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ADOPTED BY УТВЕРЖДЕН:

General Assembly of Shareholders Годовым общим собранием акционеров

Of JSC Solikamsk Magnesium Works ОАО «Соликамский Магниевый Завод»

Protocol № 36 Протокол № __

оf «01» July 2013 от «_» июня 2013 года

Provisionally Approved by ПРЕДВАРИТЕЛЬНОЕ УТВЕРЖДЕНИЕ:

The Board of Directors Советом Директоров

Of JSC Solikamsk Magnesium Works ОАО «Соликамский Магниевый Завод»

Protocol № 64 Протокол № 64

of «23» May 2013 от «23» мая 2013 года

JOINT-STOCK COMPANY ГОДОВОЙ ОТЧЕТ

“SOLIKAMSK MAGNESIUM WORKS” ОТКРЫТОГО АКЦИОНЕРНОГО ОБЩЕСТВА

ANNUAL REPORT «СОЛИКАМСКИЙ МАГНИЕВЫЙ ЗАВОД»

2012 ЗА 2012 ГОД

General Director ________________ Alexei V. Prokopenko Генеральный директор ________________А.В. Прокопенко

(signature) (подпись)

Accountant General _________________ Olga V. Vyatkina Главный бухгалтер _________________ О.В. Вяткина

(signature) (подпись)

Solikamsk Соликамск

2013 2013 год

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TABLE OF CONTENT Page №

LETTER TO SHAREHOLDERS 3 COMPANY‟S MISSION 4 GENERAL COMPANY INFORMATION 5 The history in brief 5 Annual capacities to manufacture main products 5

Registration data 6

Auditors of the Company 6

The Company‟s Appraiser 7

Holder of the Company‟s register of shareholders 7

Charter capital of the Company 7

The Company‟s shareholders 7

Market price of shares and market capitalization of the Company 7

Subsidiaries (dependent entities) of the Company 8

SMW‟s membership in organizations and associations 10

PRIORITY ACTIVITIES OF THE COMPANY 10 PROGRESS IN THE COMPANY‟S PRIORITY ACTIVITIES 10 Activities of the Board 10 Financial results 11 Performance by operations 12 Magnesium Operations 13

Pure & alloy magnesium 13

Minor products of Magnesium Operations 14

Rare Metals Operations 15

Niobium compounds 16

Tantalum compounds 17

Compounds of rare earths elements (REE) 18

Titanium sponge and compounds 18

Chemical Operations 19

Usage of raw materials and energy resources 19 Technical Development and IT-technologies 21 Compliance with International Requirements 21

Integrated Management System and compliance with international requirements on trade with “conflict minerals” 21

Compliance with International Code of Conduct for the industry 23

Operational Safety and Industrial Security 23 List of the Company‟s Licenses 24 Social Responsibility 24 POSITION IN THE INDUSTRY 26 Position in the magnesium industry 26

Position in the rare earths industry 28

Position in the titanium industry 31

Position in the niobium industry 32

Position in the tantalum industry 35

Position in chemical industry 37

THE COMPANY‟S DEVELOPMENT PROSPECTS 38 RISK FACTORS 38 Risk managing policy of SMW 38

Risks of the industry 40

Risks of the country and regional risks 41

Financial risks 42

Legal risks 43

Risks of the Company 44

CORPORATE GOVERNANCE 44 Dividend statements 44

List of the Company‟s deals that may be referred to as “large deals” under legislation 44

List of the Company‟s deals that may be referred to as “deals with interest” under legislation 44

The Board of Directors of the Company 44

Information about the person who holds the position of Exclusive Executive Authority 47

Criteria of determination of fees and amount of fees paid to the person who has the position of Exclusive Executive

Authority and to members of the Board

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Compliance with the Code of Corporate Conduct 48

THE MAIN FINANCIAL RESULTS OF THE COMPANY 49 REPORT OF THE COMPANY‟S AUDITOR 50 Annexes: Annex № 1 Compliance with International Code of Conduct for the industry 5 pages

Annex № 2 Information about the Company‟s licenses 3 pages

Annex № 3 List of deals with interest 4 pages

Annex № 4 Compliance with Code of Corporate Conduct 6 pages

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LETTER TO SHAREHOLDERS

Alexei V. Prokopenko General Director, JSC Solikamsk Magnesium Works

The actual growth of the world economy was well below initial projections for the reporting year that was translated into lower demand, increased inventories, revised output schedules and price downturns for the vast majority of raw materials and consumer goods. In this environment, the Company‟s results were lower than initially expected. Sales revenues of the Company decreased by -15.2% year to year, and accounted for 5‟520.9 million rubles - equivalent of $177.7 million in US dollar terms. Sales income accounted for +661.04 million rubles, income before taxes was + 684.9 million rubles and net income resulted +567.98 million rubles representing respective drop by -70.3%, -64.5% and -64% compared to 2011. Dropped prices for rare earths along with elevated prices for electricity, gas and raw materials were the main factors those affected the Company‟s profitability. The reporting year was complicated, but only rare earths and titanium sponge were the products those suffered lack of sales stability, while shipments of the other Company‟s products ran well thanks to fixed annual contracts, and sales revenues earned on these products were not affected by global uncertainty. Financial performance of the Company kept strong in the reporting year. Moreover, loan dependency of the Company, that was increased in unfavorable 2002-2009 years, was substantially reduced in the reporting year. At the beginning of 2013, economic environment was more complicated than it was in 2012, but analysts and international financial institutions predict GDP upturn in Europe and improved performance of the world economy in the second half of 2013 with stronger demand in the markets. Regardless of development of global economy, certain actions effected by SMW in 2012 and at the start of 2013 should compensate potential losses those could be caused by economic uncertainty, and damp pressure of negative challenges on the Company‟s prospective programs to the extent the lowest possible under these conditions.

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GENERAL COMPANY INFORMATION The history in brief

14 March 1936: first ingot of primary magnesium metal was produced by the Company. This historical date is fairly considered as the Date of Birth of Solikamsk Magnesium Works.

1939: SMW started production of alloy magnesium for aircraft industry

1946: the Experimental Plant was founded, the first experimental plant inside an operating facility in the Non-ferrous Industry of the Soviet Union. All of the main basic technologies recently utilized by CIS magnesium and titanium companies were developed here.

1962 - 1966: A proprietary technology to produce Mg-Zr hardener and MZr1N3 magnesium super alloy was implemented to source the Soviet Space Program and Aircraft Industry

1971: Rare Metals Operations were brought on stream with use of chlorine generated in Magnesium Operations as the main reagent to process loparite and other raw materials in these operations

1977: a line to separate niobium pentachloride out of tantalum pentachloride with production of technical grade niobium pentaoxide was put into operation

1983: a line to produce optoelectronic grades of tantalum and niobium pentaoxides was brought on stream

1985: SMW was awarded with the Order of Great Patriotic War 1941-1945 recognizing importance of SMW‟s supply for Soviet Army to win the War

1992: state-owned enterprise Solikamsk Magnesium Works was transformed into joint-stock company Solikamsk Magnesium Works (hereinafter referred to as “SMW”, “Solikamsk”, or “the Company”)

1996: in partnership with Almamet GmbH, Germany - SZD - a plant to produce magnesium granules, powders and mixes for desulfurization of iron was brought on stream. This event pushed mass introduction of desulfurization process in the Russian Steel Industry.

2000: a line to produce rare earths carbonates was put into operation

2009: the first stage of titanium sponge project was brought on stream with capacity 2‟500 tons per year out of total projected of 5‟000 tons per year.

Solikamsk is a modern, continuously developing company that keeps leading positions in Magnesium and Rare Metals Industries of Russia accounting for virtually 100% output of tantalum, niobium and rare earths chemicals, more than 60% of commodity pure & alloy magnesium metal and 4-5% of titanium sponge of the country, with Integrated Management System conforming to appropriate international standards.

Annual capacities to manufacture main products

Magnesium operations - pure and alloy magnesium – up to 18‟200 tons including 16‟200 tons output for sales - potash, fluxes, salts – up to 79‟320 tons - calcium hypochlorite solution – up to 60‟000 tons Rare metals operations Capacity for loparite processing is 13‟000 tons that enables the production of: - niobium compounds – up to 855 tons Nb2O5 contained - tantalum compounds – up to 60 tons Ta2O5 contained - carbonates and oxides of rare earths – up to 3‟600 tons TREO contained - titanium sponge and compounds – up to 2‟600 tons of titanium (Ti) contained

Chemical operations - liquid chlorine in containers – up to 3‟000 tons - lime – up to 20‟000 tons - calcium chloride solution (32% CaCL2) – up to 72‟000 tons

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Registration Data Complete Name of the Company In Russian: открытое акционерное общество «Соликамский магниевый завод» In English: open joint stock Company «Solikamsk Magnesium Works» Short Name of the Company In Russian: ОАО «СМЗ» на английском языке: JSC «SMW». Company Location: 9 Pravda Street, 618541, Solikamsk, Perm Region. The Russian Federation. Tel: +7 (34253) 5 11 71 Fax: +7 (34253) 5 23 75. E-mail address: smw@smw.ru Web address: www.smw.ru Date of State Registration and Register Number: Order of Solikamsk City Administration № 919.1 of 10 November 1992 Key State registration number of juridical person (OGRN): 1025901972580 Date of registration: 10.09.2002 г. Taxpayer Identification Number (INN): 5919470019 Name of Registering Agency: Inter-regional Inspection № 11 for Perm Region and Komi-Permiatskiy National District, The Russian Federation Ministry of Taxes

- Registered Activities (codes OKVED): - Production of minor non-ferrous metals OKVED 27.45 - Production of minor inorganic chemicals OKVED 24.13 - Production of castings OKVED 27.5 - Processing of metallic scrap & residues OKVED 37.10 - Building & construction works for general purposes OKVED 45.21 - Generation, transfer & distribution of steam and hot water (heating energy) OKVED 40.30 - Cooking in canteens belonging to enterprises OKVED 55.51 - Medical practice OKVED 85.12 - Managing of medical entities OKVED 85.11 - Managing of sports entities OKVED 92.61 The main activity in 2012: Production of minor inorganic chemicals OKVED 24.13 Sources Of Information About The Company: Company‟s newspaper “Magnievik”, city‟s newspaper «Solikamskiy rabochiy», Company‟s web-site www.smw.ru , RIA ZAO «Interfax» for regular disclosure of information under statutory requirements Representative offices and affiliated branches: not available.

Auditors of the Company In the reporting year, the Company performed trial audit under IFRS along with audit under Russian Accounting & Financial Standards (RAFS).

Audit under RAFS was performed by ZAO Auditing Firm “Legion-Audit”, Russia, while audit under IFRS was conducted by ZAO KPMG (Russia) that is the members of independent group KMPG, a part of KMPG International Cooperative (Switzerland).

1. ZAO Auditing Firm “Legion-Audit” Name: Closed Joint-Stock Company Auditing Firm “Legion-Audit” Location: 42a Kostycheva Street, Proletarskiy Dormitory, 614031, Perm. RUSSIA INN: 5903029169 OGRN:1025900766870

Web address: www.legion-audit.ru E-mail address: office@legion-audit.ru ZAO Auditing Firm “Legion-Audit” is a member of self-regulatory accredited professional union of auditors “Non-commercial Professional Partnership «Chamber Of Auditors Of

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Russia»” in accordance with Decision of the Chamber‟s Board № 696 of 27 November 2003, ORNZ 10401003022.

2. ZAO “KMPG” Name: Closed Joint-Stock Company «KMPG» Location: 18/1 Olympic Avenue, room 3035, 129110, Moscow. RUSSIA ИНН:7702019950 OGRN: 1027700125628 Web and e-mail addresses: www.kpmg.ru ZAO «KMPG» is registered under Russian statutory requirements. The firm is a member of independent KMPG group, a part of Association KPMG International Cooperative registered under Swiss legislation.

The Company’s Appraiser Appraiser of replacement cost of the Company‟s tools was Individual Interpreter Anatoliy M. Begounov /IP Begounov A.M./. IP Begounov A.M. is a member of self-regulatory Non-commercial Partnership “National Collegium of Appraisers” under registering № 01353 of 07 February 2008 (NP “National Collegium of Appraisers” is registered by Federal Registering Agency in United State Register of Self-regulatory Appraising Organizations under № 0006 of 19 December 2007).

Holder of the Company’s register of shareholders Name: Closed Type Joint-Stock Company “Registrator Intraco” Location: 64 Lenina Street, 614990, Perm. The Russian Federation Tel/fax: (342) 233-01-63/233-01-64, Web address: www.intraco.ru License number: 10-000-1-00272 of 24 December 2002. Issuing Agency: The Russian Federal Securities Commission Validity: unlimited “Registrator Intraco” is a member of Professional Association of Register holders, Transfer Agents and Depositaries (PARTAD). The date of start to be a holder of the Company‟s register of shareholders: December 23, 1996

Charter Capital of the Company Charter Capital of the Company is 99’568 (ninety nine thousand five hundred sixty eight) rubles which is divided into 398’272 (three hundred ninety eight thousand two hundred seventy two) personal ordinary (voting) shares with a nominal value of 0.25 rubles per share State registration number of shares’ issue: 1-01-00283-А. Date of State registration of shares’ issue: 05 June 2007

The Company’s Shareholders The total number of registered shareholders at the end of the reporting year is 741, where 3 shareholders are nominal shareholders.

Shareholders who own at least 5% of charter capital, or at least 5% of voting shares: nominal shareholder Limited Liability Company “Perm Stock Company” (5.12%) and nominal shareholder Non-banking Credit Organization “National Nominal Depositary” (90.00%)

Market price of shares and market capitalization of the Company Entity that arranges trade of the Company’s shares

Ordinary shares of the Company are permitted for trade in ZAO “Stock Exchange MICEX” (SE MICEX) where Solikamsk shares are included in the Register Of Non-listed Securities of the Register Of Securities Permitted For Trade in ZAO “Stock Exchange MICEX” by Decision of the Board ZAO “Stock Exchange MICEX” № 161 of 10 October 2008. Trade index of the Company‟s shares is MGNZ. Name of Stock Exchange: ZAO «SE MICEX» Location: 13 Bol‟shoy Kislovskiy pereulok, 125009, Moscow. RUSSIA Address of Vozdvizhenka Office: 4/7, building 1, Vozdvizhenka Street, 125009, Moscow Tel: (495) 363-3232, fax: (495) 705-9622

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Web address: http://rts.micex.ru/

Market price of the Company’s shares

Market price of the SMW‟s shares is published on the MICEX web under link: http://www.micex.ru/marketdata/analysis?secid=MGNZ&boardid=EQNE&linetype=candles&period=-1d

Historical market price of the Company‟s shares is provided on the diagram below.

MICEX market price of SMW‟s shares, RUR/share

Market value of the Company

Market value of the Company is calculated by multiplying the number of shares of the relevant category (type) by the market price of one share disclosed by an entity that arranges trade of shares, if market price is compliant with the Order of the FFMS of Russia of 09 November 2010 № 10-65/pz-n “The Procedure For Determining The Market Value Of Securities, The Settlement Price Of Securities, And The Allowable Limit Of Market Price Tolerance Of Securities For The Purposes of Chapter 23 Of The Tax Code Of The Russian Federation”. Information concerning market value of the Company is available on MICEX web under link: http://rts.micex.ru/a1465

On the 31st December of corresponding year, market value of SMW was as follows, RUR: 2011 2012

3 856 945 702.4 2 374 179 046.4

Subsidiaries (dependent entities) of the Company

SMW is an owner of more than 5 % of total shares (charter capital), or at least 5% of voting (ordinary) shares in the following companies (subsidiaries):

1. SZD, OOO Complete subsidiary name: Limited Liability Company "Solikamsk Desulfurizers Works" Short subsidiary name: SZD,OOO Location: 9 Pravda Street, 618541, Solikamsk, Perm Region. RUSSIA.

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INN: 5919492823 OGRN: 1025901973459 The main activity: production of granular and powder magnesium Web address: www.szd.ru SMW’s share in Charter Capital of the subsidiary,%: 50 Share of the subsidiary in total shares of SMW, %: 0 Share of the subsidiary in voting shares of SMW, %: 0 2. RITM, OAO Complete subsidiary name: Open Joint-Stock Company "The Russian Titanium & Magnesium Research, Development & Designing Institute” Short subsidiary name: RITM, OAO Location: 101 Lenina Avenue, 618421, Berezniki, Perm Region. RUSSIA. INN: 5911030023 OGRN: 1025901707237 The main activity: R&D, designing & projecting works and services in technology of magnesium and rare metals, other areas Web address: http://www.oao-ritm.ru/ SMW’s share in total shares of subsidiary, %: 68 SMW’s share in total voting shares of subsidiary, %: 68 Share of subsidiary in total SMW’s shares, %: 0 Share of subsidiary in voting shares of SMW, %: 0 3. Mart, ООО Complete subsidiary name: Limited Liability Company "Mart". Short subsidiary name: Mart, OOO Location: 9 Pravda Street, 618541, Solikamsk, Perm Region. RUSSIA. INN: 5919491570 OGRN: 1025901972656 The main activity: Production of consumer goods SMW’s share in subsidiary’s charter capital,%: 51 Share of subsidiary in total SMW’s shares, %: 0 Share of subsidiary in voting shares of SMW, %: 0 4. Octane, ZAO Complete subsidiary name: Closed Joint-Stock Company "Octane". Short company name: Octane, ZAO Location: 27 Ordzhonikidze Street, 618541, Solikamsk, Perm Region. RUSSIA. INN: 5919000616 OGRN: 1025901972689 The main activity: lease of equipment of fuel station SMW’s share in total shares of subsidiary %: 50 SMW’s share in voting shares of subsidiary, %: 50 Subsidiary’s share in total shares of SMW, %: 0 Subsidiary’s share in voting shares of SMW, %: 0 5. Ecomag, ZAO Activity: inactive Complete name of the subsidiary: Closed Joint-Stock Company "Ecomag". Short name of the subsidiary: Ecomag, ZAO Location: 9 Pravda Street, 618541, Solikamsk, Perm Region. RUSSIA. INN: 5919001105 OGRN: 1025901971996 SMW’s share in total shares of subsidiary %: 50

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SMW’s share in voting shares of subsidiary, %: 50 Subsidiary’s share in total shares of SMW, %: 0 Subsidiary’s share in voting shares of SMW, %: 0

SMW’s membership in organizations and associations:

1. Tantalum – Niobium International Study Center (TIC) from 1992 2. Perm Chamber of Commerce from 1992 3. Verkhne-Kamskaya Chamber Of Commerce from 1995 4. Non-commercial Association of Analytical Centers “Analitika” from 1995 5. Association of Chlorine Industry (Association “RusChlor”) from 2006 6. Inter-state Association “Titan” from 2008 7. Association of Energy Facilities of Western Urals from 1997 8. Self-regulatory Organization Non-commercial Partnership «Union of Architectural & Designing Organizations of Perm Region” - SRO NP “SAPO” - from 2009 9. Self-regulatory Organization Non-commercial Partnership “Alliance of Builders” - from 2011 10. Council of Kama River Basin for Protection and Renewal of Water Resources-from 2009 11. Non-commercial Partnership “Council of Managing Directors of Enterprises in Solikamsk City and Solikamsk District” from 2002

PRIORITY ACTIVITIES OF THE COMPANY

The Charter and the Mission of the Company constitute that priority activities of SMW are to supply markets with magnesium, chemical and rare metals products, satisfy demand for commodities and services, and earn a profit. Development of SMW in priority areas is performed in compliance with the Company‟s Quality and Environmental Policies, Conflict-Free Raw Materials Purchasing Policy of Solikamsk Magnesium Works OAO, Collective Labor Agreement between Company‟s Administration and Trade Union of Mining & Metallurgical Industry Employees, agreements between SMW‟s Administration and Administration of Solikamsk City. Charter of the Company is available on the SMW‟s official web-site www.smw.ru under link http://smw.ucoz.ru/index/ustav_i_vvvv/0-21, and the Mission, the Quality Policy, the Environmental Policy, and the Conflict Free Raw Material Purchasing Policy of the Company are available under link http://smw.ucoz.ru/index/sistema_kachestva/0-40 in Russian and under link http://xn--g1ajo.xn--p1ai/index/eng/0-76 in English

PROGRESS IN THE COMPANY’S PRIORITY ACTIVITIES

ACTIVITIES OF THE BOARD In accordance with the SMW‟s Charter, the Board of Directors is a governing body which gener-ally manages the Company in the period between General Assemblies of Shareholders. Federal Law “About Joint Stock Companies” grants the Board the most important role in development and implementation of strategy, in successful financial and operational performance of the Company as well as in protection of shareholders‟ rights. The Charter and the Statute of the Board of Directors of SMW prescribe the Board to hold its Sessions in the case of necessity, but at least once per quarter. 6 Sessions of the Board were convened and held during the year, all of them in the form of absentee ballot sessions that is permitted by the Charter. Pursuant to article 65 of Federal Law № 208-FZ of 26 December 1995 “About Joint Stock Companies”, Article 11 of the Charter of the Company, and the Statute of the Board of Directors of SMW, the following issues were discussed by the Board: - approval of the Company‟s Budget; - discussion of candidates to the Board and Internal Audit Committee nominated by the owners of not less than 2% of the Company‟s shares and inclusion of these persons into voting bulletin for General Assembly of Shareholders;

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- provisional approval of the Annual Report, annual financial statements, and recommendations for distribution of Company‟s income (losses) for the reporting year including value of dividends per share and methods of its payment as well as value of the Company‟s income; - issues connected with convocation and preparation of the General Assembly of Shareholders;; - discussion of proposals to change the Company‟s Charter and presentation of these proposals for decision to the General Assembly of Shareholders; - approval of deals with interest; - approval of the Company‟s structure presented by the General Director; - appointment (retirement) of the persons who keeps a position of Director (assistants and deputies of General Director) in the Company‟s Administration; - election of the Chairman, the Deputy Chairman and the Secretary of the Board; - discussion of deals with value between 5% and 50% of the Company‟s assets on the date of decision to make these deals; - decision to be a shareholder in the other commercial entity – Limited Liability Company “Energy-3”; - other issues assigned to competence of the Board. Members of the Board performed its obligations in the interest of the Company, have been actively involved in discussions of the vote on all agenda of the Board. Activity of the Board was arranged and performed in accordance with the schedule and fulfillment of the Board decisions was under control. In the coming years, the Board will be concentrated on improvement of corporate managing and profitability of the Company as well as on development of sustainable, reliable and competitive policy in the main markets of products, works and services.

FINANCIAL RESULTS Negative environment of global economy and fallen prices in the markets of raw materials and commodities affected the Company‟s results. Throughout the Solikamsk‟s products, the largest drop of prices was observed in the rare earths market and at lesser extent in the markets of other products, and in spike of growth of physical shipments, sales revenues of the Company were less than that in 2011.

SMW. Total sales revenues of the Company and its distribution by market areas in 2005 - 2012, „000 RUR

Total sales revenues of the Company accounted for 5‟520.9 million RUR in 2012 representing a decrease of -15.19% compared to 6‟510.088 million RUR in 2011. Respective results in US dollar terms were 177.7 million and 222.8 million in 2011 and 2012, a drop of -20.26% year-to-year. Russian sales revenues increased by +15.2% year-to-year, from 2‟753.6 million RUR in 2011 to 3‟172.6 million RUR in 2012, equivalent of 93.9 million USD in 2011 compared to 102.1 million USD in 2012 representing a rise of +8.7% in the US dollar terms. Russian market share went up from 42.3% to 57.5% in total sales revenues of the Company.

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Export sales revenues, denominated in ruble terms, dropped by a factor of 1.6, from 3‟756.6 million RUR in 2011 to 2‟348.339 RUR in 2012. In US dollar terms exports dropped from 128.9 million USD in 2011 to 75.6 million USD in 2012, or by a factor of 1.705 year-to-year, with decrease of exports share from 57.7% in 2011 to 42.5% in 2012.

CB RF. Annual average RUR / USD exchange rate in 2005-2012

Softened Russian ruble partially offset price decreases, but elevated prices on electricity, energy sources and raw materials caused higher costs and lower profitability of the Company compared to 2011 year. Sales income accounted for + 661.036 million RUR (+21.3 million USD) in 2012, a drop by a factor of 3.36 compared to + 2‟224.2 million RUR (+75.7 million USD) in 2011, net income was + 567.975 million RUR (+18.3 million USD) in 2012, decrease by a factor of 2.78 compared to + 1‟576.7 million RUR (+53.6 million USD) in 2011. Profitability of the Company accounted for +16%, net profitability reached +13%, return of own equity was +27% and profitability of production assets resulted + 36% in 2012 compared to +54.5%, +46.4%, +170.4% и + 139.7% for respective indices in 2011.

PERFORMANCE BY OPERATIONS Historical sales revenues by aggregated type of activity (operation) as well as share of each operation in total sales revenues of the Company are provided in the diagrams below.

SMW. Distribution of total sales revenues by operations in 2005-2012, „000 RUR

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SMW. Share of each operation in total sales revenues in 2005 – 2012, %

MAGNESIUM OPERATIONS The production of magnesium metal is the starting point of the processes utilized by Solikamsk. Chlorine generated in the production of magnesium metal is the main reagent used to process loparite and other raw materials utilized by the Rare Metals Operations. Part of magnesium capacity is employed in the titanium-magnesium cycle of the titanium sponge manufacture where magnesium metal is used as the reductant of titanium from titanium tetrachloride with generation of titanium sponge and magnesium dichloride. Magnesium dichloride is then recycled back to magnesium metal and chlorine in the Magnesium Operations and magnesium then reverted back to process of titanium sponge production, while chlorine is used to process raw materials in the Rare Metals Operations. Commodity products of Magnesium Operations include pure & alloy magnesium metal and Minor Products of Magnesium Operations outlined in the corresponding article of this sub-section below. Following increased primary magnesium output, sales revenues of Magnesium Operations rose from 1‟925.9 million RUR (65.6 million USD) in 2011 to 2‟050.2 million RUR (65.9 million USD) in 2012 representing growth by +6.5% in ruble terms (see diagram above) or +0.4% in US dollar terms (see diagram below) respectively.

Sales revenues of Magnesium Operations in 2005 – 2012, million USD

Pure & alloy magnesium

39.3

47.5

54

78.3

48.7

60.9

65.6 65.9

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

2005 2006 2007 2008 2009 2010 2011 2012

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In 2012, SMW shipped to its customers 13‟517 mt of pure & alloy magnesium, +281 mt or +2.1% more than 13‟517 mt supplied in 2011. SMW is the main commodity magnesium producer in the EurAsEC market (EurAsEC is the Economic Community of Russia, Belorussia and Kazakhstan) and this market is the priority market in the sales strategy of the Company.

SMW. Shipments of magnesium metal by aggregated category in 2005-2012, mt

Total shipments of pure & alloy magnesium to EurAsEC market accounted for 13‟267 mt in 2012, an increase by +913 mt or +7.4% compared to 12‟354 mt in 2011. Out of this EurAsEC total, shipments to Russia rose from 11‟809 mt in 2011 to 12‟868 mt, a growth by + 1‟059 mt or +9% year-to-year. Exports outside EurAsEC dropped from 1‟163 mt in 2011 to 531 mt in 2012, or by a factor of -2.19 year-to-year.

SMW. Shipments of magnesium products by market areas in 2005-2012, mt

Minor products of Magnesium Operations The range of minor products of Magnesium Operations includes carnallite of different degree of processing, and products generated on different stages of magnesium production process: potash (40% K2O), potash and carnallite fluxes, calcium hypochlorite solution, slimes and other salts. Historical shipments of these products are provided on the diagram below.

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SMW. Shipments of Minor products of Magnesium Operations in 2005 -2012, mt

RARE METALS OPERATIONS

Loparite is the main raw material processed in Rare Metals Operations (RMO) of the Company. This material is a complex titanate-niobate-tantalate of rare earths, alkali and alkali-earth elements, and it typically contains 35-38% TiO2, 28-30% of rare earths oxides (TREO), 7.5-8% Nb2O5 and 0.5-0.8% Ta2O5. As the result of loparite processing, the following products are produced by Solikamsk: carbonates and oxides of mixed rare earths; synthetic concentrate, chlorides and oxides of niobium and tantalum; titanium tetrachloride and titanium sponge.

SMW. Raw materials processing in RMO in 2005 - 2012, mt

The tonnage of processed loparite was 6‟713 mt in 2012, an increase by + 566 mt or +9.2% compared to 6‟147 mt processed in 2011. Despite increased loparite supply, capacity utilization of loparite processing equipment was only 51.6%, and Solikamsk additionally processed 1‟171 mt of rutile, titanium mineral, to improve this rate. Capacity utilization of equipment to produce titanium sponge was also improved by that.

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Sales revenues of the Rare Metals Operations dropped by a factor of 1.416 in ruble terms (see diagram in Section RESULTS BY OPERATIONS above), from 4‟159.5 million RUR in 2011 to 2‟963.8 million RUR in 2012, or by a factor of 1.491 in US dollar terms, from 142.7 million USD in 2011 to 95.7 million USD (see diagram below).

SMW. Sales revenues of Rare Metals Operations in2005-2012, million USD

Niobium Compounds Pure niobium market was in good shape in the reporting year and shipments of niobium compounds rose from 430.9 mt of Nb2O5 contained in 2011 to 450.2 mt Nb2O5 in 2012, a growth by +4.6% year-to-year. Russian shipments of niobium compounds went up from 318.8 mt Nb2O5 contained in 2011 to 325.9 mt Nb2O5 in 2012, an increase by +2.2%. As the result of output growth, export shipments of niobium compounds increased from 112.0 mt Nb2O5 contained in 2011 to 124.3 mt Nb2O5 in 2012, up +11.0% year-to-year.

SMW. Shipments of niobium compounds by market areas in 2005-2012, mt Nb2O5 contained

In 2012, Solikamsk shipped to its customers 437.2 mt Nb2O5 contained in the form of technical grade niobium pentaoxide (406.2 mt Nb2O5 in 2011) and 13.0 mt Nb2O5 contained in the form of high purity grade compounds for optics and electronics (24.6 mt Nb2O5 in 2011).

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SMW. Shipments of niobium compounds by product grades, mt Nb2O5 contained

Tantalum compounds

In 2012, Solikamsk shipped to its customers 31.4 mt of Та2О5 contained in the form of tantalum compounds, +4.4 mt Та2О5 or +16.3% more than 27.0 mt Та2О5 contained in 2011. Out of this total, shipments of technical grade products (min. 99.8%), mainly used to produce tantalum metal and cemented carbide, accounted for 30.6 mt Та2О5 contained (26.7 mt Та2О5 in 2011), while shipments of high purity grade tantalum compounds (min. 99.95%), mainly used in optics and electronics, were equal to 0.8 mt Та2О5 contained (0.3 mt Та2О5 in 2011).

SMW. Shipments of tantalum compounds by grades in 2005-2012, mt Та2О5 contained

SMW. Shipments of tantalum compounds by market areas in 2005-2012, mt Та2О5 contained

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Market for tantalum compounds in Russia remains steady for the years and covered by shipments of SMW. Commercial scale production of the tantalum metal is not available in Russia and requirements of the country in the metal are covered by imports.

Compounds of Rare Earths Elements (REE) Rare earths carbonate is a semi-product in the production of certain products with natural mix of REEs, while the vast majority of REEs should be separated to individual elements or group of elements prior to its further use. Commercial scale REEs separation facilities are not available in Russia that is that the vast majority of rare earths carbonate is exported. In 2012, Solikamsk shipped to its customers 2 131.3 mt of TREO contained in rare earths carbonates that is +687.7 mt TREO or +47.6% more than 1‟443.6 mt TREO in 2011. Shipments to Russian customers accounted for 83.7 mt REO (22 mt TREO in 2011), while remaining 2‟047.6 mt TREO (1‟421.6 mt TREO in 2011) were exported.

SMW. Shipments of rare earths compounds by market areas in 2005-2012, mt TREO contained

Titanium sponge and compounds

Solikamsk shipped 1‟874.7 mt of Ti in titanium products in 2012, +10.6% or +180 mt Ti more than 1‟649.9 mt Ti in 2011.

SMW. Shipments of titanium products by market areas in 2005-2012, mt Ti contained

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SMW. Shipments of titanium by product grade, mt Ti contained

Shipments of titanium sponge and compounds to Russian customers increased from 885.5 mt Ti in 2011 to 1‟055.9 mt Ti in 2012, a growth by +10.2% or +170.4 mt Ti year-to-year, while 818.8 mt Ti of titanium sponge were exported that is +1.2% or +9.8 mt Ti more than 809 mt in 2011.

CHEMICAL OPERATIONS

The range of commodities manufactured in the Chemical Operations include calcium chloride solution (32% CaCl2), liquid chlorine (Cl2), lime and lime slurry milk. Historical shipments of these products provided in the diagram below.

SMW. Shipments of products of Chemical Operations in 2005-2012, mt

USAGE OF RAW MATERIALS AND ENERGY RESOURCES Raw materials and energy resources are the main expenses of the Company.

Raw Materials The main raw materials utilized by the Company are: - in the Magnesium Operations - carnallite; - in the Rare Metals Operations– loparite, and rutile was used as supplemental raw material - in the Chemical Operations – lime stone Raw materials‟ suppliers are:

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carnallite - SKRU-1 of ОАО «Uralkaliy», Solikamsk City, Perm Region, Russia; loparite – ООО «Loverskiy Mining & Concentration Works» (LGOK), township Revda, Murmansk Region, Russia, rutile – OAO “Titan”, Ukraine, and Iluka, Australia; lime stone – AVISMA branch of ОАО “VSMPO-AVISMA Corporation” and ООО “Halopolymer – Pashiya”, the both located in Perm Region, Russia.

Raw material purchases in 2009-2012, mt

Raw material name 2009 2010 2011 2012 Country of Origin

Carnallite 258 212 302 733 243 319 225 584 Russia

Lime stone 89 343 115 352 139 789 126 961 Russia

Loparite 6 628 5 120 6 226 6 712 Russia

Rutile - 344 1 200 1 023 Ukraine, Australia

Compliance with international regulations on trade with “conflict minerals” UN imposed an embargo on trade with materials containing tantalum, tungsten, tin and gold originated in “conflict area” of the Democratic Republic of Congo (DRC). Solikamsk did not make any purchases or processing of raw materials containing tungsten, tin and gold as well as did not make any purchases of raw materials containing tantalum, other than loparite, in 2009-2012.

Energy Resources Electricity is the main energy resource utilized by Solikamsk, and it is the main cost factor in Magnesium Operations. Natural gas is directly used in the generation of heating energy, production of lime and cell feed preparation. Heavy oil (mazut) is used as the reserve fuel in heat generation and cell feed preparation. Gasoline (benzin) and diesel fuel are the energy sources for internal-combustion engines in automotive transport employed by SMW. In 2012, SMW‟s expenses on energy resources accounted for 1‟318.2 million RUR. This is a rise of + 10.56% compared to 1‟192.5 million RUR in 2011.

Usage of energy resources in 2012 by kind of energy resource

Name of energy resource Unit Quantity Value, „000 RUR

Electricity MWh 451‟465.51 911‟368.7

Natural gas „000 м3 64‟107.827 200‟252.6

Heavy oil (mazut) mt 420.18 4‟357.4

Gasolene (benzin) mt 123.958 3‟863.2

Diesel fuel mt 441.19 11‟963.4

Cokes mt 1‟787.279 17‟364.2

Usage of heating energy:

Self-generated Gcal 287‟523.78 168‟979.3

Outside Gcal - -

Consumption of fresh water (artesian and river water) was 2.881 million m3 in 2012. In the reporting year, SMW was the winner in competition “The most energy efficient enterprise of the Western Urals in 2012”.

Award “The most energy efficient enterprise in the Western Urals in 2012” and award ceremony

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TECHNICAL DEVELOPMENT AND IT-TECHNOLOGIES In 2011, Solikamsk invested 563.6 million RUR (18.1 million USD) in renewing equipment, developing technology, and improving operational and work safety, an increase by a factor of +2.905 (+2.75 in USD) compared to 194.0 million RUR (6.6 million USD) in 2011. R&D expenses accounted for 17.6 million RUR, +5.4% above 16.7 million RUR incurred for the same purposes in 2011. As the result of investments and R&D, the following works were performed and results achieved:

in Magnesium Operations: - fluid bed furnace was brought on stream. Capacity 50 mt/day was reached; - testing works to neutralize acidic wastes with lime slurry milk were performed; - testing of electrolytic cell with increased ampere density on cathode was finished; - electricity saving in magnesium metal refining with use of continuous refining furnace accounted for 6.7 million RUR;

In Rare Metals Operations:

- testing works to optimize argon pressure were performed. Argon consumption was decreased from 0.03 mt/mt of titanium sponge to 0.026 mt/mt; - in titanium sponge process, lifetime of retort covers was increased from 5 to 9 cycles, 3 cycles with use of conic retort were performed; - analysis of carbon and sulfur content in niobium pentaoxide was automated, methods of analysis were improved; In Chemical and other operations: - analysis of atmosphere air was automated; - design to improve gas supply system of hot water boilers was performed; - compressing station U-18.5/8 was installed; - vibration diagnostic equipment were bought;

Expenses to develop IT & communication technologies accounted for 26.4 million rubles. This amount was used to update and replace software, computers and other IT-technics.

COMPLIANCE WITH INTERNATIONAL REQUIREMENTS

Integrated Management System and compliance with international requirements on trade with “conflict minerals”

SMW‟s Certificate ISO 14001:2004 SMW‟s Certificate ISO 9001:2008

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SMW developed and implemented Integrated Management System (IMS) conforming to ISO 9001:2008 “Quality Management System” and ISO 14001:2004 “Environmental Management System” that, in 2011, was amended with requirements of Due Diligence Guidelines on trade with tantalum materials enforced by UN Security Council Resolution № S/2010/596. Successful maintenance and improvement of this System is an incontestable priority for Solikamsk. In 2010, ISM of SMW was certified on compliance with ISO 9011 and 14001 international standards by TUV International Certification. Supervisory audit of the ISM was performed in 2012. Certificate validity is August 2013. In 2011, Conflict-Free Smelter Committee of EICC/GeSI audited SMW on compliance with Due Diligence Guidelines on trade with tantalum materials and found SMW compliant with these requirements. New audit is scheduled in 2013. Since 2007, SMW surveys customers‟ satisfaction and loyalty with respect to main products manufactured by the Company to improve IMS. Customers‟ satisfaction is studied using a 9-point ranking scale while customers‟ loyalty is assessed with use a 5-point scale where 9 and 5 are the best values, respectively. The average ranking of customers‟ satisfaction was 8.67 out of 9, and customers‟ loyalty was 4.18 out of 5 in 2012. Those results mean that the Company‟s products meet “customers‟ expectations”.

Customers‟ loyalty and satisfaction by products in 2011-2012

In 2012, in addition to earlier customers‟ certificates of approval, Solikamsk was awarded with certificates of OAO “UralRedMet” (Russia) and FORONI S.p.A. (Italy).

Certificate ISO/MEC 17025-2005 of SMW‟s laboratory

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For effective monitoring of quality at each stage of the production process, including environment and safety, the Company has an analytical laboratory which is equipped with equipment and devices made by world-leading Swiss, German and Russian manufacturers. It enables SMW to perform analyses using atomic-absorption (plasma atomization), atomic-emission (ark, spark and ICP), mass-spectrometry with ICP, potentiometric, X-ray fluorescent, spectral photometric and classical chemical methods. The accuracy of measuring for certain impurities is 0.01 ppm. The analytical laboratory of SMW is certified on conformance with international standard ISO/ MEC 17025-2005. Certificate validity is until 13th June 2017. The laboratory is accredited at ROSSTANDART for analysis of pure & alloy magnesium, chemical compositions of niobium, tantalum, titanium and rare earths, drinking water, river water, waste and recycled waste water, technical gaseous substances, harmful and injurious production factors (physical and chemical) with test precision conforming to technical requirements.

Compliance with International Code of Conduct for the industry Solikamsk performed self-assessment on compliance with Supplier Code of International Die – Casting Association (IDCA) and EICC Code of Conduct. As soon as Solikamsk sources both industries with its products, self-assessment was performed on compliance with the both Codes and results of this self-assessment are provided in Annex №1 to this Annual Report on the Company‟s web-site

OPERATIONAL SAFETY AND INDUSTRIAL SECURITY Solikamsk is in the process of development of Integrated Management System that covers the both Company‟s indisputable priority areas, operational safety and industrial security, and pre-pared a draft of the Standard “Integrated Management System For Operational Safety And In-dustrial Security” that is recently in the process of approval.

Operational Safety Operational safety is maintained in accordance with internal Company‟s “Standard For Opera-tional Safety”, Chapter VIII “Operational Safety” in Collective Labor Agreement between Ad-ministration and Trade Union, and Russian statutory requirements in this respect. In 2011, operational safety expenses accounted for 61.1 million RUR (1.97 million USD), including 36.98 million RUR for protection of personnel and 24.1 million RUR for safety techniques. These expenses do not include compensation paid to personnel in accordance with legislation.

Industrial Security Industrial Security is maintained by the Company in accordance with Environmental Policy, internal Company‟s “Standard For Surveillance Of Production On Compliance With Industrial Security Requirements”, Russian statutory requirements, and international standards in this respect. Expenses connected with industrial security accounted for 199.0 million RUR (6.4 million USD). These expenses do not include environmental costs specified for production processes. Avoidance of pollution is the main issue of concern at the time of design and production decisions. SMW continuously monitors contamination of air, water, and soil. This measuring helps to act effectively if pollution exceeds environmental norms. The system for radioactivity control of the surrounding environment is also developed and maintained that guarantees radiation safety for the local population. The Company has all permissions for use of natural resources. In 2012, SMW finished building of waste water channel with disposal pond for water purification under environmental project “Waste water disposal system to Kama River for industrial enterprises of Solikamsk city. New construction.” Since 2013, the Company‟s waste water will be pumped through this disposal pond. The main objective for manipulation with residues was further processing. 89% of residues generated by production are processed inside the Company. The Company has licenses for manipulation of dangerous residues as well as quotas for disposal in the surrounding area.

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Solikamsk continuously develops and performs actions to reduce air pollution and improves the efficiency of gas-scrubbing systems. In 2012, release of chlorine to atmosphere was 32 mt above that in 2011. It was a result of improved process of raw material preparation. Total release of polluting substances in atmosphere was 726.5 mt in 2012 compared to 652.91 mt in 2011. Total tonnage of pollution increased by 73.605 mt, volume of recycled water increased by +3.5% and accounted for 7.9 million cubic meters in the reporting year. The Company was awarded with laureate degree in competition “The Best 100 Companies in Russia. Environment and industrial security” and was the winner in nomination “Reputation and reliability” in operational safety.

SMW‟s environmental awards

In 2013, the Company will continue its projects under Program For Protection Of Water And Atmosphere From Pollution including construction of channel for disposal of rainy and drainage water from polygon of solid wastes, rebuilding of polygon of solid wastes, regeneration of Chyornaya River.

LIST OF THE COMPANY’S LICENSES Certain activities of SMW are subject to licensing. List of the Company‟s licenses is provided in Annex №2 to this Annual Report on the Company‟s web-site.

SOCIAL RESPONSIBILITY Social responsibility is an unavoidable priority of SMW. The policy of the Company in this area is concentrated on the following incontestable concerns: improvement of the welfare and intellectual development of personnel; support of the Company‟s veterans and pensioners; and support of culture, sports and education. These aspects of social responsibility of SMW are included in the Mission, Quality Policy and Environmental Policy and in the Collective Labor Agreement between the Company‟s Admin-istration and the Trade Union as well as in agreements between the Company‟s Administration and the Administration of Solikamsk city.

Improvement of welfare and intellectual development of personnel Employment and salaries

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OAO Solikamsk Magnesium Works, along with OAO Uralkaliy and OAO Solikamsk Pulp & Pa-per Works, ranks among the essential companies in Solikamsk city and maintains the second position in the city by number of employees. Historical number of employees and monthly salaries are provided in the diagram below.

SMW‟s employment and salaries in 2008 – 2012

According to ROSSTAT, in 2012, the growth of nominal salaries in the Perm Region, the whole Russia, and the Russian metallurgical industry was +13.4%, +13.3%, and + 12.3%, respectively. Consumer‟s Price Indices in Russia and the Perm Region were +6.0% and +5.7%, respectively, while inflation in Russia was + 6.6% in 2012. The monthly average salaries of the Company‟s employees increased by +9.5% year-to-year. The following social support to employees was done by the Company in the reporting year: - labor tariffs were increased since 01 February 2012 by +7%; - compensations for working conditions were increased by +10% since 01 February 2012. Financial performance of the Company enabled to improve minimal salaries in the Company next to subsistent wages in the Perm Region as well as the Company‟s attractiveness in the market of workforce.

Training and education of personnel Spending by the Company to train and educate its employees accounted for 13.9 million RUR in 2012, the same as in 2011. In 2012, 1‟332 workers were trained and educated by the company, 402 employees were educated under programs of improvement of qualification, 223 employees were awarded with higher skill rank, 197 specialists and managers were trained and certified on compliance with the rules of the Federal Services For Environment, Technology And Atomic Supervision. 8 students study in universities at the Company‟s expense, and 10 students have a scholarship grants under contracts with the Company. 111 study in universities and 102 study in colleges out of working hours. 167 students of universities and colleges were trained by the Company at its facilities. The Company has granted 1.6 million rubles of loans to its employees to study in universities themselves or to fund their children‟s studies. Social programs Social expenses of the Company decreased from 110.9 million RUR in 2011 to 62.630 million RUR in 2012. SMW spent 42.549 million RUR to support social infrastructure (sports, sanatorium, culture and others) and 8.382 million RUR to support retirees, veterans and other social

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programs. Payment of social bonuses to the Company‟s employees and certain other expenses accounted for 11.699 million RUR.

POSITION IN THE INDUSTRY Disclaimer: This part of Annual Report includes certain estimates performed by SMW itself, and/or by outside third parties. These studies are based on the facts collected from statistical reports, estimates, outlooks and other similar sources of information which, by SMW opinion, are based on reasonable assumptions. Nevertheless, SMW in neither event is and will be liable, if actual results differ of those expressed in this Section below, as well as SMW in neither event is and will liable for potential losses and/or injury those may happen of use of this information.

Position in the magnesium industry

End-uses of magnesium Magnesium is a silvery white metal, 1.5 times lighter than aluminium. Magnesium exhibits the best strength-to-weight ratio and is the lightest among structural metals, and contributes other important physical and chemical properties. That is that magnesium is widely used in the auto-motive, aerospace, and electronic industries as well as serves as an alloying additive in the production of aluminium alloys. It is also used in the production of vitamins, food additives and various chemical compounds; in iron and steel desulphurization and modification; as the reducing agent in the production of certain non-ferrous metals; for cathodic protection of steel structures from corrosion; as the metal for alternative energy sources; and other applications. Substitutes for magnesium may be in: - aluminium alloying –no substitutes, but aluminium alloys with magnesium may be substituted by polymers, glass, paper and steel in packaging; by magnesium alloys, polymers, composites, zinc, iron and steel in design of land-based transport and in structural uses; by magnesium alloys, titanium, steel, polymers and composites in aerospace and electronics; by steel, composites, wood and polymers in building and construction; - structural uses – aluminium and zinc alloys, polymers, composites, iron, steel and titanium; - iron and steel desulfurization – calcium carbide, lime and aluminium; - titanium sponge production - sodium and calcium metals. Titanium may also be produced by an electrolytic process and by a process of thermal decomposition of titanium iodide.

World output and consumption of primary magnesium

Note: Definitions:

Primary magnesium is a magnesium metal produced by the way decomposition of natural raw materials and does not include secondary magnesium that is produced by the way remelting of magnesium scrap and residues. Primary magnesium also does not include magnesium produced by titanium sponge manufacturers from recycled magnesium dichloride generated inside titanium-magnesium cycle of titanium sponge production.

EurAsEC (www.tsouz.ru ) is an official abbreviation of European-Asian Economic Community that includes the Russian Federation, Republic of Kazakhstan, and Republic of Belarus.

The 204th Anniversary of the discovery of the metal called “magnium” by the British scientist Sir Humphrey Davy was celebrated with historical record of production of the metal. According to statistics from China (CNIA), USGS and Solikamsk estimates, world primary magnesium production increased from 787 thousand tones in 2011 to 833 thousand tones in 2012. This is growth of +46 thousand tones or +5.8% year-to-year. Estimated output of primary magnesium by country/region is provided in the diagram below. Based on this estimate, in 2012, Solikamsk‟s share was 1.7% in the world total primary magnesium output and approximately 70% of that in Russia and EurAsEC countries.

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CNIA, USGS, SMW. Estimated world primary magnesium output in 2005-2012, „000 tpy

*data for 2012 is provisional. Output in Canada, Ukraine, EurAsEC and USA is SMW estimate, output in Israel and Brazil is

USGS estimate http://minerals.usgs.gov/minerals/pubs/commodity/magnesium/mcs-2013-mgmet.pdf, output in PRC is China

Metals Monthly http://cnm.minmetals.com.cn/default.jsp?column_no=0294 , output in Malaysia is USGS и Platt’s Metals Daily,

21 Jan 2013 page 7, Malaysia’s CVM eyes March restart after plant upgrades

SMW. World primary magnesium supply – demand balance in 2005-2012, „000 mt 1

Region/Year 2005 2006 2007 2008 2009 2010 2011 2012

Total output 639 678 754 754 606 771 787 833

Output outside China 169 153 127 123 105 117 126 135

Exports from China 353 350 408 396 234 384 400 371

Apparent consumption outside China2 522 503 535 519 339 501 526 506

EU-27 173 169 179 174 101 165 158 150

USA 122 112 109 119 52 88 87 92

Canada 44 50 33 47 24 47 48 51

Japan 47 50 49 46 28 40 41 32

Brazil 13 14 25 26 22 24 24 23

EurAsEC 10 14 15 15 7 13 18 19

Others3 113 94 125 92 105 122 150 139

Consumption inside China4 110 170 272 188 196 260 305 348

TOTAL ESTIMATED DEMAND 622 673 807 707 535 761 831 854

World supply-demand balance +17 +5 -53 +47 +71 +10 -44 -21

1according to customs exports-imports statistics and estimated output in corresponding country/region. Data may include industry inventories, data for industry inventories drawdown is not available. Consumption inside China does not include purchase of magnesium me4tal by Chinese

Government for State Stockpiles. Consumption inside China in 2012 is a provisional estimate. 2 Output outside China + exports from China 3 Difference between Apparent consumption outside China – countries/regions listed above 4 based on CNIA/CMA reports. SMW adjusted consumption of magnesium in Ti-sponge production and recalculated total consumption. 2012 is SMW

estimate based on 2011 CMA data.

SMW. Estimated primary magnesium consumption by end-use (+/-10% of tonnage) in 2010-2012, „000 mt

End-use 2010 Доля 2011 Доля 2012 Доля

Total consumption: 761 100.0 831 100.0 854 100.0

Metal reduction (pure magnesium)1 75 9.9 87 10.5 102 11.9

Structural uses (alloy magnesium)2 250 31.5 280 32.5 270 30.4

Desulfuration (granule and powder magnesium)3 143 18.8 124 14.9 129 15.1

Nodular iron (pure magnesium)4 33 4.3 35 4.2 38 4.4

Aluminium alloying and other end-uses (pure magnesium)5 260 35.5 307 37.9 315 38.2 1 Production of titanium sponge, zirconium, beryllium, uranium. Direct calculation based on titanium sponge output data (see sub-section Position

in the titanium industry below). 2 Production of castings, mill and wrought products, parts and articles made with magnesium including sacrificial

anodes for cathodic protection and other kinds of electrochemical uses of alloy magnesium like batteries, hydrogen storage, etc. 3 Desulfuration of iron and steel including miscellaneous uses of powder magnesium like pyrotechnics, perfume, etc. Based on CNIA data with output of granular

(including powder, chips, turnings, etc) magnesium in China despite availability of granular production outside China because part of Chinese chips is used in Thixo process that is structural application. 4 Based on CNIA data consumption inside + 5 kilotons outside China. 5 Calculated as the

difference between Total consumption – applications listed above. Others include pharmaceutical industry and other applications not listed above.

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Historical prices Metal-Pages, Metals Week. Annual average prices on magnesium (min.99.8%) in 2005-2012, $/mt

Magnesium consumption outlook Outlook for magnesium consumption, based on International Magnesium Association (IMA) participants estimates, is provided in the diagram below.

IMA. Magnesium consumption forecast until 2022, 000‟ tpa

Balance of capacities and demand Balance of demand and capacities is not discussed herein. According to different estimates, capacities to produce magnesium accounted for 1‟695 kilotons per annum at the end of 2012 including 1‟520 kilotons per annum in China and 175 kilotons per annum outside China, therefore capacity-demand balance is not a matter of concerns in foreseeable future.

Position in the rare earths industry

Note : All data in this sub-section is provided in total rare earths oxide (TREO) content independently on actual form of use, e.g. mixed rare earths or individual element, chemical compound or metal, unless otherwise stated.

End-uses It has been 218 years since discovery of the element called “yttrium” by its discoverer, Finnish chemist Johan Gadolin. This was the first element in the group of the 15 elements collectively called “rare earths”. Despite all 15 rare earths have single valence and similar properties, and typically occur in the earth‟s crust collectively, however, in individual form, each rare earths element enhances its own properties and in mixed form the properties of one element depress properties of the other element. This is the reason that these elements are normally separated for further use.

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The main uses of rare earths by element: Cerium (Се) - catalyst in emission combustion systems, polishing powders, modifier for nodular iron production, decolorizer and ultraviolet absorption addition for glass, flints, heat-resistant aluminium and magnesium alloys. Lanthanum (La) - oil cracking catalysts, camera and laser optics, fiber optics, modifier for nodular iron production, additive for HSLA grade steels, NiMH batteries and hydrogen storage systems, sensors, architectural and electronic ceramics, capacitors, resistors and thermistors, heat-resistant magnesium alloys. Praseodymium (Pr) – electronic and traditional ceramics, glass and enamels, high strength permanent magnets, yellow ceramic pigments, tiles, ceramic capacitors, with neodymium in combination for goggles to shield glass makers against sodium glare, cryogenic refrigerant, creep resistant magnesium alloys for elevated temperature applications (magnesium super alloys). Neodymium (Nd) – high strength permanent magnets, ceramic capacitors and other components of electronics, glazes and colored glass, lasers, petroleum cracking and polymerization catalysts, magnesium super alloys, energy saving lamps, lasers. Samarium (Sm) – permanent magnets, microwave filters, lasers, nuclear applications, constituent of computer memory chips. Europium (Eu) - phosphors, LCD/LED, energy-saving lights, neutron absorption. Gadolinium (Gd) - phosphors, permanent magnets, refrigerators, medical devices, magnesium super alloys, microwave ovens, superconductors. Yttrium (Y) - phosphors, ceramics, color glass, magnesium and aluminium super alloys. Terbium (Tb) – permanent magnets, phosphors, optical computer memories, hard disc components, magnetostrictive alloys. Dysprosium (Dy) – permanent magnets, phosphors, ceramics, nuclear applications. Holmium (Но) – permanent magnets, ceramics, lasers, nuclear applications. Erbium (Er) – ceramics, glass color, infra-red absorption glass, fiber optics, lasers, medicine and nuclear applications. Ytterbium (Yb) – metallurgical and chemical research. Lutetium (Lu) – single crystal scintillators, deoxidizer in stainless steel production, rechargeable batteries, medical uses, phosphors, superconductors. Thulium (Tm) – magnetic resonance imaging, phosphors.

Supply and demand issue Roskill, SMW. Estimated world output of rare earths in 2005-2012, „000 mt TREO

China‟s share accounted for more than 95% of total world rare earths shipments in 2012. Shipments from China cover more than 95% of the total world supply of rare earths (REEs). Besides China, Solikamsk and Molycorp in USA, were the main sources of rare earths supply to the market, independent on China. Solikamsk supplied 2.1 thousand tones TREO and Molycorp shipped 2.8 thousand tones TREO in 2012. Other supplies, mainly represented by pilot plants of different rare earths projects, accounted for between 0.5 and 2.0 thousand tones TREO. Official data concerning rare earths output in China in 2012 was not available to the date of compilations of this Report, but based on information from different sources, estimated

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production in China was about 130 thousand tones TREO in 2012, approximately the same as it was in 2011. Based on this estimate, Solikamsk‟s share was 1.5% in the world total and 100% in Russia.

Supply-demand balance in the rare earths market in 2005, 2010 – 2012, „000 mt TREO

20051 20101 20111 20122

Demand:

China 52 87 75 844

Rest of the World 46 38 35 351

TOTAL DEMAND 98 125 1102 119

Supply:

China 110 119 1302 1302

Solikamsk 2 2 1 2

Molycorp5 0 3 4 3

Others 0 0 0 2

TOTAL SUPPLY 112 124 135 137

Surplus (+)/deficit (-) +14 -1 +26 +213

1 Roskill, IMCOA – reports in conferences. 2 SMW estimate. 2011 estimate is based on excessive output over quotas and estimated illegal exports from China and taking into account consumption inside China. 32012– out of 21 thousand mt TREO excessive output

approximately 20 thousand mt TREO were stockpiled by Chinese Government in 2012 and at the beginning 2013. 4 Metal-Pages “China‟s rare earth consumption in 2013 estimated at 90,000 tonnes” https://www.metal-pages.com/news/story/70058/chinas-rare-

earth-consumption-in-2013-estimated-at-90000-tonnes/ - 11 April 2013, analyst Chen Jiazuo, Beijin Antaike. 5 Molycorp reports

www.molycorp.com , from 2012 data for Resources division in Molycorp’s reports.

Assessment of rare earths consumption is a complicated survey due to big number of elements and forms of products involved, therefore this study is performed by special research companies, the most qualified are Beijin Antaike in China, and Roskill and IMCOA in the West whose work closely together by the way of exchange of information. According to Roskill and IMCOA, rare earths consumption by end-use was as follows:

Roskill, IMCOA. Rare earths consumption by end-use in 2010-2012, „000 mt TREO

End-use/Year 2010 2011 2012

Magnetic materials 33 22 23

Metal Alloys 24 21 22

Catalyst (FCC,auto) 20 20 21

Polishing (Glass, chips) 16 18 19

Glass 11 8 8

Phosphors 8 8 9

Ceramics 5 6 7

Others 8 7 10

TOTAL: 125 110 119

Prices This part of information includes historical prices for the main rare earths oxides contained in mixed rare earths carbonates manufactured by SMW.

Metal-Pages. Annual average prices of rare earths oxides in carbonates of SMW, FOB PRC, $/mt

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Rare earths market outlook World market outlook by areas in 2013-2020, „000 mt TREO

Region/year 20131 20162 20203

China 90 107 195

Rest of the World 40 56 105

TOTAL 130 163 300 1 Metal-Pages “China’s rare earth consumption in 2013 estimated at 90,000 tonnes” https://www.metal-pages.com/news/story/70058/chinas-rare-

earth-consumption-in-2013-estimated-at-90000-tonnes/ - 11 April 2013 года, аналитик Chen Jiazuo, Beijin Antaike. 2 IMCOA-Curtis University - “The Rare Earths Industry: Comatose or In Limbo?”, November 2012 3 Metal-Pages «INSIGHT - China needs to introduce rare earths futures to

tackle oversupply» https://www.metal-pages.com/news/story/69417/insight-china-needs-to-introduce-rare-earths-futures-to-tackle-oversupply/ - 15

March 2013.

World market outlook by end-use in 2012-2020, „000 mt TREO

Область применения 20121 20162 20203

Magnets 23 36 90

Metal Alloys 22 26 50

Catalysts 21 25 35

Polishing 19 25 48

Glass 8 9 17

Phosphors 9 13 18

Ceramics 7 9 17

Others 10 20 25

TOTAL: 119 163 300 1 Averaged estimate: Roskill – «Global drivers for rare earth demand» (August 2012), IMCOA-Curtis University - “The Rare Earths Industry:

Comatose or In Limbo?” (November 2012). 2 IMCOA-Curtis University - “The Rare Earths Industry: Comatose or In Limbo?” (November 2012). 3 Metal-Pages «INSIGHT - China needs to introduce rare earths futures to tackle oversupply» - 15 March 2013.

Position in the titanium industry After the start of titanium sponge operations in 2009, the production of titanium dioxide in Solikamsk was suspended. The share of titanium tetrachloride in total titanium output is very few, and the market was not estimated for this product.

End-uses Titanium is the lightest among refractory metals, and it exhibits certain enhanced properties such as high plasticity, strength, and corrosion resistance including resistance to corrosion in high temperature environments. End-uses of titanium metal are the production of parts and mill prod-ucts for the aerospace (40-50%) and chemical and energy (30-40%) industries, production of military equipment, shipbuilding, medical appliances (implants and others), sports applications (golf clubs and other uses), and certain other applications which, depending on demand, may ac-count for between 5 and 20% of the total market for the metal.

Динамика спроса и предложения According to International Titanium Association (ITA) members data, world titanium sponge output was estimated at 238 thousand tones in 2012 , + 38 thousand tones or +19% up compared to 200 thousand tones output in 2011.

Based on the output figures expressed in the diagram below, in 2012, Solikamsk share in total world titanium sponge output was 0.9% and 4.8% of that in Russia.

ITA. World titanium sponge output in 2005 – 2012, „000 mt

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Titanium sponge prices

Metal-Pages. Annual average titanium sponge prices by grades of sponge in 2005-2012, $/kg

Titanium sponge market outlook ITA. Titanium sponge consumption outlook, „000 mt

Due to variety of delays in aircraft and industrial sectors, 2013 consumption of titanium sponge is expected to be approximately – 10% less than that in 2012 to write down customers‟ inventories, but starting 2014 consumption will be turned up, back to previous schedule of increasing demand. According to forecasts, in 2017, consumption in industrial sector and other applications (chemical industry, energy, desalination plants, military, medicine and other emerging markets) should be up by a factor of 1.5 and in aircraft industry by a factor of 1.3, representing combined growth by a factor of 1.42 compared to 2012.

Balance of capacities and demand Balance of demand and capacities is not discussed herein. Total installed capacities to produce titanium sponge accounted for 333 kilotons per annum at the end of 2012 including 148.5 kilotons in China and 184 kilotons outside China.

Position in the niobium industry Note: All data in this sub-section is recalculated to niobium pentaoxide (Nb2O5) content independently on actual form at which pure niobium is produced or consumed unless otherwise stated.

End-uses Total market of niobium (Nb) is generally divided into two main markets: HSLA Grade FeNb: Approximately 85-90% of total world niobium consumption is in the form of so-called HSLA Grade FeNb or Standard Grade FeNb that is used to produce high strength low alloy (HSLA) steels. Solikamsk does not supply this market that is that this market is not observed in this Report.

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Pure niobium market: accounts for 10-15% of entire niobium market and consists of pure & alloy niobium including niobium in alloy compositions with other metals, and niobium chemicals. The main uses of pure niobium are as follows: (1) in the form of chemicals: - production of lithium niobate which is the base of surface acoustic wave filters used to produce high resolution audio and video devices, fiber optics, lasers; - lenses for digital and still cameras, eye-glasses, coating of computer screens; - niobium oxide capacitors; - niobium carbide for hard alloy cutting tools; - niobic acid for bio-fuel catalysts (2) in the form of metal: - vacuum grade NiNb and FeNb used to produce super alloy for jet engines and gas fueled turbines; - superconductors for magnetic resonance imaging devices, magnetoencephalography, magnetic levitation transport systems, sub-atomic and other physical science like Large Hadron Collider; - mill and wrought pure & alloy niobium products for chemical processing equipment, sputtering targets, corrosion protection systems for large structures, sodium vapor lamps

The following materials can be substituted for pure niobium: ceramics, molybdenum, tantalum, tungten and titanium in high temperature applications; tantalum, lanthanum, hafnium, polymers, aluminium, and electronic ceramics in optics and electronics; tantalum, tungsten, titanium and silicon in cemented carbides; and molybdenum in catalysts.

Pure niobium market The 211th Anniversary of the discovery of the element originally called as “columbium” by its discoverer, English chemist Charles Hatchett, was celebrated with further growth of consumption in the market of pure niobium. According to TIC, shipments of pure niobium increased by +1.2%, from 6‟723 mt Nb contained (9‟618 mt Nb2O5 contained) to 6‟802 mt Nb (9‟703 mt Nb2O5 ) – a new historical record of consumption – surpassing previous record of 2011 by +79 mt Nb (+113 mt Nb2O5 ) or by +1.2% Solikamsk operates to different extents in both sectors of the pure niobium market, i.e., in supply of technical grade pentaoxide for the market of metallic niobium and in supply of high purity grade niobium compounds for optoelectronic market, although supply to the metal market represents the vast majority of SMW‟s shipments. Historical pure niobium shipments are provided in the diagram below including shipments by supplying companies whose data is known or may be reasonably estimated by SMW.

TIC, SMW, CBMM. Pure niobium shipments in 2005-2012, mt Nb2O5

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Assessment of regional markets is hampered by the lack of separate custom codes for niobium compounds. Companies producing pure niobium and niobium concentrates also prefer to keep their production data and capacities confidential.

TIC, SMW*. Pure niobium shipments by the main applications, mt Nb2O5 contained

*SMW estimate based on TIC tantalum-niobium processors’ shipments by product category

Based on the data provided above, Solikamsk share in total world pure niobium market supply is estimated at 4.6% and 100% of that in Russia. The main suppliers to the metallic pure niobium market are CBMM (Brazil), Solikamsk and Chinese processors. The other suppliers to this market are Hermann C. Starck (Germany), CIF (Brazil), Molycorp Silmet (Estonia), АО Ulba Metallurgical Plant (Kazakhstan), Mitsui Mining & Smelting (Japan). The main suppliers to the market of high purity grade products are Hermann C. Starck (Germany), Chinese processors, СВММ (Brazil), Mitsui Mining & Smelting (Japan). The other suppliers are GAM (Australia) and Solikamsk. Prices

Asianmetal, Metal-Pages. Annual average Nb pentaoxide and niobium concentrate in 2005-2012, $/kg

Pure niobium market outlook Growth of demand was observed in the all main applications of pure niobium in 2012, however, in 2013, it is expected temporary drop of pure niobium consumption by the same reasons as described for titanium sponge market above amended by poor performance of the market for electronics.

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Since 2014, it is expected revival of pure niobium consumption with CAGR +6% per annum for period 2012 – 2020 with total growth of consumption by a factor 1.6 in 2020 compared to 2012.

СВММ, SMW. Niobium market forecast for 2012-2020, mt Nb2O5

Supply-demand outlook Installed capacities to process niobium raw materials are enough to source projected growth of pure niobium consumption and this is not a matter of serious concerns, while raw material supply, that was a reason of deficit and increased prices in the pure niobium market during the last 3 years, could be a more complicated issue in foreseeable future. Nowadays, deficit was covered by increased supply of CBMM that raised niobium pentaoxide capacities from 5 kilotons per year to 7.5 kilotons per year at the end of 2012, and schedules further growth of capacities up to 10 kilotons per year in 2014, however, if market rise according to projected schedule, this capacity is enough to cover market needs until 2015-2018 years, and raw material supply issue may rise once again after that period of time. Capability of other countries to supply pure niobium market are limited by 3-5 kilotons Nb2O5 contained per year.

Position in the tantalum industry Note: All data in this sub-section is recalculated to tantalum pentaoxide (Ta2O5) content independently on actual form at which tantalum is produced or consumed unless otherwise stated.

End-uses

Tantalum market could be sub-divided by the two main sections: (1) Market of tantalum compounds used to produce:

- lithium tantalate that is the base of surface acoustic wave filters used in high precision audio and video devices, fiber optics, lasers; - optics for digital and still cameras, spectacles, X-ray films, ink jet printers; - tantalum carbide for hard alloy cutting tools;

(2) Market of tantalum metal used to produce:

- capacitor grade powder for electronic and electric industries; - jet turbines and rocket nozzles; - alloys for hard drives with shape memory; - sputtering targets; - high temperature parts of furnaces; - corrosion resistant parts of chemical processing equipment, corrosion protection systems for large structures; - implants and prosthesis; - DVD/BD-ROM, signal masts, battery charges, power rectifiers, engine management modules and auto components like ABS and airbag activation, other electronic components operating at wide range of temperature.

Solikamsk supplies the both markets described above, but the vast majority of SMW‟s shipments are concentrated on metal market supply.

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The following materials can be substituted for tantalum: niobium, aluminum and ceramics in capacitors; glass, polymers, niobium, platinum, titanium, and zirconium in corrosion-resistant equipment; hafnium, iridium, molybdenum, niobium, rhenium, tungsten, vanadium and molybdenum in high-temperature applications and superalloys; niobium, hafnium, lanthanum and polymers in optics; and niobium, titanium, silicon and tungsten in hard alloys. Tantalum market overview It has been 210 years since discovery of the element called “tantalum” by its discoverer, Swedish chemist Anders Eckeberg. According to TIC, tantalum processors shipments decreased from 2‟512 mt Ta contained (3‟067 mt Та2О5 contained) in 2011 to 2‟038 Ta (2‟489 mt Та2О5 ) in 2012, a drop by - 474 mt Та (-578 mt Та2О5) or -23.3% year-to-year.

TIC. Tantalum processors‟ shipments in 2005-2012, mt Ta2O5 contained

Based on these figures SMW‟s share accounted 1.3% in the world tantalum market and virtually 100% in tantalum pentaoxide production in Russia. Suppliers to metal market are Hermann C. Starck (Germany), GAM (Australia-USA), Chinese processors, UMP (Kazakhstan), Mitsui Mining & Smelting (Japan), CIF (Brazil), Solikamsk and Molycorp Silmet (Estonia). Suppliers of high purity chemicals used to supply optoelectronic market are Hermann C. Starck (Germany), GAM (Australia-USA), Chinese processors, Mitsui Mining & Smelting (Japan) and Solikamsk. Estimated consumption by the main end-uses of tantalum those are possible to extract from TIC statistics is provided in diagram below.

TIC, SMW*. Estimated consumption of tantalum by the main end-uses in 2005 - 2012, mt Та2О5

The main suppliers to tantalum market are:

GAM (Cabot Supermetals) + H.C. Starck (Germany+Thailand) – 40-50%

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China – 30-40% Ulba (Kazakhstan) – 11% (234 т Та = 285 т Та2О5) Molycorp Silmet, Mitsui, Treibacher (carbides), Solikamsk – remaining suppliers

Poor performance of electronic market was not the only reason of drop of tantalum processors‟ shipments; the main reason was deficit of tantalum raw materials and uncertainty in supply after imposition of an embargo on trade with tantalum materials originated from Central African countries and suspension of tantalum mining operations in Australia. Under these circumstances, center of supply migrated to Latin America that accounts for approximately 50% of total tantalum raw material supply recently, but there are only 2 commercial scale mining companies in Latin America, CIF with annual capacity 150-200 mt Та2О5

per annum and Pitinga Mine with annual capacity 100-250 mt Та2О5 per annum (where tantalum ore is a by-product of tin ore mining and output of Ta ore closely depend on tin market development), the both in Brazil, while remaining supply is performed by small scale artisanal miners and cooperatives from Brazil, Columbia, Bolivia and Argentina with monthly output 0.3-1 mt Та2О5 contained. Uncertainty in supply and elevated tantalum prices already caused replacement of tantalum with other materials in mobile phones and certain other applications.

Prices Annual average prices of tantalite (raw material), metal grade (min. 99.5%) and optoelectronic grade (min. 99.95%) tantalum pentaoxide are provided in diagram below.

Asianmetal, Metal-Pages. Annual average tantalite and tantalum pentaoxide prices in 2005 – 2012, $/кг

Tantalum market outlook Before events of 2011-2013 years those led to suspension of Australian operations and dropped supply from Central African countries, CAGR growth of tantalum consumption was estimated at 6% per annum, but due to recent uncertainty in supply may be revised.

Position in the chemical industry Calcium chloride solution is a result of gas-scrubbing in the processes utilizing chlorine as a reagent, and this material is supplied to the oil industry and for production of de-icers. Russian output of oil increased by +1.3% in 2012 and further growth of +0.5-1% is scheduled in 2013. The market for this product is very competitive with a large number of suppliers offering the material. Solikamsk estimates the Russian market for this product at 900 – 1‟000 thousand tons as recalculated to 32% CaCL2 in 2012 with Solikamsk‟s share 5-6% of the market. Chlorine is used as a disinfectant for drinking water and for waste disposal, as well as a reagent in the production of chlorine-containing organic and inorganic chemical compounds. The market for this product is also very competitive. According to Chem-Courier, shipments of commodity

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chlorine in Russia accounted for 120 thousand tons, Solikamsk share is estimated 1.3% of that. Lime and milk-of-lime slurry are substitutes for each other, and both are used in the disposal of industrial wastes as well as components of mixtures for building and construction. According to ROSSTAT, lime production in Russia was more than 10 million tons in 2012. SMW‟s share is estimated at 0.5% of that figure in 2012.

THE COMPANY’S DEVELOPMENT PROSPECTS

Further development of Solikamsk is scheduled as follows:

Development and implementation of new technologies - building of electrolytic cell BEN-90 with new design; - finishing of construction facility to crash flux

Improvement of production equipment: - Building of new repair shop

Improvement of product’s quality: - installation of mixing and cooling equipment to improve bulk density of niobium pentaoxide

Decrease of anthropogenic impact on the environment - rebuilding of aspiration system for coke milling facility - building of channel for removal of rainy and drainage waste water from polygon of solid wastes, regeneration of Chyornaya river - rebuilding of polygon for solid wastes

Protection of priority R&Ds – patenting.

Certification – certification audits of Integrated Management System on compliance with ISO 9001 and 14001, and Due Diligence Guidelines in tantalum materials purchasing

RISK FACTORS

Risk managing policy of SMW

I. Protection of individuals and population from accidents and its consequences at facilities operating with hazardous substances In order to prevent emergency situations and accidents that may arise due to the presence in

SMW‟s production structure facilities those operate with explosives and hazardous chemicals as

well as operations where minerals with increased level of natural radionuclides (loparite) are

processed, and in order to reduce potential risks those may cause possible injury to health of

employees by exposure of harmful and (or) hazardous substances at the time of performance of

their duties under the employment contract, the Company provides a set of preventive measures

as follows:

- Targeted, scheduled and unscheduled inspections by the staff of the Chief Engineer‟s

Department for Labor‟s Safety and Industrial Security to control the performance of facilities

utilizing hazardous substances, equipment and lifting devices, the implementation of the

"Comprehensive Plan Of Safety Measures" in the workshops of the plant , the implementation of

safety rules in the workplaces, as well as to control the use of necessary clothing and personal

protective equipment, the compliance with the rules of industrial hygiene;

- Arrangement and conducting of complex examination of the plant‟s workshops by managing

specialists of the Company on compliance with the rules for safety and industrial security;

- Monitoring of radiation by experts from the Radiation Safety Department (CRB) with the use of

capabilities of SMW‟s accredited Laboratory for Radiation Control (LRC) under the "Program of

radiation control in the loparite concentrate processing" coordinated with Rospotrebnadzor. LRC

controls surface contaminations (work surfaces, skin, clothing, personal protective equipment,

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transport), conditions of the sanitary-protective zone, the ground (soil), air at workplaces, air at

industrial premises and air plumes;

- Permanent monitoring of air conditions at workplaces, as well as physical factors that may

affect occupational health with use of capabilities of SMW‟s sanitary-industrial laboratory under

"Program of control for production on compliance with health regulations, and the

implementation of sanitary and anti-epidemic measures";

- Conducting of maintenance and capital repairs of tools; inspection, maintenance and

replacement of equipment and means of transportation;

- Implementation of environmental protection measures under targeted Programs to protect the

watershed and the atmosphere, under the project "Reconstruction of polygon for industrial solid

waste storage" in order to reduce gradually the negative impact on the environment in

accordance with the Environmental Policy, Russian legislation and international standards for

environmental protection;

- The preventive approach for avoidance of pollution in all decisions on the design, production

and reconstruction: the reconstruction of polygon for industrial solid waste storage, recycling

and sales of by-products generated in magnesium and titanium production, processing of

residues in rare metals operations, and others;

- The extension and obtaining necessary licenses and permits for certain types of works which

may affect safety of building structures;

- The provision of free nutrition and milk for employees working in facilities with hazardous

working conditions in accordance with state regulations;

- The holding of annual preventive medical examinations of employees working in hazardous

and unhealthy conditions, the prescription of additional medical examinations and therapy for

workers, which are included "risk group", performed for free under the Program Of

Supplementary Examinations in the Federal Medical and Research Center Of Preventive

Technologies For Managing Of Risks For Occupational Health, Perm; receiving affordable

health-care procedures in the plant's sanatorium "Zdravushka".

II. Insurance:

1. To protect its property interests, SMW annually insures goods (tantalum oxide, niobium oxide,

rare-earth carbonates, non-ferrous metals, titanium sponge) that are exported in containers, by

auto or air transport with the JSC "Russian Insurance Transport Company" (JSC "RSTK") under

the General Contract For Insurance Of Goods. Insurance of goods shipped by trucks is performed

with the Joint Stock Insurance Company "Express Garant " (Ekaterinburg branch).

2. In accordance with Article 15 of the Federal Law "On industrial safety of hazardous production

facilities" from 21.07.1997 № 116 - FZ (as amended on 25.06.2012) and the Rules Of Obligatory

Insurance Of Civil Liability By Owners Of Dangerous Objects, SMW insures civil liability before

person injured as a result of accident at the hazardous production facilities in the insurance

company "Rosgosstrakh " (under the Agreement of 23.03.2012 where are included 15 such kind

of facilities those are the main technological devisions and dangerous areas of servicing

workshops).

3. According to Article 56 of the Federal Law "Use of Atomic Energy» № 170 - FZ of 21.11.1995,

the plant insures risks of injury to life, health and property of physical persons as well as injury

to juridical persons in the event of radiation exposure caused by the Source of Ionizing

Radiation (SIR) –loparite concentrate – at the time of performance of the following operations:

operations with SIR at the time of storage, milling, processing and obtaining of goods as the

result of processing, transportation of wastes to and storage of wastes in the Facility for Storage

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Of Radioactive Wastes. Insurance is performed with the insurance Joint Stock Company

"National Insurance Group" (the OJSC "NSG").

4. SMW has Gas Rescue Team (GSS), and in accordance with the Federal Law "On the emergency

services and the status of rescuers" from 22.08.1995 № 151-FZ (Articles 31, 34), the Company

insures life, health and ability to work of 16 employees at the time of performance of their

obligations with insurance company "RSTK" under contract for insurance against accidents and

illnesses from 01.08.2012 year.

5. Under the contract of 19 February 1999 for mandatory health insurance of working citizens

(contract was extended until 01 March 2015 by amendment of 01 March 2010) with a health

insurance company "MIC" Medprana-Lux ", Perm, SMW arranges medical care under the

mandatory health insurance programs for the citizens of Perm Region for the workers, which are

in the list of the insured persons,.

6. In addition to the mandatory health insurance (OMS), since 01 January 2010, comprehensive

program of voluntary health insurance (DMS) is implemented for the employees. According to

this program, SMW pays to insurance company RSTK 60% of the monthly fees stipulated in

individual contracts of employees with "RSTK".

7. Under the contracts for Mandatory Insurance of Civil Liability of Vehicle Owners, in

accordance with the Rules for Mandatory Insurance of Civil Liability of Motor-Vehicle Owners

(OSAGO) and Applications with the insurance companies "RSTK" and "Rosgosstrakh", SMW

insures the risk of liability for damage to life, health or property in the event of road accidents.

Risks of the industry

Risk of failure to perform obligations before owners of the Company’s securities

The Company has not issued preferred shares and bonds that is that the risk of failure to perform obligations to pay dividends to owners of preferred shares and interest to holders of bonds as well as liabilities to re-purchase bonds (which may happen if market conditions are changed) is not assessed herein.

Price fluctuation on raw materials and/or services utilized by the Company in its operations (separately in Russia and abroad), and its effect on the Company’s results

Raw materials: Growing prices on raw materials are taken into account by SMW in its plans and these will not essentially affect performance of the Company‟s operations and social programs of the Company.

Energy resources: SMW‟s production is energy intensive. The main part of the electricity is purchased by the Company on the free market, where the risk of changes in tariffs exist, but taking into account that the primary fuel for producers of electricity in the region is gas, a significant change in electricity tariffs until mid-2013 is unlikely, but taking into account that government schedules increase of prices for gas in the 2nd half of 2013, and risk of further growth of electricity tariffs is high.

Price fluctuation on products and/or services manufactured/performed by the Company (separately in

Russia and abroad) and its effect on the Company’s results

Magnesium products: More than 90% of magnesium scheduled for production in 2013 is sold with fixed prices therefore price fluctuation in the Russian market and the market abroad will not essentially affect the Company‟s results.

Monor products of Magnesium Operations: Risk of price fluctuation on minor products of Magnesium Operations is not assessed due to insignificant share of these products in total sales revenues of the Company.

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Niobium compounds: Demand in the market is volatile, prices have dropped significantly at the end of 2012, but by the end of the 1st quarter of 2013, prices have stabilized and taking into account the growth of production in the aerospace industry, the market situation is expected to improve in the second half of 2013. Growth of market prices is possible.

Tantalum compounds: all volume scheduled for production in 2013 is sold under contracts with fixed prices therefore any changes of the Company‟s earnings is not expected for these products.

Titanium sponge: Demand in the market of titanium sponge is uncertain. Market instability is caused by significant accumulation of stocks in warehouses of consumers due to delays in the start of production of new models and variety of other reasons that caused lower output of aircrafts than it was initially scheduled. Manufacturers of titanium sponge around the world adjust their output downwards, while aerospace industry ramps up its production and deliveries of aircrafts that is that market for titanium sponge is expected to improve in the second half of 2013.

Rare earths compounds: More than 95% of the world supply and about 60% of the world consumption of REE are concentrated in China, where a decline in prices is observed. Demand in the market remains uncertain. However, Government of China intensified the process of consolidation and nationalization of Rare Earths industry in China with the closure of illegal enterprises and the main reason of the decline in prices is caused by intensive sales of the illegally manufactured products in order to avoid its confiscation. The largest manufacturers of rare earth in China report about losses or working on the verge of profitability, which suggests that prices will soon stabilize and may go up, but the risk of a further fall in prices for this product remains, which can significantly affect production and social programs of the Company.

Products of Chemical Operations: Risk of price fluctuation on products of Chemical Operations is not described in this Report due to insignificant share of these products in total sales revenues of the Company.

Based on combination of risks expressed above, risk of significant drop of revenues is not excluded that may affect production and social programs of the Company.

Risks of the country and regional risks Risks of the country SMW is the company that is registered and operates on the territory of Perm Region of the Russian Federation.

Political stability in Russia was observed for the last 9 years. This stability lowers political risks and provides a favorable climate for investments in the Russian economy.

Investments in Russia are associated with certain risks. Elevated oil prices have led to the stabilization of the macroeconomic situation in the country, and the growth of Russian economy is observed since the second half of 2009 and this trend has been continued in 2012 and continues in 2013. However, due to the general deterioration of the situation in the world markets, the decline of the sovereign ratings of several major countries in the Eurozone and the U.S., changes in ratings of Russia may occur for the worse, if oil prices fall significantly below the current level, and Standard & Poor's has notified Russian Government about that. As for example, Moody‟s has lowered forecast for banking system of Russia from “stable” to “negative”. Russia faces increased risks despite financial stability warns Moody‟s. The main reasons of risks are unfavorable demography and significant dependence of Russian economy on oil and gas. Assessments of credit risk of investments in Russia released by the three world leading rating agencies as on 31.12.2012 were as follows:

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- Fitch ratings: long term rating for operations in national and foreign currency is “ВВВ”, forecast “positive”, short-term rating for operations in foreign currency F3, rating of country‟s top level «ВВВ+», rating under national scale BBB (rus); - Moody‟s ratings: sovereign risk – BBB, currency risk – BB, the risk of the banking sector – B, political risk – B, the risk of economic structure – BB, deposits in foreign currency – Ваа1/P-2, debts in foreign currency – A2/P-1, forecast – “stable”; - Standards & Poor ratings: on operations in foreign currency “BBB/А-2/”, in national currency ”ВВВ+/А-2”, rating under national scale “ruAAA”, forecast – “stable”.

At present, the political situation in Russia is assessed as “stable”.

Regional risks

Concentration of power in the Federal Government substantially reduced the power of regional Governments and, consequently, reduced the influence of regional authorities on the Company‟s activities. Accordingly, the regional political risk is assessed as “low”. The consequences of technogeneous catastrophe nearby the railway station in Berezniki City continue to impact the Company's operations, but the situation has improved significantly as a result of attracting additional modes of transport in the region, which has reduced the risk of shortage in deliveries voluminous raw materials from suppliers as well as shipments of voluminous products to customers. The degree of risk for the Company - medium. The Company is located in a region where the risk of military conflicts, strikes, or a state of emergency, as well as the risk of natural disasters, etc., are “very low”.

Financial Risks

The activity of JSC «Solikamsk Magnesium Plant" is subject to a variety of financial risks: currency risk, interest rate risk, credit risk, inflation risk and liquidity risk. The company's management is committed to manage risks effectively, thus ensuring the stability of the financial performance of the company, to maintain the strategy and the mission of the Company in accordance with modern standards for quality in production and management.

Currency Risks Foreign exchange risk arises when future commercial transactions, or recognized assets, or liabilities are presented in a currency other than the functional currency of the Company. SMW is an export-oriented company that operates on an international level, exports about 50% of the products, which is subject to risks due to unfavorable changes in exchange rates. The greatest effect on the financial operations of the Company is caused by significant fluctuations of the ruble / U.S. dollar exchange rate because significant part of export revenues are in the U.S. dollar, while the ongoing administrative and operating expenses, as well as the cost of servicing of the ruble borrowings of the Company are in Russian rubles . Depreciation of the Russian ruble against the U.S. dollar has a positive impact on cash flow, and vice versa, leads to an increase of the ruble value of costs and expenses denominated in foreign currencies. Since the income and expenses of the Company are presented in different currencies, the Company's business is subject to currency risk, and the risk is assessed by the Company as significant. In the event if adverse changes in the exchange rate will be serious and sustained, the Company has the ability to hedge this risk by entering into options and forward contracts.

Risks of changes in interest rates Income and cash flow of the Company are subject to changes in interest rates due to the fact that the part of the loan portfolio is represented by borrowings using interest rates of the banks, which are based LIBOR and MosPrime rates. The increase in interest rates could lead to higher expenses to serve debt of SMW and exposes interest rate risks on the Company's cash flow, but due to the fact that the share of loans with a

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floating rate is low in the total portfolio of the Company, these risks are assessed by the Company as low. In order to reduce the impact of this risk, the Company is taking steps to improve the structure of the loan portfolio and controls the need to refinance the debt. Various scenarios are simulated taking into consideration refinancing, renewal of existing loans and alternative financing.

Inflation Risks The Company is at risk of inflationary cost increases, due to the fact that a substantial part of the cost depends on the level of inflation in the country. The negative impact of inflation on the financial and economic activities of the Company may be due to the following risks: - Risks associated with the losses in the real value of accounts receivable caused by late payment; - The risk of increasing cost of goods, works and services due to higher growth of tariffs for products and services provided by monopolies in energy resources and rail transport, increasing the prices of other goods and services, wages, etc versus possible price increases on the products manufactured by the Company. To reduce the impact of inflation risk, the Company pays key attention to the reduction of production costs, as well as the assessment of this risk when making investment decisions. Risks associated with the increase of prices for raw materials, tariffs and services are assessed by the Company as acceptable.

Liquidity Risk Liquidity risk is the risk when the company may face difficulty in fulfilling its financial obligations. The dependence of the Company revenues from negative movements in exchange rates and prices in the markets lead to difficulties in predicting the ruble equivalent of earnings in the foreign currency those are necessary for stable financing of the Company‟s running costs and it can lead to a lack of funds, and/or default on loans, leading to liquidity risk. Due diligence in the managing of liquidity risk requires maintaining of sufficient cash to fulfill the obligations of the Company and aims to maintain a sufficient level of liquidity on the basis of the monthly cash flow budgets, which are prepared for the year ahead and are updated on a monthly basis throughout the year. Liquidity risk is estimated by the Company as acceptable.

Credit Risk Credit risk is defined as the probability of loss due to the inability of the customer/counterparty to fulfill its obligations under the contract or to fulfill its obligations before the Company. The risk of loss is associated with later payment or lack of payment that may cause additional costs associated with additional financing to maintain liquidity. Financial assets, which potentially are the subject to credit risk consist primarily of trade accounts receivable, other financial assets and cash, and bank deposits. Cash and short-term deposits of the Company are located in banks with minimal risk of default. The Company has no significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, the Company believes that there is not a substantial risk of loss in excess of reserves to cover doubtful debts.

Legal risks

Legal risks of SMW are related to changes in currency, tax and customs legislation, as well as its inconsistency and lack of rules governing certain issues that could affect the Company's financial condition. Legal risks are also associated with changes in judicial practice on issues related to the activities of the Company, which may adversely affect the results of its operations and affect the SMW as well as all entities of the Russian Federation. These risks are minimal.

44

Exports are one of the main activities of SMW. Therefore, state policy with respect to revision of regulations for customs control, rates of export taxes, and methods of their collection plays a key role for the Company. Since 01 January 2012, a new version of the Nomenclature for Foreign Economic Activity of Customs Union and a new import duties were enforced. A new form of the customs value declaration DTS-2 has been introduced. The list of goods and rates in respect of which during a transitional period Kazakhstan uses the rates of import duties, which differ from the Common Customs Tariff of Customs Union (decision of the Commission of the Customs Union of 18.11.2011g. № 851 approved the Explanation to a single TN VED of Customs Union) is defined. The Company is one of two Russian producers of magnesium and magnesium alloys, and the only Russian producer of rare metal products, and taking into account the state policy aimed to support Russian producers and exporters - the changes do not carry the negative consequences for the company. Risks of general changes in licensing of foreign economic activity are considered as low. Licensing requirements for this activity have not been changed.

Risks of the Company

At present, there is no significant risks associated with the Company's participation in legal processes as the result of which the Company may be subject to sanctions, which could materially affect financial and economic activities of the Company. The Company is not involved in lawsuits related to licensing of its main activities, including li-censes issued by Russian Ministry of Mineral Resources. Risks connected with potential responsibility of the Company under debts of third parties including debts of the Company‟s subsidiaries are assessed as “low”. Risks associated with the potential loss of customers are medium, due to the fact that the largest consumer of rare earth carbonates produced by SMW, Silmet (Estonia), was bought by the company Molycorp (USA), which intends to use the capacity of Molycorp Silmet (new name) for processing of its own raw materials. For the rest of goods, SMW has opportunities to sale to other customers. Majority of products manufactured by the Company are covered by long-term contracts, which provides the reasonable ground to not be afraid of the lack of demand for the products.

CORPORATE GOVERNANCE

Dividend statements The Company did not make any decision to pay any dividends for results of the first quarter, the half a year, the nine months of the year and the whole reporting year (2012).

List of the Company’s deals that may be referred to as “large deals” under legislation In 2012, the Company did not conclude any deals that may be referred to as a “large deal” under the Federal Law “About Joint Stock Companies” or that require approval as a “large deal” under the Charter of the Company.

List of the Company’s deals that may be referred to as “deals with interest” under legislation In 2012, the Company concluded deals that may be referred to as “deals with interest”. List of these deals is provided in Annex №3 to this Report.

The Board of Directors of the Company The Board of Directors of the Company consists of 9 members.

As on 31 December 2012, the following persons were members of the Board:

Chairman of the Board:

1. Dr. Alexander S. Gutin

Year of birth: 1968 Employing entity: ООО «Kris»

45

Education and specialty under diploma: high education (Perm State Medical Institute, specialty “Stomatology” in 1990; Perm State University, specialty “Jurisprudence” in 1997, doctor degree in jurisprudence) Position in the employing entity: Director Member of the Board since 2003. % of the Company‟s shares: 0 % of the Company‟s voting shares: 0

Members of the Board:

2. Dr. Dmitriy L. Melnikov Year of birth: 1961 Employing entity: ОАО «Solikamsk Magnesium Works» Education and specialty under diploma: high education (Moscow Institute of Fine Chemical Technology with name of M.V. Lomonosov, specialty “Technology of rare and trace elements” in 1984, doctor degree in technology). Position in the employing entity: Chief Engineer Member of the Board since 2009. % of the Company‟s shares:: 0.0005

% of the Company’s voting shares: 0.0005

3. Alexei V. Prokopenko

Year of birth: 1974

Employing entity: ОАО «Solikamsk Magnesium Works»

Education and specialty under diploma: high education (Karl-Franzens Universität Graz, Austria,

specialty "Managing of enterprises" in 1997; Perm State Technical University, specialty

“Economics and managing of enterprises” in 1998).

Position in the employing entity: General Director

Member of the Board since 2011.

% of the Company’s shares: 0

% of the Company’s voting shares: 0

4. Valentin A. Sidak

Year of birth: 1947

Employing entity: data is not available

Education and specialty under diploma: high education (Moscow Institute of Fine Chemical

Technology with name of M.V. Lomonosov, specialty “Engineer and chemist for processing of

rare and trace elements” in 1971, Institute of KGB awarded with Red Flag Order belonging to

Council of Ministers of USSR, specialty “International expert” in 1976; Academy of National

Economy of Russian Government, specialty “Specialist in State policy and management of State”

in 1999).

Position in the employing entity: data is not available

Member of the Board since 2010.

% of the Company’s shares: 0

% of the Company’s voting shares: 0

5. Anastasiya B. Zalazaeva

Year of birth: 1982 Employing entity: ОАО «Solikamsk Magnesium Works»

Education and specialty under diploma: high education (Perm State Technical University,

specialty “Jurisprudence” in 2005).

Position in the employing entity: Lawyer. The Head of Corporate Governance Department.

Member of the Board since 2012.

% of the Company’s shares: 0

% of the Company’s voting shares: 0

6. Anton A. Kukushkin

46

Year of birth: 1981 Employing entity: ОOО «Nafta Moskva», Representative Office of a limited liability company

"Nafta Moskva (Cyprus) Limited".

Education and specialty under diploma: high education (Moscow State Jurisprudence Academy in

2003, postgraduate course in 2007, specialty “Jurisprudence”, doctor degree in jurisprudence)

Position in the employing entity: Lawyer.

Member of the Board since 2012.

% of the Company’s shares: 0

% of the Company’s voting shares: 0

7. Galina I. Petukhova

Year of birth: 1962

Employing entity: Administration of Solikamsk, Perm Region.

Education and specialty under diploma: high education (Perm State Technical University,

specialty “Production of aircrafts” in 1986, Perm State University, specialty “Accounting,

Analysis and Audit”,in 2002)

Position in the employing entity: Head of Financial Department

First elected to the Board of Directors in 2004.

% of the Company’s shares: 0

% of the Company’s voting shares: 0

8. Alexei Y. Pykhteev

Year of birth: 1975

Employing entity: OOO “Business-contact”

Education and specialty under diploma: high education (Perm State Technical University,

specialty “Economy” in 1997)

Position in the employing entity: Director

First elected to the Board of Directors in 2012.

% of the Company’s shares: 0

% of the Company’s voting shares: 0

9. Anton V. Timofeev

Year of birth: 1975 Employing entity: ОАО «Uralkaliy» Education and specialty under diploma: high education (Perm State University, specialty “Jurisprudence” in 1997) Position in the employing entity: The Head of Law Department First elected to the Board of Directors in 2012. % of the Company‟s shares: 0 % of the Company‟s voting shares: 0

Before elections of the Board during Annual General Assembly of Shareholders on 8 June 2012, the members of the Board were as follows:

1.Victor N. Beliakov Year of birth: 1973 Employing entity: ОАО «Uralkaliy» Education and specialty under diploma: high education (Tver State Technical University, specialty “Automated systems of managing and database processing” in 1995, Kingston Business School (UK), specialty «Information systems in economics” in 1997, MBA degree) Position in the employing entity: Director for Economics and Finance Member of the Board since 2010. % of the Company‟s shares: 0 % of the Company‟s voting shares: 0

2.Dr. Alexander S. Gutin (Chairman of the Board) 3. Evgeniy K. Kotliar

47

Year of birth: 1958 Employing entity: ОАО «Uralkaliy» Education and specialty under diploma: high education (Perm Polytechnical Institute, specialty “Technology and complex mechanization of underground mining of potassium deposits”). Position in the employing entity: Chief Engineer Member of the Board since 2003. % of the Company‟s shares: 0 % of the Company‟s voting shares: 0 4. Dr. Dmitriy L. Melnikov

5. Alexei V. Prokopenko

6. Valentin A. Sidak

7. Igor G. Tzuranov Year of birth: 1964 Employing entity: ОАО «Uralkaliy» Education and specialty under diploma: high education (Moscow State Institute of Electronics, specialty “Technology of micro-electronics, mathematic modeling, programming”). Position in the employing entity: Director for Strategy and Investments Member of the Board since 2011. % of the Company‟s shares: 0 % of the Company‟s voting shares: 0

8. Sergei B. Shalaev Year of birth: 1956 Employing entity: information is not available Education and specialty under diploma: high education (Perm Polytechnical Institute, specialty "Technology and complex mechanization of underground mining of deposits"). Position in the employing entity: information is not available Member of the Board since 2005 % of the Company‟s shares: 0.001 % of the Company‟s voting shares: 0.001

9. Marina V. Shvetzova Year of birth: 1972 Employing entity: ОАО «Uralkaliy» Education and specialty under diploma: high education (Perm State University with name of A.M. Gorkiy, specialty “Jurisprudence”). Position in the employing entity: Director for Legal Issues and Corporate Governance Member of the Board since 2011. % of the Company‟s shares: 0 % of the Company‟s voting shares: 0

There were no deals with the Company‟s shares concluded by the Board members in 2012.

Information about the person who holds the position of Exclusive Executive Authority Pursuant to article 69 of Federal Law № 208-FZ of 26 December 1995 “About Joint Stock Com-panies” and internal documents of the Company (article 12 of the Company‟s Charter, Statute of General Director of OAO “Solikamsk Magnesium Works”), the Company is managed by General Director of the Company (Exclusive Executive Authority).

General Director of the Company is: Alexei V. Prokopenko, 1974 year of birth, General Director and member of the Board since 2011.

There were no deals with Company‟s shares concluded by the General Director in 2012.

Criteria of determination of fees and amount of fees paid to the person who has the position of Exclusive Executive Authority and to members of the Board

48

The criteria for determining the wages of the General Director are set forth in sub-article 12.2 of The Company‟s Charter, article 1.3 of The Statute of General Director and the contract between the Company and General Director. By decision of the Board of Directors, and in accordance with clause 5.6. of General Director‟s employment contract, the General Director was granted with the annual bonus for the results of the Company performance in 2012. Pursuant to Statute of the Board of Directors, each member of the Board has the right to receive a monthly fee to execute the functions of a Board member. The amount of these fees is equal to the average monthly salary of industrial employees of the Company. Total fees paid to the members of the Board accounted for 20 642.425 thousand rubles in 2012.

Compliance with the Code of Corporate Conduct The Company does not have its own Code of Corporate Conduct or other similar document, however, SMW provides to shareholders all appropriate ability to participate in managing of the Company and sources them with information about the Company‟s activities in compliance with Federal Law “About Joint-Stock Companies”, Federal Law “About Securities Market” and normative enactments of federal executive agency responsible for market of securities (Federal Services for Financial Markets). The main principles of SMW in building its relationships with shareholder and investors is reasonable balance between the Company‟s interests as the operating subject and the Company‟s interests as the joint-stock company that protects rights and legal interests of its shareholders. The Company‟s governing bodies tend to follow principles and recommendations stipulated in the Code of Corporate Conduct recommended in Instruction № 421/p of 4 April 2002 “About Recommendation for Implementing of the Code of Corporate Conduct” by the Federal Commission for Securities Market. The Secretary of the Board of Directors of the Company is an authorized person who reflects the recommendations of the Code of Conduct, as well as internal documents approved by the Company aimed for the implementation of the basic principles of corporate behavior. The Company's corporate governance department ensures compliance with the procedural requirements guaranteeing the legitimate rights and interests of the shareholders of the Company shall promptly disclose information in accordance with the legislation of the Russian Federation, making it publicly available. For the convenience of shareholders - the Company organized the work to implement the transfer agent functions - reception and transmission of shareholders documents necessary for transactions in the register system, and transfer executed and received documents from the registered persons by the registrar. All persons who are interested in are regularly sourced with information about activities of the Company through official web-site of SMW www.smw.ru and information agency ZAO “Interfax” http://www.e-disclosure.ru/portal/company.aspx?id=6100 where published infromation about the Company, Charter and internal documents of the Company, quarterly reports, annual financial statements and reports, list of affiliated persons, information about essential facts (also published by RIA Interfax), documents for General Assembly of Shareholders. The Charter and internal documents of the Company contain certain norms and regulations prescribed by the Government in its Model Form of the Code of Corporate Conduct. List of compliance corporate governance of the Company consists of a smaller number of parameters in comparison with the Code recommended by the Federal Securities Commission, as a result of the current organizational structure of the Company in which the Company does not provide a collegial executive body, the committees by the directions of the Board of Directors, auditing service is not created (from 01.12.2011 operational control and audit department has been established). There is no Regulation on dividend policy due to non-payment of dividends on common stock since 2001 and because of the absence of the authorized capital of the Company's preferred shares. Compliance of the Company‟s actions and documents with this Model Form of the Code of Corporate Conduct is provided in Annex № 4.

49

THE MAIN FINANCIAL RESULTS OF THE COMPANY

Aggregated balance sheet on 31 December 2012 (in thousand rubles)

ASSETS LIABILITIES

1. Fixed assets 2 142 982 1. Equity

2 482 588

2. Inventories and expenses 590 019 2. Accounts payable and other liabilities

430 253

3. Accounts receivable, banking

accounts and other assets 1 857 008 3.

4.

Loans 587 000

including: Other long-term loans 1 090 168 Banking accounts and short-term

investments 110 727

Accounts receivable and other assets 1 725 635

TOTAL ASSETS 4 590 009 TOTAL LIABILITIES 4 590 009

Income statements for 2012 (in thousand rubles)

Item name Line code 2012

2011

Sales revenues 2110 5 520 900 6 510 088

Cost of goods sold 2120 (4 174 995) (3 787 078)

Gross margin (loss) 2100 1 345 905 2 723 010

Selling expenses 2210 (369 198) (273 898)

General & Administrative expenses 2220 (315 671) (277 765)

Sales income (loss) 2200 661 036 2 171 347

Earnings from participation in other entities (dividends) 2310 16 707 20 830

Interests receivable 2320 980 583

Interests payable 2330 (63 840) (28 782)

Other revenues 2340 419 621 466 319

Other expenses 2350 (349 591) (700 321)

Including doubtful debts 2351 (4 458) (6 776)

Income (loss) before taxation 2300 684 913 1 929 976

Current income tax 2410 (116 938) (289 316)

Including fixed tax liabilities (assets) 2421 10 776 54 166

Changes of deferred tax liabilities 2430 0 0

Changes of deferred tax assets 2450 (63 996)

Others 2460

Net income (loss) in the reporting period 2400 567 975 1 576 664

FOR REFERENCE.

Result of re-assessments of net assets not included into net income (loss) 2510 163 604 0

Results from other operations not included into net income (loss) 2520 0 0 Total financial result in the reporting period 2500 731 579 1 576 664 Earnings (losses) per share 2900 1.84 4.43 Diluted earnings (losses) per share 2910

50

REPORT OF THE COMPANY‟S AUDITOR

51

ANNEX № 1 to Annual Report 2012

of JSC Solikamsk Magnesium Works

Compliance with Code of Conduct for the Industry

Compliance with Code of Conduct for the Industry

This self-assessment is based on the Supplier Code developed by the International Die-Casting Association (IDCA) and the Electronic Industry Code Of Conduct developed by the Electronic Industry Citizenship Coalition (EICC). As soon as Solikamsk sourced both industries with its products, self-assessment was performed in compliance with both Codes. The requirements of both Codes are combined and results of self-assessment are provided in the table below.

1. Business Ethics Compliance 1.а. Compliance with legislation The Company must be in compliance with all applicable national and international laws and regulations, as well as with relevant international agreements.

Yes

1.b. Product safety The products and services provided by the Company must never endanger persons or the environment, and must meet the agreed and legally specified product safety standards. Instructions on their safe use are adequately communicated by the Company.

Yes

1.с. Anti-corruption No form of corruption will be tolerated. This pertains in particular to the payment of bribes and payoffs and to extortion in order to exert influence on business partners and representatives of the political, administrative, and judicial systems or the public.

Yes

1.d. Fair Competition, Advertising and Business The Company shall apply the rules governing fair business, advertising and competition to all its business activities. It complies with the relevant antitrust laws as well as legislation prohibiting unfair business practices. Standards of fair business, advertising and competition are to be upheld. Appropriate means to safeguard customer information must be available.

Yes

1.е. Protection of Intellectual Property The Company respects the intellectual property rights of third parties; transfer of technology and know-how is to be done in a manner that protects intellectual property rights.

Yes

1.f. Disclosure Of Information. Information regarding business activities, structure, financial situation and performance is to be disclosed in accordance with applicable regulations and prevailing industry practices.

Yes

2.Human Rights 2.а. Prohibition of Child Labor The Company may not employ anyone under the age of 15. In countries where economic standards and educational facilities are less developed, the minimum age is 14 years and for light work 13 years. The use of legitimate workplace apprenticeship programs, which comply with all laws and regulations, is supported. Dangerous work may only be performed by persons over the age of 18. (ILO Conventions 79, 138, 142, 182, Recommendation 146).

Yes

2.b. Prohibition of Forced Labor Any and all forced or compulsory labor including bonded, indentured or prison labor is prohibited. All work will be voluntary, and workers shall be free to leave upon reasonable notice. The Company or Labor Agent may not require employees to hand over personal documents, such as identification card, passport or work permit, as a condition of employment. (ILO Conventions 29, 105).

Yes

2.с. Prohibition of Discrimination Equal opportunity shall be afforded all employees in hiring, employment practices and remu-neration, promotions, rewards, and access to training. The Company should not discriminate against anyone on the grounds of gender, age, ethnic origin, nationality, religion, sexual orientation, union affiliation or any type of disability. (ILO Conventions 100, 111, 143, 158, 159).

Yes

2.d. Prohibition of Disciplinary Measures and Inhumane Treatment The Company’s disciplinary policies and procedures shall be clearly defined and communicated to workers. There is to be no harsh and inhumane treatment, including any sexual harassment, sexual abuse, corporal punishment, mental or physical coercion or verbal abuse of employees: nor is there to be the threat of any such treatment. The Company may not inflict corporal punishment or coercion of any kind on its employees. This is particularly true in the event that employees report in good faith business practices that

Yes

violate national, international or internal regulations. 3.Socially Responsible Working Conditions 3.а. Safe and Healthy Workplaces Occupational safety and health protection should be provided as a minimum in the scope of the national regulations. Employee exposure to potential safety hazards including, but not limited by that, electrical and other energy sources, fire, vehicles, potentially dangerous chemicals, biological and natural substances as well as fall hazards are to be controlled through proper design, engineering and administrative controls, preventative maintenance and safe work procedures (including lockout/tagout of potentially dangerous objects), and ongoing safety training. Where hazards cannot be adequately controlled by these means, employees are to be provided with appropriate, well-maintained, personal protective equipment. The Company must implement occupational health and safety guidelines and procedures and inform its employees of these in order to reduce or prevent accidents and occupational diseases. Risks of employees exposure to the hazards of physically demanding tasks, including manual material handling and heavy or repetitive lifting, prolonged standing and highly repetitive or forceful assembly tasks is to be identified, evaluated and controlled. Production and other machinery is to be evaluated for safety hazards. Physical guards, interlocks and barriers are to be provided and properly maintained where machinery presents an injury hazard to employees. Employees are to be provided with ready access to clean toilet facilities, potable water and sanitary food preparation, storage, and eating facilities. Employees dormitories are to be maintained clean and safe, and provided with appropriate emergency egress, hot water for bathing and showering, and adequate heat and ventilation and reasonable personal space along with reasonable entry and exit privileges. Employees shall not be disciplined for raising safety concerns. (ILO Convention 155, Recommendations 164, 190).

Yes

3.b. Emergency Preparedness Emergency situations and events are to be identified and assessed, and their impact minimized by implementing emergency plans and response procedures, including: emergency reporting, employee notification and evacuation procedures, employee training and drills, appropriate fire detection and suppression equipment, adequate exit facilities and recovery plans.

Yes

3.с. Occupational Injury and Illness Procedures and systems are to be in place to prevent, manage, track and report occupational injury and illness, including provisions to: a) encourage employee reporting; b) classify and record injury and illness cases; c) provide necessary medical treatment; d) investigate cases and implement corrective actions to eliminate their causes; and e) facilitate return of employees to work.

Yes

3.d. Living Wages, Wages and Benefits The Company shall compensate its employees adequately and in accordance with the legally or contractually stipulated minimum wages or in line with the industry standard. In compliance with local laws, employees shall be compensated for overtime at pay rates greater than regular hourly rates. The basis on which employees are being paid is to be provided in a timely manner via pay stub or similar documentation. Compensation should be sufficient to meet the basic needs of every employee and his immediate family, in addition to having a discretionary income. The Company furthermore provides the social benefits to which the employee is entitled by law. Compensation is paid transparently, at regular intervals and in the legal means of payment. Illegal and unauthorized wage deductions as well as deductions in the form of disciplinary measures are not permissible. (ILO Conventions 26, 131).

Yes

3.e. Regulated Working Hours The Company ensures that its employees do not work more than the maximum number of hours legally prescribed or collectively agreed upon in the respective country or dictated by the industry standard. The maximum working requirement should not exceed 60 hours a week (including overtime). Overtime should be voluntary and compensated by the Company according to applicable law. Employees are to be granted at least one day off following six consecutive workdays. Employees are furthermore entitled to a regular annual holiday. (ILO Conventions 1, 14).

Yes

3.f. Freedom of Association and Collective Bargaining Open communication and direct engagement between employees and management are the most effective ways to resolve workplace and compensation issues.

Yes

Employees have the right to bargain collectively and to organize themselves in labor unions. Should a labor union not be permitted in a country for political reasons, the Company must facilitate independent alliances in another form. The Company may not discriminate against employee representatives on the grounds of their function or against unionized employees because of their membership. Employees shall be able to communicate openly with management regarding working conditions without fear of reprisal, intimidation or harassment. (ILO Conventions 87, 98, 135, 154, Recommendation 143). 4. Environmental Standards 4.a. Environmental Permits and Reporting All required environmental permits (e.g. discharge monitoring), approvals and registrations are to be obtained, maintained and kept current and their operational and reporting requirements are to be followed.

Yes

4.b. Sustainable Use of Resources The Company shall reduce to a minimum the consumption of resources for every business activity. Particular emphasis shall be given to the conservation of energy and water. The use of renewable resources is encouraged wherever possible.

Yes

4.c. Prevention and Reduction of Environmental Impact, Avoidance of Hazardous Substances

The Company shall reduce or eliminate emissions and waste of all types, including water and energy, at the source or by practices such as state of the art technologies, and shall control harmful emissions and treats them prior to discharge. Waste is to be avoided or recycled wherever possible. Materials should be reused at every opportunity. Substances which pose a threat to health and the environment are to be avoided if possible. The Company shall put in place a hazardous substances management that ensures the safe use, transport, storage, treatment and disposal of hazardous substances. Wastewater and solid waste generated from operations, industrial processes and sanitation facilities are to be characterized, monitored, controlled and treated as required prior to discharge or disposal. Chemical and other materials posing a hazard if released to the environment are to be identified and managed to ensure their safe handling, movement, storage, use, recycling or reuse and disposal. Air emissions of volatile organic chemicals, aerosols, corrosives, particulates, ozone depleting chemicals and combustion by-products generated from operations are to be characterized, monitored, controlled and treated as required prior to discharge.

Yes

4.d. Environment-friendly Products The Company shall develop products and services that are efficient in their consumption of energy and natural resources and that can be recycled, reused and disposed of safely. The Company is to adhere to all applicable laws, regulations and customer requirements regarding prohibition or restriction of specific substances, including labeling for recycling and disposal.

Yes

5. Management Systems The Company shall establish management systems that adhere to the fundamental principles set forth in this Code and certify these according to recognized standards. Customer shall give preference to Companies who actively operate a quality management system according to ISO 9001, an environmental management system according to ISO 14001, in addition to OHSAS 18001 for occupational health and safety, or other comparable systems. A manage-ment system for social accountability in line with SA 8000 standards is recommended.

Yes

5.а. Company Commitment Corporate social and environmental responsibility policy statements affirming Company’s commitment to compliance and continual improvement, endorsed by executive management.

Yes

5.b. Management Accountability and Responsibility The Company clearly identifies Company representative[s] responsible for ensuring implementation of the management systems and associated programs. Senior management reviews the status of the management system on a regular basis.

Yes

5.с. Legal and Customer Requirements Identification, monitoring and understanding of applicable laws, regulations and customer requirements.

Yes

5.d. Risk Assessment and Risk Management Process to identify the environmental, health and safety and labor practice and ethics risks Yes

associated with Company’s operations. Determination of the relative significance for each risk and implementation of appropriate procedural and physical controls to control the identified risks and ensure regulatory compliance. Areas to be included in a risk assessment for environmental health and safety are production areas, warehouse and storage facilities, plant/facilities support equipment, laboratories and test areas, sanitation facilities (bathrooms), kitchen/cafeteria and employee housing/dormitories.

5.е. Improvement Objectives Written performance objectives, targets and implementation plans to improve the Company’s social and environmental performance, including a periodic assessment of Company’s performance in achieving those objectives.

Yes

5.f. Training Programs for training managers and employees to implement Company’s policies, procedures and improvement objectives and to meet applicable legal and regulatory requirements.

Yes

5.g. Communication Process for communicating clear and accurate information about Participant’s policies, practices, expectations and performance to workers, suppliers and customers.

Yes

5.h. Employees Feedback and Participation Ongoing processes to assess employees’ understanding of and obtain feedback on practices and conditions covered by this Code and to foster continuous improvement.

Yes

5.i. Audits and Assessments Periodic self-evaluations to ensure conformity to legal and regulatory requirements, the content of the Code and customer contractual requirements related to social and environmental responsibility.

Yes

5.j. Corrective Action Process Process for timely correction of deficiencies identified by internal or external assessments, inspections, investigations and reviews.

Yes

5.k. Documentation and Records Creation and maintenance of documents and records to ensure regulatory compliance and conformity to Company requirements along with appropriate confidentiality to protect privacy.

Yes

6. Implementation 6.а. Monitoring and Verification The Company should perform a self-assessment, provide correct and comprehensive infor-mation, and monitor execution of these requirements.

Yes

6.b. Non-Compliance If Company’s management system does not comply with listed requirements, the Company should apply corrective actions in order to adjust its managerial system to abovementioned requirements.

Yes

ANNEX № 2 To Annual Report 2012

Of JSC Solikamsk Magnesium Works

List of the Company’s Licenses

List of the Company’s Licenses

№ Kind of activity License № Date of

issue Validity Issuing Authority

1. Registration card for external trade

№ 10200/000776 19.03.2003 Indefinite, until is changed

Volga Territorial Agency of Federal Customs, Perm’ Office

2. Use and maintenance of X-ray equipment. List of X-ray equipment & devices: X-ray apparatus for spectral and structural analysis, X-ray defectoscopy

59.55.11.002.Л000089.07.06 31.07.2006 01.08.2016 Perm’ Territorial Agency Of Federal Agency For Supervision In Area Of Customers Protection & Human Welfare

3. Exploiting of source of radiation – apparatus containing radioactive substances

ВО-03-207-2447 06.03.2012 06.03.2017 Federal Services for Environment, Technology And Atomic Supervision Of (FS ETAN)

4. Polluting the air by stationary polluting sources of the Company

Permission for pollution of air by air contaminants № 03-04-0320

27.12.2011 10.11.2016 Federal Services for Environmental Survey

5. Local telephonia excluding coin-phones and means of collective access

№ 95054 01.01.2012 01.01.2017 Federal Services For Supervision in Area Of Communications

6. Operations of stationary unit for disposal and storage of radioactive wastes & residues

ВО-03-308-1978 26.10.2009 26.10.2012 FS ETAN

7. Operations of stationary unit for disposal and storage of radioactive wastes & residues

ВО -03-308-2534

29.10.2012 29.10.2017 FS ETAN

8. Disposal of contaminants with waste waters in water basin – Kama Basin

Permission for pollution (water objects) №2

20.11.2008 31.12.2012 Perm’ Inter-Regional Agency For Supervision of Technology & Environment

9. Disposal of contaminants with waste waters in water basin – Kama Basin

Permission for pollution of environment № 03-02-0118

27.12.2012 18.10.2017 Federal Services for Environmental Survey

10. Medical activity ЛО-59-01-000039 06.02.2008 06.02.2013 Ministry Of Health-care Of Perm’ Region

11. Exploiting of objects with chemical hazards

ВП-00-010099 (ЖХ) 15.05.2009 15.05.2014 FS ETAN

12. Exploiting of objects with explosives and flammable substances

ВП-00-010111 (ЖКМСХ) 15.05.2009 15.05.2014 FS ETAN

13. Mining of fresh underground water in water intake “Kaliyetz” for household & industrial use within SMW

ПЕМ 00660 ВЭ 04.05.2005 07.07.2015 Perm’ Nedra (Perm Ministry of Natural Resources)

14. Mining of fresh underground water for household use in Sanatorium of SMW

ПЕМ 00659 ВЭ 04.05.2005 07.07.2015 Perm’ Nedra

15. Mining of fresh underground water for household & industrial use in Pig-breeding

ПЕМ 01956 ВЭ 04.05.2005 07.07.2015 Perm’ Nedra

farm

16. Activity in collection, use, processing, transportation & disposal of Class 1-4 wastes & residues

ОП-48-001746(59) 20.08.2010 20.08.2015 FS ETAN

17. Loading/reloading operations with dangerous materials in railway transport

Серия ПРД № 5905734 21.01.2011 21.01.2016 Federal Agency For the Supervision in Area of Transportation (ROSTRANSNADZOR)

18. Exploiting of source of radiation - complex containing radioactive substances

№ ВО-03-210-2372 29.09.2011 29.09.2016 FS ETAN

19. Air pollution (except radioactive substanses)

Permission №03-04-0611 26.12.2012 31.12.2014 Perm Agency of Federal Services for Environmental Survey

ANNEX № 3 To Annual Report 2012

Of JSC Solikamsk Magnesium Works

List of Deals With Interest

Contracts for sale and supply of goods and services

Date of sale Approving Authority

Person representing

interested party

Basis of interest № of deal/ amendment

Name of interested party

Subject of the contract/agreement/amendment Validity

Contracts for Services 19.03.2012 The Board D.L.Melnikov Member of RITM Board

Member of SMW Board Protocol № 12 to contract № 26-11 от 03.02.2011

RITM - contractor Training and certification of managers and specialists of SMW on compliance to rules of Federal Services For Environment, Technology And Atomic Supervision

09.04.2012-27.04.2012

10.01.2012 General Assembly Of Share holders

D.L.Melnikov Member of RITM Board Member of SMW Board

Contract № 28-12 with Amendments № 1-6

RITM - contractor Survey: Analysis of operations of Plant №1 From date of signing to date of fulfillment

16.03.2012 The Board D.L.Melnikov Member of RITM Board Member of SMW Board

Contract № УЦ 03-014

RITM - contractor Training and certification of employees of Plants № 1,3,4,7,8,9,15,20 in number 61 under specialty “Slinger with rights to operate lifting equipment from the floor”

May 2012

25.01.2012 General Assembly Of Share holders

D.L.Melnikov Member of RITM Board Member of SMW Board

Contract № 32-12 RITM - contractor R&D and designing under theme 10-12-32 «Improvement of design of continuous refining furnace in casting workshop of Plant 1 taking into account difficulties observed during operations”

From date of signing to date of fulfillment

15.06.2012 The Board D.L.Melnikov Member of RITM Board Member of SMW Board

Protocol № 14 to contract № 26-11 от 03.02.2011

RITM - contractor Negotiation of fees for training of managers and specialists of SMW under safety rules

14.05.2012 The Board D.L.Melnikov Member of RITM Board Member of SMW Board

Additional agreement to contract № УЦ 03-014

RITM - contractor Approval of new fees for educational services May 2012

02.04.2012 The Board D.L.Melnikov Member of RITM Board Member of SMW Board

Contract № УЦ 03-015

RITM - contractor Training and certification of employees under specialty “Transportation, handling and storage of balloons with compressed liquid gases”

From date of signing to date of fulfillment

14.05.2012 The Board D.L.Melnikov Member of RITM Board Member of SMW Board

Additional agreement to contract № УЦ 03-015

RITM - contractor Approval of new fees for educational services From date of signing to date of fulfillment

04.06.2012 The Board D.L.Melnikov Member of RITM Board Member of SMW Board

Contract № УЦ 03-016

RITM - contractor Training and certification of employees under specialty «Operator of small lifting machines”

From date of signing to date of fulfillment

18.05.2012 The Board D.L.Melnikov Member of RITM Board Member of SMW Board

Contract № 52-12 with amendments №№ 1-4

RITM - contractor Designing works for titanium sponge technology Q2 2012- Q1 2013

18.05.2012 General Assembly Of Share

M.V. Shvetzova

Member of Supervisory Board of ZAO Registrator Intraco

Additional agreement to contract

ZAO Registrator Intraco - contractor

Providing of additional services From date of signing to date of fulfillment

holders V.N. Beliakov Member of SMW Board

02.05.2012 General Assembly Of Share holders

M.V. Shvetzova V.N. Beliakov

Member of Supervisory Board of ZAO Registrator Intraco Member of SMW Board

Contract for additional services

ZAO Registrator Intraco - contractor

Services for registering of participants and arrangements of General Assembly of Shareholders

From date of signing to date of fulfillment

31.05.2012 General Assembly Of Share holders

D.L.Melnikov Member of RITM Board Member of SMW Board

Protocol № 13 to contact № 26-11 of 03.02.2012

RITM - contractor Negotiation of fees From date of signing to date of fulfillment

02.07.2012 General Assembly Of Share holders

D.L.Melnikov Member of RITM Board Member of SMW Board

Contract № УЦ 03-017

RITM - contractor Training and certification of employees under specialty «Slinger»

From date of signing to date of fulfillment

03.07.2012 General Assembly Of Share holders

D.L.Melnikov Member of RITM Board Member of SMW Board

Contract № УЦ 03-018

RITM - contractor Training of SMW employees under rules of Federal Services For Environment, Technology And Atomic Supervision

From 01.01.2012 to 01.09.2012

07.08.2012 General Assembly Of Share holders

D.L.Melnikov Member of RITM Board Member of SMW Board

Protocol of fees agreement № 15 to contact № 26-11 of 03.02.2011

RITM - contractor Training and certification of SMW employees under rules of Federal Services For Environment, Technology And Atomic Supervision

From date of signing to date of fulfillment

07.08.2012 General Assembly Of Share holders

D.L.Melnikov Member of RITM Board Member of SMW Board

Contract № УЦ 03-019

RITM - contractor Training and certification of employees under specialty «Worker in cradle of lifting machine”

From date of signing to date of fulfillment

13.09.2012 General Assembly Of Share holders

D.L.Melnikov Member of RITM Board Member of SMW Board

Protocol of fees agreement № 16 к договору № 26-11 от 03.02.2011

RITM - contractor Training and certification of SMW employees under safety rules

From date of signing to date of fulfillment

12.09.2012 General Assembly Of Share holders

D.L.Melnikov Member of RITM Board Member of SMW Board

Contract № 55-12 RITM - contractor Designing and projection works «System of waste water disposal of Solikamsk city enterprises to Kama River basin “

From date of signing to date of fulfillment

22.11.2012 General Assembly Of Share holders

D.L.Melnikov Member of RITM Board Member of SMW Board

Amendment № 17 to contract № 26-11 от 03.02.2011

RITM - contractor Training and certification of SMW employees under safety rules

From date of signing to date of fulfillment

14.11.2012 General Assembly Of Share holders

D.L.Melnikov Member of RITM Board Member of SMW Board

Contract № УЦ 03-020 with Amendment № 1

RITM - contractor Training and certification of SMW employees under professions listed in Amendment № 1

From date of signing to date of fulfillment

Contracts for goods 28.02.2012 General

Assembly Of Share

M.V. Shvetzova

Member of Uralkaliy Board Member of SMW Board

Additional agreement № 3 to contract №

ОАО Uralkaliy - supplier

Carnallite supply, prolongation of contract, price agreement

From date of signing to 30.06.2012

holders V.N. Beliakov 916/ОМ

17.05.2012 General Assembly Of Share holders

D.L.Melnikov Member of SZD Board Member of SMW Board

Amendment № 3 to contract № 1037 of 23.12.2011

SZD - buyer Shipments of magnesium June-September 2012

20.04.2012 General Assembly Of Share holders

M.V. Shvetzova V.N. Beliakov

Member of Uralkaliy Board Member of SMW Board

Contract № 3195/2012

ОАО Uralkaliy - buyer

Supply of artesian water From 01 January 2013

23.08.2012 General Assembly Of Share holders

D.L.Melnikov Member of SZD Board Member of SMW Board

Amendment № 4 to contract № 1037 of 23.12.2011

SZD - buyer Shipments of pure magnesium MG90 From date of signing to date of fulfillment

26.09.2012 General Assembly Of Share holders

D.L.Melnikov Member of SZD Board Member of SMW Board

Amendment № 5 to contract № 1037 of 23.12.2011

SZD - buyer Shipments of pure magnesium MG90 From date of signing to date of fulfillment

23.11.2012 General Assembly Of Share holders

D.L.Melnikov Member of SZD Board Member of SMW Board

Amendment № 6 to contract № 1037 of 23.12.2011

SZD - buyer Shipments of pure magnesium MG90 From date of signing to date of fulfillment

14.11.2012 General Assembly Of Share holders

SMW is 50% shareholder of the buyer

SMW is 50% shareholder of the buyer

Specification № 2 to contract № 912 of 14.11.2011

OOO Mart - buyer Shipments of lime slurry 2013

ANNEX №4 To Annual Report 2012

Of JSC Solikamsk Magnesium Works Compliance with Russian Code of Corporate Conduct

№ Article in the Model Code Compliance (+)

Notes

1 2 3 4 General Assembly of Shareholders

1 Notifying of shareholders concerning date of General Assembly not later than 30 days prior to the date of General Assembly independently on issues proposed for discussion in the Assembly unless more period is prescribed by legislation

+ Article 10.13 of the Charter, Article 7.4. of The Statute of General Assembly Of Shareholders

2 Ability of shareholder to read the list of persons who have rights to participate in the Assembly from the date of announcement until the moment of closure the Assembly or, in the case of an absentee ballot Assembly, until the date on which voting ballots are accepted.

+ Article 10.18 of the Charter

3 The shareholder should be able to propose agenda items for the Assembly and request convening the Assembly without presentation of an extract from the list of shareholders if registration of his/her shareholder’s rights is made in the system of keeping the register of shareholders, and, if his/her share-holder’s rights are registered in the stock deposits, an extract from the register of stock deposits is sufficient to prove his/her rights

+ Article 10.10 of the Charter, articles 3.1 through 3.12 of The Statute of General Assembly Of Shareholders

4 The shareholder should have an access to information (documents) to be discussed during the Assembly, including access through internet and other electronic media

+ Article 10.13 of the Charter

5 The Charter of the Company should contain an article(s) that require attendance of the candidates in the Board, Executive authorities, General Director, Internal Auditing Commission and External auditing entity on the voting Assembly

Usually comply

In the Charter and internal documents of the Company this requirement is not available due to lack of this requirement in Russian legislation, while, de facto, candidates to the position of General Director, Chairman of the Board, members of the Board, Internal Auditing Commission and External auditing entity are invited to participate in such a General Assembly.

6 If the Assembly discusses the election of Board members, members of executive authorities, General Director, Internal Auditing Commission and external auditing entity, it is mandatory that candidates to these positions should attend the Assembly.

Usually comply

In the Charter and internal documents of the Company this requirement is not available due to lack of this requirement in Russian legislation, while, de facto, candidates to the position of General Director, Chairman of the Board, members of the Board, Internal Auditing Commission and External

auditing entity are invited to participate in such a General Assembly.

7 The Company’s internal documents should describe the registering procedure for attendees of the Assembly

+ Articles 12.1 through12.8 of The Statute of General Assembly of Shareholders

The Board of Directors 8 The Company’s Charter should grant the Board the

authority to approve the Company’s annual financial and business plans

+ Sub-article 1 of article 11.3 of the Charter

9 The Company’s Charter should grant the Board the authority to suspend the authority of General Director appointed by the General Assembly of Shareholders

+ Sub-article 27 of article 11.3, article 12.4 of the Charter

10 The Company’s Charter should grant the Board the authority to set forth the requirements for the qualification and compensation for the General Director, members of the managerial board, and heads of the main structural units of the Company

+ Article 11 of the Charter

11 The Company’s Charter should grant the Board the authority to approve the terms and conditions of the contracts with the General Director and members of the managerial board

+ Sub-article 27 of article 11.3, article 12.2 of the Charter

12 The Board should include at least 3 independent Directors conforming to requirements of the Code Of Corporate Conduct

+ The Board includes 3 independent Directors

13 The Board should not include individuals who were convicted of economic crimes, and/or crimes against the interests of State, against the interests of governmental, regional and municipal agencies, and/or persons who have records of administrative offences in the areas of entrepreneurship, finance, taxes and duties, and/or operations with securities.

+ The Board does not include such kind of persons

14 The Board should not include individuals who are shareholders (owners, participants), and/or members of the board, general directors and/or members of managerial authorities, and/or employees of a competing legal entity

+ The Board does not include such kind of persons

15 The Company’s Charter should contain requirements for election of the Board by means of cumulative voting

+ Article 10.9 of the Charter

16 Internal documents of the Company should include obligations of the Board members do not act at the way that may rise and/or potentially rise, a conflict between their own interests and interests of the Company. In the case if conflict arise, they should disclose before the Board the reason of such a conflict.

соблюдается Article 4.1. of the Board Statute

17 Internal documents of the Company should include obligations of the Board members to notify in writing the Board if they want to make deals with the Company’s securities or securities of the Company’s subsidiaries as well as disclose information concerning such deals if deals are happen.

+ article 4.1. of the Board Statute, Section 7 of SMW’s Rules About Insider’s Information

18 Internal documents should describe the procedures for conducting the Board meetings

+ Articles 7.1 through 7.11, 8.1 through 8.7 of the Board Statute

19 Internal documents of the Company should include provision(s) that deals with value not less than 10 % of

+ Article 11.3 of the Charter

the Company’s assets should be provisionally adopted by the Board

20 Internal documents of the Company should grant members of the Board the authority to obtain from the executive authorities and the heads of main structural units all the information they need to perform their duties as well as set forth penalties for failure to provide such an information

+ Article 3.1 of the Board Statute

21 The Board should include Committee for Strategic Planning, or other committee, except committee responsible for audit and/or personnel and/or fees, should bring function of strategic planning

+ The Company does not have such a Committee . Strategy of the Company and priorities of the Company are developed in accordance with sub-articles 1 and 36 of article 11.3 of the Charter

22 The Company’s Charter should describe the procedure of determining the quorum of the Board members that grants mandatory representation of independent directors in the Board meetings

+ Article 11.10 of the Charter

Executive Authorities 23 The executive authorities of the Company should not

include individuals who are shareholders (owners, participants), and/or members of the board, general directors and/or members of managerial authorities, and/or employees of a competing legal entity

+ Executive Authorities of the Company do not include such persons

24 The executive authorities of the Company should not include individuals who were convicted of economic crimes, and/or crimes against the interests of State, against the interests of governmental, regional and municipal agencies, and/or persons who have records of administrative offences in the areas of entrepreneurship, finance, taxes and duties, and/or operations with securities. If functions of Exclusive Executive Authority are performed by managing entity or executive officer, General Director and the Board of the managing entity or executive officer should be compliant with the same requirements as expressed in the previous paragraph above.

+ Executive Authorities of the Company do not include such persons

25 Internal documents of the Company should include obligations of Executive Authorities do not act at the way that may rise and/or potentially rise, a conflict between their own interests and interests of the Company. In the case if conflict arise, they should disclose before the Board the reason of such a conflict.

+ Article 13.1. of the Charter Article 5.1. SMW’s Statute of General Director

26 Executive Authorities should provide monthly report about their activities to the Board.

соблюдается General Director provides reports about his/her activity for the period defined in internal documents of the Company. Besides of that, General Director provides reports in accordance with Russian legislation and schedule of reporting defined by the Board in its specific decisions in this respect.

27 Contracts of the Company with General Director

(managing organization, executive officer) and managerial authorities should include provisions to keep safe from disclosure any confidential and business proprietary information of the Company as well as responsibility for violation of these non-disclosure obligations.

+ This provision is included in the contact with General Director of SMW

Secretary General of the Company 28 The Company should include specific officer

(secretary general) whose obligations are to guarantee that executive authorities of the Company follow up procedures in the interests of the Company and do not violate its right granted by law.

+ Article 10 of the Charter, article 7 of the Board Statute

29 The Company’s Charter or internal documents should describe the procedure for appointing (electing) the Secretary and his/her rights and obligations

+ Sub-article 23 of article 11.3 of the Charter, article 7.3 of the Board Statute

Critical corporate actions 30 The Company’s Charter or internal documents should

require that “large deal” must be approved prior to its signing

+ Articles 10 and 11 of the Charter

31 The Company’s Charter should include mandatory requirements of independent assessments current market price of shares and potential changes of market price of shares by independent assessor in the case of corporate takeover

Partial compliance

Charter does not include such requirements, but de facto SMW follows this requirements in accordance with Federal Law “About Joint-Stock Companies”.

32 Absence from the Company’s Charter of any provision that a buyer is free from obligations to offer other shareholders to sell voting shares (or other issued securities convertible into voting shares) in the case of takeover (absorption) of the Company

+ Charter does not include such requirements

33 Charter or internal documents of the Company should include requirements of independent assessment of conversion rate of shares by independent assessor in the case of re-organization of the Company.

Partially compliant

Charter does not include such requirements, but de facto SMW follows this requirements in accordance with Federal Law “About Joint-Stock Companies”.

Disclosure of information 34 Internal documents of the Company should describe

the information and documents those should be presented to shareholders to discuss issues included in the agenda of the General Assembly of Shareholders

+ Articles 10.13 and 10.14 of the Charter

35 The Company should have and maintain its own web-site and should regularly disclose information about the Company on this web-site

+ Web-address of the Company web-site: www.smw.ru. Articles 16.9 and 16.10 of the Charter

36 The Company should have internal document, approved by the Board, that describes use of business proprietary information concerning the Company’s activities, shares and other securities, deals with securities that should not be disclosed to public and disclosure of such an information may essentially affect market price of the Company’s shares and other

The Company has Rules Concerning Use of Inside Information approved by the Board

securities

Supervision of Financial & Economic Activities 37 The Company should have the regulatory document

adopted by the Board that describes procedures for audit of financial and economic activities of the Company by the Internal Auditing Committee.

+ The Company has approved Statute Of Internal Auditing Committee

38 The Company’s structure should include control-advisory department that guarantee execution of all the procedures of internal control (control-advisory services)

+ The Company has such Department in its structure

39 Control-advisory department should not include persons who were convicted of economic crimes, and/or crimes against the interests of State, against the interests of governmental, regional and municipal agencies, and/or persons who have records of administrative offences in the areas of entrepreneurship, finance, taxes and duties, and/or operations with securities.

+ Such persons are not available in this Department

40 Control-advisory department should not include persons who are shareholders (owners, participants), and/or members of the board, general directors and/or members of managerial authorities, and/or employees of a competing legal entity

+ Such persons are not available in this Department

41 Charter of the Company should include requirements of provisional study of deals by control-advisory department with respect to advisability of such deals, if such deals are not included in the Budget (business plan) of the Company (unusual deals)

Non-compliance

The Charter of SMW does not include such requirements

42 The Company should have internal document, approved by the Board, that describes procedures for internal audit of financial and economic activity of the Company by Internal Auditing Commission

+ Article 7 of SMW’s Statute Of Internal Auditing Commission describes this procedure