Polymetal Reports Full Year 2007 Financial Results

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Saint-Petersburg, Russia, July 11, 2008 - JSC "Polymetal" (LSE, MICEX, RTS: PMTL) ("Polymetal" or the "Company"), released its US GAAP audited consolidated financial statements for the year ended December 31, 2007, which are available on the Company's website at www.polymetal.ru

 HIGHLIGHTS

• In 2007, silver sales declined 6% to 16.2 million ounces on the back of 8% production decline. Lower realized silver price resulted from deliveries to ABN Amro Bank under the hedging agreements. Of 13.3 million ounces sold during the year at the below market prices, 1.4 million ounces were bought on the spot market
• Gold sales fell by 8% after production declined by 5% whereas average realized gold price grew by 16%, in line with the market
• Costs grew due to higher mining and processing volumes, inflationary pressures in both materials and labor segments, and non-recurring and extraordinary items, such as purchase of metal on the spot market to meet hedging requirements, share based compensation expensing, IPO related costs, amortization of asset write-ups etc.
• Adjusted EBITDA declined by 47% to approximately US$71 million as a result of both reduced revenues and increased costs
• Cash costs per tonne of ore milled grew mostly in line with inflation whereas cash costs per once of silver at Dukat and Lunnoye and per ounce of gold at Khakanja grew even higher due to lower grades resulting from mine sequencing
• Capital expenditures nearly doubled to approximately US$116 million which reflected increased exploration effort, replacement of remaining CIS-produced mining fleet with western equipment to increase productivity and save on maintenance labor, and timely execution of growth projects, including pre-payments for long-lead items to ensure timely delivery and to secure attractive prices
• Net debt fell by 45% to approximately US$221 million as a result of capital restructuring following the IPO (most of the proceeds from sale of primary shares was used to repay part of debt)

"2007 financial results are quite weak mostly due to deliveries into silver forward contracts at below-market prices," said Vitaly Nesis, CEO of Polymetal, commenting on the results. "We expect significant improvement in 2008 as production growth and full elimination of hedge position will lead to both revenues and profits increasing sharply".

REVENUES

In 2007 revenues fell by 2% to US$308.7 million (from US$315.6 million in 2006) as volumes of both gold and silver sold declined as a result of weaker production compared to 2006. This decline was partially offset by higher average realized gold price (which grew by approximately 16% to US$701/oz, in line with the market); however, average realized silver price fell by 6% to US$8.8/oz in spite of a 16% growth demonstrated by the market.

The Company continued to fulfill its obligations to sell silver under the hedging agreements. Out of total 16.2Moz of silver sold in 2007, more than 13.3Moz were delivered to ABN Amro Bank at prices significantly below market (capped at US$7.83/oz). Out of this metal, approximately 1.4Moz were purchased on the market to ensure the soonest elimination of hedge position. After the last sale under the hedging contracts was recorded in January 2008, the Company became hedge-free and fully exposed to price upside in both metals.

Polymetal's Board of Directors reviewed hedging policy in June 2008 and approved a no-hedge approach going forward As price environment on the precious metals market remains favorable, and based on the production target of 250-270Koz of gold and 17-18Moz of silver, the Company expects that revenue growth in 2008 compared to 2007 will be quite significant.

COST OF SALES  

Cost of sales rose by 49% mostly driven by costs associated with third party silver purchases at market prices. Without accounting for this third party metal, cost of sales rose by 37%. Operating costs excluding staff costs increased by 35% driven by approximately 20% increase in volumes of mining (including waste mined and underground development) and processing and 20% dollar-denominated inflation in Russia. Staff costs rose by 34% due to above-inflation growth in average wages and modest increase in headcount to achieve with increased physical volumes. Average wages for highly qualified labor significantly outpaced inflation in 2007.

Depreciation and depletion increased by 20% mostly because the Company amortized the write-up of assets resulting from buying out minority shareholders at Khakanja and Dukat (purchase price significantly above book value). Change in accounting estimate was dictated by the reduction in projected overall silver recovery from the heaps. This necessitated one-time write-off of the carrying value of work-in-progress on the heaps. Other costs in costs of sales represent mostly transportation expenses for raw materials and personnel at remote locations which were previously included in operating cost of sales.

GENERAL, ADMINISTRATIVE AND SELLING EXPENSES

GA&S increase by 49% was mostly driven by non-cash option expense. 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. Net of option expense GA&S increased by 12% driven mostly by above-inflation growth in average wages partially offset by 10% headcount reduction. OTHER OPERATING EXPENSES Other operating expenses increased by 29%, driven mostly by IPO-related consulting services and impairment of PP&E. Impairment of fixed assets was recorded because open-pit mining at Lunnoye was completed earlier than initially planned and the carrying value of the open pit was written down to zero. This happened because the last two ore benches, after detailed economic assessment, were deemed to be better suited for underground mining. Exploration expenses were significantly lower than in 2006 as a result of successful exploration results supported by JORC-compliant resource discoveries at most projects. As a result, most exploration expenditures incurred during the year were capitalized. Bank services declined almost tenfold because in 2006 this expense mostly comprised commissions paid to Standard Bank London and ABN Amro Bank in association with restructuring of the credit facility.

OTHER INCOME STATEMENT ITEMS Interest expense fell by 58% as the proceeds of the IPO were used to reduce the amount of debt. Exchange gains decreased by 57% as ruble appreciation in 2007 was not as strong as it was in 2006 and the carrying balance of dollar-denominated debt decreased significantly. Pre-tax income decreased from US$93.7 million to a loss of US$16.8 million, mostly as a result of substantial increases in costs of sales and GA&S while revenues declined. Income tax expense decreased by 76% from US$25.3 million to US$6.1 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 2007 of US$22.8 million compared with net income of $61.7 million in 2006. Adjusted EBITDA fell by 47% or by US$62.8 million, largely as a result of reduction in revenues by US$75.7 million caused by silver sales under forward contracts at prices significantly below market. In 2006 this reduction amounted only to $38.7. Adjusted EBITDA reconciliation is detailed in the following table:  

CASH COSTS

Domestic inflation in Russia and declining grades were the key drivers of total 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 by 22% (led mostly by labor costs increase in the Magadan region), total cash costs per ounce of silver grew significantly higher by 37% to US$6.6/oz as average silver grades declined by 16% due to planned transition to lower-grade ore zones.   At both Khakanja and Voro, cash costs per tonne of ore milled increased significantly (by 29% and 37% respectively), mostly driven by increased waste stripping volumes and domestic inflation. Total cash costs per ounce of gold at Khakanja more than doubled to US$442/oz after grades fell dramatically as mining of first pit was completed and stockpiled lower-grade ore was processed while second pit was being pre-stripped. As richer ore from second pit at Khakanja and Yurievskoye mine (Khakanja satellite) is being processed in 2008, cash costs per ounce of gold are expected to decrease. Total cash costs at Voro increased by 35% to US$420/oz in line with costs per tonne as grades were stable.   As a result of the above, total cash costs per ounce of gold equivalent increased by 54% to US$397/oz; silver equivalent - by 55% to US$7.6/oz. Breakdown of cash costs calculated on a co-product method is given in the following table.  

CAPEX

Capital expenditures in 2007 nearly doubled compared to those in 2006 and amounted to US$115.7 million. Out of this sum, approximately $27 million was spent on exploration, US$24 million on maintenance capital, US$38 million on Dukat expansion, US$9 million on Voro expansion US$15 million on advance payments for equipment and materials to be used at Albazino and Dukat expansion projects. The remaining US$3 million represents the capitalized portion of interest payments. NET DEBT Net debt in the period decreased by 45% as IPO proceeds were used to retire a significant portion of debt as well as to pay US$10.5 million to Pan American Silver for an acquisition of the stake in Dukat. Net debt calculation is detailed in the following table:

CONFERENCE CALL

Polymetal will hold a conference call on Monday, July 14, 2008 at 1:00pm Moscow time (10:00am London time).   To participate in the call, please dial:      +1 888 423-3281      (toll-free from the US), or   +1 612 ...  (international). Please be prepared to introduce yourself to the moderator.   Recording of the conference call will be available at      +1 800 475-6701      (toll-free from the US), or     +1 320 ...    (international), access code 954088, from 03:00pm Moscow time Monday, July 14, till 11:59pm Moscow time Monday, July 21.      

Pavel Danilin VP,

Corporate Finance and Investor Relations

Tel.:    +7 812 334 3666

E-mail: danilin@polymetal.ru Website: www.polymetal.ru  

***

This release includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the words "targets", "believes", "expects", "aims", "intends", "will", "may", "anticipates", "would", "could" or "should" or similar expressions or, in each case their negative or other variations or by discussion of strategies, plans, objectives, goals, future events or intentions. These forward-looking statements all include matters that are not historical facts. By their nature, such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond the Company's control that could cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company's present and future business strategies and the environment in which the Company will operate in the future. Forward-looking statements are not guarantees of future performance. Many factors that could cause the Company's actual results, performance or achievements to differ materially from those expressed in such forward-looking statements. These forward-looking statements speak only as at the date of this release. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. 

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