OREANDA-NEWS. October 1, 2007. JSC “Polymetal” (LSE, MICEX, RTS: PMTL) (“Polymetal” or the “Company”), released its US GAAP consolidated financial statements, reviewed by independent accountants, for the six months ended June 30, 2007.

• In 1H 2007, silver sales declined 3% to 8.4 million ounces after production fell by 7%. Of the sold metal, 0.6 million ounces was bought from the third parties at market prices to satisfy delivery requirements under the forward sales contracts with ABN Amro Bank.

• Gold sales fell by 18% on the back of 3% production decline. Some of the gold produced during 1H 2007 (19 thousand ounces) was sold after the period was ended in July 2007

• After a relatively weak first quarter, Polymetal’s operations demonstrated significant improvements and the Company remains on track to meet its earlier production guidance of 16-18 Moz of silver and 230-250 Koz of gold in full year 2007.

“Financial results for the first 6 months of 2007 are unimpressive due to worse-than-expected production in the first quarter and deliveries into silver forward contracts at below-market prices,” said Vitaly Nesis, CEO of Polymetal, commenting on the results. “We expect profitability to improve in the second half of 2007 as production increases, while 2008 should see both revenues and profits increasing sharply as we start selling silver at market prices”.

REVENUES
In the 1H 2007, revenues declined 5% from $145.8 million to $139.0 million with volume declines partially offset by increases in average realized metal prices. Average realized gold price rose 12% to $660/oz, largely in line with the market. Average realized silver price rose 2% to $8.99/oz and remained significantly below the prevailing spot price due to deliveries at fixed prices.
During the 1H 2007, 6.5 million ounces of silver was delivered under forward sales contracts with the average price of US$7.79/oz thus resulting in approximately US$34 million of lost revenues.
As of October 1, Polymetal still has to deliver 3.4 million ounces of silver under the existing forward sales agreements (4.0 million ounces have been delivered between July 1 and October 1, 2007).

COSTS
Cost of sales rose 42% from US$73.5 million to US$104.4 million mostly due to increased physical volumes of mining and processing, increased depreciation and depletion expenses, and costs of silver purchased from third parties.

Operating costs (excluding personnel costs) rose 10% due to increased volumes of mining and processing. Personnel costs rose 44% as significant ruble-denominated average wage increases were compounded by ruble appreciation and IPO-related cash bonuses. Total operating costs rose 19% from US$50.3 million to $59.6 million.

Other taxes rose 48% to US$4.2 million as property taxes increased after fixed assets at Khakanja and Dukat were officially registered by the relevant government authorities. Depreciation, depletion, and amortization increased more than twofold from US$11.1 million to US$23.0 million as the company amortized the write-up of assets resulting from buying out minority shareholders at Khakanja and Dukat (purchase price significantly above book value).
Increase in other costs of sales represents largely US$7.8 million attributed to costs of silver purchased form third parties. Selling, general, and administrative expenses remained flat at around US$16.5 million.

Other expenses increased by 96% from US$7.5 million to US$14.7 million mostly due to the expenses incurred in conjunction with the IPO (lawyers, consultants etc) and option program expenses.

Following the IPO, the controlling shareholder granted 5.5 million shares of Polymetal (representing 1.76% of the Company’s share capital) to fund the employee stock option program through which employees received a right to purchase shares for the nominal price of approximately US$0.04 per share in equal installments in February 2008, February 2009, and February 2010. Part of the value of these option contracts is included in other expenses for the period as mandated by relevant accounting rules.

Interest expense fell by 27% to US$7.3 million as the proceeds of the IPO were used to reduce the amount of debt. Exchange gains decreased substantially from US$12.0 million to US$1.3 million as ruble appreciation in 2007 was not as strong as it was in 2006 and the carrying balance of dollar-denominated debt decreased significantly.
Income tax expense decreased from US$17.6 million to US$4.0 million as pre-tax income turned negative. The income tax expense was positive despite the pre-tax loss as a significant portion of costs in the period was not tax deductible (option expense, depletion and amortization resulting from asset write-up after the buy-out of minorities, IPO-related expenses). Minority expense in the period fell to zero as Polymetal consolidated 100% of all of its operating subsidiaries.
As a result of the above, the company reported net loss for 1H 2007 of US$7.7 million compared with net income of $27.0 million for 1H 2006.

CASH COSTS
Grades were the key driver of cash costs per ounce of metal produced at each of the operations.

Although cash costs per tonne milled at Dukat and Lunnoye grew in line with inflation (led mostly by labor costs increase in the Magadan region), cash costs per ounce of silver produced grew significantly higher as a result of lower grades (by 18% compared with the same period of the previous year) mostly due to mine sequencing. As grades at Dukat and Lunnoye are planned to increase in 2H 2007, the Company expects full year 2007 cash costs per ounce of silver to average below US$6.

At both Khakanja and Voro, cash costs per tonne of ore milled declined significantly (by 19% and 18% respectively) as record ore throughputs at both processing plants resulted in significant economies of scale. However, whereas Voro’s stable grades led to decreased cash costs per ounce of gold, Khakanja’s drastic grade decline (by 45% in both gold and silver) resulted in relatively similar jump in per ounce cash costs. As richer ore from Khakanja’s open pit 2 will start to be processed in 2008, overall cash costs per ounce of gold are expected to decrease.

CAPEX
Capital expenditures increased from US$15.8 million to US$40.3 million as the company continued to spend on Dukat expansion and Voro expansion along with increasing its exploration spend.

Short-term investment assets represent loans given to related parties with interest ranging from 10.5 to 11% per annum. Out of the total amount, US$70.2 was fully repaid in July 2007 with the remainder due to be repaid in September 2008.

CONFERENCE CALL

Polymetal will hold a conference call to discuss the 1H 2007 financial results on Monday, October 1, 2007 at 6:00pm Moscow time (3:00pm London time; 10:00am New York time).

Dial in number: +44 (0) 20 7153 9902
Meeting number: 213528

A recording of the conference call will be available by dialing +44 20 7154 2617 immediately after the end of the call for one week.

For further information look on http://en.polymetal.ru/news_center/company_news/2183