INFORMATION ABOUT THE COMPANY

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2 ALROSA. ANNUAL REPORT INFORMATION ABOUT THE COMPANY ALROSA is a Russian group of diamond mining companies that occupies a leading position in the industry and has the largest rough diamond reserves in the world. The Group accounts for one third of the reserves and more than a quarter of the production of the global rough diamond market. The key activities of ALROSA, which are the focus of major strategic efforts of the Group, comprise deposits exploration, mining, processing and sales of rough diamonds. The core activities of ALROSA Group are concentrated in two regions of the Russian Federation, namely Yakutia and the Arkhangelsk Region, as well as on the African continent, in Angola, Botswana and Zimbabwe. The majority of ALROSA revenue comes from selling gem quality rough diamonds, most of which are sold under long-term agreements to Russian and foreign diamond cutting companies. The rough diamond segment accounts for about 90% of the total Group revenue.

3 002 ALROSA. ANNUAL REPORT 2014 ALROSA. ANNUAL REPORT INTRODUCTION 006 GEOGRAPHIC REACH 008 KEY PERFORMANCE INDICATORS 010 ADDRESS OF THE CHAIRMAN OF THE SUPERVISORY BOARD OF OJSC ALROSA 012 ADDRESS OF THE ACTING PRESIDENT OF OJSC ALROSA 02 STRATEGIC REPORT 016 CONTRIBUTION OF OJSC ALROSA TO THE DEVELOPMENT OF THE INDUSTRY KEY EVENTS 020 ALROSA MARKET POSITION AND BUSINESS MODEL 026 ALROSA GROWTH STRATEGY 034 MEETING KEY PERFORMANCE INDICATORS 036 OPERATING ACTIVITIES: RESULTS FOR THE REPORTING PERIOD 067 INVESTMENTS AND INNOVATIONS: RESULTS FOR THE PERIOD 079 FINANCIAL RESULTS FOR THE REPORTING PERIOD 088 RISK MANAGEMENT: MANAGEMENT AND CONTROL SYSTEM 097 SUSTAINABLE DEVELOPMENT 03 CORPORATE GOVERNANCE 106 ROLE OF CORPORATE GOVERNANCE IN IMPLEMENTATION OF THE COMPANY S DEVELOPMENT STRATEGY 107 PRINCIPLES OF CORPORATE GOVERNANCE 111 CORPORATE GOVERNANCE STRUCTURE 144 INTERNAL CONTROL SYSTEM 04 FINANCIAL RESULTS 150 AUDITOR S REPORT 156 MAIN FINANCIAL INDICATORS 05 INFORMATION FOR INVESTORS AND SHAREHOLDERS 160 INFORMATION ABOUT SECURITIES OF THE COMPANY 167 INTERACTION WITH THE INVESTMENT COMMUNITY 170 COMPANY DIVIDEND POLICY 06 PHOTO GALLERY: EVENTS OF PHOTO GALLERY 07 APPENDICES YEAR DYNAMICS OF OPERATING INDICATORS 189 CONTACT INFORMATION 191 APPENDICES 193 List of LOCAL REGULATORY documents 194 OJSC ALROSA REGISTRAR AND TRANSFER AGENTS OF THE REGISTRAR 196 List and method of CALCULATION of ALROSA Group s KPI 198 Accounting STATEMENTS of OJSC ALROSA based on the Russian ACCOUNTING STANDARDS (RAS) 210 Information on disposal of non-core assets of OJSC ALROSA for Summary DATA on the RESULTS of sales of rough and polished diamonds, and on the achievement of planned targets of ALROSA Group in Information on the Company s interested PARTY TRANSACTIONS and major TRANSACTIONS 242 Information on ALROSA s Compliance with the Corporate Code of Conduct per the RECOMMENDATIONS of the FFMS of Russia 258 Information on ACTUAL results of fulfilment of the INSTRUCTIONS of the President of the Russian FEDERATION and the GOVERNMENT of the Russian FEDERATION received by OJSC ALROSA in Minutes of the meetings of the SUPERVISORY BOARD and the issues considered at the meetings of the Committees 266 Energy CONSUMPTION and IMPLEMENTATION of the ENERGY SAVING program of ALROSA OJSC in Report of the Audit Committee of OJSC ALROSA for 2014

4 004 ALROSA. ANNUAL REPORT 2014 INTRODUCTION INTRODUCTION ALROSA. ANNUAL REPORT ALROSA INTRODUCTION produces diamonds in two regions of the Russian Federation, the Republic of Sakha (Yakutia) and the Arkhangelsk region - 11 kimberlite pipes and 16 placer mines. To maintain and expand its base of mineral raw materials, the company carries out prospecting and exploration works on the territory of the Russian Federation and in the countries of Africa.

5 006 ALROSA. ANNUAL REPORT 2014 INTRODUCTION INTRODUCTION ALROSA. ANNUAL REPORT GEOGRAPHIC REACH ANABARSKY DISTRICT, RUSSIAN FEDERATION OJSC ALMAZY ANABARA LONDON, UK ARCOS LTD. SAINT-PETERSBURG, RUSSIAN FEDERATION OJSC NPP BOUREVESTNIK (RESEARCH AND PRODUCTION COMPANY) MOSCOW, RUSSIAN FEDERATION BRILLIANTY ALROSA DIVISION, UNITED SELLING ORGANIZATION OF ALROSA REPRESENTATIVE OFFICE IN MOSCOW UDACHNY, RUSSIAN FEDERATION UDACHNY MPD SVETLY, RUSSIAN FEDERATION OJSC VILYUISKAYA HPP-3 NAKYN, RUSSIAN FEDERATION NYURBA MPD AIKHAL, RUSSIAN FEDERATION AIKHAL MPD ARKHANGELSK, RUSSIAN FEDERATION OJSC SEVERALMAZ AMAKINSKAYA EXPLORATION EXPEDITION ANTWERP, BELGIUM ARCOS BELGIUM N.V. BARNAUL, RUSSIAN FEDERATION KRISTALL BARNAUL LLC NYURBA, RUSSIAN FEDERATION OJSC ALROSA-NYURBA YAKUTSK, RUSSIAN FEDERATION ALROSA DIVISION YAPTA (YAKUTSK DIAMOND TRADING ENTERPRISE) REPRESENTATIVE OFFICE IN YAKUTSK GEOGRAPHIC LOCATION NEW YORK, USA ARCOS USA, INC. OREL, RUSSIAN FEDERATION OREL-ALROSA LLC REPRESENTATIVE OFFICE IN OREL GELENDZHIK, RUSSIAN FEDERATION CJSC GOLUBAYA VOLNA RESORT LENSK, RUSSIAN FEDERATION ALMAZDORTRANS PRODUCTION DIVISION OJSC ALROSA-LENA SHIPPING COMPANY SALES DIVISIONS, DIAMOND PRODUCTION NEBUG VILLAGE, RUSSIAN FEDERATION PROMETHEUS HEALTH AND RECREATION CENTRE HONG KONG, CHINA ARCOS HONG KONG LTD. SOCIAL FACILITIES REPRESENTATIVE OFFICES FOREIGN-BASED DIAMOND TRADING COMPANIES DUBAI, UAE ARCOS EAST DMCC RAMAT GAN, ISRAEL ARCOS DIAMONDS ISRAEL LTD MIRNY, RUSSIAN FEDERATION DIAMOND SORTING CENTRE MIRNY MPD MINING AND PROCESSING DIVISIONS EXPLORATION UNITS INDUSTRIAL AND EXPLORATION ENTITIES PRODUCTION INFRASTRUCTURE DIAMONDS AND GEMS COMPLEX LUANDA, ANGOLA HIDROCHICAPA S.A.R.L. REPRESENTATIVE OFFICE IN LUANDA LUANDA SUL, ANGOLA CATOCA LTD. MINING COMPANY CAPITAL CONSTRUCTION DIVISION (UKS), SUPPLIES & LOGISTICS DIVISION (UMTS), YAKUTNIPROALMAZ RESEARCH INSTITUTE, GEO-SCIENTIFIC RESEARCH ENTERPRISE (NIGP), ALMAZAVTOMATIKA SPECIALIZED DIVISION, MIRNY AUTOMOBILE ROADS DIVISION (MUAD) THE CULTURAL AND SPORTS COMPLEX (CSC) TSPK

6 008 ALROSA. ANNUAL REPORT 2014 INTRODUCTION INTRODUCTION ALROSA. ANNUAL REPORT KEY PERFORMANCE INDICATORS RESERVES ACCORDING TO JORC 608 MILLION CARATS AS OF RESOURCES ACCORDING TO JORC MILLION CARATS AS OF GEM-QUALITY DIAMONDS AMOUNT TO PROFIT OF ALROSA ALROSA PLANS INCREASE IN MINING 41 MILLION CARATS IN MILLION CARATS IN 2014 ALROSA EXTRACTS DIAMONDS 95% 28% IN RUSSIA IN THE WORLD ALROSA DEVELOPS PLACER DEPOSITS KIMBERLITE PIPES RESERVES ACCORDING TO STATE RESERVES COMMITTEE DIAMOND MINING AVERAGE CONTENT OF DIAMONDS SALES OF DIAMONDS +4% 1158 MILLION CARATS AS OF ,212 THOUS. CARATS 1,4 CARATS/TONNE 39,570 THOUS. CARATS

7 010 ALROSA. ANNUAL REPORT 2014 INTRODUCTION INTRODUCTION ALROSA. ANNUAL REPORT ADDRESS OF THE CHAIRMAN OF THE SUPERVISORY BOARD OF OJSC ALROSA Dear shareholders, ALROSA Group continues to be the undisputed leader of the world diamond mining industry. In 2014, the Company produced 36.2 mn carats of rough diamonds. Today ALROSA has the largest resource base and one of the longest estimated mining reserve periods among the major players in this market. The organized sales system enabled the Company to earn a record revenue of over $5 bn from sales of its products in Maintaining the leading position, focusing on the exploration and mining of rough diamonds and consolidating the Company s status on the world market form the basis of the longterm development strategy at ALRO- SA. The Company s current operating and financial figures confirm the economic efficiency of this model. The Company s activities are highly rated on the market, which is confirmed by the fact that since its IPO in October 2013, the Company s capitalization has more than doubled. In 2014, ALROSA took important steps to further develop this strategy. Udachny, the last of the four underground mines under construction, was put into operation. Construction of new enrichment facilities was completed and a new diamond pipe was put into operation in the Arkhangelsk Region. Stripping operations were completed and diamond mining commenced at the Botuobinskaya pipe in the western part of Yakutia. The Company s investments in the construction of new facilities made over the past years are beginning to produce returns. In 2015, ALROSA s production volume will rise to 38 mn carats and in the near future it will exceed 41 mn carats. In order to maintain and expand its resource base, the Company is continuing active geological exploration operations, focusing not only on Russia but also on Africa, a region with a high potential for discovery of new major diamond deposits. The record sales figures achieved by the Company are the direct result of a sales policy based on long-term contracts. Sales under such contracts provide the Company and its customers with stable supplies of rough diamonds, protect against price volatility on the rough diamond market and make it possible to plan business processes. This sustainable model is also integrated in the Company s development strategy and will remain unchanged. ALROSA has already established a pool of clients to work with under long-term contracts for the next 3 years. The Company ensures full transparency of its activities and has high requirements for its clients. Since 2015, long-term clients of OJSC AL- ROSA have to accept the Principles of responsible business conduct, declaring compliance with the requirements of the Kimberley Process in selling rough diamonds, financial transparency and openness of information, combating corruption, fair competition, respect for human rights and labour rights. A clear plan of production development and a balanced sales system make it possible for the Company to maximize the price of diamonds sold and ensure stability and predictability of cash flows from operating activities. Given the actual growth of financial indicators, ALROSA intends to pay dividends for 2014 at the level of 2013 despite receiving a nominal net loss as a result of the devaluation of the ruble. ALROSA implements corporate social responsibility measures in accordance with the best international practices. In 2014, the ALROSA Policy in the field of sustainable development and corporate social responsibility was developed and approved. It is aimed at respecting the rights and interests of employees, improving the quality of life, and promoting active development of the regions where the Company operates. The prerequisites for the development of this document were the strategic goals of the Company and compliance with recommendations of international experts and auditors. Today the ALROSA Supervisory Board comprises experienced directors and managers who are well versed in the specifics of the diamond industry and understand the challenges and tasks facing the Company. In 2014 we assessed the work of the Supervisory Board for the first time with the help of independent auditors. Following the assessment, the experts spoke favorably of the speed at which complex issues were addressed, the high level of teamwork and the efficiency of decision-making. I would like to acknowledge the tremendous contribution made to the development of the Company by Fyodor Borisovich Andreev, who passed away prematurely. Mr Andreev joined ALROSA in the difficult period of crisis and in just 5 years he managed to build a truly world-class company. Today ALROSA is one of the most successful mining companies in Russia and a major player on the world rough diamond market. The achievements that make the Company and its shareholders proud today are, in many respects, his achievements. I would like to praise the actions taken by the President and the Management Board of the Company and thank all the employees of ALROSA Group for their hard work in I am confident that the successful implementation of the development strategy carried out by many thousands of professionals employed by the Company will enable ALROSA Group to strengthen its leading position on the rough diamond market, and ensure sustainable long-term production, revenue growth, and an increase in shareholder value. Ilya Yuzhanov, Chairman of the Supervisory Board of OJSC ALROSA

8 012 ALROSA. ANNUAL REPORT 2014 INTRODUCTION INTRODUCTION ALROSA. ANNUAL REPORT ADDRESS OF THE ACTING PRESIDENT OF OJSC ALROSA Dear shareholders, In 2014 ALROSA confirmed its status as the world s largest supplier of diamonds. ALROSA enterprises extracted 36.2 mn carats of rough diamonds, the Company today accounts for over 25% of the world market. This leading position is the result of many years of consistent work aimed at developing production. In the past year, ALROSA completed an important phase in its development having implemented a program for the construction of underground mines in the Republic of Sakha (Yakutia). In June, the Company put the Udachny underground mine into operation. When it reaches its design capacity, the mine will produce 4 million tonnes of ore per year and will be the largest ALROSA underground mine and one of the largest mines in the world. Udachny is the fourth of the underground mines to be constructed under the ALROSA development program. In the past years, the Company also brought the Aikhal mine to design capacity and put the Mir mine into operation. The program for a transition to underground mining, in which ALROSA invested heavily, will allow the Company to maintain a stable high level of production in Yakutia. In the Arkhangelsk Region ALROSA put the processing facilities into operation allowing the Company to mine and process 4 mn tonnes of ore per year at the Lomonosov mine. We can in fact say that a new diamond mining province has appeared on the map of the Russian Federation, as until recently rough diamonds from hardrock deposits were only mined commercially in Yakutia. In 2015, OJSC Severalmaz will begin bringing about 2 mn carats of diamonds per year to ALROSA following the opening of Karpinskogo-1, a new kimberlite pipe, and in the long run production will increase to 5 mn carats. The world rough and polished diamond market situation in 2014 was not stable. Steady growth in the first six months of the year turned into a decline in demand in the second half of the year. Despite this, sales of rough and polished diamonds by ALROSA in 2014 exceeded the $5 bn mark for the first time in the Company s history. We were able to achieve such high figures due to an effectively organized sales system based on long-term contracts. The balanced system of sales to the largest participants of the global rough diamond market is approved by our shareholders and integrated in the Company s long-term development program. In 2015 ALROSA will begin a new three-year contract period, long-term agreements have been concluded with 47 clients. In 2014 ALROSA paid great attention not only to the organization of sales but also to working together with participants of the rough and polished diamonds market. During the year, the Company entered into memoranda of understanding with several key industry organizations. These agreements will facilitate information exchange between members of the industry and will help to provide a better understanding of the market conditions. They will also create a platform for working together in protecting the market from synthetic gems and protecting the reputation of diamonds, on which the long-term demand for our products ultimately depends. Within the framework of implementation of the strategy approved by the shareholders, ALROSA is focusing on the rough diamond mining business and continues to withdraw from noncore assets. In 2014 ALROSA closed large transactions involving the sale of CJSC Irelyakhneft oil producing company and INTERFINANCE financial investment company as well as the public sale of its insurance business to SOGAZ Group. In addition, the Company withdrew from participation in the capital of LLC Mediagroup Sitim, Sakha Diamond Corp., CJSC BRINT-M, OJSC Udachny KPP and JSCB SIR. The Company will continue disposing of non-core assets in In 2014 ALROSA demonstrated steady growth in terms of key operating and financial figures. The Company s Revenue increased 23% to RUB billion, the flow of funds from core activities rose 40% in comparison to the previous reporting year totalling RUB 78 billion and in terms of EBITDA profitability (45.3%) OJSC ALROSA is one of the leaders of the Russian mining industry. However, the sharp rise of the dollar exchange rate in 2HY 2014 resulted in the revaluation of foreign currency liabilities, which at the end of the year led to a nominal net loss of RUB 16.8 bn in accordance with IFRS. ALROSA maintains a high level of corporate social responsibility. In 2014, the Company ensured that the salaries increased 8% on average in accordance with the Collective agreement, and continued the implementation of all corporate programs, including residential construction, pension, culture, sports and healthcare programs. The programs for local community support and environmental protection are being implemented in full. Today ALROSA, with its considerable mineral resource base and major investments in the production, has set itself the strategic objective of reaching an annual level of production of approximately 41 million carats. As early as in 2015 ALROSA diamond production will reach 38 mn carats due to the increased ore mining volumes at the Mir and Udachny underground mines and the start of open pit mining at Botuobinskaya and Karpinskogo-1 pipes. Implementation of the strategy of industrial development and withdrawal from non-core assets, efforts to expand the resource base, stable sales marketing and an efficient marketing policy have all contributed to ALRO- SA consolidating its position on the global rough diamond market. All the good performance indicators that we are proud of today were largely made possible by the great personal contribution of Fyodor Borisovich Andreev, the President of ALROSA, who passed away prematurely. His goal was to make the Company a global leader in all aspects. He dreamed that Russia, Yakutia and every employee would be proud of the Company. He was able to do a great deal for the production development and social and economic development of the Republic. We will remember his contribution and build on the good work that Mr Andreev has done. On behalf of the Executive Committee, I sincerely thank the shareholders of the Company, the Governments of the Russian Federation and the Republic of Sakha (Yakutia), the members of the Supervisory Board and all our business partners for their trust and support. Ilya Ryashchin, Acting President of ALROSA

9 014 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT STRATEGIC REPORT The main objective of ALROSA is to strengthen its leading position in the global diamond market by focusing on profile activities exploration, production and sale of rough diamonds. Successful implementation of the Group s tasks will ensure a steady production growth and secure long-term interests of its shareholders.

10 016 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT CONTRIBUTION OF OJSC ALROSA TO THE DEVELOPMENT OF THE INDUSTRY KEY EVENTS The ALROSA strategy aims to keep and maintain leading positions in the production of rough diamonds. In 2014, the company was able to implement the planned strategic initiatives that in the future will increase rough diamond production to 41 mn carats per year. In 2014 ALROSA completed the following major projects aimed at expanding existing facilities and put into operation new facilities: the second module of the processing plant of the Lomonosov Mining and Processing Enterprise in the Arkhangelsk Region reached the designed capacity. An increase in the processing capacity of OJSC Severalmaz from 1 mn to 4 mn tonnes of ore per year made it possible to start production at Karpinskogo-1, a new pipe, in addition to the producing open pit at the Arkhangelskaya pipe. As early as in 2015 OJSC Severalmaz will reach a level of production of about 2 mn carats of diamonds and in the future will increase this figure to about 5 mn carats per year; Udachny mine, the last of the four mines included in the program for the construction of underground mines in Yakutia, was put into operation. When it reaches the design capacity, it will become one of the largest enterprises and will produce 4 mn tonnes of ore, or over 5 mn carats of rough diamonds per year. The program for the transition to underground mining, in which ALROSA has invested heavily in previous years, will allow the Company to maintain a stable high level of production in Yakutia; construction was completed of the Botuobinsky open pit at the Nyurba Mining and Processing Division, with a design capacity of 400,000 tonnes of ore; Ebelyakh River and Gusiny Brook placers owned by OJSC Almazy Anabara were put into operation. In 2014, with a view to developing the mineral resource base in the most promising regions, the Company implemented the following initiatives: obtained a license for exploration and mining at the Molodovo River deposit and the right to use the subsoil at the Olom Brook and Log 325 Brook deposits and Zarya pipe; ensured that research and production geological exploration works were performed in joint ventures in Angola, Botswana, Zimbabwe; increased exploration efficiency through introducing the use of contracted drilling services, which lowered the cost of the works by 17.5%. In 2014 ALROSA continued interaction with leading international organizations and cooperation with representatives of the diamond industry. The Company took an active part in the Kimberley Process. ALROSA contributed to completing the reform of the World Diamond Council (WDC) by establishing new management bodies (a representative of the Company became a member of the Board of Directors and Executive Committee of the WDC), developing a new agenda and determining ways to further develop the organization. In the past year ALROSA signed memoranda of understanding with the Gems and Jewellery Export Promotion Council of India (hereinafter referred to as the Council), the Dubai Diamond Exchange and the Diamond Dealers Club of New York. These agreements provide for close cooperation across a wide range of areas. In the course of cooperation with the Council, with the support of OJSC ALROSA, the World Diamond Conference took place in New Delhi (India) with the participation of Vladimir Putin, the President of Russia, and Narendra Modi, the Prime Minister of India, heads of major diamond mining companies of the world, representatives of industry organizations and financial institutions. The Russian Federation represented by the Federal Agency for State Property Management (Rosimushchestvo) is one of the shareholders of the Company. 1 In 2014 ALROSA provided full reports on the actual results of executing the instructions of the President and the Government of the Russian Federation. As for execution of the orders, the following initiatives were implemented in the Company in the reporting period: the ALROSA Group long-term development program up to 2023 was approved taking into account the recommendations prepared by the Ministry of Economic Development of the Russian Federation; measures were taken to ensure effectiveness of procurement involving the purchase of goods from small and medium-sized enterprises, including the purchase of high-tech and innovative products, as well as to reduce the cost per item of goods in the procurement process; a system of key performance indicators was developed for the remuneration of the top management; steps were taken to integrate the provisions of the Corporate Governance Code in the Company s activities; the Program for Innovation Development and Technological Upgrade of OJSC ALROSA for the period from 2011 to 2018 was updated; 1 The share in the registered capital is %. The full information on the actual results of executing the orders of the President and the Government of the Russian Federation issued to OJSC ALROSA in 2014 is disclosed in Appendix to the Annual Report. a new version of the Program on the non-core assets disposal of OJSC ALROSA was approved; steps were taken to structure the work of the Unified Treasury and the financial flows management system, which will make it possible for the Unified Treasury to start functioning from 2HY 2015.

11 018 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT KEY EVENTS On March 14, in the Arkhangelsk region, ALROSA (subsidiary of OJSC Severalmaz) launched a second processing plant at the Lomonosov MPD. Such introduction of new processing facilities will allow processing additional volumes of ore at the Arkhangelskaya pipe. According to the forecasts, OJSC Severalmaz will reach the diamond production level of more than 5 mln carats per annum by On June 27, 2014 ALROSA Group commissioned Udachny underground mine. Reaching its design capacity of 4 mln tons of ore per year, Udachny will become the largest underground diamond mine in Russia and one of the largest worldwide. The underground mine is expected to reach its design capacity in On June 28, the Annual General Meeting of Shareholders of OJSC ALROSA was held in Mirny. During the voting, the shareholders adopted a resolution on payment of dividends based on the results of 2013, the dividends grew by 32 % up to RUB 1.47 per ordinary share compared with the previous year. ALROSA has received a RUB bln installment from EVRAZ plc for a 51% stake in OJSC GMK Timir, including RUB 990 mn to repay the principal plus the interest on the outstanding balance. Within the framework of the corporate non-core asset disposal programme, ALROSA announced about signing of an agreement with CJSC Russian Funds on sale of a 19.9 % stake in Financial Investment Company INTERFINANCE for RUB 8.9 mn. ALROSA has sold its 99.74% stake in ALROSA Insurance Company to OJSC SOGAZ. The deal was priced through an open auction at RUB 620 mn. ALROSA sold its insurance business as part of the corporate non-core asset disposal programme to focus on diamond mining exclusively. EVENTS AFTER THE REPORTING DATE ALROSA compiled a list of long-term customers for the new contract period of Within the period from January 19 to January 23, the company's new long-term customers carried out the first trade session. ALROSA sold its 84.7% stake in LLC MAK-Bank to Expobank, the purchase price of the said stake is RUB mn, including taxes OJSC Severalmaz started extracting ore at Karpinskogo-1 pipe of the M.V. Lomonosov diamond deposit in the Arkhangelsk Region. On May 15, the shares of ALROSA were added to MSCI index. On April 28, ALROSA attracted two long-term bank loans in the total amount of USD 1,090 for a 3 year period. The funds in the amount of USD 820 mln were spent on early repayment of bank loans with withdrawals in June and December The ALROSA's bank loans and public debt instruments account for USD 4 bln with long-term debt share of 88 % as of April 30, On December 11, the Supervisory Board of ALROSA approved the Long-Term Program for Development up to Successful implementation of the development program will allow ALROSA Group to strengthen its leadership on the diamond market, ensure the stable long-term growth of production and proceeds, as well as the growth of shareholder value. The ALROSA Group (Nizhne-Lenskoe OJSC) won the auction for the right to carry out exploration and mining on the diamond placer along the Molodo River in the Republic of Sakha (Yakutia). ALROSA and Israel Diamond Stock Exchange signed a Memorandum of Understanding to strengthen partnership and develop the diamond mining industry in Russia and Israel.

12 020 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT ALROSA MARKET POSITION AND BUSINESS MODEL concentrated in India and China. Major jewellery brands collectively hold 15-20% of the total polished diamond jewellery manufacturing market. The average profitability in the jewellery production segment is 3-5%. RETAIL sales The main players on the retail polished diamond jewellery market include specialized jewellery shops, retail chains, department stores and online stores. Profitability in the retail sales segment is from 4-6% (small shops) to 14-18% (large chain stores) based on the size of the business. The leading polished diamond jewellery consuming countries are the USA, China and India, accounting for over 60% of the world polished diamond jewellery consumption. The USA accounts for about 35% of the consumption. Among the major macroeconomic factors that determine the demand for polished diamond jewellery, specialists highlight a higher level of disposable personal income and, mainly for China and India, the number of households with an annual income greater than $10,000. These factors are directly related to the growth of the country s GDP. BRIEF DESCRIPTION OF THE DIAMOND INDUSTRY The value chain in the diamond industry (from geological exploration and mining to retail sales of jewellery to end customers) includes several segments with significantly different economic characteristics. WORLD DIAMOND PRODUCTION IN 2014 KEY SEGMENTS Exploration, production and sale of rough diamonds The geological exploration and rough diamond mining segment is characterized as having a limited mineral and raw material base, a lengthy exploration and deposit development cycle, a large technological input and substantial investments. Due to these factors, the rough diamond mining market has a small number of participants. Given the current plans of diamond mining companies, expected deadlines for putting new pipes into production, the retirement of reserves of the existing deposits, the gradual transition from open pit to underground mining and changes in the quality structure of production, Bain & Company predict a moderate increase in the supply of rough diamonds in the coming years. The average annual rough diamond supply growth rates during the period from 2013 to 2019 are expected to be 3.5-4% per year, with a subsequent decrease of % per year during the period from 2019 to The average operating margin in the exploration and mining segment is 21-25% and 1-3% in the rough diamond sales segment. Cutting and sale of polished diamonds Gem quality diamonds are cut by specialized companies. Nowadays, most of the world s rough diamonds are processed in India. Historically, Belgium, Israel and the USA are also considered as the world s major cutting centres. The average level of profitability in the polished diamonds cutting and sales segment is 2-4%. MANUFACTURE of polished diamond JEWELLERY The key players in the jewellery design and manufacture segment are specialized manufacturers, international companies manufacturing luxury goods, and representatives of regional brands. There are a total of over 10,000 companies in this segment. Suppliers of little-known brands account for the vast majority (80-85%) and are mainly Over the past two years the world production volume levelled off at around 130 mn carats. Before the crisis, world rough diamond production was mn carats, but since 2009 there has been a significant drop in production to mn carats of OTHER COUNTRIES CANADA AUSTRALIA 12 DROC PRODUCTION VOLUME DISTRIBUTION IN 2014 natural diamonds. The Russian Federation ranks first in the world in terms of production volume. Botswana, Congo, Australia and Canada were also among the top five in Zimbabwe, Angola and South Africa are also major producers. These 8 countries account for 97% of the world production. 2 The world diamond production in 2014 is estimated at 131 mn carats, which corresponds to the level of RUSSIA 29 BOTSWANA 18 2 Statistics of the Kimberley Process.

13 022 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT KEY INDICATORS FOR ALROSA GROUP ROUGH DIAMOND DEMAND AND SUPPLY BALANCE IN 2014 DIAMOND MINING % SALES OF DIAMONDS 4901 $ MILLION $ MILLION +1,1% GROWTH IN RESERVES AND RESOURCES ACCORDING TO STATE RESERVES COMMITTEE 25.6 MILLION CARATS CAPITAL INVESTMENTS 38,537 MILLION RUBLES TAX OBLIGATIONS 42 BILLION RUBLES +13% GEOLOGICAL EXPLORATION 27 LICENSES 39 OBJECTS COST OF GEOLOGICAL EXPLORATION MILLION RUBLES +2,6% COST OF SOCIAL PROGRAMS 10,816 MILLION RUBLES The actual supply of rough diamonds by the leading companies that account for about 70-75% of the world rough diamond production in 2014 remained at the level of The situation on the world rough diamond market in 2014 was unstable. In 1HY 2014 the tendency was positive, there was a growth in demand against the limited supply of rough diamonds. This was caused, among other things, by reduced supplies from ALROSA and De Beers in Q2 compared to Q ALROSA MARKET POSITION ALROSA Group is ranked first in the world in terms of rough diamond production in carats and based on 2014 data it accounts for 25% of the world production. ALROSA produces 97% of all diamonds in the Russian Federation. In 2014, the ALROSA Group companies produced 36.2 mn carats of rough diamonds. ALROSA carries out mining operations in the Republic of Sakha (Yakutia) and in the Arkhangelsk Region developing 11 kimberlite pipes and 13 placer deposits. The technologies underlying the Company production are based on However, in 2HY 2014 the market activity demonstrated a downward trend due to a number of factors, namely a decline in the demand for polished diamonds and a drop in the price of polished diamonds, increased stock of rough and polished diamonds at cutting enterprises and industry funding problems. In 2014, the macroeconomic situation on the major sales markets for polished diamond jewellery products was positive against the accelerating economic growth in the USA, the the best global scientific and technical achievements and unique engineering know-how of how to operate under the severe climate conditions of the northern regions of the Russian Federation. The proven and probable reserves of ALROSA exceed 600 mn carats. The total resource base of the Company is about 1 bn carats. Gem quality and near gem quality diamonds account for about 65% of production in volume terms and for over 95% in value terms. world s leading market for polished diamond jewellery, and high development rates in China and India. Overall, the world diamond market in 2014 demonstrated a growth in demand of 2% compared to the previous year. The fastest growing sales market was the USA. Further information is available on the corporate website at ru/diamonds-explained/ ALROSA has its own modern geological exploration facilities contributing to maintenance and increase of the resource base. The Company also carries out geological exploration works in African countries.

14 024 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT ALROSA BUSINESS MODEL BUSINESS MODEL ALROSA focuses its major strategic efforts on mining and sales of rough diamonds. The rough diamond segment accounts for about 90% of the total Group revenue. The main revenue of the Group comes from selling gem-quality rough diamonds, most of which are sold under long-term framework agreements with Russian and foreign cutting enterprises that prepare rough diamonds for use in the jewellery industry. Following the trend of the world diamond mining companies development with a focus on achieving the maximum performance figures, ALROSA Group adopted a strategy for the development of the core activities in rough diamond mining being the most profitable element of the production and sales chain of the diamond mining industry. The Group s strategy is aimed at ensuring that the Company occupies the position of a recognized market leader with a strategic focus on exploration, production and sales of rough diamonds and has a presence in promising regions of Russia and Africa. EXPLORATION EXPEDITION Amakinskaya Exploration Expedition, Mirny Exploration Expedition, Botuobinskaya Exploration Expedition MINING AND PROCESSING SUBDIVISIONS Aikhal MPD, Mirny MPD, Udachny MPD, Nyurba MPD ALROSA GROUP IMPLEMENTS A GLOBAL LEADERSHIP STRATEGY AT THE EXPENSE OF FOCUSING ON EXPLORATION, EXTRACTION AND SALE OF ROUGH DIAMINDS DIAMOND MINING SUBSIDIARIES Severalmaz ALROSA Nyurba Almazy Anabara Nizhne-Lenskoye* JV FOR DIAMOND EXTRACTION Catoca Mining Company Ltd. Profitability in segments, expert INDUSTRY-based assessment Source: AWDC SORTING, ASSESSMENT AND SALE United Selling Organization of ALROSA * - purchased in 2013 by Almazy-Anabara 21-25% 1-3% 3-4% SURVEY AND EXTRACTION SALE OF DIAMONDS CUT OF DIAMONDS DIAMOND CUTTING Brillianty Alrosa CUTTING - SUBSIDIARIES Orel-ALROSA Kristall Almazny Mir* 4-18% 3-5% 2-3% SUBDIVISIONS OF PRODUCTION INFRASTRUCTURE AND SOCIAL COMPLEX Subsidiaries, joint ventures RETAIL SALE OF JEWELLERY PRODUCTION OF JEWELLERY WITH CUT DIAMONDS SALE OF CUT DIAMONDS More detailed information on the strategy and competitive advantages is available at Company s Growth Strategy Further information is available in the Company Growth Strategy section.

15 026 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT ALROSA GROWTH STRATEGY In 2014, the ALROSA Supervisory board approved the Long-term ALROSA Group development program for the period up to It is based on the documents that were approved and put into effect in the company, namely the ALROSA Group Strategy, LOng-term development plan for and other documents. The development program provides for the growth in diamond production by ALROSA up to 41 mn carats due to the diamond deposits in the Arkhangelsk Region reaching the design capacity, with the current production level in the Republic of Sakha (yakutia) remaining the same. The company will focus on the exploration, production and sale of rough diamonds. Successful implementation of the DeveLOpment Program will make it possible for ALROSA Group to consolidate leading positions on the rough diamond market, and ensure sustainable LOngterm production, revenue growth and an increase in the shareholder value. BY 2023 THE ALROSA GROUP VALUES ITSELF AS A recognized global market leader focused on exploration, extraction and sale of rough diamonds A diamond mining company that is present in the most promising development regions (Russia, Africa) STRATEGIC PRIORITIES OF ALROSA GROUP 1. Focus on diamond mining. ALROSA intends to adopt a monoproduct business strategy and focus on the core activities, namely the exploration, mining and sale of rough diamonds. This diamond industry Socially responsible company with high environmental and industrial safety standards Leader in the diamond industry in terms of operating efficiency at the expense of innovations and continuous improvement segment remains the most profitable. The accumulated experience and market analysis show that it is economically unfeasible for the Company to enter other industry segments, such as large-scale diamond cutting or jewellery manufacturing. Global leader in terms of maximization of price of rough diamonds rated No.1 among its customers Highly efficient organization with a strong managerial team and competences relating to change management The current mineral resource base and project portfolio make it possible for the Group to increase production of rough diamonds to more than 41 mn carats, thus consolidating the leading position of ALROSA on the market in the medium term. The focus on core activities implies the gradual retirement of ALROSA from non-core businesses. The diversification model requires significant capital expenditures, which are reflected in the cost of production of rough diamonds, thus affecting their competitiveness on the global diamond market. Income from the sale of non-core assets will be used to invest in core activities and reduce the Company s debt. 2. Preservation and expansion of the mineral and RAW MATERIAL base for LONG-term growth of ALROSA Group. ALROSA will keep investing in prospecting and geological exploration works in order to maintain and expand the mineral resource base, which is a catalyst for long-term business growth. The focus is on Africa and Russia being the two regions that have, in the opinion of the Group, the highest commercial diamond deposit discovery potential. The Company will also improve effectiveness of the development of existing deposits. For this purpose, an investment approach to the analysis of new projects is integrated into the Company s management system requiring persuasive arguments in the form of a return on investment and profitability figures at the key stages of funding each project. 3. Increasing productivity through INNOVATION and improvement of PRODUCTION processes. Innovative development is the most important part of the ALROSA production strategy. The use of new technology can improve operational efficiency and, consequently, raise the level of profitability. In open pit mining the Company is introducing the use of emulsion explosives and remotely operated equipment. To increase the profitability of underground mining, the Group is refining extraction and backfill technologies, optimizing compressor equipment, and using heading-and-stall development methods and forced collapse technologies. Along with these measures, ALROSA is striving to increase the diamond extraction ratio. With this objective in mind, the Group is introducing a multistage ore crushing and grinding cycle, and developing and introducing X-ray luminescent separation systems, tailings refining technologies and crystal preserving technologies. ALROSA actively optimizes costs at all stages of production. The measures taken by the Group include procurement optimization, use of standards to improve labour productivity, introduction of integrated management reporting and reduction of the inventory turnover rate. 4. CONSOLIDATION of the STATUS of a RECOGNIzed leader of the diamond INDUSTRY with a FLAWLESS REPUTATION among CUSTOMERS. Broadening the base of loyal and reliable customers to ensure stable sales of rough diamonds under long-term contracts is one of the main priorities of ALROSA Group. In order to achieve this goal, the Company is taking successive steps aimed at establishing a reputation of a customer-oriented business partner. ALROSA guarantees to all its buyers transparency of pricing, ensuring equal conditions of accessing rough diamonds, use of unified selling procedures and improvement of the standard of customer services. In addition, the Group intends to make efforts to liberalize and improve the rough diamond sales regulation regime including through new standard classifications of rough diamonds. The Group also intends to promote the ALROSA brand and amplify the level of influence that the Company has in the diamond industry through active participation in the work of international organizations and support for implementation of the Kimberley Process principles. 5. Compliance with high STANDARDS of ENVIRONMENTAL and INDUSTRIAL SAFETY, social responsibility and CORPORATE governance in the regions where the Company OPERATES. Sustainable development is inextricably linked to the implementation of corporate social responsibility measures. ALROSA Group carries out a set of traditional activities aimed at supporting personnel, creating conditions for professional development of specialists, ensuring a safe labour environment, minimizing the negative industrial impact on the environment, rational use of the subsoil, compliance with international environmental safety standards, and the promotion of social and economic development. The pattern of relations established by the Group in the regions of its presence is based on the principles of social responsibility and mutually advantageous cooperation with government authorities and local self-government bodies.

16 028 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT Strategic PRIORITY Activities COMPLETED Achievements/Comments Link TO additional information in a SECTION of the report Strategic PRIORITY Activities COMPLETED Achievements/Comments Link TO additional information in a SECTION of the report Consolidating the leading position on the world diamond mining market Completion of Botuobinsky open pit construction and commencement of ore mining at placer deposits. Launch of start-up complex I of Udachny mine. Mined rock processing 6,000,000 m3 Implementation of a long-term motivational program for the management (on the basis of shares/options). Constant improvement of the corporate governance quality. Focus on core rough diamond business Launch of the Ebelyakh River and Gusiny brook placers owned by OJSC Almazy Anabara. Implementation of the capital investments program of OJSC Almazy Anabara, namely construction of facilities at the Ebelyakh River and Gusiny brook placers and the Verkhnee Molodo deposit. Bringing the second module of the processing plant of Lomonosov Mining and Processing Enterprise of OJSC Severalmaz to design capacity. Implementation of the rough diamond mining plan within ALROSA Group. Implementation of the non-core assets disposal program: Withdrawal from participation in CJSC Irelyakhneft LLC Mediagroup Sitim, ALROSA Insurance Company LLC, Sakha Diamond Corp., Financial and Investment Company Interfinance LLC Liquidation of CJSC Brint-M, OJSC Udachny KPP and JSCB SIR. Increased funding from the budget to maintain the facilities associated with noncore activities of the Company. Ore dressing 1,050,000 m3 500,000 m3 total investments RUB 1,638 mn 3 million tons per year 36,212,000 carats of rough diamonds Information on the implementation of the program for the disposal of non-core assets of the Company for 2014 is presented in Appendix Development of the mineral and raw material base in the most promising regions Marketing policy development Obtaining a license to develop the Molodovo deposit. Obtaining the right to use the subsoil at the Olom Brook and Log 325 Brook deposits. Obtaining the right to use the subsoil of the Zarya pipe in Q Scientific and production support for geological exploration works carried out by joint ventures in Angola, Botswana, Zimbabwe. Increasing exploration efficiency through introducing the use of contracted drilling services. Increase in the number of long-term agreements for the contractual period. Test sales of polished diamonds at Sotheby's auctions. Development of long-term cooperation with famous international jewellery companies, such as Tiffany, CTF, etc. Development of long-term relations with clients based on the principles of the ALROSA Alliance Responsible Principles Program. received in Q received in Q received in Q reduction of the cost of the works being performed by 17.9% up to 62 agreements up to $2.65 mn Implementation of the program of reforming the housing and utility complex. Rough diamond product sales optimization in ALROSA Group Optimization of the corporate governance model Increasing the number of the directors meeting the advanced criteria of independence in the composition of the Supervisory Board of the Company to two directors. Development of a comprehensive risk management system. reduction of residues % Further information is available in the Corporate Governance section In 2015, the Company will continue to focus on development of its rough diamond business according to the strategy adopted. Next year diamond production will increase by 2 mn carats compared to 2014 and will amount to 38.2 mn carats. Diamond production growth will be caused by increased ore mining volumes at the Mir and Udachny underground mines in accordance with the mining development plan and commencement of mining at the Botuobinskaya and Karpinskogo-1 pipes. The quality of ALROSA product assortment in 2015 improved compared to 2014 primarily thanks to rough diamonds mining at the Udachny mine, putting into production Karpinskogo-1 pipe and improvement of characteristics of the diamonds mined at the Internatsionalny underground mine. ALROSA Group rough diamond sales in 2015 will amount to about 40 mn carats. In 2015, the Company plans, within the framework of the program for the disposal of non-core assets, to withdraw from participation in 9 subsidiaries and affiliates.

17 030 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT COMPANY STRUCTURE AND MAJOR SHAREHOLDERS RUSSIAN FEDERATION (REPRESENTED BY ROSIMUSHCHESTVO) % SHARE IN THE AUTHORIZED CAPITAL MINISTRY OF PROPERTY AND LAND RELATIONS OF THE REPUBLIC OF SAKHA (YAKUTIA) % SHARE IN THE AUTHORIZED CAPITAL MINORITY SHAREHOLDERS % SHARE IN THE AUTHORIZED CAPITAL COMPETITIVE ADVANTAGES OF THE BUSINESS MODEL OF THE COMPANY Competitive advantages of ALROSA Group determine its possibilities and development strategy. USO OF ALROSA YAPTA DIVISION OF ALROSA HR TRAINING CENTER BRILLIANTY ALROSA ALROSA-TRANSSNAB ENTERPRISE KOMMERAL MEDICAL CENTER TRK (TV AND RADIO COMPANY) ALMAZNY KRAY COMPETITIVE ADVANTAGES OF THE BUSINESS MODEL OF THE COMPANY DIAMOND SORTING CENTER CULTURAL AND SPORTS COMPLEX YAKUTNIPROALMAZ RESEARCH INSTITUTE MIRNY AVIATION ENERPRISE MIRNY AUTOMOBILE ROADS DIVISION ALMAZDORTRANS PRODUCTION DIVISION SUPPLIES AND LOGISTICS DIVISION GEO-SCIENTIFIC RESEARH ENTERPRISE PROMETHEUS HEALTH AND RECREATION CENTRE STATE FARM NOVIY REPRESENTATIVE OFFICES The global leader in terms of diamond extraction with the world s largest reserve of rough diamonds Strong position in the developing industry and favourable fundamental indicators Attractive prospects for future growth Diversified portfolio of high quality assets Successful strategy for sale and marketing Stable cash flow and stable financial position Experienced and proven team of managers DIVISIONS OJSC ALROSA, MOSCOW OJSC ALROSA, YAKUTSK OJSC ALROSA OREL ALROSA SUBSIDIARIES AND AFFILIATES DIAMONDS AND GEMS COMPLEX (6) FOREIGN-BASED DIAMOND TRADING COMPANIES (6) INDUSTRIAL AND EXPLORATION (6) CONSTRUCTION (1) TRANSPORT (1) CREDIT AND FINANCIAL (1) ALROSA DIVISION IN THE REPUBLIC OF ANGOLA KEY BUSINESS ASSETS UDACHNY MPD MIRNY MPD NYURBA MPD AIKHAL MPD BOTUOBINSKAYA EXPLORATION EXPEDITION AMAKINSKAYA EXPLORATION EXPEDITION MIRNY AVIATION DIVISION ALMAZAVTOMATIKA SPECIALIZED DIVISION CAPITAL CONSTRUCTION DIVISION Due to the leading positions in rough diamond PRODUCTION, ALROSA Group meets the growing demand. Industry experts believe that in the coming years a there will be a lack in the supply of rough diamonds on the world market, which will result in a price rise for uncut diamonds. According to forecasts, the global demand for rough diamonds in the coming years will increase by an average of 5% per year due to the growing number of members of the middle class, especially in developing countries such as China and India. At the same time, the world rough diamond production is demonstrating a tendency towards decline in the medium term due to the gradual depletion of the producing deposits. It is estimated that only 1% of the kimberlite pipes discovered across the globe are suitable for cost-effective production of rough diamonds; furthermore, almost no new large deposits have been discovered since As the largest producer of raw diamonds in the world, ALROSA Group plans to build up and maintain a high level of production against the decline in the total world supply. The estimated mining periods for the deposits owned by ALROSA Group are considered to be the longest in the rough diamond industry. ALROSA Group invests in development of its business in the long run. ALROSA ensures the long-term growth and development prospects regardless of the external conditions. Even during the period before the crisis the Group did not reduce funding under the investment program and did not suspend operation of the enterprises, realizing that the platform for its future growth is established. In the past years ALROSA successfully completed construction of several mining enterprises at its deposits. The projects being implemented will allow the Group to increase production from 36.2 mn carats in 2014 to 41 mn carats and more after NON-COMMERCIAL (1) WATER AND HEAT SUPPLY UNIT SALES AND OTHER (12) HOUSING AND UTILITIES DIVISION

18 032 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT ALROSA GROUP ROUGH DIAMOND PRODUCTION FORECAST up to 2023, mn carats P 2016P 2017P 2018P 2019P 2020P 2021P 2022P 2023P Actual Detailed information on capital expenditures of the Company, investment projects implementation, modernization and introduction of innovative technologies is given in the section Investment activities: construction, modernization, innovation and results for the reporting period. changes in conditions on the rough diamond market. Since 2009 ALROSA has focused its efforts on establishing a reliable longterm customer base comprising good reputation companies involved in rough diamond cutting and jewellery manufacturing. During this time the sales under long-term contracts in the total revenue of the Group increased noticeably and now amount to about 70%. ALROSA Group has subsidiaries in the major world centres of rough diamond trade, namely Antwerp, Ramat Gan, Dubai, New York and Hong Kong. International representative offices make it possible for the Group to maintain regular contact with key players on the diamond market and industry-specific organizations, and also promptly receive information on current market situation. Further information on the clients is available on the corporate website at sales.alrosa.ru/rough-diamonds/long-termcontacts/our-customers/ ALROSA Group develops under the SUPERVISION of an experienced managerial team. ALROSA Group management was able to preserve the business of the Company overcoming the consequences of the global financial and economic crisis that started in 2HY 2008 and to cope with the downturn in the Russian economy in Top managers of ALROSA have extensive industry and marketing experience and all the necessary knowledge in strategic management and finance. The Company constantly strives to improve the quality of corporate governance. In 2013, the Corporate Governance Code was adopted, which aims to ensure efficient protection of the rights and interests of shareholders, transparency of the Company s management processes, and professional and ethical responsibility of managers at all levels. The Code was developed based on the best international practice including the principles specified in corporate governance codes of the OECD and the UK. The Company is developing a comprehensive risk management system, and is assessing the key risks and taking measures to mitigate them. Further information about members of the top managers of the Company and activities developed to improve the corporate governance quality is presented in the Corporate Governance section. ALROSA Group has a diversified portfolio of high quality assets. The main rough diamond mining facilities of the ALROSA Group are located in two regions of the Russian Federation, namely Yakutia and the Arkhangelsk Region. Six production complexes support diamond mining activities of the Company. Four of them, namely Udachny, Aikhal, Mirny and Nyurba, are mining and processing enterprises being a part of AL- ROSA. The other two, namely OJSC Almazy Anabara (including production and processing facilities of OJSC Nizhne-Lenskoe) and OJSC Severalmaz, are subsidiary companies. Each production enterprise consists of one or several deposits, processing facilities and related equipment. The resource base of ALROSA Group on average contains 1.4 carats of diamonds per tonne of ore and 44% of the reserves estimated according to JORC Code contain over 3 carats per tonne. High diamond content kimberlites are mined at five large pipes, namely Mir, Internatsionalnaya, Botuobinskaya, Aikhal and Nyurbinskaya. Together with Catoca Mining Company Ltd. (32.8% participation of ALRO- SA), the Group develops the Catoca kimberlite pipe in Angola. The ALROSA Group believes that the quality of the assets presents opportunities for achieving a high operating margin and obtaining significant economic benefits from the deposit mining. Further information on the production assets of the Company is available on the corporate website at ru/operations/where-we-operate/ ALROSA Group STEADILY DEVELOPS sales and marketing. ALROSA Group rough diamonds are sold in three ways: under long-term contracts, competitive sales and product sales on the spot market. This sales pattern makes it possible to improve the stability of sales, reduce dependence on the Company and its customers on rough diamond price fluctuations, strengthen relationships with a wide range of customers and flexibly manage its product offering in case of

19 034 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT MEETING KEY PERFORMANCE INDICATORS THE TARGET FIGURES OF ALROSA GROUP KEY PERFORMANCE INDICATORS KPI name UoM 2012 ACTUAL 2013 ACTUAL 2014 % of plan ACTUAL the plan Financial and ECONOMIC INDICATORS Market return per share % -31% 32% 46% The relative change in the market return per ALROSA share is more than the relative annual MICEX index growth (in case of MICEX index growth) and less than the relative annual MICEX index fall (in case of MICEX index fall) Dividend flow growth mn RUB 5,001 5,011 >0* 2,013 >0* KEY PERFORMANCE INDICATORS (KPIs) As per instructions of the President and the Government of the Russian Federation, OJSC ALROSA developed the list, calculation method and target figures of the key performance indicators of ALROSA Group for the period up to 2023 and they were approved by the Supervisory Board of OJSC AL- ROSA in December The main purpose of introducing the KPIs is translating the long-term plans and strategies of ALROSA Group into specific operational management indicators. Such indicators make it possible to appraise the current status, form a basis for taking long-term and medium-term managerial decisions, as well as to develop a motivational system linking interests of individual employees and the Group as a whole. The basic principles of developing the Key Performance Indicators system include: conformity to the strategic objectives of the Group; balance (financial and non-financial indicators; performance indicators contributing not only to the achievement of a short-term result but to the long-term development of the Group); interconnection (vertical and horizontal); integration of the KPIs into the motivational system of employees flexibility (KPIs change in line with strategic goals); conformity to requirements of the shareholders (the Federal Property Management Agency, the Ministry of Property Relations of the Republic of Sakha (Yakutia), minority shareholders). monitoring of actual vs. planned deviations in KPIs figures. The Key Performance Indicators system includes: financial and economic indicators (market return per share, dividend flow growth, return on equity, adjusted EBITDA profitability, net profit); industry-specific indicators (revenue from sales of core products, rough diamonds production, cost of sales share in the sales revenue); bonus cancellation reasons (net debt/adjusted EBITDA, lost time injury frequency rate (LTIFR)) Calculation of the key performance indicators is made on a quarterly and annual basis: the quarterly calculation includes the figures for: diamond production, revenue from sales of core products, net profit; the annual calculation includes the figures for: market return per share, dividend flow growth, return on equity, adjusted EBITDA profitability, cost of sales share in the sales revenue, net debt/adjusted EBITDA, lost time injury frequency rate. Since 2015, the key performance indicators developed have been integrated into the effective motivational system of the top management (President and Executive Committee members), the remuneration to be received by the management will be directly proportional to the achievement of the target KPI figures. The respective additions and amendments to the Regulations on Remuneration of the President and Members of the Executive Committee of OJSC ALROSA were approved by the Supervisory Board of OJSC ALROSA in December Return on equity (ROE) % 28% 22% 18% -11% -63% 19% 21% 21% 19% 19% 19% 20% 20% 21% Adjusted EBITDA profitability % 41% 41% 37% 45% 122% 40% 42% 44% 44% 44% 45% 47% 50% 53% corrected EBITDA Net profit bn RUB % INDUSTRY-specific INDICATORS Revenue from sales of core products $ mn 4,611 4, , % Extraction of rough mn carats diamonds Share of the cost of sales % 45% 49% 57% 47% 82% in the sales 54% 52% 50% revenue Bonus CANCELLATION INDICATORS Net debt/ coeff. adjusted EBITDA ,0 Lost time injury frequency rate eff. co (LTIFR) LTIFR The 2014 figures of the key performance indicators exceed the parameters approved by the shareholders except for share capital profitability and net profit. The failure to achieve the planned level for these KPIs is caused by the result of revaluation of the credit portfolio denominated in US dollars as a consequence of the devaluation of the Russian rouble. The KPIs of ALROSA Group fully meet the requirements of the Guidelines on application of key performance indicators by public corporations, stateowned companies, state unitary enterprises and business entities with a share of the registered capital owned by the Russian Federation or a constituent entity of the Russian Federation totalling over fifty per cent, developed by the Ministry of Economic Development of the Russian Federation. The detailed list and calculation method for target figures of the key performance indicators of the Group are given in Appendix to the Annual Report.

20 036 ALROSA. ANNUAL REPORT 2014 STRATEGIC REPORT STRATEGIC REPORT ALROSA. ANNUAL REPORT OPERATING ACTIVITIES: RESULTS FOR THE REPORTING PERIOD EXPLORATION Regeneration of the resource base is one of the main strategic objectives of ALROSA Group. In 2014, ALROSA Group balance reserves according to the standards of the State Reserves Committee of the Russian Federation as of amounted to 1,158,312,600 carats. 3 The Group strives to ensure that every year the reserves growth should be equal to the production volume. Reserves and prognostic resources growth based on the results of the work completed in 2014 amounted to 25.6 mn carats. In 2014 ALROSA Group performed exploration works using resources of its structural subdivisions, namely Amakinskaya, Botuobinskaya and Mirny geological exploration expeditions and the Geo-Scientific Research Enterprise as well as its subsidiaries, such as OJSC ALROSA-Nyurba, OJSC Severalmaz, OJSC Almazy Anabara and OJSC Nizhne-Lenskoe. The objective of increasing the reserves and prognostic resources in the reporting year was pursued through carrying out exploration works at the deposits that are being mined and that are being prepared for mining. Utilization of ALROSA Group geological exploration budget amounted to RUB 6,042.9 mn. The costs of these works increased by 2.6% compared to The operational exploration budget utilization amounted to RUB 1,144.3 mn. The cost of this type of work increased by 35.9% compared to OJSC ALROSA 3 The data include the deposits that are being prospected. In 2014, OJSC ALROSA carried out exploration works in nine districts of the Yakutian diamondiferous province: Sredne-Markhinsky, Muno-Tyungsky, Daldyno-Alakitsky, Morkokinsky, Ygyattinsky, Malo-Botuobinsky, Prilensky, Verkhne-Oleneksky and Nizhne-Oleneksky. The works aimed at geological survey of the subsoil and financed from its own funds were held under 27 licenses at 39 prospects, including: exploration works under 10 licenses at 9 prospects; prospecting and prospecting and appraisal works under 14 licenses at 17 prospects; comprehensive airborne geophysical survey and airborne geophysical surveys at 1:10000 and 1:5000 scales of 4 prospects; thematic works at 4 facilities; groundwater monitoring at 2 prospects that do not require licensing; prospecting for buried structures and drainage water injection under 3 licenses at 3 prospects. During the reporting period, exploration works were completed at 13 prospects. Small and medium-scale (regional) prospecting works aimed at detecting new kimberlite fields were carried out in Muno-Tyungsky, Morkokinsky, Ygyattinsky, Prilensky, Verkhne-Oleneksky and Nizhne-Oleneksky diamondiferous districts. More detailed prospecting surveys to detect new hardrock diamond deposits were carried out mainly within the radius of activities of OJSC ALROSA mining and processing enterprises in the Daldyno-Alakitsky, Sredne-Markhinsky and Malo-Botuobinsky diamondiferous areas. C1+C2 reserves and P1 resources growth for the reporting period amounted to 14.5 mn carats. The objective of increasing the reserves and Р1 prognostic resources in the reporting year was pursued through carrying out exploration works at the deposits that are being mined and that are being prepared for mining. Work continued to explore deep horizons of the Internatsionalnaya kimberlite pipe in the 1,190-1,450 m depth range (absolute depth marks: ,050 m); mining and exploration mine openings were completed; 4 inclined exploration wells and 6 degassing wells were drilled. Drilling was completed of inclined exploration wells at the Dalnyaya kimberlite pipe with a view to intersecting the contacts of the ore body at reference marks and studying its diamond content. According to the results of core samples enrichment, porphyry kimberlites were confirmed to be near-commercially diamondiferous. Materials for issuing the Conditions Feasibility Study were prepared and a reserves estimation report was produced. Total В+С1+С2+Р1 reserves and resources of rough diamonds at the deposit amount to mn carats, with mn carats of them in the central ore shoot. Exploration drilling at 80 x 80 m grid was completed at the Zarnitsa pipe. As a result of the works completed, the morphology of the ore body was verified, as well as the diamond content and physical and mechanical properties of kimberlite rocks. Geological materials to the Conditions Feasibility Study were compiled and submitted to Yakutniproalmaz Institute for estimation of the Zarnitsa pipe reserves as of Exploration works continued at the Mayskoe kimberlite body and adjacent placer occurrences. 7 inclined and 5 vertical wells were drilled to study the morphology and diamond content of the ore body. A cluster of exploration wells was drilled in the open pit cutback zone. 139 tonnes of core samples were prepared. Pilot development of the Verkhne-Munskoe field continued. Field preparation of 4,451 tonnes of bulk kimberlite samples was completed. Processing of concentrate and middling of bulk samples of kimberlites from the Deimos, Novinka and Zapolyarnaya pipes was completed. Design and estimate documentation for the Aikhal pipe was prepared and submitted to the State Expert Appraisal Committee to carry out exploration works and calculate diamond reserves in deep horizons of the Aikhal pipe down to the depth of 900 m (the horizon is 400 m). Drilling commenced of inclined exploration wells with the collection and preparation of core samples. Exploration wells are being drilled at the Zarya pipe together with well logging, core sampling and preparation of core samples. As a result of the work completed, the morphology of the ore body was verified and the diamond content of the kimberlites in the central ore shoot was confirmed as close to commercial. Two exploration trenches were dug at Piropovy Brook placer and the Udachnaya pipe deluvial placer located outside the outlined area (one for each placer). A bulk sample totalling 200 m3 of the sands was collected and prepared. Based on results of the works, a report on reserves and a feasibility report on permanent exploration conditions (Conditions Feasibility Study) were prepared. Geological exploration works in the north-western part of the Russian Federation were carried out under two licenses at 2 prospects, namely Kepinsky-3 and Verkhnekepinsky-3, using ALROSA funds. During the reporting period, at Kepinsky-3 prospect prospecting and confirmatory drilling works were carried out in two sections: the Pobeda pipe Gorelaya pipe in the central part of Kepinskaya area and the Solokha pipe in its south-eastern part. 18 promising magnetic anomalies were verified, no kimberlite bodies were found. Works at the facility were completed. The final exploration report on the results of the works was prepared. Prospecting and confirmatory drilling was carried out at the Verkhnekepinsky-3 prospect. Six promising magnetic anomalies were verified. Kimberlite sills were accessed at the depths of m within VK264 and VK115 anomalies. Based on sampling results, no presence of diamonds in the kimberlite rocks was identified. Works at the facility were completed. A final exploration report on the results of the works was prepared. In addition to the abovementioned works, geological subdivisions conducted thematic geological surveys and operational exploration works based on the orders from mining and processing divisions. Within the framework of scientific support of geological exploration works the following was performed: prognostic estimation of the diamondiferous territories in the western part of Yakutia, north-western part of the Russian Federation and in Africa (Angola, Botswana, Zimbabwe); improvement of the local forecast methods and experimental and methodological testing of modern prospecting technologies (geophysical, drilling, mineral analysis); comprehensive study of the diamonds from prospecting areas and kimberlites of the deposits being studied.