ADOPTED BY:

Annual General Assembly of Shareholders

Of JSC Solikamsk Magnesium Works

Date of General Assembly od Shareholders

28 June 2016

Protocol №2

of 01 July 2016

Provisionally Approved by:

The Board of Directors

Of JSC Solikamsk Magnesium Works

Protocol № 5

of «20 » May 2016

JOINT-STOCK COMPANY

SOLIKAMSK MAGNESIUM WORKS

ANNUAL REPORT

2015

General Director ________________ Dmitriy L. Melnikov

(signature)

Solikamsk

2016

1

TABLE OF CONTENT Page

LETTER TO SHAREHOLDERS 2 MISSION 3 GENERAL COMPANY’S INFORMATION 4 History in Brief 4 Solikamsk Magnesium Works in Brief 5 Registration Data 6 Auditor of the Company 6 Register-keeper of the Company 6 Authorized Capital of the Company 7 Shareholders of the Company 7 Market Capitalization of the Company 7 Subsidiaries (Dependent Entities) of the Company 8 SMW’s Membership in Organizations & Associations 8

PRIORITY ACTIVITIES OF THE COMPANY 9 REPORT OF THE BOARD CONCERNING PROGRESS IN THE COMPANY’S PRIORITY ACTIVITIES 9 Financial Overview 9 Performance by Operations 11 Magnesium Operations 11 Rare Metals Operations 13 Niobium Compounds 15 Tantalum Compounds 15 Compounds of Rare Earths 16 Titanium Sponge & Compounds 18 Chemical Operations 19

Usage of Raw Materials & Energy Resources 19 Technical Development & IT-Technologies 19 Compliance of Management System with International Requirements 20 Compliance with International Code of Conduct for the Industry 20 Integrated Management System of the Company & Due Diligence on Trade with “Conflict Minerals” 20

Operational & Industrial Safety 21 List of the Company’s Licenses 23 Social Responsibility 23 POSITION IN THE INDUSTRY 24 Position in the Magnesium Industry 24 Position in the Rare Earths Industry 27 Position in the Titanium Industry 30 Position in the Niobium Industry 31 Position in the Tantalum Industry 33 Position in the Chemical Industry 35

PROSPECTS OF THE COMPANY 35 RISK FACTORS 36 Technical & Operational Risks 36 Risks Associated with Lawsuits 38 Risks Associated with Inability to Prolong Existing Licenses of the Company 39 Risks Associated with Potential Liability of the Company under Obligations of the Third Parties 39 Risks Associated with the Potential Loss of Large Customers 39

CORPORATE GOVERNANCE 39 Obligations and Activities of the General Assembly of Shareholders in the Reporting Period 39 Obligations and Activities of the Board of Directors in the Reporting Period 39 Dividend Statements 40 List of the Company’s Deals Those May Be Referred to as the Large Deals under Legislation 40 List of the Company’s Deals Those May Be Referred to as the Deals with Interest under Legislation 41 The Board of Directors of the Company 41 Information on the Person Who Holds the Position of Exclusive Executive Body of the Company 43 The Main Provisions of the Company's Policy in the Field of Compensation and Reimbursement of Expenses, as well as the Criteria for Determining the Amount of Remuneration and Compensations Paid to the Members of the Board of Directors of the Company for 2015

43 The Main Provisions of the Policy of the Company's Remuneration and Reimbursement of Expenses, as well as the Criteria for Determining and Amount of Remuneration and Compensations Paid to the Members of the Executive bodies of the Company During 2015

44 Information (report) on Compliance with Principles and Recommendations of the Code of Corporate Governance Recommended by the Bank of Russia

44

Information Concerning Approval of Annual Report 44

KEY PERFORMANCE INDICATORS OF THE COMPANY 45 REPORT OF AUDITOR 46 Annexes (available only electronically in Russian under link: http://смз.рф/raport/2016/2015_godovoj_otchet_smz_2015_dlja_sajta.pdf ) Annex № 1 List of the Company’s Licenses

Annex № 2 List of “Deals with Interest” Annexе № 3 Compliance with Code of Corporate Governance Recommended by CBRF Entire Version of this Report is located on the Company’s site under link http://смз.рф/index/en_information/0-104

2

LETTER TO SHAREHOLDERS

Dmitriy L. Melnikov

General Director of OAO Solikamsk Magnesium Works

Last year – 2015 – was the most challenging year in the markets for the vast majority of commodities, fossil fuels, and raw materials since the crisis of 2008 - 2009.

The global economy continued to slow down, and its growth was well below initial expectations, due, primarily, to the low growth rate of the Chinese economy, the recession in oil and gas producing countries like Brazil and Russia, and the stagnation of the European, Japanese, and other developed economies.

This was a reason for the downward trend in prices for the whole reporting year, and this negative trend expanded to more and more industries during the year. Products of Solikamsk Magnesium Works were not immune from this negative tendency.

Despite these adverse circumstances, the performance of the Company was on a positive trend in the reporting year.

Sales revenues increased from 5’164.7 million rubles to 6’395.5 million rubles or by 23.8% year-to-year. Sales income amounted to 686.7 million rubles, which was an increase of 890.4 million rubles year-to-year compared to a loss of 203.7 million rubles in 2014. Net income increased from 40.0 million rubles in 2014 to 474.5 million rubles in the reporting year.

The global economic forecast for 2016 is not optimistic, and this outlook is regularly worsened by international financial organizations (IMF, World Bank, etc.).

All of this is a signal of a more complicated year ahead than the reporting year which has just passed.

Nevertheless, the management of the Company hopes to overcome any challenges that may arise during 2016 and to strengthen the technical and financial performance of the Company in the coming year and beyond.

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MISSION

Activities of our Company are concentrated on the manufacturing of quality magnesium, chemical and rare metals products designed for use in High-Tech

industries.

Our long-term and reciprocal relationships with customers, suppliers, employees, shareholders and the community are established with use of

efficient, environment-friendly and modern engineering approaches.

VISION

We confidently remain on leading market positions, meeting improved and modified customers’ requirements by the way of development environment-

friendly and efficient processes.

High-skilled, self-motivated and devoted employees are considered as the basic source of the Company’s success in the market.

Efficient and reciprocal relationships with our partners give us a competitive edge.

4

GENERAL COMPANY INFORMATION

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 (SMW)

● 1939: SMW had 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 and Israeli DSM were developed here

● 1962-1966: A proprietary technology to produce Mg-Zr master alloy 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 pentoxide was put into operation

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

● 1985: SMW awarded with the Order of Great Patriotic War 1941-1945 recognizing importance of SMW’s supply for Soviet Army and Navy 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 joint venture partnership with Almamet GmbH, Germany, a plant to produce magnesium granules, powders and mixes for desulfurization of iron and steel – Solikamsk Desulfurizers Works OOO SZD - 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 brought in operation

● 2000: the first ISO 9001 certification

● 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

● 6 November 2009: the first 1’000’000th ton of magnesium metal was melted by SMW

● 2010: the first ISO 14001 certification

● 2013: production of separated and individual rare earths compounds was arranged

● 2014: facility to process by-products of Magnesium Operations was brought on stream

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

5

Solikamsk Magnesium Works In Brief

Annual capacities to manufacture main products Magnesium Operations

- Pure & alloy Mg – up to 18’200 mt, including 16’200 mt output for sales; - Potash, fluxes, etc. – up to 79’320 mt; - Calcium hypochlorite solution – up to 60’000 mt

Rare Metals Operations

Capacity for loparite processing is up to 13’000 mt that enables to produce: - Niobium compounds – up to 855 mt Nb2O5 contained - Tantalum compounds – up to 60 mt Та2О5 contained - Rare earths compounds – up 3’600 mt Total Rare Earths Oxide (TREO) contained - Titanium sponge & titanium compounds – up to 2’600 mt Ti contained

Chemical Operations - Chlorine, liquid – up to 3’000 mt - Lime – up to 20’000 mt - Calcium chloride solution (32% CaCL2) – up 72’000 mt

SMW

Solikamsk Desulfurizers Works

50%

Mart

50%

Russian R&D Institute of Titanium & Magnesium

68%

SMW’s suppliers of the main raw materials SMW’s Group of the Companies

Solikamsk

SOLIKAMSK PRODUCTION FLOW CHART

Raw material supply Production Finished Products

Magnesium Operations

•Pure & alloy Mg metal •Potash (40% К2O) •Carnallite •Fluxes, etc •Ca hypochlorite solution

Chemical Operations

•32% CaCL2 solution •Lime •Lime slurry •Liquid chlorine

Ch

lori

na

tio

n

Production of rare earths compounds Rare Earths Chlorides

TiCl4

•Titanium sponge

лопарит

•Nb pentachlorides & oxides •Та pentachlorides & oxides •Ti tetrachloride •Nb пентахлориды и оксиды •Та пентахлориды и оксиды •Ti тетрахлорид

•Rare earths carbonates •Се carbonates & oxides •La carbonates & oxides •Nd carbonates & oxides •Pr carbonates & oxides •Nd/Pr carbonates & oxides •SmEuGd carbonates & oxides

рутил

Lime stone

Chlorine, Lime slurry milk

Mg

MgCl2

Chlorine (gas) Lime slurry

Rare Metals Operations

Production of Nb, Ta, Ti compounds

Production of titanium sponge

Ti, Nb, Ta chlorides

Carnallite

ООО Галополимер-Пашия

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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» In English: JSC «SMW» Company Location: 9 Pravda Str., 618541, Solikamsk, Perm Region. RUSSIA Tel: +7(34253) 51171 Fax: +7(34253) 52375 E-mail: smw@smw.ru htpp:// 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 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 inorganic chemicals OKVED 24.13 - Production of minor non-ferrous metals OKVED 27.45

- Production of castings OKVED 27.5

- Processing of metallic scrap & residues OKVED 37.10

- Building & construction works for general purposes OKVED 45.21

- Exploration of gravel and sand pits OKVED 14.21

- Generation, transfer & distribution of steam and hot water (heating energy) OKVED 40.30

- Cooking in canteens belonging to enterprises OKVED 55.51

- Managing of sports entities OKVED 92.61 - Medical practices OKVED 85.12

- Managing of medical entities OKVED 85.11

- Education of adults and other kinds of education not included in other groups OKVED 80.42

- Retail in shopping trays and market places OKVED 52.62 - Wholesale of other food OKVED 51.38 - Wholesale of processed food and meal OKVED 51.38.22 - Retail of alcohol-free soft drinks OKVED 52.25.2 - Other retail activity out of shops OKVED 52.63

The main activity in 2015: 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 http://www.smw.ru, ООО «CRCI - Interfax» http://www.e-disclosure.ru/portal/company.aspx?id=6100

Representative offices and affiliated branches: not available

Auditor of the Company Name: Closed type joint-stock company Firm Legion-Audit (ZAO Auditing Firm Legion-Audit) Location: ul. Kostycheva 42a, 614031, Perm. RUSSIA INN: 5903029169 OGRN: 1025900766870 E-mail address: office@legion-audit.ru Auditor is a member of Self-Regulatory Organization of Auditors Chamber of Auditors of Russia (Association) (SRO APR, OGRN 1037739752687, ORNZ 10401003022)

Register-keeper of the Company Name: Closed Type Joint-Stock Company Registrator Intraco Location: ul. Lenina,64, Floor №2, 614990, Perm. RUSSIA Tel/fax: +7(342) 233-01-63/233-01-64, http://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). Performs function of Register-keeper of the Company since 23 December 1996

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Authorized Capital of the Company Authorized 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

Shareholders of the Company Number of persons registered in the list of shareholders on the last date of the reporting year is 698, including 1 nominal shareholder. List of the main registered shareholders of the Company was changed during reporting year. On 25 November 2015, companies Canemare Enterprises Limited and K2 Bank sold its shares to new owners. List of shareholders owing at least 5% of authorized capital or not less than 5% of ordinary (voting) shares of the Company on 31 December 2015: 1. Igor Leonidovich Pestrikov – 24.9997 % 2. Slontecco Investments Limited – 24.0002% 3. Vojiesko Holdings Limited – 17.7100 % 4. Fullcircle Facilities Management (Cyprus) Ltd – 15.7018% 5. Sergei Yurievich Kirpichev – 7.0432% 6. Other shareholders – 10.5451 % Information concerning any agreement of any shareholder(s) and/or person(s) who keep(s) a control on any shareholder(s) act together with participation of the other shareholder(s), which may have significant impact on the Company’s activities, under which parties of such agreement(s) assume its obligations act together in connection with business activities including managing of the Company, is not available.

Market Capitalization of the Company Market price of shares of Solikamsk Magnesium Works OAO on MICEX, ruble per share

Ordinary shares of JSC SMW (trade index - MGNZ) are included in the Level 3 List of Securities permitted for trade in ZAO “Stock Exchange MICEX” (SE MICEX) since 09 June 2014. Location of exchange: 13 Bolshoi Kislovskiy pereulok, 125009, Moscow. RUSSIA Tеl: +7 (495) 363-3232, fax: +7 (495) 705-9622 Information concerning market price of SMW’s shares is readily available under link: http://www.micex.ru/marketdata/analysis?secid=MGNZ&boardid=EQNE&linetype=candles&peri

od=-1d .

8

Information concerning market capitalization of the Company is readily available under link: http://moex.com/a3503. Market capitalization of the Company on the 31st December of subsequent year was as follows, RUB:

2011 2012 2013 2014 2015

3’856’945’702.40 2’374’179’046.40 2’395‘446‘771.20 1'362'090'240.00 1’752'396'800.00

Subsidiaries (Dependent Entities) of the Company 1. OOO SZD Complete subsidiary name: Limited Liability Company Solikamsk Desulfurizers Works Short subsidiary name: OOO SZD Location: 9 Pravda Street, 618541, Solikamsk, Perm Region. RUSSIA INN: 5919492823 OGRN: 1025901973459 Company’s information: www.szd.ru The main activity: production of other non-ferrous metals SMW’s share in Authorized 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. OAO RITM Complete subsidiary name: Open Joint-Stock Company "The Russian Titanium & Magnesium Research, Development & Designing Institute” Short subsidiary name: OAO RITM Location: 101 Lenina Avenue, 618421, Berezniki, Perm Region. RUSSIA INN: 5911030023 OGRN: 1025901707237 Company’s information: www.oao-ritm.ru The main activity: research and development works in areas of natural and technical science 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. ООО Mart Complete subsidiary name: Limited Liability Company "Mart" Short subsidiary name: OOO Mart Location: 9 Pravda Street, 618541, Solikamsk, Perm Region. RUSSIA INN: 5919491570 OGRN: 1025901972656 The main activity: production of lime products SMW’s share in subsidiary’s Authorized Capital,%: 67.54% Share of subsidiary in total SMW’s shares, %: 0 Share of subsidiary in voting shares of SMW, %: 0

4. ZAO Octane – inactive 5. ZAO Ecomag - inactive Subsidiaries do not have quasi-securities (shares of SMW) at their disposal.

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. Association of Analytical Centers Analitika - from 1995 5. Non-commercial alliance Association of Chlorine Industry (Association RusChlor) - from 2006 6 ZAO 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. Non-commercial Partnership Council of Managing Directors of Enterprises in Solikamsk City and Solikamsk District - from 2002

9

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. The Company’s strategy is gradual development of products with enhanced features in order to assure sustainable sales of the Company’s products in changing market conditions.

REPORT OF THE BOARD CONCERNING PROGRESS IN THE COMPANY’S PRIORITY ACTIVITIES

FINANCIAL OVERVIEW The growth of the global economy was well below expectations in the reporting year. It was due to slowdown of Chinese economy, negative trends in oil and gas producing countries, uncertain growth of leading developing and developed countries. Forecast for 2016 is also not optimistic. Bearish trend in demand and prices affected virtually all products in the mining and processing sectors, and SMW’s products were also affected by that. Dropped oil prices caused further devaluation of Russian ruble. Softening of Russian ruble increased competitiveness of Russian producers, because particularly dampened inflated costs which was a result of Government increases in prices of products and services of natural monopolies, in taxes and non-tax fees, in key interest rate of Russian Central Bank. World prices for all of the products of the Company deflated in 2015, but key performance indicators of SMW improved due to devaluation of Russian ruble. Sales revenues of the Company accounted for ₽6’395.495 mln in the reporting year. This is a rise of +23.8% compared to ₽5’164.738 mln in 2014. The same parameter in US$ terms totaled US$104.864 mln representing a drop of – 21.6% compared to US$133.795 mln in 2014. Sales income accounted for + ₽686.735 mln (+ US$ 11.260 mln), net income totaled +₽474.540 mln (+US$ 7.792 mln) compared to sales loss of - ₽203.666 mln (-US$ 5.297 mln) and net income of +₽40.023 (+US$ 1.041 mln) in 2014.

SMW. Sales revenues and income ₽ mln, US$ mln, exchange rate ₽/US$

Sales revenues in the Russian market increased by a factor of 1.47 Y-o-Y, from ₽2'593.914 mln in 2014 to ₽3’820.781 mln in 2015, while, in USD terms, the same result accounted for US$68.514 mln and

₽ m

ln

US

$m

ln –

Ex

chan

ge

rate

, ₽/U

S$

10

US$62.757 mln respectively representing a drop of -8.41% Y-o-Y. Share of sales to Russia in total sales revenues of the Company increased from 51.2% до 59.7%.

SMW. Sales revenues, ₽ mln and US$ mln, exchange rate ₽/US$

In combination with shipments to Kazakhstan and Belarus, share of sales to EAEC market accounted for 64.4% in total sales revenues of SMW. Export sales revenues increased by +0.15%, from ₽2’570.824 mln in 2014 г to ₽2’574.714 mln in 2015, while, in USD terms, this is a drop by a factor of 1.55, from US$65.282 mln in 2014 to US$42.107 mln in 2015. Export share in total sales revenue of SMW dropped from 48.8% to 40.3% respectively.

SMW. Sales by market areas, ₽ mln and US$ mln, % on the graphs

₽ mln 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RU 582.927 917.773 1’406.640 1'589.463 1’226.148 1’747.359 2‘674.856 3’172.561 2’867.001 2'593.914 3'820.781

BY+KZ+KG+AM 27.400 65.264 146.325 178.775 251.208 330.613 1 388.396 238.671 335.514 425.794 294.969

Total EAEC 610.327 983.037 1'552.965 1'768.238 1'477.356 2'077.972 4'063.252 3'411.232 3'202.515 3'019.708 4'115.750

Americas 401.318 334.083 185.138 279.309 118.523 395.136 78.812 198.792 336.134 749.857 939.917

Asia 44.400 32.368 45.818 95.542 107.885 170.166 290.559 238.849 346.091 717.292 610.819

Europe, others 620.415 624.017 757.092 974.316 823.056 704.560 2'077.465 1'672.027 570.830 677.881 729.009

ROW 1'066.133 990.468 988.048 1'349.167 1'049.464 1'269.862 2'446.836 2'109.668 1’253.055 2'145.030 2'279.745

TOTAL 1'676.460 1'973.505 2'541.013 3'117.405 2'526.820 3'347.834 6'510.088 5'520.900 4’455.570 5'164.738 6'395.495

US

$ m

ln –

Ex

chan

ge

rate

, ₽/U

S$

₽ m

ln

11

US$ mln 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RU 20.588 33.822 55.051 63.901 38.598 57.523 90.998 102.096 89.857 68.514 62.647

BY+KZ+KG+AM 0.968 2.405 5.727 7.187 7.908 10.884 47.233 7.681 10.516 10.896 4.836

Total EAEC 21.556 36.227 60.778 71.088 46.506 68.407 138.230 109.777 100.372 79.410 67.484

Americas 14.174 12.312 7.246 11.229 3.731 13.008 2.681 6.397 10.535 19.075 15.411

Asia 1.568 1.193 1.793 3.841 3.396 5.602 9.885 7.686 10.847 17.922 10.015

Europe, others 21.912 22.996 29.630 39.170 25.909 23.194 70.675 53.808 17.891 17.388 11.953

ROW 37.654 36.501 38.669 54.240 33.036 41.804 83.240 67.891 39.273 54.385 37.380

TOTAL 59.210 72.728 99.446 125.328 79.543 110.211 221.471 177.668 139.645 133.795 104.864

SMW. Sales revenues by Operations in ₽ mln, US$ mln, %% on the graphs

₽ mln 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Magnesium Operations 1'112.110 1'287.519 1'376.143 1'938.084 1’519.937 1’850.875 1'925.943 2’050.233 2’081.928 2’117.357 2’744.153

Rare Metals Operations 463.471 551.162 895.832 956.945 793.769 1'226.470 4'159.545 2’963.816 1'830.148 2'538.288 3’220.397

Chemical & Services 100.879 134.824 269.038 222.376 213.114 270.489 424.600 506.851 543.494 509.092 430.945

TOTAL, ₽ mln 1’676.460 1'973.505 2'541.013 3'117.405 2’526.820 3’347.834 6'510.088 5'520.900 4'455.570 5’164.737 6'395.495

US$ mln 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Magnesium Operations 39.278 47.448 53.857 77.916 47.847 60.931 65.520 65.979 65.251 55.826 45.197

Rare Metals Operations 16.369 20.311 35.060 38.472 24.987 40.376 141.506 95.379 57.360 64.590 52.567

Chemical & Services 3.563 4.969 10.529 8.940 6.709 8.905 14.445 16.311 17.034 13.379 7.100

TOTAL, US$ mln 59.210 72.728 99.446 125.328 79.543 110.211 221.471 177.668 139.645 133.795 104.864

Share of Magnesium Operations in total sales revenue increased from 41.0% in 2014 to 42.9% in 2015. Sales revenues of these Operations rose from ₽2’117.357 mln to ₽2’744.153 mln respectively. This is a growth of + 29.6% in terms of Russian rouble, but this is a drop of -19.0% in USD terms Y-o-Y, from US$ 55.826 mln to US$ 45.197 mln. Share of Chemical Operations & Services in total sales revenues declined from 9.9% in 2014 to 6.7% in 2015. Sales revenues of these Operations dipped from ₽509.092 mln to ₽430.945 mln or by – 15.4% Y-o-Y. In USD terms, this is a drop of -46.9%, from US$13.379 mln to US$7.100 mln As the result of sales of separated rare earths, with higher value than original rare earths carbonate, share of Rare Metals Operations in total sales revenues improved from 49.1% in 2014 to 50.4% in 2015. Sales revenues of these Operation rose by +26.9% Y-o-Y, from ₽2'538.288 mln in 2014 to ₽3’220.397 mln in 2015, while, in USD terms, this is a drop of -18.6% Y-o-Y, from US$ 64.590 mln to US$ 52.567 mln.

PERFORMANCE BY OPERATIONS

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 production where magnesium metal is used as the reducing agent to extract 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

12

is then reverted back to the process of titanium sponge production, while chlorine is used to process raw materials on chlorination stage of the Rare Metals Operations.

SMW. Shipments of products of Magnesium Operations, mt

SMW. Shipments of products of Magnesium Operations by areas, ₽ mln and US$ mln, % (graphs)

₽ mln 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RU 346.003 686.312 787.891 950.869 725.289 1'069.342 1'513.027 1'593.712 1'770.394 1'564.447 2'087.137

KZ+BY+KG+AM 25.426 12.412 17.706 64.278 141.752 59.629 74.358 59.099 55.883 86.782 54.528

Total ЕАEС 371.429 698.724 805.597 1'015.147 867.041 1'128.971 1'587.385 1’652.811 1'826.277 1'651.229 2'141.666

Americas 353.513 301.409 145.509 213.598 90.097 347.386 41.177 16.947 15.720 234.785 221.453

Asia 0.000 0.000 1.573 90.752 88.535 113.769 197.789 199.387 113.724 120.073 185.825

Europe and others 387.168 287.386 423.464 618.587 474.264 260.749 99.592 181.088 126.207 111.270 195.220

Total ROW 740.681 588.795 570.546 922.937 652.896 721.904 338.558 397.422 255.651 466.128 602.498

TOTAL 1’112.110 1'287.519 1'376.143 1'938.084 1'519.937 1'850.875 1'925.943 2'050.233 2'081.928 2'117.357 2'744.163

US$ mln 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RU 12.220 25.292 30.835 38.227 22.832 35.203 51.473 51.287 55.487 41.648 34.425

KZ+BY+KG+AM 0.898 0.457 0.693 2.584 4.462 1.963 2.530 1.902 1.751 2.326 0.929

Total ЕАEС 13.118 25.749 31.528 40.812 27.294 37.166 54.002 53.189 57.239 43.974 35.354

Americas 12.486 11.108 5.695 8.587 2.836 11.436 1.401 0.545 0.493 5.948 3.532

Asia 0.000 0.000 0.062 3.648 2.787 3.745 6.729 6.416 3.564 3.051 2.976

Europe and others 13.674 10.591 16.573 24.869 14.930 8.584 3.388 5.828 3.956 2.921 3.336

Total ROW 26.160 21.698 22.329 37.104 20.553 23.765 11.518 12.789 8.013 11.92 9.844

TOTAL 39.278 47.448 53.857 77.916 47.847 60.931 65.520 65.979 65.251 55.894 45.197

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13

Pure & alloy magnesium are the main products of Magnesium Operations, while other or minor products of these Operations include processed carnallite mainly used to produce salts for balneotherapy, potash (min. 40% K2O) mainly used as the fertilizer, fluxes and other salts mainly used in the non-ferrous industry, and calcium hypochlorite solution used for disinfection of premises and paper bleach.

SMW. Shipments of pure & alloy magnesium by areas, mt and in %% (graphs) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RU 4'222 7'642 8'643 6'460 5'861 9'307 11'809 12'868 13'315 11'207 10'729

KZ+BY+KG+AM 355 274 213 596 240 154 549 399 330 609 243

Total ЕАEС 4'578 7'916 8'856 7'056 6'101 9'461 12'358 13'267 13'645 11'816 10'972

Americas 5'315 6'257 2'441 2'570 901 3'544 375 142 138 1'695 1'051

Asia 0 0 21 1 003 215 80 0 0 20 0 0

Europe and others 5'625 6'080 6'391 5'952 4'903 2'376 784 389 167 233 437

Total ROW 10'940 12'337 8'853 9'525 6'019 6'000 1'159 531 325 1 928 1'488

TOTAL 15'518 20'253 17'709 16'581 12'120 15'461 13'517 13'798 13'970 13'744 12'460

Low priced imports to EAEC countries, mainly from China, were the main reason of dropped output and shipments of magnesium products in the reporting year. In 2015, SMW shipped 12’460 mt of pure & alloy magnesium. This is a drop of – 9.3% or -1’284 mt compared to 13’744 mt in 2014. Shipments of pure magnesium (min.99.9%) accounted for 11'425 mt, ultra-pure magnesium (min.99.5%) totaled 401 mt, magnesium super (MZr1Nd3) and master (L2, L4, M2) alloys accounted for 113 mt, and shipments of common grade of magnesium alloys amounted to 521 mt. Shipments to EAEC market declined from 11’816 mt in 2014 to 10’972 mt in 2015. This is a drop of -844 mt or -7.1% Y-o-Y. Out of this total, shipments to Russia accounted for 10’729 mt. This is a decline of -478 mt or -2.7% compared to 11’207 mt in 2014. Exports outside EAEC accounted for 1’488 mt in 2015. It was a drop of -440 mt or -22.8% compared to 1’928 mt exported in 2014. Out of other products of Magnesium Operations, potash is the main product of export, while other products are mostly sold in Russia and shipments abroad are very few.

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-earths elements, and typically contains 35-38% TiO2, 28-30% TREO, 7.5-8% Nb2O5 and 0.5-0.8% Ta2O5. As the result of processing of raw materials, the following products are produced by Solikamsk: carbonates and oxides of rare earths; chemical concentrate, pentachlorides and pentoxides of niobium and tantalum; titanium sponge and tetrachloride. Solikamsk processed 8’509 mt of loparite in 2015. This is a growth of +810 mt or +10.5% compared to 7’699 mt in 2014. In contrast to previous years, loparite was the only raw material processed in 2015.

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Growth of shipments was observed for all aggregate categories of products of Rare Metals Operations, except for tantalum compounds.

SMW. Raw materials processing in Rare Metals Operations, mt

SMW. Shipments of Rare Metals Operations by aggregate product category, mt of the main substance contained

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Rare Earths compounds, mt TREO 2'026.8 2'935.0 2'711.0 2'470.0 1'898.0 1'495.5 1'443.6 2'131.3 1'443.1 2'133.8 2'312.3

Titanium products, mt Ti 1'413.7 1'716.1 2'231.3 1'788.3 647.7 1'605.8 1'694.9 1'874.7 1'452.2 1'981.8 2'013.9

Niobium compounds, mt Nb2O5 638.7 656.2 688.4 584.9 511.0 397.1 430.8 450.2 510.7 580.7 628.2

Tantalum compounds, mt Ta2O5 35.4 37.8 47.7 39.3 34.8 31.0 27.0 31.4 32.2 39.9 31.6

SMW. Sales revenues of Rare Metals Operations by market areas, ₽ mln, US$ mln, %% (graphs),

₽ mln 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RU 145.062 247.492 192.328 406.884 266.324 374.353 704.189 1'071.931 553.113 520.375 1'302.709

KZ+BY+KG+AM 6.181 52.853 128.619 114.497 109.457 270.984 1'314.038 179.571 279.631 339.012 240.441

Total EAEC 151.243 300.344 320.947 521.381 375.780 645.336 2'018.227 1'251.502 832.744 859.387 1'543.150

Americas 47.805 32.674 330.647 65.711 28.425 47.750 37.635 179.179 320.414 515.072 533.789

Asia 44.400 32.368 1.573 10.988 35.983 56.397 92.769 36.897 237.269 597.219 718.464

Europe and others 220.022 185.776 242.665 358.865 353.581 476.986 2'010.914 1'496.238 439.721 566.611 424.9937

Total ROW 312.228 250.818 574.885 435.564 417.989 581.134 2'141.318 1'712.314 997.404 1'678.902 1'677.247

TOTAL 463.471 551.162 895.832 956.945 793.769 1'226.470 4'159.545 2'963.816 1'830.148 2'538.289 3'220.397

US$ mln 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RU 5.123 9.121 7.527 16.358 8.384 12.324 23.956 34.496 17.336 13.554 21.233

KZ+BY+KG+AM 0.218 1.948 5.034 4.603 3.446 8.921 44.703 5.779 8.764 8.570 4.132

Total EAEC 5.342 11.068 12.561 20.961 11.829 21.245 68.659 40.275 26.100 22.124 25.365

Americas 1.688 1.204 12.940 2.642 0.895 1.572 1.280 5.766 10.042 13.128 11.570

Asia 1.568 1.193 0.062 0.442 1.133 1.857 3.156 1.187 7.436 14.871 7.113

Europe and others 7.771 6.846 9.497 14.427 11.130 15.702 68.410 48.151 13.782 14.467 8.519

Total ROW 11.027 9.243 22.499 17.511 13.158 19.131 72.847 55.104 31.260 42.466 27.203

TOTAL 16.369 20.311 35.060 38.472 24.987 40.376 141.506 95.379 57.360 64.590 52.567

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Niobium Compounds Due to increased output, shipments of niobium compounds rose from 580.7 mt Nb2O5 contained in 2014 to 628.2 mt Nb2O5 in 2015. This is a growth of +47.5 mt or +8.2% Y-o-Y.

SMW. Shipments of niobium compound by market areas, mt Nb2O5 contained and in %% (graphs)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RU 131.0 130.9 174.6 153.7 269.4 260.4 318.8 325.9 175.3 153.6 242.2

KZ+BY+AM+KG 15.1 35.2 83.9 0.2 0.1 0.2 0.1 0.2 0.1 0.1 0.0

Total EAEC 146.2 166.1 258.5 153.9 269.5 260.6 318.9 326.1 175.4 153.7 242.2

Americas 91.5 117.4 89.6 206.1 41.8 56.3 21.1 90.0 247.6 403.6 367.1

Asia 129.6 75.3 43.7 10.1 28.8 0.0 0.0 0.0 0.0 0.0 0.0

Europe and others 271.4 297.5 296.7 214.9 170.9 80.2 90.8 34.1 87.7 23.4 18.9

Total ROW 492.5 490.2 429.9 431.0 241.5 136.5 111.9 124.2 335.3 427.0 386.0

TOTAL 638.7 656.2 688.4 584.9 511.0 397.1 430.8 450.2 510.7 580.7 628.2

Shipments of niobium compounds by product grades, mt Nb2O5

Shipments to EAEC grew from 158.7 mt Nb2O5 in 2014 to 242.2 mt Nb2O5 in 2015 due to increased demand in Russia. This is a rise by a factor of 1.53 or by +83.5 mt Nb2O5 Y-o-Y. Shipments to Belarus and Kazakhstan were very few. Shipments outside EAEC decreased from 427.0 mt Nb2O5 in 2014 г to 386.0 mt Nb2O5 in 2015. This is a drop of -41.0 mt Nb2O5 or -9.6% Y-o-Y. Shipments of metallurgical grade pentoxide accounted for 608.4 mt Nb2O5 and high purity grade compounds for optics and electronics totaled 19.7 mt Nb2O5.

Tantalum Compounds Russian demand for tantalum compounds is relatively small due to lack of commercial scale tantalum metal facilities inside Russia and covered by shipments of SMW, while demand of Russia for tantalum metal is covered by imports, mainly from Kazakhstan.

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Due to oversupply, tantalum market worsened during a year and part of tantalum compounds remained in inventory. In 2015, SMW shipped to its customers 31.6 mt Та2О5 contained. This is a drop of -8.3 mt Та2О5 or -20.8% compared to 39.9 mt Та2О5 in 2014.

SMW. Shipments of tantalum compounds by market areas, in %% (graphs) and mt Ta2O5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RU 3.2 1.7 2.7 1.3 2.0 2.1 2.0 3.0 1.6 2.4 3.4

KZ+BY+AM+KG 0.0 13.5 25.0 22.4 26.2 19.6 0.0 3.1 25.0 34.2 16.2

Toal ЕАEС 3.2 15.2 27.7 23.7 28.2 21.7 2.0 6.1 26.6 36.6 19.6

Americas 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.9 0.0

Asia 2.5 0.2 4.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Europe and other 29.7 22.4 15.7 15.6 6.6 0.0 25.0 25.3 5.6 2.4 12.0

Total ROW 32.2 22.6 20.0 15.6 6.6 9.3 25.0 25.3 5.6 3.3 12.0

TOTAL 35.4 37.8 47.7 39.3 34.8 31.0 27.0 31.4 32.2 39.9 31.6

SMW. Shipments by product grades, mt Ta2O5 contained

Compounds of Rare Earths

Original rare earths carbonate manufactured by Solikamsk has a limited range of applications, and the main use of this product is a semi-product to produce separated and individual rare earths by further extraction. In 2015, SMW shipped to its customers 2’312.3 mt TREO contained in rare earths compounds. This is a rise of +178.5 mt TREO or +8.4% compared to 2'133.8 mt TREO in 2014. Shipments of original carbonates accounted for 1’772.4 mt TREO. This is an increase of +323.4 mt TREO or +22.3% compared to 1’449.0 mt TREO in 2014. Shipments of separated products totaled 539.9 mt TREO in 2015. This is a drop of – 144.9 mt TREO or – 21.2% compared to 684.8 mt TREO in 2014.

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Shipments to EAEC market accounted for 228.6 mt TREO. This is a growth of +118.8 т TREO or by a factor of 2.08 compared to 109.8 mt TREO in 2015 including 4.9 mt TREO in the form of original carbonate and 223.7 mt TREO in the form of separated products, all of them to Russia. Shipments outside EAEC (ROW) accounted for 2’083.7 mt TREO. This is a rise of +59.9 mt TREO or +2.9% compared to 2’024.0 mt TREO в 2014 including 1’548.7 mt TREO in the form of original carbonate and 535.0 mt TREO in the form of separated products. Out of ROW shipments, shipments to Asia amounted 888.8 mt TREO including 564.8 mt TREO in the form of original carbonate and 324.0 mt TREO in the form of separated products. Sales to Europe increased from 1’171.1 mt TREO in 2014 to 1’194.9 mt TREO in 2015. This is a growth of +23.8 mt TREO or +2.0% including 983.9 mt TREO in the form of original carbonate and 211.0 mt TREO in the form of separated products.

SMW. Shipments of rare earths compounds by product category, mt TREO contained

SMW. Shipments of rare earths compounds by market areas, in %% (graphs) and mt TREO

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RU 48.5 41.0 37.0 12.8 8.2 30.0 22.0 83.7 48.7 109.8 228.6

KZ+BY+KG+AM 54.2 146.7 435.5 502.0 150.8 448.4 656.4 213.0 0.0 0.0 0.0

Total EAEC 102.7 187.7 472.5 514.8 159.0 478.4 678.4 296.7 48.7 109.8 228.6

Americas 257.7 0.0 250.3 0.0 0.0 12.0 0.0 0.0 0.0 0.0 0.0

Asia 0.0 300.5 113.0 0.0 0.0 102.2 55.1 0.0 784.2 852.9 888.8

Europe and others 1’666.4 2’446.7 1'875.2 1'955.2 1'739.0 872.9 710.3 1'834.6 610.1 1’171.1 1’194.9

Total ROW 1'924.1 2'747.3 2'238.5 1'955.2 1'739.0 987.1 765.4 1'834.6 1'394.4 2'024.0 2’083.7

TOTAL 2’026.8 2'935.0 2'711.0 2'470.0 1'898.0 1'465.5 1'443.8 2'131.3 1'443.1 2'133.8 2'312.3

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Titanium Sponge and Compounds In 2015, SMW shipped to its customers 2’013.9 mt Ti contained in all the forms of titanium products. This is a rise of +32.1 mt or +1.6% Ti compared to 1’981.8 mt Ti in 2014. Out of this total, 1’981.0 mt were shipped in the form of titanium sponge (Ti sponge) and 32.9 mt Ti (130.1 mt physical tonnage) in the form of titanium tetrachloride (TiCL4). Shipments to EAEC market accounted for 1620.1 mt Ti in 2015. This is a rise by a factor of 1.66 or +645.8 mt Ti compared to 974.3 mt Ti shipped to this market in 2014. Out of this total, shipments to Russia accounted for 1’615.1 mt Ti, a growth by factor of 1.66 or +640.8 mt Ti compared to 974.3 mt Ti in 2014, while shipments to other EAEC countries amounted 5.0 mt of Ti sponge. Shipments outside EAEC (ROW) totaled 393.5 mt of Ti sponge in 2015. This is a drop by a factor of 2.56 or -613.7 mt compared to 1’007.5 mt in 2014.

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

SMW. Shipments of titanium products by market areas, in % (graphs) and mt Ti

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RU, mt Ti 1'413.7 1'716.1 2'231.3 1'778.3 242.3 643.0 885.5 1 055.9 967.2 974.3 1’615.1

KZ+BY+KG+AM 0.0 0.0 0.0 0.0 0.4 0.0 0.0 0.2 3.0 0.0 5.0

Total EAEC 1'413.7 1'716.1 2'231.3 1’778.3 242.7 643.0 885.5 1'056.1 970.2 974.3 1'620.1

Americas 0.0 0.0 0.0 0.0 14.4 0.0 0.0 112.0 0.0 0.0 0.0

Asia 0.0 0.0 0.0 0.0 96.0 130.6 48.0 104.0 60.0 522.0 0.3

Europe and others 0.0 0.0 0.0 0.0 294.6 832.2 761.4 602.6 422.0 485.5 393.5

Total ROW 0.0 0.0 0.0 0.0 405.0 962.8 809.4 818.6 482.0 1'007.5 393.8

TOTAL, mt Ti 1’413.7 1'716.1 2'231.3 1‘778.3 647.7 1'605.8 1'694.9 1’874.7 1'452.2 1'981.8 2'013.9

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CHEMICAL OPERATIONS The range of commodities manufactured in the Chemical Operations include calcium chloride solution (32% CaCl2), liquid chlorine (Cl2), lime (CaO) and lime slurry milk (Ca(OH)2 ● xH2O). Historical shipments of these products are provided in the table below.

SMW. Shipments of products of Chemical Operations, mt 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Calcium chloride solution 32% CaCL2 52'688 61'735 62'938 50'453 38’914 44'489 53'645 58'881 53'099 53’885 46'368

Liquid chlorine 784 1’216 1'271 1'328 1'514 1'571 1'566 1'561 1'519 1'384 971

Lime 9'671 11’947 11’642 11'641 6'561 9’620 19'440 14’975 16'557 13'223 14'368

Lime slurry milk, m3 2'913 1'908 1'243 1'218 658 709 693 605 568 923 1’058

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; in the Chemical Operations – lime stone. Raw materials’ suppliers in 2015 were: carnallite - SKRU-1 of PАО «Uralkaliy», Solikamsk City, Perm Region, Russia; loparite – ООО «Lovozerskiy Mining & Concentration Works» (LGOK), township Revda, Murmansk Region, Russia; lime stone – AVISMA branch of ОАО “VSMPO-AVISMA Corporation” and AO “Berezniki Soda Works”, all of them are located in Perm Region, Russia.

SMW. Raw material receipts, mt

Name 2009 2010 2011 2012 2013 2014 2015 Country of Origin

Carnallite 258'212 302'733 243'319 225'584 219'700 225’340 200’677 Russia

Loparite 6'628 5'120 6'226 6'712 7'485 7’770 8’482 Russia

Rutile 0 344 1'200 1'023 1'268 105 0 Ukraine, Australia

Lime stone 89'343 115'352 139’789 126'961 117’022 117’235 103’864 Russia

Compliance with international “conflict minerals” regulations 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 2009-2015.

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 heat, 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. Coke is used as the reducing agent in the processes of Magnesium and Rare Metals Operations.

In 2015, expenses on energy resources dropped by -4.9% compared to 2014 with the following distribution per each kind of resource (change in % Y-oY): electricity - ₽972.815 mln (- 6.7%); natural gas - ₽233.608 mln (- 2.3%); heavy oil (mazut) - ₽5.801 mln (– 20.1%); gasoline (benzin) - ₽3.868 mln (-11.5%); diesel fuel - ₽11.966 mln (--13.7%); coke - ₽20.835 mln (+ 3.7%). Consumption of each kind of energy resource was as follows (change Y-o-Y in %): 408'144.72 МWh (-6.0%); 57’322’720 м3 ( -6.1%); 655.280 mt (- 4.8%); 101.013 mt (- 21.8%); 425.679 mt (- 6.0%); 1’990.46 mt (+5.1%) respectively.

Consumption of fresh water (artesian and river water) accounted for 4.148 mln м3 (-3.0%) in 2015.

TECHNICAL DEVELOPMENT AND IT-TECHNOLOGIES In 2015, Solikamsk invested ₽159.060 mln (US$2.612 mln) in renewing equipment, developing technology, and improving operational and works’ safety. This is a drop by a factor of 1.13 (factor of 1.80 in US$ terms) compared to ₽ 180.305 mln (US$ 4.690 mln) in 2014. R&D expenses accounted for ₽22.102 mln in 2015. This is a rise of +13.1% compared to ₽19.550 mln incurred for the same purposes in 2014. The following works and R&D were performed:

- in the Magnesium Operations: - test of electrolytic cell designed with use of the most recent developments in technology was continued. Test results were better than those obtained on conventional electrolytic cells in operation;

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- continuous refining furnace was redesigned to meet quality requirement for magnesium intended for use in Ti sponge production in April 2015; - new Zr and Nd containing materials were tested to produce magnesium alloy MgZr1Nd3; - pilot equipment and technology to produce granular potash were developed and set of designing documentation for commercial scale plant was ordered

- in the Rare Metals Operations: - trial lot of lithium niobate was produced to test with potential customers; - new quartz equipment for purification of niobium & tantalum chlorides were tested; - designing documentation for equipment to modernize Ti sponge operations was completed; - new technology of hydrolysis to produce high density niobium pentoxide was tested

- in Chemical and auxiliary operations: - new filter fabrics for purification of chlorine were tested and device to control quality was installed; - chlorine store was modernized to improve its safety; - development of technology for treatment of acid drains with waste solutions after off-gas scrubbing of Magnesium Operations was continued IT & communications: SMW’s Data Center was improved to enhance reliability, technical solutions to accelerate CPU speed and virtualization (HP DL360 Gen9, EMC NXe3200, Symantec BackupExec, VMware vSphere) were implemented. New version of ORACLE in DBMS Alfa was installed. Sanatorium was connected with internet and IP- telephony through optical wire.

COMPLIANCE OF MANAGEMENT SYSTEM WITH INTERNATIONAL REQUIREMENTS

Compliance with International Code of Conduct for the industry Solikamsk performed unaudited self-assessment on compliance with Supplier Code of International Die – Casting Association (IDCA) and EICC Code of Conduct. Result of this self-assessment is provided on the web-site of SMW under links in Russian: www.смз.рф/index/integrirovannaja_sistema_menedzhmenta/0-90 in English: www.смз.рф/en/manag_system/new2014/Compliance_with_Code_of_Conduct_for_the_Industry.pdf

Integrated Management System and Compliance with “Conflict-Free Smelter” Requirements 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 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 the Company. Administering of IMS is performed in accordance with Quality Policy, Environmental Policy and Conflict Free Raw Materials Purchasing Policy of Solikamsk Magnesium Works OAO. All these documents are readily available on the Company’s official web-site under links: In Russian: http://www.смз.рф/index/integrirovannaja_sistema_menedzhmenta/0-90 In English: http://www.смз.рф/index/en_information/0-104 In 2015, the following third-party inspection audits were performed by certifying organizations: - IMS was inspected on compliance with ISO 9001 and 14001 by Intercertifica -TUV together with TUV-Turingen. Certification audit is scheduled in 2016; - tantalum supply chain was audited by EICC under Conflict-Free Smelter Program. SMW was granted with 3 years’ Conflict Free Smelter status, until 2018, provided with certain requirements are met; - Analytical Laboratory of SMW was audited on compliance with GOST ISO/MEC 17025-2009 by Association of Analytical Centers Analitica. 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 8.4 out of 9, and customers’ loyalty was 3.8 out of 5 in 2015. These results mean that the Solikamsk products meet customers’ expectations.

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Customers’ loyalty in 2014-2015

Customers’ satisfaction in 2014-2015

The following customers performed second-party certification audits of SMW’s products: - PAO VSMPO-AVISMA. SMW’s IMS and Ti sponge production were ranked 98 out of 100, Solikamsk was certified as the Class A (the top in VSMPO’s ranking) supplier; - ОАО «RUSAL». SMW was certified as the Green supplier, the top in RUSAL’s ranking; The Company is certified supplier for: - magnesium alloys with ОАО Aircraft Reducers & Transmissions – Perm Motors (ОАО «REDUCTOR - PM», Perm, certificate № 275-02-2015) - Mg – Zr master alloy and carnallite flux - ОАО KUMZ, certificate № 27 - magnesium alloys - ОАО VASO, certificate № 0699-148/ОССМКиС.

OPERATIONAL AND INDUSTRIAL SAFETY Care of life, health and safety of SMW’s employees, residents and guests of Solikamsk city is unavoidable priority of the Company.

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An integrated systematic approach in the field of operational and industrial safety is performed in accordance with the Company’s Regulations The Managing System of Operational & Industrial Safety.

Operational & Works Safety SMW’s System of Operational & Works Safety is maintained in accordance with the Company’s Regulations The Operational & Works’ Safety, requirements of Section VIII The Operational & Works’ Safety. Term & Conditions in Collective Labor Agreement between the Company & Trade Union as well as in accordance with statutory requirements in the Russian Federation. SMW’s expenses to maintain abovementioned System accounted for ₽ 52.3 mln including ₽23.7 mln for personal protection and ₽29.2 mln for safety techniques. These expenses do not include compensation paid to personnel in accordance with legislation.

Industrial & Environmental Safety SMW’s System of Industrial & Environmental Safety is maintained in accordance with the Company’s Policy in Industrial Safety, Environmental Policy, Regulations The Production Control on Compliance with Industrial Safety Requirements as well as in accordance with statutory requirements in the Russian Federation and international environmental standards. SMW’s expenses to maintain this System accounted for ₽17.670 mln. These expenses do not include environmental costs specified for production processes. Measures prescribed by Schedule for 2015 to maintain industrial & environmental safety have been completely performed by SMW. In 2015, supervisory State agencies (RosTechNadzor, RosPotrebNadzor, RosTrud, EMERCOM) performed 6 surveys of the Company. Certain non-conformities were found during audits, and elimination of these non-conformities is performed under schedule developed with these authorities. SMW’s Sanitary – Production Laboratory (SPL) monitors sanitary conditions of air in industrial areas and buildings, air conditions in defined points of control, residential zone, and sanitary-protective zone of Sanatorium. This monitoring is performed in accordance with the Program of Production Control on Compliance with Sanitary Regulations and Sanitary – Anti Epidemic Prophylactic Practices. SMW continuously monitors contamination of air, water, and soil. This measuring helps to act effectively if pollution exceeds environmental norms. The system of radioactivity control of the surrounding environment is developed and implemented. This system guarantees radiation safety for the local residents. OAO “RITM”, Perm CGMS, KamVNIIVH, FBU CLATI, OOO ZUIVEP, FBUZ “Centre of Hygiene & Epidemiology” were also employed for the purposes of environmental monitoring. SMW paid ₽ 1.705 mln to these contractors. Avoidance of pollution is the main issue of concern at the time of design and production decisions. The Company has all permissions for use of natural resources. SMW systematically schedules and implements measures to improve off-gas scrubbing equipment and reduce negative effect of polluting the air. The Company modernized off-gas scrubbers in Magnesium Operations, aspiration equipment in Rare Metals Operations and chlorine storage equipment. Expenses to protect atmosphere accounted for more than ₽13.0 mln in 2015. The Company has all permissions for air pollution covering all of the Company’s areas (industrial area, sanatorium, polygon of solid wastes). Total release of polluting substances in atmosphere was 707.2 mt in 2015 mt compared to 773.5 mt in 2014. No cases of excess of TLV for chlorine and hydrogen chloride were fixed during the reporting year. Annual average concentration of hydrogen chloride was 0.15 of TLV. 12 times a year emergency mode of operations was announced due to critical weather conditions, total number of critical weather conditions were fixed 20 times a year. In the case of emergency mode, SMW has a schedule of specific safe mode of operations. In 2015, SMW has been continued works for adjustment of equipment and technology to neutralize acidic waste water, reconstruction of waste water transportation channel, modernization of local treatment facilities and rainy water channels, reclamation of Ch’ornaya river including designing works for reclamation of river floodplain. In 2015, SMW disposed 2’513.41 mt cakes from purification of calcium chloride. This is a rise by a factor of 1.91 Y-o-Y. 8’225’190 m3 of waste water, including waste water of OOO Vodokanal, were entered settling pond for purification in 2015. This waste water contained 39’010 mt of solid wastes in 2015. Due to increased

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concentration, this is approximately +12’360 mt above that in 2014. The Company met solid substances TLV requirements in purified waste water. Total expenses for water treatment and purification exceeded ₽ 1.7 mln in the reporting year. Consumption of recycled water accounted for 7’189’970 m3. SMW have licenses to operate hazardous substances and limits for disposal of wastes as well as its own polygon to store solid residues registered under № 59-00034-Х-00479-010814 in the State Register. The number of residues generated inside SMW was 71’622 mt in 2015. This is a drop of -10.5 kilotons compared to number of 2014. Residues of Magnesium Operations were completely processed into saleable products. 4’472.7 mt of residues were disposed in the Company’s polygon, 2.67 kilotons were transported for processing to outside facilities for recycling, 1’212.7 mt were disposed in the city polygon and 447.3 mt in the polygon of Kizel city, 13.82 mt of residual oil were shipped to ZAO Perm Oil Plant, 5’112 Hg-containing lamps (1.2251mt Hg contained) were transported to UralTradeGroup-Oil for recycling, 10.28 mt of used tires and 5.92 mt of used rubber were shipped to OOO Ecoshina, 20 mt of plastic wastes were transported to OOO Green-City and IP Tveritinov , 98 units of computer devices were shipped to OOO IT MAX and 1’116.4 mt of steel and non-ferrous scrap were sold. SMW maintains production environmental control which enables to assess compliance with industrial safety requirements and avoid impact on environment. Results of monitoring are recorded on paper and/or electronic media. SMW is a transparent company. Environmental activities of the Company are regularly disclosed to the public in the Company’s newsletter “Magnievik” and radio reports. SMW participates in the Days of Environment Protection arranged by Solikamsk City Administration each year. In 2015, the Company was granted with award of Parliament (State Duma), Council of Federation, Russian Chamber of Commerce and International Academy of Quality and Marketing Top-100 Organizations in Russia. Environment and Environmental Management

LIST OF THE COMPANY’S LICENSES Certain activities of SMW are subject to licensing. List of the Company’s licenses is provided in Annex №1 to this Annual Report (available only electronically in Russian under link http://смз.рф/raport/2016/2015_godovoj_otchet_smz_2015_dlja_sajta.pdf).

SOCIAL RESPONSIBILITY Social responsibility is an undisputable 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 of the Company, into Collective Labor Agreement between the Company and the Trade Union, as well as in the Agreements between the Company and the Administration of Solikamsk city.

Improvement of Welfare and Intellectual Development of Personnel Professional training and education of personnel In 2015, 490 employees were trained and educated by SMW that accounted for 17.7% of the total number of employees. 347 employees were educated under programs of improvement of qualification, 168 employees were awarded with higher skill rank, 109 specialists and managers were trained and certified on compliance with the rules of RosTechNadzor. 3 students study at universities at the Company’s expense, and 20 students have a scholarship grants under contracts with the Company. 62 employees study in universities and 104 study in colleges out of working hours, more than 90 students of universities and colleges were trained by the Company at its facilities. The Company has granted ₽ 0.647 mln of loans to its employees to study in universities themselves or to fund their children’s studies in 2015. Employment and salaries OAO Solikamsk Magnesium Works, along with PAO Uralkaliy and OAO Solikamsk Pulp & Paper Works, ranks among the essential companies in Solikamsk city and maintains the second position in the city by the number of employees.

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In accordance with ROSSTAT, in 2015, growth of nominal salaries in Perm Region, in Russia and Russian metallurgical industry accounted for +3.7%, +4.6% and + 7.6% respectively. Consumer price indices (CPI or official inflation) in Perm Region and in Russia accounted for +12.9% and +12.6%, respectively.

SMW. Number of employees and salaries

In 2015, nominal salaries of SMW’s employees increased due to labor tariff rise twice a year, by +6% from 1 March 2015 and +7% from 1 September 2015, and average bonuses growth from 25.9% to 39% due to improved financial performance of the Company in the reporting year.

Social Programs Social expenses of the Company decreased from ₽ ₽ 53.608 mln in 2014 to ₽ 50.617 in 2015. SMW has spent ₽22.681 mln to support social infrastructure (sports, sanatorium, culture and others) and ₽8.405 mln to support retirees, veterans and other social programs. Payment of social bonuses to the Company’s employees and certain other expenses accounted for ₽19.531 mln.

POSITION IN THE INDUSTRY Disclaimer: This part of Annual Report includes certain estimates performed by SMW itself, and/or 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 be liable for potential losses and/or injury those may happen of use of this information.

Position in the Magnesium Industry

End-uses Magnesium is a silvery white metal, 1.5 times lighter than aluminium. Magnesium exhibits the best strength-to-weight ratio and it is the lightest among structural metals, and contributes other important physical and chemical properties. That is that magnesium is widely used in the automotive, 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, titanium, polymers, composites,

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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, cerium, calcium; - titanium sponge production - sodium and calcium. Titanium may also be produced by an electrolytic process and by a process of thermal decomposition of titanium iodide.

Primary Magnesium Market Overview

Definitions: Primary magnesium is a magnesium metal produced by the way of decomposition of natural raw materials and does not include secondary magnesium that is produced by the way of 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 that is then reverted back to this process after in-site electrolysis of this magnesium dichloride.

2015 was the first year since the crisis of 2008-2009 years when world output and consumption of primary magnesium was affected by eventual slowdown of the world economy. In accordance with statistics from China (CNIA), USGS and SMW’s own estimate, world primary magnesium output declined from 1’004 kilotons (Kt) in 2014 to 982 Kt in 2015. This is a drop of -22 Kt or -2.2% Y-o-Y. Based on this estimate, in 2015, the Solikamsk’s share was 1.3% in the world total primary magnesium output and approximately 64% of that in Russia and EAEC countries. Drop of primary magnesium output was observed in the all producing countries except for the United States where US Magnesium finished 1st stage of its expansion project providing capacity increase from 63.5 to 76.5 Kt per year and adjusted its output accordingly. Total capacity of expansion project is 90 Kt per annum and further development of project is recently under decision. ICL (Israel) announced its plans to close Dead Sea Magnesium in 2017 due to changed tax conditions, but final decision in this respect is not officially published yet.

CNIA, USGS, SMW. Estimated world primary magnesium output, kilotons

* do not include primary magnesium involved in production of Ti sponge Sources: Kazakhstan, Russia and USA are SMW estimates. Israel and Brazil are USGS estimates http://minerals.usgs.gov/minerals/pubs/commodity/magnesium/mcs-2016-mgmet.pdf , China output is CNIA data under link http://cnm.minmetals.com.cn/default.jsp?column_no=0330

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Magnesium supply-demand balance, Kt 1

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Output - China2 470 525 627 631 501 654 661 694 770 874 852

Output – outside China1,3 169 153 127 123 105 117 126 131 128 130 130

World output 639 678 754 754 606 771 787 825 898 1004 982

Exports from China1 353 135 408 396 234 384 400 371 412 435 406 Output outside China 169 153 127 123 105 117 126 131 128 130 130

Total shipments outside China 522 503 535 519 339 501 526 502 540 565 536

including:

EU-281 173 169 179 174 101 165 158 150 160 164 165

USA3 122 112 109 119 52 88 87 92 113 104 93

Canada1 44 50 33 47 24 47 48 51 50 64 61

Japan1 47 50 49 43 33 40 40 38 37 40 38

Brazil1,3 13 14 25 26 22 24 24 23 30 30 24

EAEC1 10 14 15 15 7 13 18 19 22 22 20

Others 4 113 94 125 95 100 124 151 129 128 141 135

Consumption in China 5 107 157 263 158 172 232 277 310 352 371 365

TOTAL CONSUMPTION 625 660 796 677 511 733 803 812 892 936 901

Output – consumption balance +14 +18 -44 +77 +95 +38 -16 +13 +6 +68 +81 1 SMW’s estimate based on customs statistics and output. Customs statistics Brazil http://aliceweb.mdic.gov.br/#, China http://info.hktdc.com/hktdc_offices/mi/ccs/index_static_type/ChemicalExport.htm, Japan http://www.customs.go.jp/toukei/srch/indexe.htm?M=01&P=0, Russia http://stat.customs.ru/apex/f?p=201:2:2982514202106882::NO, EUROSTAT http://ec.europa.eu/eurostat/data/database#, Kazakhstan http://e.customs.kz/wps/portal/customs/ Canada http://cansim2.statcan.gc.ca/cgi-win/cnsmcgi.pgm?Lang=E&ResultTemplate=CII_CIMT5&CIMTSrch=1&RootDir=&Sort=0&Year=2011&Month=12&Freq=6&C2DB=PRD&Commod=81 2 China Non-ferrous Metals Monthly http://cnm.minmetals.com.cn/default.jsp?column_no=0330 3 USGS http://minerals.usgs.gov/minerals/pubs/commodity/magnesium/mcs-2016-mgmet.pdf 4 Balance between Total shipments outside China – areas listed before 5 CNIA

SMW*. Estimated consumption of magnesium by end-use (+/-10%) in 2010-2015, Kt and %

End-use 2010 % 2011 % 2012 % 2013 % 2014 % 2015e %

Total cosumption 733 100.0 803 100.0 812 100.0 892 100.0 936 100.0 901 100.0

Metal reduction 45 6.1 48 6.0 72 8.9 90 10.1 100 10.7 100 11.1

Structural uses 250 34.1 280 34.9 270 33.3 325 36.4 300 32.1 250 27.7

Desulphurization 143 19.5 124 15.4 129 15.9 140 15.7 128 13.7 118 13.1

Nodular iron 33 4.5 35 4.4 32 3.9 33 3.7 35 3.7 30 3.3

AL alloying and other uses 262 35.7 316 39.4 309 38.0 304 34.1 373 39.9 403 44.7

* Estimation is based on CNIA, USGS, and other sources of information Asianmetal. Average magnesium metal (min.99.9%) prices, US$/mt

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Magnesium Market Outlook Implementation of programs connected with decrease of fossil fuel consumption and greenhouse gas emission through weight reduction of aircrafts and vehicles provides for magnesium prospectus of growth at CAGR at +7.7% (http://www.platts.com/latest-news/metals/munich/global-magnesium-demand-projected-to-rise-77year-26800334) due to substitution of steel with magnesium containing aluminium alloys in the body of vehicles, increasing use of parts made with magnesium alloys in the design of vehicles and aircrafts, and possible substitution of lithium with magnesium in batteries. Significant drop of magnesium prices during last 5 years may support more intensive use of magnesium alloys as alternative to plastics and aluminium in design of tablets, laptops and other consumer electronics.

Historical consumption of magnesium in 2005-2015 and outlook until 2025, Kt

Supply – Demand Balance is not observed in this report and it is not an issue of concerns. Installed capacities to produce primary magnesium in the world exceeded 1’750 Ktpa at the end of 2015.

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 The term Rare Earths Elements (REEs), according to UIPAC, is assigned to 17 elements of Periodic Table, but, due to the fact that Sc (21) is extracted from other kinds of ores than other REEs, and Pm (61) is a synthetic element, in industrial practice, this term is applied to 15 elements with numbers of 57-60, 62-71 (Lantanides) and 39 (Yttrium). Despite all 15 REEs have single valence and similar properties, and typically occur in the earth’s crust collectively, however, in individual form, each REE 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. 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. 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. 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). 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

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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.

Rare Earths Market Overview IMCOA, SMW. World output of rare earths and outlook until 2025, Kt TREO

Conditions of REE market were significantly changed during the reporting year. Following WTO decision, China eliminated export quotas on REEs since 01 January and export duties on the same since 02 May 2015. Along with removal of export duties, China imposed new resource tax on REEs ores based on the value of processed products effective since 02 May 2015, in contrast to previous taxes based on tonnage mined. The following new resource taxes were imposed: from 7.5% to 11.5% for concentrates of light REEs and 27% for concentrates of heavy REEs, and these taxes may be changed in the future. Removal of export restrictions in the country caused growth of Chinese REEs exports, rising competition outside China and significant drop in prices, but this move improved confidence of developers and producing customers outside China in reliability of Chinese REEs supply. Mandatory production plan for REEs processing in China was initially set forth at 105 Kt TREO for 2015, but this was revised down to 95 Kt at the end of the year, under proposal of producers. However, actual output is estimated 150 Kt including illegal mining and processing, unchanged Y-o-Y. Outside China, in 2015, increased output was reported by Lynas, IREL and SMW, while Molycorp announced suspension of its operations in Resource Division (Mountain Pass, USA) at the end of 2015 and appealed for protection under Chapter 11 (bankruptcy). Estimated output of Molycorp’s Resource Division was 4 Kt TREO during first 10 months of 2015. Output outside China is estimated, approximately, 18 Kt with breakdown as follows: ~ 2 Kt by SMW in Russia, ~4 Kt by Molycorp in USA, ~9 Kt by Lynas Corp (Malaysia), ~ 2 Kt by IREL in India and ~ 1Kt by others. Altogether, world output of rare earths is estimated ~ 168 Kt in 2015. In accordance with this estimate, Solikamsk’s share in the global market of primary rare earths is estimated 1.4% and more than 90% of that in Russia.

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Asianmetal, SMW. Composite price* of rare earths oxides in SMW’s rare earths carbonates, FOB China, US$/kg TREO

*Composite price = Price of individual rare earths oxide х content of individual rare oxide in SMW’s rare earths carbonate, kg/kg TREO

According to IMCOA, world consumption of rare earths was as follows: IMCOA. World rare earths consumption in 2010 – 2015, Kt TREO

2010 2011 2012 2013 2014 2015е

China 80 82 84 87 92 97

ROW 47 36 38 41 44 49

TOTAL CONSUMPTION 127 118 122 128 136 146

IMCOA. World consumption of rare earths by end-use in 2010-2015, Kt TREO

End-use/year 2010 2011 2012 2013 2014 2015е

Magnets 33 30 31 35 40 45

Metal Alloys 24 21 22 24 24 25

Catalysts 20 20 21 24 25 28

Polishing 16 18 19 15 19 20

Glass (including optics) 11 8 8 8 8 8

Phosphors (including pigments) 8 8 6 7 6 6

Ceramics 5 6 7 7 6 6

Other 10 7 13 8 8 8

TOTAL: 127 118 122 128 136 146

Rare Earths Market Outlook

IMCOA. Consumption of rare earths by areas - outlook until 2025, Kt TREO

Area/year 2015 2020f 2025f*

China 97 128 160

ROW 49 72 90

TOTAL 146 200 250

IMCOA. Consumption of rare earths by end-use - outlook until 2025, Kt TREO

Область применения 2015 2020f 2025f*

Magnets 45 75 100

Metal Alloys 25 30 35

Catalysts 28 32 36

Polishing 20 25 30

Glass (including optics) 9 12 15

Phosphors (including pigments) 5 6 7

Ceramics 6 8 10

Other 8 12 17

TOTAL: 146 200 250

Supply – Demand Balance is not observed in this report and it is not an issue of concerns. Installed capacities to produce rare earths in the world exceeded 300 kilotons/year at the end of 2015.

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Position in the Titanium Industry After the start of Ti sponge operations in 2009, the production of titanium dioxide in Solikamsk was discontinued. The share of titanium tetrachloride in total titanium output is a very few, and the market of this product is not estimated.

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 products 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 account for between 5 and 20% of the total market for the metal.

Titanium Market Overview In accordance with CNIA, JTA, USGS, announcements of producers and SMW’s own estimates, Ti sponge output accounted for 179 Kt in 2015. This is a drop of – 3 Kt or – 1.6% compared to 182 Kt in 2014. Drop of production was observed in China (-7 Kt), USA (-2Kt) and Russia (-2 Kt) while Japan and Ukraine increased its output. Based on this estimate, SMW’s share in the global output accounted for 1.0% and 4.8% in Russia. 2015 year was complicated for the world titanium industry.

World Ti sponge output, Kt

Ti sponge and FeTi prices, US$/kg

Scheduled increase of capacities to produce new models of aircrafts by Boeing and Airbus was not come on stream yet, while start of production of Chinese jetliner C-919 was delayed by COMAC. This was a reason that consumption in this sector was below initial expectations.

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Slowdown of world economy caused low demand in chemical processing industry and energy sectors. Then, significantly dropped oil and gas prices affected certain seabed projects where titanium is used in desalination and liquid petroleum gas installations. Global market conditions worsened during a year and caused lower demand and prices in the market. At the end of the year, it was announced start of production of 2 new models narrow-body jetliners in 2016: long-waiting C-919 by COMAC in China at the beginning of 2016 and MS-21 by Irkut (division of UAC) in Russia in June 2016.

Titanium Market Outlook In accordance with Proceedings of Titanium Europe 2016, titanium demand outside China is forecast to grow at CAGR +4% during 2016 – 2025. Titanium consumption in China is forecast to rise from 59 Kt in 2015 to 122 Kt in 2020 and estimated at CAGR +4% thereafter, until 2025.

Demand for Ti sponge in 2010-2015 and outlook until 2025, Kt

Supply-Demand Balance is not observed in this Report and it is not an issue of concerns. Total installed capacities exceeded 340 kilotons per annum (Ktpa) at the end of 2015, including 159 Ktpa in China and 184 Ktpa in the Rest of the World (ROW).

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

End-uses Entire niobium (Nb) market is generally divided into two main markets: 1. HSLA Grade FeNb that accounts for approximately 85-90% of total world niobium market. HSLA Grade FeNb or Standard Grade FeNb is used to produce high strength low alloy (HSLA) steels. Supply of Solikamsk to this market is a very few that is that this market is not observed in this Report. 2. Pure niobium market that accounts for remaining 10-15% of entire niobium market. Pure niobium market could also be sub-divided to two aggregate markets categories 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 and auto catalysts, other uses (2) in the form of the metal: - vacuum grade NiNb and FeNb used to produce super alloy for jet engines and gas fueled turbines;

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- 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, tungsten and titanium in high temperature applications; tantalum, lanthanum, hafnium, polymers, aluminium, poly-silicon and electronic ceramics in optics and electronics; tantalum, tungsten, titanium and silicon in cemented carbides; and molybdenum in catalysts.

Pure Niobium Market Overview TIC, SMW. Pure niobium shipments and share of SMW, mt Nb2O5 contained

According to TIC, niobium processors’ shipments decreased from 6’460 mt Nb contained (equivalent of 9’254 mt Nb2O5 contained) in 2014 to 6’451 mt Nb (9’228 mt Nb2O5) in 2015. This a decline of - 0.1% or - 9 mt Nb (-13 mt Nb2O5) Y-o-Y. Based on the data provided above, Solikamsk share in total world pure niobium market supply is estimated at 6.3% and 100% of niobium oxide output in Russia

Asianmetal. Average prices on niobium pentoxides and columbite, US$/kg

Solikamsk operates to different extents in both sectors of the pure niobium market, i.e., in supply of technical grade pentoxide 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.

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Companies producing pure niobium and niobium concentrates prefer to keep their production data and capacities confidential. The main suppliers to the metallic pure niobium market are CBMM (Brazil), Solikamsk, AMG (Brazil) and Chinese processors. The other suppliers to this market are Hermann C. Starck (Germany), 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. Pure Niobium Market Outlook Pure niobium market is forecast to rise with CAGR +4 - +5%. Super alloys market will be the main driver of entire pure niobium market with CAGR +9 - +10% - see http://www.researchandmarkets.com/publication/mrb3ylc/3498682.

Pure niobium market outlook, mt Nb2O5

Supply-Demand Balance is not observed in this Report and it is not an issue of concerns. Installed capacity is enough to cover demand until 2025.

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

End-use 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. The following materials can be substituted for tantalum: niobium, aluminum and ceramics in capacitors; glass, polymers, niobium, platinum, alloys of refractory metals and full alloy steels, titanium and

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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 TIC, SMW. Tantalum processors’ shipments and share of SMW, mt Та2О5 contained

According to TIC, tantalum processors shipments increased from 2’001 mt Ta (2’444 mt Та2О5) in 2014 to 2’153 mt Ta (2’629 mt Та2О5) in 2015. This is a rise of + 152 mt Та (+185 mt Та2О5) or +7.6% year-to-year. According to data expressed above, share of Solikamsk in global tantalum processors shipments accounted for 1.2% and 100% of tantalum oxide output in Russia. Suppliers to metal market are Hermann C. Starck (Germany), GAM (Australia-USA), Chinese processors, Mitsui Mining & Smelting (Japan), AMG (Brazil), Molycorp Silmet (Estonia), Solikamsk. 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.

Asianmetal. Average prices on tantalum pentoxides and tantalite, US$/kg

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Tantalum Market Outlook Reliability of tantalum supply is improved due to increased mining in Latin America and in “non-conflict” areas of Central Africa. CAGR of tantalum consumption is estimated 2.89% (http://www.researchandmarkets.com/publication/mn5j2jd/3512445 )

Tantalum market outlook, mt Та2О5

Position in the Chemical Industry Position in the market of products of Chemical Operations is not observed in this Report due small share of these Operations in the Company’s sales revenues.

PROSPECTS OF THE COMPANY

Further development of the Company is scheduled as follows:

Development and implementation of new technologies: - building of line for granular potash production - designing of carnallite warehouse - monitoring of parameters of operations with modernized electrolytic cell BEN - 90 - test of electrolytic cells with single-bar anodes - test of electrolytic cells with ceramic baffle designed to improve lifetime and chlorine yield - designing of electrolytic cell BEN–165 - pilot production of rare earths - containing magnesium alloys for casting with enhanced properties - development of technology for complete neutralization of acid waste with residual solutions from off-gas scrubbers

Modernization of equipment: - start-up works with modernized equipment of Chlorine Storage Unit - installing of devices to measure dust contamination of chlorine gas on filter №2 in real-time behavior – designing of improved main equipment and parts for titanium sponge production - designing of equipment for automation of process in rotary kilns - designing of equipment for chlorine filter №5

Decrease of anthropogenic impact on the environment - building of unit N16 for radioactive waste disposal - reclamation of polygon for disposal of solid waste under Map Б - monitoring of conditions of ground and surface water around polygon for disposal of solid waste - survey of ground contamination in area of polygon for solid waste disposal and sanitary zone

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Protection of priority R&Ds – patenting

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

RISK FACTORS

Technical & Operational Risks

The continuous management of internal risks at the Company is based on a set of protective measures aiming to prevent the main factors and minimize the main types of risks – strategical (avoidance of risky investments), market (diversification of market areas, etc), reputation (keeping reputation of reliable and conscientious supplier, compliance to the main principles of corporate governance and business practices, disclosure of complete and reliable information concerning the Company activities in accordance with legislation covering the securities market), technical, operational, environmental (compliance with technological regulations and operational manuals, maintaining of production and environmental control by responsible departments of the Company (Works Safety and Production Control Department, Radioactivity Control Department, Environment Protection Bureau, EMERCOM representative) and plant’s managers of different levels in each division, improvement in organization of production) and insurance (insurance of property and civil liability of the Company in the case of emergency), as well as other kinds of risks described below.

Control of Production One of the most important ways to manage risks of industrial enterprise is to control the safe conducting of technological process with the aim to defend the vital interests of individuals and community from accidents at production facilities operating with dangerous substances and from consequences of such accidents. In order to prevent accidents in production and injury to personnel due to availability in the structure of the Company facilities operating with hazardous and explosive substances, as well as facilities where processed minerals (loparite concentrate) containing increased level of natural radionuclides, in order to reduce professional risks connected with probability of harm to the health of employees from exposure of hazardous and/or dangerous production factors at the time of performance of their jobs, the Company implemented set of preventive (prophylactic) measures in the following areas: - systematic training employees and representatives of contractors to form and conduct safe behavior, examination of their knowledge before giving an admission to perform their jobs; - supervision in the form of telic, regular, spontaneous and detailed inspections with involvement of Department of Deputy Chief Engineer for Works, Technological, Industrial, and Environmental Safety, leading managers and public inspectors to control proper technical conditions of hazardous operations, safe operations of equipment and lifting machines, implementation and performance of measures prescribed by “The Schedule of Measures to Guarantee Industrial Safety” and ”The Agreement Concerning Improvement of Conditions in Workspaces and Supplementary Utilities” at the plants and shops of the Company, compliance with works safety requirements, use of certified workwear and protective devices, compliance with requirements to take individual respirator for each person entering industrial area of the Company; - radiation control is maintained by the personnel of Radiation Safety Services (RSS) utilizing capacity of accredited SMW’s Laboratory of Radiation Control (LRC). It is performed under “Program of Radiation Control in Loparite Concentrate Processing” approved by RosPotrebNadzor; LRC controls radiation of surfaces (surfaces of production equipment, skin, workwear, devices for individual protection, transport), sanitary-protective zone, soil, in the stream of off-gases and in the air of industrial areas and workspaces; - permanent monitoring of air condition of workspaces, and physical factors affecting employees under requirements of “Program of Production Control for Compliance with Sanitary Rules and Performance of Sanitary – Antiepidemic Measures” using capacities of SMW’s SPL; - maintenance works and capital repair of tools; timely revision, repair and replacement of equipment and means of transport;

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- implementation of environmental measures and special Programs aimed gradual reduction of negative effect to water and air from solid wastes disposal under principles of Environmental Policy and requirements of federal, local and international environmental regulations and standards; - implementation and maintenance of production environmental control aiming compliance with limits of pollution, use of natural resources and requirements to quality conditions of environment in areas affected by the Company’s activities; - conducting of annual exercises and training sessions, in accordance with approved schedule, aiming coherent interaction of plant’s personnel and specialized outside emergency services (EMERCOM, Police, Medical Services) under schedule of complex interactions prescribed in emergency response plan. Tactical training in fire-fighting was performed on 22 April 2015, tactical emergency training under plan of interactions in the case of accident “Squeeze of liquid chlorine as the result of destruction impermeability of chlorine tank” were held under supervision of Western-Urals Division of RosTechNadzor on 24 July 2015, regular training in deployment of restoration works and other training under supervision of EMERCOM; - avoidance of pollution is the preventive approach in any decision connected with projection, rebuilding and/or production (rebuilding of polygon for storage of solid production residues, processing of by-products generated in production of magnesium metal and titanium sponge, processing of residues in Rare Metals Operations and other measures); - timely obtaining and prolongation of licenses and permissions to certain types of construction works connected with safety of structures; - providing free nutrition, fermented milk products or dietary food recommended by regulations and medical norms to employees working under harmful and dangerous conditions; - conducting the annual preventive medical examinations of employees engaged in heavy work or work under harmful and dangerous working conditions (medical examinations are performed by physicians of Medical Center “Philosophy of Beauty & Health”, Perm, from 2012); - conducting of the annual preventive medical examinations of women by physicians of Perinatal Center, Solikamsk city; - providing affordable health care procedures in the Company’s medical center and/or sanatorium. New SMW’s regulations concerning safety of employees ИОТ-03-1-2015 were put into effect by the Company’s Order № 219 of 20 October 2015. SMW’s “Policy in Industrial Safety” is readily available on the Company web-site under link http://смз.рф/en/manag_system/The_Policy_Of_Industrial_Safety_Of_Solikamsk_Magne.pdf . The Policy contains objectives and obligations of the Company’s management to minimize risks of production accidents and describes principles of management in industrial safety. SMW developed and implemented its own Regulations “Production Control on Compliance with Industrial Safety Requirements” prepared under requirements of Federal Law “Industrial Safety of Dangerous Production Facilities” No 116-FZ of 21 July 1997 (as amended to date of 2 July 2013). Due to increased international terroristic activity, SMW tightened requirements and control of admission to the plant and improved protection of dangerous objects and, specifically, extremely dangerous Chlorine Storage Unit by the Company’s Order № 240 of 19 November 2015 Additional Counter- terroristic Measures to Improve Security of Objects. The Company formed special department of United State System for Prevention and Liquidation Extra-Ordinary Natural, Technogenic and Military Disasters and adopted its organization structure by Order № 244 of 26 November 2015 in compliance with statutory regulations of Russian Federation in this respect. Monitoring of the Company’s activities is performed by supervisory authorities in the form of scheduled and spontaneous inspections.

Insurance of Risks 1. In order to protect its property interests, SMW insures goods (chemical products, non-ferrous metals, titanium sponge, tantalum & niobium oxides & chlorides, rare earths carbonates & compounds, non-ferrous metals, potash) those are transported in containers, by auto, marine, railway or air transport in accordance with Rules for Transport Insurance of Goods with the JSC "Insurance Company of Gas Industry" (JSC "SOGAS"), Perm Division, under the General Insurance Police № 2215CG0071 of October 2015.

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2. In accordance with Article 15 of the Federal Law "Industrial Safety of Dangerous Production Facilities" of 21 July 1997 № 116 – FZ, Federal Law № 225 of 27 July 2010 and the Rules of Mandatory Insurance of Civil Liability by Owners of Dangerous Facilities for Injury Caused by Accident in Dangerous Object, SMW insures its civil liability under these Rules with insurance company OAO Alfa Insurance under the Contract for Mandatory Insurance of Civil Liability № 6191R/921/0167/5 of 28 June 2015. Contract covers 14 dangerous facilities of the Company those are the main technological divisions and dangerous areas of servicing workshops listed in Annex №1 to this contract. 3. In accordance with legislation of Russian Federation and licensing requirements of RosTechNadzor for entities operating with objects using atomic energy (Article 56 of the Federal Law "Use of Atomic Energy” № 170 - FZ of 21 November 1995), the Company signed the Contract for Insurance of Civil Liability of Entity Exploiting Atomic Energy № 6191R/788/0235/5 of 28 September 2015 with OAO Alfa Insurance covering compensation of loss and harm for third party caused by radiation exposure at the objects of the Company where sources of ionizing radiation are available: 1) Storage facility for radioactive waste; 2) Complex containing radioactive substances; 3) Transport packing container ПУ type – 2 units; 4) Radon generator in Radon laboratory; 5) X – ray equipment for spectral and structural analysis; 6) X-ray equipment for detection of defects; 4. In accordance with Article 31 of the Federal Law "The emergency services and the status of rescuers" of 22 august 1995 № 151-FZ, SMW has its own Gas Rescue Team (GRT). Contract of Collective Insurance in the Case of Disaster № 6193R/186/0258/5 of 12 August 2015 with OAO Alfa Insurance covering insurance of property interests of GRT employees connect with harm to life and health during the time of performance of their jobs in accordance with Rules for Insurance. 5. In accordance with Contract (police) of Civil Liability Insurance with OAO Alfa Insurance № 6191R/906/0280/5 of 12 November 2015 for member of self-regulatory organization, which includes members involved in building works, for cases of injury caused by defects of building & construction that affect safety of structures, the Company insures its own and third parties property interests connected with risks of civil liability those may arise as the result of defects affecting safety of structures caused by improper performance of building and construction works under SMW’s permission № 0943-2011-5919470019-С-018 of 06.12.2011 issued by NP SRO “Alliance of Builders”. This Police grants amount of compensations not exceeding value covered by insurance police and within limits described in the contract in accordance with Insurance Rules of Insurer (period of insurance is from 06 December 2015 to 05 December 2016) 6. In accordance with the rights of SRO NP “Union of Architectural & Designing Organizations of Perm Region” (NP SAPO SRO) to conclude collective insurance contracts on behalf of its members, this organization concluded the civil liability insurance contract ГОС № 38-57/0025/15-26 with insurance company OOO “Building Insurance Group” for complex insurance of civil liability and financial risks of SRO members covering cases of injury and additional expenses those may arise as the result of defects affecting safety of structures caused by improper performance of works. This Police guarantees payment of insurance compensations for injury, reimbursement of compensation fees and fees connected with lawsuits those may arise during performance of works, designing & engineering services as defined in the SMW’s Certificate of Permission № 0691.04-2010-5919470019-П-063 of 01.10.2012 issued by NP SAPO SRO (period of insurance is from 18.10.2015 to 17.10.2016) 7. The Company insures its civil liability for harm to life, health and injury to property of persons affected by road accidents under contract of mandatory civil liability insurance (OSAGO) of 24 June 2015 with OAO Alfa Insurance under Rules of OSAGO. 8. In order to support in access to additional medical services to SMW’s employees, the Company concluded the Contract for Voluntary Medical Insurance with IPAO Ingosstrakh where employees may select its own class of insurance police. Basic insurance police is free for employees and completely paid by the Company.

Risks Associated with Lawsuits The Company's is involved in critical lawsuits as the defending party. In the case of cognovits of petitions in critical lawsuits, where SMW is involved as the defending party, and enactment of these decisions, it may be possible to appeal the court for recognition of the Company as the insolvent (bankrupt). In the case of enactment of Central Bank’s petitions with respect to SMW, the Company will be charged with significant penalties.

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Risks Associated with Inability to Prolong Existing Licenses of the Company Risks of revocation, suspension or refusal to prolong the licenses for the main activities of the Company is virtually nonexistent. SMW builds its forecasts on the base of compliance of its actual results with requirements to prolong appropriate licenses. SMW conscientiously meets its environmental obligations and adjusts its activities towards requirements prescribed by Russian legislation as well as requirements prescribed by international standards, agreements, conventions and protocols. Efforts to improve efficiency of the Company’s production activities include, inter alia, efforts to reduce pollution and discharge of hazardous substances, building of waste disposal facilities. Changes in environmental legislation, enforcement of more strict requirements for licensing could rise expenses connected with improvement of production process as well as different fees and duties. The Company strives to comply with requirements governing the licensing of its activities, provides resources and arrange appropriate measures for that.

Risks Associated with Potential Liability of the Company under Obligations of Third Parties The Company has neither obligations against debts of third parties.

Risks Associated with the Potential Loss of Large Customers Risks associated with the potential loss of customers accounting for at least 10% in total sales revenues of the Company are moderate, and competition in the market is the only factor which may result this failure. In the event of such a case, SMW has opportunity to sell its products to other customers without any significant loss of profitability.

CORPORATE GOVERNANCE

Obligations and Activity of the General Assembly of Shareholders in the Reporting Period In accordance with Article 10.1. of SMW’s Charter, the General Assembly of Shareholders (GAS) is a top governing body of the Company. The Annual GAS was convened under initiative of the Board and was held on 05 June 2015. GAS adopted Annual Report and Accounting/Financial Statements for 2014 year, decided not to share the income and not to pay any dividends, elected new Board and Audit Commission, approved ZAO Auditing Company Legion-Audit as the auditor of SMW Accounting/Financial reporting for 2015 year, approved deals which may be referred to as the deals with interest (9) including prospective deals.

Obligations and Activity of the Board of Directors in the Reporting Period In accordance with SMW’s Charter, the Board of Directors performs general management of the Company during the period between GASs. Federal Law Joint-Stock Companies grants the Board the most important role in development and implementation of strategy, in supporting financial and general activity of companies as well as in granting of the shareholders’ rights. Obligations of the SMW’s Board members are described in the Section 5 of the SMW’s Board Statute. 13 proxy Meetings of the Board were convened and held under rules of the Board Statute during the reporting year. These Meetings were called by the Chairman of the Board as well as under requests of the following the Board members: Dr. Dmitriy L. Melnikov, Ksenia S. Zlobina and Dr. Pavel G. Detkov. From 5 to 8 the Board members participated in proxy votes while quorum threshold is 5 members in accordance with Article 10.3. of the Board Statute, that is that all Meetings were considered as constituent and results of votes are valid. In accordance with Article 65 of Federal Law Joint-Stock Companies № 208-FZ of 26 December 1995, Article 11 of SMW’s Charter and provisions of the SMW’s Board Statute, the following issues, assigned to the Board competence, were discussed and voted: - approval of the budget for 2015 for the main activities of the Company; - discussion of candidates to the Board and Audit Commission proposed by the shareholders owing at least 2% shares of the Company and selection of nominees to the list for vote by GAS; - approval of the Company’s representatives to the managing and controlling bodies of subsidiaries/depending entities where SMW is a shareholder/co-owner or partner (OAO RITM, ZAO Octane, OOO SZD);

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- conclusion of the deal with respect to property valued from 5% to 50% of asset balance value on the date of discussion of the deal; - convening the Annual GAS and setting its Agenda; - provisional approval of Annual Report and Financial/Accounting Statements for 2014 year, Auditor of the Company for 2015 year and recommendations to the GAS concerning sharing the income for 2014 year; - concerning approval of deals which may be referred to as the deal with interest; - concerning approval of deals, which may be referred to as the deal with interest, that may be concluded during normal course of business (under rules of the Article 6 of Federal Law Joint-Stock Companies), and decision concerning inclusion of proposed deals for approval by Annual GAS; - early retirement of Sergei B. Shalaev from the position of General Director and termination of his power, payment of bonuses for results of the reporting period in accordance with labor contract; - appointment of Dr. Dmitriy L. Melnikov on the position of the General Director and signing of the labor contract with him; - election of the Chairman, Deputy Chairman and Secretary of the Board; - under provision of Article 11.3 of the Charter and proposal of General Director, approval of the Company’s Organizational Structure and persons on the positions of Deputy General Director: Deputy General Director for Development – Ivan I. Shatrov from 27.03.2015, Chief Engineer – Vasiliy A. Kiselev from 16.07.2015; - foundation of Committee for Strategical Development, adoption of its Statute and its members; - approval of Auditor’s fees; - approval of loan contracts (3) with VTB Bank (PAO) under provisions of sub-article 22 of Article 11.3 in the SMW’s Charter; - recognition of previously concluded SMW’s contracts (4) inconsistent with terms and conditions of Agency Agreement between SMW and OOO Mineral Trading of 28.11.2014; - approval of contracts №PF/PC-2015-01 of 30.06.2015 and №PF/PC-2015-02 of 22.07.2015 with Polyfer Handels Ges.m.b.H. referred to as the deal with interest under provisions of Article 84 of Federal Law Joint Stock Companies; - early termination of Chairman power of Alexander S. Gutin and election оf Dr. Pavel G. Detkov on the position of the Chairman of the Board; - convening the Extra-Ordinary GAS and setting its Agenda under decision of the Chairman of the Board; - issues related with convocation of Extra-Ordinary GAS; - foundation of Committee for Personnel Policy and Corporate Ethics, adoption of the Committee Statute and its members. At the first time in practices of the Board, it was a conflict of interests between certain members of the Board and the Company and between SMW’s Agent OOO Mineral Trading and the Company. Member of the Board Ksenia S. Zlobina appealed Arbitration Court of Perm Region with petitions covering submission of information and documents by the Company as the inconsistent to Joint Stock Companies Federal Law as well as recognition as invalid certain decisions of the Board. Information concerning these lawsuits is readily available on the Company’s web in the section of Акционерам – Корпоративные споры The Board priorities are improvement of corporate management and profitability, sustainability, reliability and competitiveness of the Company in the main markets.

Dividend Statements Neither decision to pay any dividends for the results of 2014 year as well as for the results of the first quarter, the half a year, the nine months of the year, as well as for whole 2015 year were adopted by the Company.

List of the Company’s Deals That May Be Referred to as the Large Deals under Legislation Neither deal or (trans)action, that fall under criteria ‘large’ in accordance with the Federal Law “Joint Stock Companies” and/or the Charter of the Company, were signed by the Company in 2015.

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List of the Company’s Deals That May be Referred to as the Deals with Interest under Legislation In 2015, the Company concluded deals that may be referred to as “deals with interest”. List of these deals is provided in Annex №2 to this Report (Available only electronically in Russian under link http://смз.рф/raport/2016/2015_godovoj_otchet_smz_2015_dlja_sajta.pdf).

The Board of Directors of the Company The Board of Directors of the Company consists of 9 members. In accordance with decision of General Assembly of Shareholders of 05 June 2015, the following persons were elected to the Board:

Dr. Pavel G. Detkov Chairman of the Board from 22.12.2015 Member of Committee for Personnel Policy and Committee for Corporate Ethics Year of birth: 1960 Education: M.V. Lomonosov’s Moscow Institute of Fine Chemical Technology, specialty Chemical Technology of Rare & Trace Elements, 1984. Russian Academy of External Trade, specialty International Economic Relations (World Economy), 1995. Doctor Degree in Technology Director of Polyfer Handels GmbH (Wien, Austria) from 2008 Member of the SMW’s Board from May of 2014 and was a member of the earlier Boards. % in the Authorized Capital of SMW: 0.1599 % in Voting Shares of SMW: 0.1599

Sergei B. Shalaev Deputy Chairman of the Board Chairman of the Board Committee for Strategical Development Member of the Board Committee for Personnel Policy and Corporate Ethics Year of birth: 1956 Education: Perm Polytechnic Institute, specialty Technology & Complex Mechanization of Underground Mining of Mineral Deposits, 1978 Member of the Board from 2005 % in the Authorized Capital of SMW: 0.001 % in Voting Shares of SMW: 0.001

Dr. Alexander S. Gutin Member of the Board, former Chairman of the Board (until 22.12.2015) Year of birth: 1968 Education: Perm State Medical Institute, specialty Stomatology, 1990. Perm State University, specialty Jurisprudence, 1997. Doctor Degree in Jurisprudence. Director of OOO Kris (01.2008-06.2014), information concerning recent job is not available Member of the Board from 2003 % in the Authorized Capital of SMW: nil % in Voting Shares of SMW: nil

Ksenia S. Zlobina Member of the Board Year of birth: 1976 Education: Perm State University, specialty Aircraft Engines and Energy Systems, 1998. Federal State High Professional School of the President’s Russian Academy of Economy and Education of Government Personnel, specialty Management of Organizations – Management of Business Competitiveness, 2012. General Director of ОАО Echo/ZAO Echo (09.2011-02.2015), information concerning recent job is not available Member of the Board from 2015 % in the Authorized Capital of SMW: nil % in Voting Shares of SMW: nil

Vadim V. Manin Member of the Board

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Year of birth: 1970 Education: Omsk Polytechnic Institute, specialty Missiles Engines, 1993. Russian Institute for Economics & Finance, specialty Finance and Credits, 1995. Managing Director of ZAO Aksioma Capital (2013-2014); Deputy Chairman, member of the Board ОАО EcoPromBank (05.2014-08.2014), information concerning recent job is not available Member of the Board from 2015 % in the Authorized Capital of SMW: nil % in Voting Shares of SMW: nil

Dr. Dmitriy L. Melnikov Chairman of the Board Committee for Personnel Policy and Corporate Ethics Member of the Board Committee for Strategical Development Year of birth: 1961 Education: M.V. Lomonosov’s Moscow Institute of Fine Chemical Technology, specialty Chemical Technology of Rare & Trace Elements, 1984. Doctor Degree in Technology, 1987. General Director of SMW, Chief Engineer of SMW from 09.2005 to 03.06.2015 Member of the Board from 2015 % in the Authorized Capital of SMW: 0.0005 % in Voting Shares of SMW: 0.0005

Artem M. Nechaev Secretary of the Board Член комитета Совета директоров по кадровой политике и корпоративной этике Member of the Board Committee for Personnel Policy and Corporate Ethics Year of birth: 1976 Education: Perm State University, specialty Jurisprudence, 1998. Perm State University, specialty Management, 2012. SMW Director for Legal Affairs Member of the Board from 2015 % in the Authorized Capital of SMW: nil % in Voting Shares of SMW: nil

Evgeniy Yu. Syrtzev Member of the Board Committee for Personnel Policy and Corporate Ethics Year of birth: 1983 Education: Webster University (Wien, Austria), Master of Business Administration, 2008. General Director of KPI GmbH Member of the Board from 2015 % in the Authorized Capital of SMW: nil % in Voting Shares of SMW: nil

Alexei V. Chibisov Member of the Board Year of birth: 1971 Education: S.M. Kirov’s Urals Polytechnic Institute, specialty Economics & Management in Metallurgy, 1993 Deputy Prime-Minister of Perm Region – Minister of Industry, Business and Trade of Perm Region Member of the Board from 2014 % in the Authorized Capital of SMW: nil % in Voting Shares of SMW: nil

Before the Board elections by General Assembly of Shareholders of 06 June 2015, the Board consisted of the following members:

Dr. Alexander S. Gutin

Dr. Pavel G. Detkov

Dr. Dmitriy L. Melnikov

Alexei Yu. Pykhteev

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Member of the Board Year of birth: 1975 Education: Perm State University, specialty Economist, in 1997. Director of OOO Business-contact Member of the Board from 2012 % in the Authorized Capital of SMW: nil % in Voting Shares of SMW: nil

Evgeniy Yu. Syrtzev

Alexei V. Chervonnykh Member of the Board Year of birth: 1968 Education: Perm State University, specialty: English and French, 1992. Academy of National Economy of Russian Government, Master of Business Administration, 2007. General Director of ОАО PermOblNeft. Member of the Board from 2012 % in the Authorized Capital of SMW: nil % in Voting Shares of SMW: nil

Alexei V. Chibisov

Sergei B. Shalaev

Ivan I. Shatrov Member of the Board Committee for Strategical Development (07.2015-09.2015) Year of birth: 1983 Education: Perm State University, specialty Jurisprudence, 2005. Perm State Technical University, specialty Economist – Manager, 2010. General Director of ООО ART-Technology, former SMW Deputy General Director for Development (03.2015-09.2015) Member of the Board from 2012 % in the Authorized Capital of SMW: nil % in Voting Shares of SMW: nil

Neither deals with the Company’s shares were concluded by the Board members in 2015.

Information on the Person Who Holds the Position of Exclusive Executive Body of the Company Pursuant to article 69 of Federal Law № 208-FZ of 26.12.1995 Joint Stock Companies and the SMW’s Charter, the Company is managed by General Director (Exclusive Executive Body of the Company). General Director of the Company is Dmitriy Leonodovich Melnikov since 04 June 2015, 1961 year of birth, former Chief Engineer of the Company (from 09.2005). Neither deals with the Company’s shares were concluded by General Director in 2015

The Main Provisions of the Company's Policy in the Field of Compensation and Reimbursement of Expenses, as well as the Criteria for Determining the Amount of Remuneration and

Compensations Paid to the Members of the Board of Directors of the Company for 2015 In accordance with Article 4.1 of the SMW’s Board Statute – adopted by Annual GAS of 12.05.2014 - the Board members have a right to a monthly remuneration for performance of their duties in the amount equal to monthly average salaries of industrial employees of the Company and/or compensation of expenses connected with performance of their functions as the Board members. The total remuneration of the Board, including salaries of the Board members who are the Company’s employees, including bonuses, remunerations, fees paid individually for their participation in the governing body, other types of remunerations those were paid by the Company during the reporting year totaled 38’082.61 thousand rubles. Compensations of expenses related to the performance of the functions of the Board member were not paid by the Company during 2015 year.

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The Main Provisions of the Company’s Policy in the Field of Remuneration and Reimbursement of Expenses, as well as the Criteria for Determining the Amount of Remuneration and

Compensations Paid to the Members of the Executive Bodies of the Company During 2015 The criteria for determining and amount of remuneration of the General Director (GD) are defined in the article 12.2 of the Charter of the Company, in the article 1.3. Statute of the General Director and in the labor contract between the General Director and the Company. The remuneration of GD is determined as a fixed monthly tariff of salary in accordance with the labor contract. This tariff is subject to indexing in proportion to indexing of fixed monthly tariffs of salary for regular employees the Company in accordance with Collective Labor Agreement between the Company and Trade Union. For each period, under decision of the Board, additional remuneration (bonus for period/annual bonus) may be paid to GD depending on results of the Company’s performance during the reporting period including compensation of travelling expenses, in proportion to the period of employment in this position within reporting period. The remuneration of General Director is subject to the Company’s regulations on confidentiality and it is not disclosed separately.

Information (report) on Compliance with Principles and Recommendations of the Code of Corporate Governance Recommended by the Bank of Russia

The Company does not have its officially adopted Code of Corporate Governance or other similar document, however, in accordance with requirements of Federal Law Joint-Stock Companies, Federal Law Securities Market and regulations of the Bank of Russia, SMW provides to shareholders and investors all appropriate ability to participate in managing of the Company and obtaining the information concerning the Company’s activities. This information is published by the Company on its own web-site http://www.смз.рф and on the web-page of Center of Corporate Information Disclosure of OOO Interfax http://www.e-disclosure.ru/portal/company.aspx?id=6100 and includes general company information, banking account and price for copying of documents that company should provide in accordance with the Russian legislation under request of owners of the Company’s securities and other interested persons, Charter and internal documents of the Company, quarterly and annual financial statements and reports, list of affiliated persons, information about essential facts (also published by RIA Interfax). Duties of the Secretary of the Board are performed by the specially appointed person whose job duties include provisions recommended in the CB RF Code of Corporate Governance and provisions of internal documents of the Company aiming implementation of the basic principles of corporate governance. The Company's Department of Corporate Relations enforces managing bodies of the Company and the Company’s executives to comply with the procedural requirements guaranteeing the legitimate rights and interests of the shareholders, timely disclose an information making this information readily available to the public. For the convenience of shareholders, who are physical persons, and for implementation of rights of owners of the Company’s securities, the Company provides services to get documents from shareholders required for recording of operations in register, and arranges transfer of these papers to the Company’s Register-keeper. The Company’s governing bodies tend to follow principles and recommendations stipulated in the Code of Corporate Governance approved and recommended for implementation by the Board of Bank of Russia on 21 March 2014 for public joint-stock companies. Statement on compliance of the Company with the Code of Corporate Governance under requirements of Annex 1 to Recommendations of Completion of the Statement on Compliance with Principles and Recommendations in the Code of Corporate Governance (Annex to Letter of Bank of Russia № ИН-06-52/8 of 17.02.2016) is provided in Annex №3 to this Annual Report (available electronically and in Russian only under link http://смз.рф/raport/2016/2015_godovoj_otchet_smz_2015_dlja_sajta.pdf).

Information Concerning Approval of Annual Report In accordance with sub-article 5 of Article 3.1. of the SMW’s Board Statute, Annual Report is subject to provisional approval by the Board. Authenticity of information contained in Annual Report, under requirements of Article 16.2 of the SMW’s Charter, should be confirmed by internal Audit Commission that is the Company’s supervisory body on financial and general activity of the Company.

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In accordance with sub-article 11 of Article 10.2. of the SMW’s Charter, Annual Report should be adopted by the General Assembly of Shareholders. Text of Annual Report adopted by the General Assembly of Shareholders should be published on the web with free access to the Report during three years, at least.

KEY PERFORMANCE INDICATORS OF THE COMPANY

Aggregated balance sheet on 31 December 2015 (in thousand rubles)

ASSETS LIABILITIES

1 Fixed assets 2’273’545 3 Equity 2’934’922

2.1 Inventories and expenses 1’199’529 4 Long-term loans and other long-term borrowings

1’225’554

2.2 Cash, accounts receivable and other assets, including

1’635’498 5 Accounts payable and other liabilities 948’096

Cash and equivalent 172’240

Accounts receivable and other assets 1’463’258

TOTAL ASSETS 5’108’572 TOTAL LIABILITIES 5’108’572

Income Statement for 2015 year (in thousand rubles)

Name Line № 2015 2014

Sales revenues 2110 6'395'495 5’164’738

Cost of goods sold 2120 (4’990'877) ( 4'699'448)

Gross margin (loss) 2100 1'404'618 465’290

Selling expenses 2210 (383'913) ( 329'549)

General & Administrative expenses 2220 (333'970) (339’407)

Sales income (loss) 2200 686'735 ( 203'666)

Earnings from participation in other entities (dividends) 2310 59'022 45’160

Interest receivable 2320 1'883 2’791

Interests payable 2330 (45’632) ( 66'581)

Other revenues 2340 507'894 581'401

Other expenses 2350 (590'223) ( 318'972)

Income (loss) before taxation 2300 619'679 40’133

Сurrent income tax 2410 (144'650) ( 7'911)

Including fixed tax liabilities (assets) 2421 49'210 19’935

Deferred tax liabilities 2430 (538) 7’687

Deferred tax assets 2450 (72) ( 25'932)

Other 2460 121 26'046

Net income (loss) in the reporting period 2400 474’540 40’023

FOR REFERENCE. Result of re-assessments of net assets which is not included into net income (loss) of the reporting period

2510 -

115’455

Results from other operations which are not included into net income (loss) of the reporting period

2520 -

-

Total financial result for the reporting period 2500 474'540 155'478

Earnings (losses) per share 2900 1.19 0.10 Diluted earnings (losses) per share 2910 - -

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REPORT OF AUDITOR

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