Description and potential impact

Mitigation

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

ii) The Group relies on the supply and availability of various services and equipment in order to successfully run its operations. For

example, timely delivery of mining equipment and jaw crushers and their availability is essential to the Group's ability to extract ore from the Group's assets and to crush the mined ore prior to production. Delay in the delivery or the failure of mining equipment could significantly delay production and impact the Group's profitability.

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

Pumping systems are in place and

tested periodically to ensure that they are functioning.

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

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

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

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

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Change in risk after mitigation

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

The Group's exploration budget is fixed for each asset at the start of each financial year depending upon previous results. In 2014, the Group continued to focus its exploration

programme on areas at or close to its existing operating mines and in particular, on finding new, non-refractory resources.

2014 exploration results were reviewed by independent mining experts Wardell Armstrong International.

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

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Change in risk after mitigation

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

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

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

These laboratories are licensed by the Russian authorities and use multiple quality assurance and quality control procedures. These procedures include the use of 'standards', 'blanks' and 'duplicates' as well as cross checking a percentage of all samples analysed, in an independent laboratory in Ulan Ude, Republic of Buryatia, Russia.

The Mineral Resource and Ore Reserve estimates included in this Report for the Group's four principal gold deposits located in the Amur region, Far East Russia, prepared in accordance with the guidelines

of the JORC Code (2012) were reviewed and signed-off by Wardell Armstrong International ('WAI') in April 2015. WAI is an independent consultancy that has provided the mineral industry with specialised geological, mining, and processing expertise since 1837.

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

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

In addition, the Company publishes its Reserves and Resources estimates based on gold prices which are lower than the current market price of gold.

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Change in risk before mitigation

Description and potential impact

Mitigation

Adverse events or uncertainties affecting the gold price and/or the global financial markets could affect the Group's ability to raise new debt

or refinance existing debt in the capital markets. It could also in future lead to higher borrowing costs. 

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

The Group's borrowing facilities include a requirement to comply with certain specified covenants in relation to the level of net debt and interest cover. A breach of these covenants could result in a significant proportion of the Group's borrowings becoming repayable immediately. In the absence of refinancing the Group was forecast to breach certain covenants in its banking facilities at 31 December 2014.

The Refinancing involving:

·      The issue of a new US$100m 9% Convertible Bond due 2020; and

·      A rights issue to Shareholders of new Ordinary Shares with a value of £155.1m (US$235.4m)

in order to repay the Group's 4%

Convertible Bonds due 2015 was completed on 18 March 2015. This has secured the immediate future of the Group.

The Group continues to focus on cost reduction and operational efficiency.

The Group continues to maintain its

available cash with several reputable major Russian and international banks and does not keep disproportionately large sums

on deposit with a single bank. Strong relationships are maintained between the Company and existing and potential equity and debt providers.

As part of the Refinancing the Group negotiated waivers or relaxation of certain financial covenants in its banking facilities with the Group's Senior Lenders

(Sberbank and VTB) and ICBC. These covenant waivers are effective as at the end of 2014 and during 2015.

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Change in risk after mitigation

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

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

The Executive and the Board review the Group's hedging position on a regular basis.

In October 2014, the Group purchased a number of gold put options for an aggregate of 150,000 ounces of gold with a strike priceof US$1,150/oz as part of its downside protection strategy. The option contracts mature over the period from January 2015 to June 2015. The aggregate premium paid was US$4.8 million.

Forward contracts to sell an aggregate of 50,000 ounces of gold at an average price of US$1,310 per ounce were outstanding as at 31 December 2014.

The success of the Group's recent exploration programme has enabled the Board to increase its gold production target from non-refractory ore to 680,000-700,000oz for 2015. Whilst the effect of the continuation of the cost-cutting programme introduced in 2013, along with the depreciation of the Rouble against the US Dollar, has enabled the Group to reduce its 2015 TCC/oz target to lower than

US$700/oz, this is based on the present Rouble exchange rate and assuming inflation does not increase.

The Group intends to continue to minimise overhead costs and to operate and maintain low-cost and efficient operations in order to optimise the Group's returns.

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Change in risk after mitigation

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

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

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

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

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

Despite ongoing inflation of Rouble denominated costs, in particular electricity costs and diesel costs which both increased by 4%, the Group's operations benefitted from the weakness of the Russian Rouble during 2014.

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Change in risk after mitigation

Petropavlovsk has provided a guarantee against a US$340 million loan facility provided to K&S by ICBC to fund the construction of IRC's mining operations at the K&S mine. In the event that K&S was to default on its loan, Petropavlovsk may be liable to repayment of the outstanding loan under the terms of the guarantee.

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

If the IRC assets are reclassified out of 'held for sale', IRC would be re-consolidated on a line-by-line basis, which would increase the Group's reported net debt and net finance charges positions.

The market price of iron ore can be volatile. Iron ores price have declined sharply over the course of the last year. The price of iron ore

halved from US$135 per tonne for the benchmark 62% product for delivery to China at the start of 2013 to US$71 per tonne by the end of the year The iron ore price is currently approximately US$50/t. Iron ore prices have declined due to a combination of weakness in demand and rising global iron ore production, resulting in an oversupply situation.

The Group ensures constant monitoring of IRC's performance through (1) IRC presentations to the Petropavlovsk Board (2) attendance of IRC Chairman and CEO at Petropavlovsk Executive Committee meetings and (3) regular communication between the Group CFO and the IRC CFO.

Subject to the completion of the investment in IRC Ltd (see note 27), an indemnity entered into by the Company and General Nice on

17 January 2013 will come into effect (the 'Indemnity'). Pursuant to the Indemnity, General Nice will, while the Indemnity remains in effect, indemnify the Company in

respect of payments made by Petropavlovsk in respect of the ICBC guarantee or under the terms of a recourse agreement entered

into between the Company, IRC and K&S on 13 December 2010 in proportion to their respective holdings in IRC.

In addition, following the completion of the investment, General Nice and Minmetals have agreed to use their respective reasonable efforts to assist Petropavlovsk with the removal of the ICBC bank guarantee.

The completion of the investment in IRC Ltd by General Nice and Minmetals approved by Shareholders in March 2013 (see note 27), has not completed. As at 31 December 2014 the Group's interest in IRC was 45.39%.

Although discussions with General Nice and Minmetals are ongoing it is not certain that the investment will complete. If the investment does not complete the Indemnity will not come into effect.

IRC is continuing discussions with General Nice and Minmetals regarding their investment and in the absence of this, the IRC Board expects that IRC will be able to raise additional funds, from other third party investors in new IRC equity. Any of these actions is expected to reduce the Company's interest in IRC such that the Company will lose control of IRC and IRC will be accounted for as an associate.

The IRC Board has conducted a strategic review at Kuranakh and has implemented a severe cost-cutting exercise.

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Change in risk after mitigation

Description and potential impact

Mitigation

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

to the Group's employees. These could also result in production delays and financial loss.

Health and Safety management systems are in place across the Group to ensure that the operations are managed in accordance with the relevant health and safety regulations and requirements. The Group has an established health and safety training programme under which its employees undergo initial training on commencement of employment and take part in refresher training on a regular basis.

The Group continually reviews and updates its health and safety procedures in order to minimise the risk of accidents and improve accident response, including additional and enhanced technical measures at all sites, improved first aid response and the provision of further occupational, health and safety training.

The Group operates a prompt incident reporting system to the Executive Committee and the Board. Unfortunately there were three fatalities during 2014 (2013: 2). These fatalities were reported immediately to the Chairman and to the Health, Safety and Environmental ('HSE') Committee. The incidents in both 2013 and 2014 were investigated by the Russian authorities who have confirmed that no action will be taken against the Company as the Company was not found to be at fault for any of these accidents. The HSE Committee discussed each of the fatalities in detail to identify whether any actions could be taken or further training provided to mitigate against any reoccurrence of a similar accident. Further safety awareness training was subsequently provided to all of the safety officers in the Group's operations.

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

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Change in risk after mitigation

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

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

Regular monitoring is undertaken to rule out discharges to groundwater and soil.

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Change in risk after mitigation

Description and potential impact

Mitigation

The Group's principal activity is the mining of

precious and non-precious metals which

requires it to hold licences which permit it to

explore and mine in particular areas in Russia.

These licences are regulated by Russian

governmental agencies and if a material licence

was challenged or terminated, this could have a

material adverse impact on the Group.

In addition, various government regulations

require the Group to obtain permits to

implement new projects or to renew

existing permits.

Failure to comply with the requirements and

terms of these licenses may result in the

subsequent termination of licenses crucial to

operations and cause reputational damage.

Alternatively, financial or legal sanctions could

be imposed on the Group. Failure to secure

new licences or renew existing ones could lead

to the cessation of mining at the Group's

operations or an inability to expand operations.

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

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Change in risk after mitigation

Actions by governments or changes in

economic, political, judicial, administrative,

taxation or other regulatory factors or foreign

policy in the countries in which the Group

operates or holds its major assets could have

an adverse impact on the Group's business or

its future performance. Most of the Group's

assets and operations are based in Russia.

Russian foreign investment legislation imposes

restrictions on the acquisition by foreign

investors of direct or indirect interests in

strategic sectors of the Russian economy,

including in respect of gold reserves in excess

of a specified amount or any occurrences of

platinum group metals.

The Group's Pioneer and Malomir licences have

been included on the list of subsoil assets of

federal significance, maintained by the Russian

Government ('Strategic Assets'). The impact

of this classification is that changes to the direct

or indirect ownership of these licences may

require obtaining clearance in accordance with

the Foreign Strategic Investment law of the

Russian Federation.

Fluctuations in the global economy may

adversely affect Russia's economy. Russia's

economy is increasingly dependent on global

economic trends and is more vulnerable to market downturns and economic slowdowns

elsewhere in the world, as well as to reductions

and fluctuations in the prices of hydrocarbons

and minerals.

To mitigate the Russian economic and

banking risk the Group strives to use the

banking services of several financial

institutions and not keep disproportionately

large sums on deposit with a single bank.

The Group seeks to mitigate the political and

legal risk by monitoring of the proposed and

newly adopted legislation to adapt to the

changing regulatory environment in the

countries in which it operates and specifically

in Russia. It also relies on the advice of

external counsel in relation to the

interpretation and implementation within the

Group of new legislation.

The Group continues to closely monitor its

assets and the probability of their inclusion

into the Strategic Assets lists published by

the Russian Government.

New Articles of Association were adopted by

Special Resolution of Shareholders of the

Company on 26 February 2015. The Articles

include a provision which allows the Board to

impose such restrictions as the Directors may

think necessary for the purpose of ensuring

that no ordinary shares in the Company are

acquired or held or transferred to any person

in breach of Russian legislation, including any person having acquired (or who would as a

result of any transfer acquire) ordinary shares

or an interest in ordinary shares which,

together with any other shares in which that

person or members of their group is deemed

to have an interest for the purposes of the

Strategic Asset Laws, carry voting rights,

exceeding 50 per cent (or such lower number

as the Board may determine in the context of

the Strategic Asset Laws) of the total voting

rights attributable to the issued ordinary

shares without such acquisition having been

approved, where such approval is required,

pursuant to the Strategic Asset Laws.

This risk cannot be influenced by the

management of the Company. However,

the Group monitors changes in the political

environment and reviews changes to the

relevant legislation, policies and practices.

Following volatility in eastern Ukraine in late

2013 and 2014, the United States Treasury

and the EU imposed financial sanctions over

many Russian financial institutions and

companies in the energy and defence sectors.

The sanctioned entities are restricted from

issuing new equity or long-term debt in the

United States and EU markets which could

have a material effect on their ability to raise

financing. It is also possible that the sanctions

may be extended in the future and could result

in diminished investor confidence in Russia,

the possibility of increased capital flight and

weaker economic growth.

In response to the sanctions Russia has

enforced certain input restrictions on Russian

companies in respect of products emanating

from states that have imposed sanctions,

which could lead to greater instability in the

Russian economy, which could have a material

adverse effect on the value of investments

relating to Russia and on the Group's business,

results of operations and financial condition.

The increase in the perceived risk of investing in

Russia could also be detrimental to the Group.

The Group has no assets or operations in

Ukraine. The Group produces gold from its

Russian mines and sells this gold to Russian

licensed banks. The Board and the

Executive continue to monitor the position.

The Company maintains an ongoing

dialogue with its Shareholders and

potential investors.

Description and potential impact

Mitigation

The Group's success is closely aligned to the experience, abilities and contributions of certain

of its key senior managers.

The Group depends on personnel with a range

of skills and good knowledge of the customs

and practices in the mining industry in Russia,

and for certain senior positons a considerable

fluency in English and Russian may be required.

The Group's growth and future success will

depend in significant part upon the continued

contributions of a number of the Group's

key senior management, geologists and

other experts.

Succession planning is an important item on the agendas of both the Nomination Committee and the Board.

Reviews of reward structures and incentive plans are carried out by the Remuneration Committee as appropriate in order to attract,

retain and incentivise key employees.

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Change in risk after mitigation