Carve-out of Geology-Prospecting Projects from Polyus Gold

Background

 Feb 27, 2008

Interros Position on the Carve-Out of Exploration Assets

Interros continues to be a longstanding investor in Polyus Gold («Polyus Gold» or the «Company»). We are deeply disappointed that Polyus Gold’s share price has underperformed its peers and failed to benefit from the strong growth of the price of gold. We believe that the valuation discount on Polyus Gold is attributable to a fundamental lack of confidence in management’s commitment and ability to unlock value for all shareholders. These issues are driven by the lack of independent board oversight, tiered corporate structure designed to allow management to make decisions on key transactions unilaterally, without Board approval, and insufficient disclosure to shareholders on key strategic transactions and decisions. This structural valuation is compounded by poor performance, including flat production volume and EBITDA while operating and administration costs remain high.

Interros has tried to raise a number of these issues with the Board of Directors of the Company, including the necessity to revise the strategy, streamline the corporate structure, improve corporate governance standards, include more independent directors, etc. However, management and the Chairman, who are entrenched by virtue of Board control and a blocking vote, have consistently ignored these pleas.

The situation has now reached a new level of urgency as management suggested a carve out of an important part of Polyus Gold’s exploration assets into an offshore, non-Russian incorporated vehicle called Polyus Exploration with a view of a subsequent offering of its shares, which would materially dilute Polyus Gold’s ownership of these assets. Management has not offered comprehensive disclosure with respect to the shareholders’ rights to receive or acquire shares in such an entity, but we understand that they intend to place 80% of Polyus Exploration among shareholders of Polyus Gold, on a pro rata basis, in exchange for an additional capital contribution of $380 million.

We also understand that any undistributed stock would then be offered to those shareholders who subscribed for the offering, on a pro rata basis. This means that, unlike in a spin off or rights offering situation, non-participating shareholders will face dilution without being able to receive any compensation for it.

We understand that management will be conducting a roadshow within the next few weeks, presenting their arguments for this carve-out to shareholders. From the limited information available, we have major questions regarding their proposal:

• Is there really a lack of operating synergies between the exploration assets being carved out and the existing production and development operations?
• Why shouldn’t exploration activities be part of the Company’s core activity, aimed at replenishing the resource base, especially for areas located within or in close proximity to the areas where Polyus Gold already has operations?
• We take management's point on bringing in new management to drive exploration, but can't that be accomplished without having to enter into an asset carve-out transaction that stands to deliver significant incremental upside to the same management that has been unable to unlock the value of the assets to date?
• Even if separation is desirable (and we don't believe that it is), why via the proposed carve-out structure as opposed to a pro rata spin-off to the shareholders?
• Is this a means to deliver more ownership un Polyus Gold exploration assets to selected holders at a discount?
• Doesn’t Polyus Gold have enough cash on hand to fund operations without a new cash infusion?
• What's the analytical basis for the valuation ($475 million) disclosed by management?
• Why haven’t management shared more information with shareholders on such a material transaction as the carve-out of exploration assets?

As the management plan currently stands, we are very concerned that it may destroy value for Polyus Gold shareholders. Moreover, the path that management has chosen to implement the transaction would enable management to act unilaterally, even if the transaction does not serve the interests of shareholders.

As a result of these concerns, Holding Company Interros (ZAO) has demanded that Polyus Gold should hold an Extraordinary Shareholders’ Meeting in order to:

• Elect a new Board of Directors which would include at least 3 independent Directors
• Amend Company’s charter to require Board approval of all significant transactions including with respect to assets held by subsidiaries, by a vote of 2/3 of all elected directors (i.e., 6 out of 9 directors vs. 3 of 9 currently)

In addition, we are committed to pursue further changes to the benefit of all shareholders of Polyus Gold, including further streamlining of the corporate structure, strengthening the management team, improving disclosure to shareholders, and potentially achieving a primary listing of Polyus Gold on the London Stock Exchange.

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