 38 532Mining tax 9 000 5 334Other taxes, except for income taxes 4 418 3 277Depreciation and depletion 12 341 6 306Amortization of intangible assets 168 224Accretion of reclamation and mine closure obligation 665 423Development costs written off 232 549Other costs 1 514 1 155Total cost of sales 92 850 55 80066 Polymetal annual report 2004

Note 24Income TaxThe income tax expense consists of the following:Year ended December 312004Year ended December 312003Current tax expense 3 414 58Change in deferred tax assets (4 667) (3 007)Net change in valuation allowance 4 331 (2 460)Change in deferred tax liability 8 199 4 542Less deferred tax liability charged to accumulated translation adjustment − (2 296)Income tax expense (benefit) 11 277 (3 163)The actual tax expense (or taxcredit) differs from the amountwhich would have beeen determinedby applying the statutory rate of24 % (2003: 24 %) to the incomefrom continuing operations beforetaxes and minority interest as a re−sult of the application of Russian taxregulations, which disallow certaindeductions which are included in de−termination of income before taxesunder U.S. GAAP (social related ex−penditures and other non−produc−tion costs, certain general, adminis−trative, financing, foreign exchangerelated and other costs). At thesame time certain gains and rev−enues recognized under U.S. GAAPmay represent nontaxable income(gain on disposal of subsidiary).The components of deferred tax assets and liabilities were as follows:December 312004December 312003Deferred tax asset:Property, plant and equipment − (1 240)Intangible assets (15) (32)Accounts payable (263) (248)Provisions (280) (396)Inventory – production materials and work in progress (7 034) (3 114)Tax losses carried forward (7 572) (5 467)Total deferred tax asset (15 164) (10 497)Valuation allowance 9 361 5 030Total net deferred tax asset (5 803) (5 467)Deferred tax liability:Property, plant and equipment 5 753 −Accounts receivable 8 160 3 826Inventory – Finished goods − (408)Translation effect in the cost of property, plant and equipment − 2 296Deferred tax liability on property, plant and equipment 4 430 −Total deferred tax liability 18 343 5 714A valuation allowance of U.S. Dollar 9361 (2003: U.S. Dollar 5 030) hasbeen provided for due to the uncer−tainties of realizing deferred taxassets, other than those arisingfrom tax losses carried forward,in the future. Tax losses carriedforward are amounts, which will beoff−set against future taxable prof−its by Serebro “Territorii”, SerebroMagadana and Okhotskaya GGCduring the period up to year 2010.Each legal entity within the Grouprepresent a separate tax−payingcomponent for income tax purpos−es. Tax losses at one entity cannotbe used to reduce taxable incomeof other entities in the Group.Appendix #1: Consolidated financial statements67

Additional deferred tax liability on property, plant and equipment amounting to U.S. Dollar 4 430 arose on acqui−sition of ZAO Serebro Magadana (Note 26).Deferred tax liabilities may be classified as follows:December 312004December 312003Deferred tax liability:Current deferred tax liability 6 422 −Long− term deferred tax liability 11 921 5 714Total deferred tax liability 18 343 5 714NOTE 25Sale of subsidiaryIn December 2004, the Companysold its 70.5% equity interest inZAO Zun Hada, a subsidiary hold−ing licenses to develop the Barun−Kholba properties, for U.S. Dollar1 453 without recourse. Of totalamount, U.S. Dollar 412 was paidin 2004. The remaining receiv−able of U.S. Dollar 1 041 is includ−ed within other current assets inthe consolidated balance sheetat December 31, 2004. ZAO ZunHada had suspended extractionof ore in July 2003 and had notconducted any significant opera−tions thereafter and through thedisposal. As ZAO Zun Hada hadsignificant accumulated lossesat the time of disposal, the Grouprecognized a pre−tax gain on dis−posal of U.S. Dollar 47 551. As atDecember 31, 2004 the Grouphad loans receivable from ZunHada totaling U.S. Dollar 49 397(see note 7). These loans receiv−able were fully recovered on June27, 2005 and June 28, 2005.As the operations and cash flowsof ZAO Zun Hada have been elimi−nated from the ongoing opera−tions of the Group and the Groupwill not have any significant con−tinuing involvement in the opera−tions of ZAO Zun Hada, the resultsof operations of the disposedcomponents for 2004 and 2003together with the gain on disposalare reported as a separate com−ponent of income in the state−ments of operations.NOTE 26AcquisitionsIn November 2004, the Compa−ny acquired the remaining 20%in its subsidiary ZAO SerebroMagadana, the license owner forthe Dukat mine. The Companypaid U.S. Dollar 21 266 in cash andwill pay up to U.S. Dollar 22 500 incontingent future payments. Thefuture payments will be paid annu−ally based on the average yearlysilver price per troy ounce (FPS)in the range U.S. Dollar 5.5 perounce to U.S. Dollar U.S. Dollar10.0 per ounce:Annual installments5.5 < FPS < 6.0 5006.0 < FPS < 7.0 1 0007.0 < FPS < 8.0 2 0008.0 < FPS < 9.0 5 0009.0 < FPS

In accordance with FAS 141, thecontingent payments have notbeen recorded in the accompany−ing financial statements as theoutcome of the contingency is notdeterminable beyond a reason−able doubt. Accordingly, any futurepayments will be recorded whenmade.On the basis that the half yearaverage silver price to June 30,2005 of U.S. Dollar 7.05 perounce remains unchanged for theforeseeable future, the Companywill pay U.S. Dollar 2 000 per yearuntil 2015 and U.S. Dollar 500 in2016.The acquisition of the 20% inter−est in ZAO Serebro Magadana hasbeen recorded using the purchasemethod of accounting. The differ−ence between the purchase con−sideration of U.S. Dollar 21 266and the historic value of the minor−ity interest acquired totaling U.S.Dollar 7 200, has been recordedas property, plant and equipment.NOTE 27OAO Okhotskaya GGKshare issueIn February 2004, ISPA “Polymet−al” sold 538 ordinary shares(25.08% equity interest) of OAOOkhotskaya GGC to third parties.Consideration received amountedU.S. Dollar 5. As a result, Polymet−al share in OAO Okhotskaya GGCreduced to 54.9%. In April 2004,OAO Okhotskaya GGC issued 20592 common shares at par valueRussian rubles 100 per share, ofwhich 14 136 shares were pur−chased by ISPA “Polymetal” forU.S. Dollar 22 942, and 6 456shares – by other shareholdersfor U.S. Dollar 10 478. As a resultof the second transaction the in−terest of ISPA “Polymetal” in OAOOkhotskaya GGC has increased to65.35%.NOTE 28Subsidiary Preference SharesIssuanceIn September 2003 ZAO ZolotoSevernogo Urala , a Company’ssubsidiary, issued 30 000 seriesA preferred shares with par valueRuble 1 000 per share for a priceof Ruble 20 409 per share. Theproceeds from the issuance to−taled U.S. Dollar 20 787 and theentire issue was sold to Nomos−Bank, a related party (associateof ZAO ICT). According to theterms of the issue, the preferredshare have a liquidation prefer−ence of 50% of stated par valueand convey dividend rights equalto those enjoyed by holders ofcommon shares. As a result ofthe issue, the Company’s effectiveownership interest in ZAO ZolotoSevernogo Urala decreased from99.95% to 83.33%.The transaction was accountedfor as a disposal of an interest ina consolidated subsidiary, and theCompany recognized a gain on dis−posal of U.S. Dollar 13 850 deter−mined as the difference betweenthe proceeds from the preferredshare issuance and the carryingvalue of the disposed interest.NOTE 29Commitments and ContingentLiabilitiesCapital commitments imposedby license agreementsThe “Khakanjinskoye” mine minerallicense agreement (with amend−ments) imposes an obligation onthe OAO Okhotskaya GG_ to con−tribute U.S. Dollar 500 to theproject of Okhotsk region infra−structure development till 1 July2005. As at December 31, 2004,U.S. Dollar 60 was contributed.Operating environmentWhilst there have been improve−ments in economic trends in thecountry, the Russian Federationcontinues to display certain char−acteristics of an emerging market.These characteristics include, butare not limited to, the existence ofa currency that is not freely con−vertible in most countries outsideof the Russian Federation, re−strictive currency controls, andrelatively high inflation. The tax,currency and customs legislationwithin the Russian Federation issubject to varying interpreta−tions, and changes, which can oc−cur frequently.The future economic direction ofthe Russian Federation is largelyAppendix #1: Consolidated financial statements69

dependent upon the effective−ness of economic, financial andmonetary measures undertakenby the Government, together withtax, legal, regulatory, and politicaldevelopments.Environmental contingenciesThe enforcement of environ−mental regulation in the RussianFederation is evolving and theenforcement posture of govern−ment authorities is continually be−ing reconsidered. The Group pe−riodically evaluates its obligationsunder environmental regulations.As obligations are determined,they are recognised immediately.Potential liabilities, which mightarise as a result of changes in ex−isting regulations, civil litigation orlegislation, cannot be estimatedbut could be material. In the cur−rent enforcement climate underexisting legislation, managementbelieves that there are no signifi−cant liabilities for environmentaldamage.Legal contingenciesDuring the year, the Group wasinvolved in a number of court pro−ceedings (both as a plaintiff and adefendant) arising in the ordinarycourse of business. In the opinionof management, there are no cur−rent legal proceedings or otherclaims outstanding, which couldhave a material effect on the re−sult of operations or financial posi−tion of the Group and which havenot been accrued or disclosed inthese consolidated financial state−ments.Insurance policiesThe Group holds no insurancepolicies in relation to its assets,operations, or in respect of publicliability or other insurable risks, ex−cept for insurance for property intotal amount of U.S. Dollar 22 474(including insurance for assetsunder capital lease in amount U.S.Dollar 9 419)Sales commitments.In accordance with the loan agree−ment of ZAO Zoloto SevernogoUrala with Nomos−Bank, Nomos−Bank has a priority right to buygold produced in 2005 from Zo−loto Severnogo Urala. The price isnot specified in the agreement.Taxation.Russian tax, currency and cus−toms legislation is subject to vary−ing interpretations, and changes,which can occur frequently. Man−agement’s interpretation of suchlegislation as applied to the trans−actions and activity of the Groupmay be challenged by the relevantregional and federal authorities.Recent events within the RussianFederation suggest that the taxauthorities may be taking a moreassertive position in their inter−pretation of the legislation andassessments, and it is possiblethat transactions and activitiesthat have not been challenged inthe past may be challenged. As aresult, significant additional taxes,penalties and interest may be as−sessed. Fiscal periods remainopen to review by the authoritiesin respect of taxes for three cal−endar years preceding the yearof review. Under certain circum−stances reviews may cover lon−ger periods.As at 31 December 2004 man−agement believes that its inter−pretation of the relevant legisla−tion is appropriate and that it isprobable that the Group’s tax,currency and customs positionswill be sustained. Where manage−ment believes it is probable thata position cannot be sustained, anappropriate amount has been ac−crued for in these financial state−ments.Political environment.The operations and earnings ofthe Company are affected by po−litical, legislative, fiscal and regu−latory developments, includingthose related to environmentalprotection. Because of the capi−tal−intensive nature of the indus−try, the Company is also subjectto physical risks of various kinds.The nature and frequency ofthese developments and eventsassociated with these risks, whichgenerally are not covered by in−surance, as well as their effect onfuture operations and earnings,are not predictable.70 Polymetal annual report 2004

NOTE 30Subsequent eventsBank loan repaymentIn April – June 2005, the Companyrepaid U.S. Dollar 6 700 of totalU.S. Dollar 105 000 long−termloan from Standard Bank London.Appendix #1: Consolidated financial statements71

APPENDIX #2PRODUCTION COSTS BY GOLD INSTITUTE STANDARDS72 Polymetal annual report 2004

Vorontsovskoye (Northern Urals Gold)In thousands USD, except as indicated 2004 2003Direct mining expenses 16 954 12 578Stripping and mine development adjustments − −Third−party smelting, refining and transportation costsBy−product credits silver (407) (345)By−product credits (154) (892)Other 139 17Cash Operating Costs 16 532 11 358Royalties 1 664 937Production taxes 88 89Total Cash Costs 18 283 12 384Depreciation 3 526 3 158Depletion \ amortization − −Reclamation and mine closure 21 17Total Production Costs 21 830 15 559By−product (method 1): Silver as a by−productProduction costs 18 845 13 621By−product credits (561) (1 237)18 283 12 384Reported gold ounces produced 82 742 95 351Reported total cash costs per ounce 221 130Reported noncash costs per ounce 43 33Total production costs per ounce 264 163Note:The calculations take into account that silver is a co−product at the Vorontsovskoye deposit (according to GoldInstitute Standards).Appendix #2: Production costs by Gold Institute Standard73

Khakanjinskoye (Okhotsk Mining and Geological Company)In thousands USD, except as indicated 2004 г.Direct mining expenses 12 848Stripping and mine development adjustments 4Third−party smelting, refining and transportation costs−By−product credits silver (7 449)By−product credits (217)Other 197Cash Operating Costs 5 383Royalties 2 608Production taxes 667Total Cash Costs 8 658Depreciation 5 227Depletion \ amortization−Reclamation and mine closure 55Total Production Costs 13 940By−product (method 1): Silver as a by−productProduction costs 16 324By−product credits (7 666)8 658Reported gold ounces produced 75 795Reported total cash costs per ounce 114Reported noncash costs per ounce 70Total production costs per ounce 184Note:The calculations take into account that silver is a co−product at the Khakanjinskoye deposit (according to Gold In−stitute Standards). In 2003, only mining operations took place at the Khakanjinskoye deposit; no metal productionoccurred.74 Polymetal annual report 2004

Dukat and Lunnoye (Magadan Silver, Silver Territoty)In thousands USD, except as indicated 2004 2003Direct mining expenses 50,603 31,527Stripping and mine development adjustments 228 549Third−party smelting, refining and transportation costs − −By−product credits (32,300) (12,601)Other − 139Cash Operating Costs 18,532 19,614Royalties 8,038 5,254Production taxes 1,910 66Total Cash Costs 28,480 24,934Depreciation 3,491 2,945Depletion \ amortization − −Reclamation and mine closure 11 17Total Production Costs 31,982 27,896By−product (method 1): Gold as a by−productProduction costs 60,780 37,535By−product credits (32,300) (12,601)28,480 24,934Reported silver ounces produced 16,933,856 9,765,675Reported total cash costs per ounce 1.68 2.55Reported noncash costs per ounce 0.21 0.30Total production costs per ounce 1.89 2.86NotePrecious metals production at the Dukat and Lunnoye deposits is a single technological process. The above figuresare calculated for both deposits together. Silver is a co−product at the deposit. Calculations are[This was into ac−count during calculations] based on Gold Institute Standards.Appendix #2: Production costs by Gold Institute Standard75

Excerpt from production cost calculation metodology usingGold Institute StandardsTo improve [the] reporting practices within the gold mining industry, the North American gold industry has ad−opted revisions to its Production Cost Standard [(“Standard”)] — [,] a uniform format for reporting productioncosts per ounce [on a per−ounce basis]. The Standard was first adopted by the industry in 1996.The purpose of the Standard is to give the financial community and individual investors a tool to make meaningfulcomparisons between [of] gold mining companies and their individual [separate] operations, using [with sufficientinformation in] a uniform format. The production cost standard was developed under the aegis of The Gold Insti−tute, by a committee of senior financial executives representing leading North American gold producers.In developing the Standard, the Institute [it was] recognized that each company had its own accounting policiesand practices and that these differences could [may] result in different [cost] per ounce cost calculations,even at facilities [operations] where companies operated as [are] joint venture partners. Rather than tryingto change [or conform] these individual practices, a “uniform disclosure matrix” (or reporting standard) wasdeveloped. The Standard has been widely adopted throughout the global gold industry. [The success of The GoldInstitute Production Cost Standard and its wide acceptance are due to this disclosure−based philosophy]. Therevised Standard is shown below.Revised Standard for Reporting Production CostsPer Ounce (1)Direct mining expenses (2)Stripping and mine development adjustments (3)Third−party smelting, refining and transportation costsBy−product credits (4)Other$ XXXXXXXXXXXXXXXCash Operating CostsX X XRoyalties (5)Production taxes (6)XXXXXXTotal Cash CostsX X XDepreciation (7)Depletion \ amortization (8)Reclamation and mine closure (9)Total Production CostsXXXXXXXXX$ X X X76 Polymetal annual report 2004

1) Per ounce of gold produced or sold based [in accordance with] on each company’s own reporting practices;(2) Direct mining expenses include all expenditures incurred at the site, including inventory changes, site specific corporate charges (e.g. insurance, computer services, etc.) and in−mine drilling expenditures that are produc−tion related (e.g. in−fill drilling, grade control, etc.). Exploration expenditures are not included in direct miningexpenses. In case of a joint venture or partnership, management or overhead fees charged by that opera−tion’s operator, that are in addition to site−specific corporate charges, should be included in each company’smine−site cash expenditures;(3) These adjustments include normalization[ing] of stripping costs at open−pit operations and nomalization of costs associated with developing and accessing new production areas in underground opera−tions. Footnote disclosure of the total amount of these adjustments is encouraged;(4) When by−product accounting is employed, if the by−product represents more than 5% of an indvidual mine’s revenues, the effect on reported production costs of using co−product accounting also shouldbe disclosed. This information should be reported on a mine−by−mine basis in each company’s external re−porting documents. (See Exhibit 1 for an example of additional disclosure requirements.);(5) Information with respect to royalties, on an operation−by−operation basis, should be disclosed in each company’sexternal reporting documents;(6) Includes net proceeds tax, severance tax and other similar taxes. Ontario and BritishColumbia provincial mining taxes are considered to be forms of income taxes rather than property taxes, andas such should not be included in production cost calculations;(7) Treatment of capital lease payments should follow the normal accounting practice of bengiexcluded from cash costs but included in noncash costs as part of depreciation expenses.(8) Additional footnotes may be required to disclose what amounts have been included or excluded in the calculations (e.g. includes purchase accounting adjustments);(9) Includes costs of final site reclamation, which are accrued on a unit[s]−of−production basis over the entire life of an operation. To the extent that an operation elects to perform a portion of this final reclamationconcurrently with active mining, these costs also should be included in noncash production costs.Examples of Additional Disclosures:Reporting method No.1 − By−product AccountingSilver is accounted for as a by−product at the XYZ mine whereby revenues from silver are deducted from operating costs in the calculation of cashcosts per ounce. If the Company had accounted for silver production as a co−product, whereby costs were allocated separately to gold and silverbased on their proportion of revenues, the following costs per ounce would be reported:GoldSilverTotal cash costs $219 $2.92Noncash costs 46 .62$265 $3.54Appendix #2: Production costs by Gold Institute Standard77

CONTACT INFORMATIONSaint−Petersburg2, Narodnogo Opolchenia Prospect, 198216Phone: (812) 753 7773, 753 6177Fax: (812) 753 6376E−mail: info@polymetal.ruMoscow1, 1st Golutvinsky Pereulok, 119180Phone: (095) 937 3153Fax: (095) 937 3157E−mail: pr@polymetal.ruhttp://www.polymetal.ru78 Polymetal annual report 2004