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Material Risk Review at Polyus’ Alluvial Operations

1 May 2015
Material Risk Review at Polyus’ Alluvial Operations

Overview of the Alluvial Operations

In 2015, Polyus initiated a Material Risk Review (MRR) process to review and refine our understanding of the key Sustainable development risks and opportunities associated with our Alluvial Operations. The MRR will be carried out in accordance with the standards and good practice guidance of the International Council for Mining and Metals (ICMM).

In 2004, Polyus acquired a controlling stake in the Lenzoloto alluvial operations in the Bodaibinsky District, Irkutsk Region, Russia. The alluvial operations date from the mid-19th century, following the first discovery of alluvial deposits in the area by prospectors. Lenzoloto was established as a state-owned entity in 1921. Polyus acquired a controlling stake in the asset in 2004 during a government auction and subsequently set up the Alluvials Business Unit incorporating the Lenzoloto business and associated subsidiaries.

The Business Unit currently employs around 2,300 people and holds approximately 102 licenses, extending over an area of 125 sq. km. Over 60 of those license areas are currently being explored, developed or operated. In 2014, the alluvial operations produced 190koz of gold, accounting for approximately 11% of Polyus’ refined gold production, making it the third largest producer in the Group’s portfolio (surpassed only by the Olimpiada and Blagodatnoye mines). Since acquiring the alluvial operations, the Group has operated in accordance with all the relevant mining license terms and Russian legislative requirements.

The Alluvials Business Unit mines gold from riverbed gravels and flood-plain terraces using quarrying and dredging techniques, followed by gravity separation, with the waste materials being subject to re-vegetation & progressive reclamation. No chemical agents are used in the process.

Sustainability Context

Polyus recognizes that the alluvials mining process presents a range of complex sustainability challenges. Before 2014, a long history of small-scale alluvial mining in the region had created a legacy of community, environmental and safety challenges that had to be taken into consideration for Polyus’ approach going forward. The Group embarked on a number of studies & assessments, often commissioning internationally recognized independent experts, to gain a clearer understanding of the nature of these risks and opportunities and to ensure the appropriate steps were taken to manage them in the future.

Socio-Economic Context and Key Social Risks

The Bodaibinsky District is a remote area with a declining population. Over two decades many young people and skilled workers had left the area in search of employment and economic opportunities elsewhere. Agricultural activity there [is] limited, due to the poor quality of the soil; during the time of the Soviet Union, regular interventions from the State were required to provide infrastructure and social services to support the continuing mining operations.

Approximately 13 small settlements (often < 200 — 100 people per settlement) are located within the area local to Polyus’ Alluvial Business Unit. These settlements grew up to support historic mining activities, often with very limited local infrastructure, and almost wholly reliant on continued alluvial mining to support their inhabitants.

We are working with the local government to foster community development through targeted investment in key infrastructure, hiring staff from local communities where possible, and ongoing efforts to make life in the District more appealing. In addition to providing the primary source of employment, we have worked with local authorities to develop a social and economic partnership agreement setting out the Group’s commitment to community investment in the region, which has included investments in the local road network, power supply, medical services and social infrastructure. These social and community investments have targeted key areas of risk and opportunity, as identified in consultation with local authorities and the affected communities. The stability and improvements that Polyus has achieved in this regard have stimulated further investment by the State, and the continued activities of the Group, in partnership with local authorities, are considered crucial to the ongoing survival and prosperity of these communities.

Safety Context

Polyus is committed to becoming a zero fatality company. Prior to being acquired by Polyus, Lenzoloto had achieved one of the best safety performance records for alluvial mining operations in the Irkutsk region. The Business Unit had an existing Industrial Safety Management System, which complied fully with Russian legal requirements, including defining roles and responsibilities, identifying Health and Safety risks, investigating incidents and clear action plans to address deviations from good practice.

In order to improve the efficiency of the existing system, the Group has introduced new standards for alluvial operations in the region to improve Health and Safety performance and culture. This is part of a Group-wide initiative to transition to international best practice in Health and Safety. New Health and Safety standards have been introduced to ensure transparent reporting, root cause analysis of accidents and incidents and other key performance indicators.

Over the years, the Group has strengthened its existing governance structure by introducing new staff, including risk managers and senior leaders. The existing reporting structures have been improved to align with the requirements of the Global Reporting Initiative and ensure pertinent information is shared within the Group.

We have also reviewed and improved our existing risk management framework and support processes to ensure greater awareness of Health and Safety risks and the measures required to mitigate them. Polyus has partnered with DuPont consultants to further strengthen its existing safety management systems and ensure it is aligned with international best practice, and to introduce a targeted safety culture transformation programme, which includes developing clear and specific ‘cardinal safety rules’ for each of its operations.

Environmental Context

There are no protected areas in close proximity to the Group’s operations.

From an environmental perspective, the key challenge relates to water management and protection. Polyus has introduced a number of measures to improve water management, including carefully designed settlement ponds and diversion channels, erosion controls and reclaiming abundant operations.

Polyus has an established water quality monitoring programme, which tests samples at the Group’s environmental laboratory in Bodaibo, the District capital. Water quality monitoring is also carried out independently by the regulatory authorities. No regulatory compliance issues have been highlighted to date, and the company has a positive working relationship with the regulatory authorities.

Our Commitment Going Forward

Polyus has reviewed both the business and sustainability cases for maintaining the alluvial operations and considered a range of different scenarios. We recognize that, not only do we need to ensure we are operating our business in the right way, we also need to help address the legacy issues caused by the long history of mining in the area.

We will continue to actively manage the sustainability risks and opportunities in terms of our socio-economic impact, safety record and environmental performance. This cannot be fully achieved without significant commitment and resourcing, and we recognize that it will take time to reach the high standards that we have set ourselves in these areas. With this in mind, in 2015 we initiated a Material Risk Review process to review and refine our understanding of the key risks and opportunities associated with our Alluvial Operations. The MRR process will help the Group guarantee that we are taking every action necessary to ensure social stability and continued regional development, while achieving the desired improvements in terms of our safety and environmental performance.