The Private Exchange Offer will see certain eligible holders of Polyus shares offered KazakhGold shares at a ratio of 9.26 KazakhGold Level 1 GDRs for each Polyus Share; and 4.885 KazakhGold Level 1 GDRs for each Polyus ADS.

The company has also entered into a Principal Shareholders Option Agreement with Nafta and Onexim, Russian investment funds which in partnership are the controlling shareholders of Polyus Gold, holding 74.3% of the issued share capital. The agreement grants KazakhGold the option to acquire the entire holdings of Nafta and Onexim - 94,797,361 and 93,644,839 shares respectively - in Polyus Gold using the same exchange ratios used in the Private Exchange Offer. Under the agreement, Onexim has agreed to receive a portion of the Regulation S GDRs they would be entitled to as KazakhGold shares, determined by KazakhGold.

Furthermore, the company has an option agreement with Jennington, the Jenington Option agreement, under which KazakhGold has been granted the option to acquire Jenington's entire holding of 10,776,161 shares (5.65% of the issued share capital) in Polyus, the conversion rate will be the same as that used for the Private Exchange Offer.

The company entered into the Jenington Shareholder Loan with Jenington in August 2009. Jenington granted KazakhGold a loan of USD 50 million, which following the completion of the transactions will be convertible at the option of Jenington into newly issued KazakhGold shares at a price of USD 1.50 per share.

Full acceptance Private Exchange Offer and the options agreements would result in the issuance of approximately 1,709,995,409 KazakhGold shares and KazakhGold GDRs, representing approximately 93.5% of the issued share capital of the company. The completion of the agreement and issue of the shares would mean that KazakhGold would acquire approximately 94.9% of the issued share capital of Polyus Gold. As a result of the various agreements with Polyus shareholders and the issue of KazakhGold shares, existing shareholders of Polyus would hold 93.5% of shares in the combined group, excluding the Jenington Distribution. KazakhGold shareholders would hold approximately 6.5% of shares in the combined group following the agreement.

After the completion of the transactions, the composition of the board would change. Messrs Ivanov and Coates would remain on the board, and eight new directors, who are members of the board of Polyus Gold would be appointed to the board of which only one is currently considered independent by the company. In PIRC's opinion, the proposed new board will have insufficient independent representation.

The management of the company believe that if the transactions with Jenington, Polybus Gold and the Private Exchange Offer do not go ahead, there can be no assurance that furhter financial support from either Jenington or Polybus Gold would be forthcoming beyond the current financial year, nor previously made commitments, and the company would be unable to raise sufficient capital to continue its operations.

PIRC has concerns that this takeover of the company by existing Polyus Gold shareholders would squeeze out minority interests at KazakhGold, and deny them the opportunity to sell there shares to the acquiring party for a premium. We recommend opposition to all proposals related to this issue.