Petropavlovsk : Trading Statement

22 July 2014

Petropavlovsk PLC

2014 Half-Year Trading Update

Petropavlovsk PLC ("Petropavlovsk", the "Company" or, together with its subsidiaries, the "Group") today issues its Trading Update for the period from 1 January 2014 to 30 June 2014 ("the Period" or "H1 2014") in advance of its 2014 Half-Year Results, which are expected to be published on 28 August 2014.

H1 2014 Highlights and FY 2014 Outlook

·      4% increase in total gold production to 306,400oz compared to H1 2013 (294,700oz)

·      5% increase in gold sold to 310,700oz compared to H1 2013 (297,100oz)

·      Average realised gold price of US$1,386/oz includes a US$93/oz positive effect from the Group's hedging position

·      As at 30 June 2014, the Group had outstanding hedging contracts for 225,400oz of gold at an average price of US$1,326/oz

·      The Group reconfirms its total cash cost ("TCC/oz") guidance for FY 2014 of US$900/oz to US$950/oz (2013: US$1,016/oz)

·      The decrease in TCC/oz is mainly due to an increase in efficiencies, a decrease in high-cost alluvial production and Rouble devaluation (a RUR/USD exchange rate of 35 in H1 2014 compared to RUR/USD of 31 in H1 2013)

·      As at 30 June 2014, the Group's (unaudited) Net Debt stood at c.US$924 million, a c.US$24 million reduction in comparison with the year-end Net Debt as at 31 December 2013 and a c.US$230million reduction in comparison with Net Debt as at 30 June 2013

·      The Group's strategic focus is on a further reduction of its Net Debt

·      Further encouraging exploration results  from non-refractory mineralisation located near the ore processing plants at Pioneer, Malomir and Albyn

·      The Group's production in the first half of July is ahead of schedule

·      The Group re-iterates its FY 2014 production guidance of 625,000oz of gold

Peter Hambro, Chairman of Petropavlovsk, said:

"Operationally, Petropavlovsk continues to perform strongly, with a 4% increase in production in the first half. Thanks to the hedging programme, our average realised price of gold was some US$1,386/oz, well above the prevailing market price for the period.

The cost reduction that we achieved in the second half of 2013 has continued and we are able to reiterate our total cash cost guidance for the full year 2014 of US$900-US$950/oz. That is an achievement, by industry standards, and, as a consequence, has helped us to continue to reduce our Net Debt during the first half of the year. "Cash Generation" are the watchwords of the moment.

The team has successfully started the second half of the year, operating ahead of its production target for July. Looking forward, the operational plan for the rest of the year remains intact, supporting 625,000oz targeted production levels for the year.

Our exploration in H1 has been focussed on the non-refractory mineralisation which forms the basis of the Group's mining schedule until plans to resume our pressure oxidation project are implemented. This exploration has been successful and a JORC Mineral Resource and Ore Reserve update will be provided with our interim results on 28 August 2014.

Looking forward, I am pleased to reconfirm that we foresee a significant reduction in our cash costs in 2015-2019 to c.US$750/oz (assuming 2013 price levels and foreign exchange rates). This expected cost reduction is principally due to the decrease in volumes of waste needed to be moved when recovering ore from the newly-identified operating areas. The decrease in cash costs, together with the substantial reduction of capital expenditure (down to c.US$40-45 million in 2015-2016 and c.US$10 million in 2017-2018), are the basis of the Group's strategy of balance sheet deleveraging and debt repayment plan.

I am also pleased to say that, following the Annual General Meeting, we have made good progress in the identification of holders of our 4% Convertible Bonds and have now carried out a series of meetings with bondholders claiming to own c.US$280 million in nominal value. These meetings were constructive and a range of views were expressed across the bondholder group.

Based on these preliminary bondholder conversations, the Group is actively working on a holistic refinancing plan to take into account the interests of all its stakeholders, including senior lenders, bondholders and shareholders, for the refinancing and/or restructuring of its 4% Convertible Bonds. The consensus preliminary feedback from the bondholder meetings, together with the non-binding commitments which our senior lenders have already given for the relaxation, as part of a refinancing, of certain covenants governing their loans to us, suggests that a refinancing of our Convertible Bonds is likely to be negotiable.

Finally, I wish to thank our employees and management teams on the ground for their hard work and dedication, which has enabled us to remain on-track to achieving our production and TCC/oz targets for the year."

Conference call details

There will be a conference call today to discuss the announcement at 10.00 BST .* 

To access the call, please dial + 44(0)20 3139 4830 . When prompted, please enter the pin code 76737744# to be transferred to the call.

* The conference calls may include information relating to the shares and convertible bonds

Detailed Operations Report

Pioneer

Pioneer produced approximately 124,300oz in H1 2014, of which 58,900oz were produced in Q2 2014.

During H1 2014, the western section of the Andreevskaya pit was completed and pit expansion work commenced on the western wall of Andreevskaya East. At NE Bakhmut, pit 6.3 was completed, work at pit 6.1 continued and the push back of the north wall of pit 6.2 commenced.

In order to maintain full throughput in the process plant, mining of soft oxidized ores was intensified in pit 1 and the southwest flank of pit 2. Low grade ore for feed to both the heap leach and the processing plant commenced at pit 7 at the end of Q2 2014.

H2 2014 outlook

Mining of pit 6.1 at NE Bakhmut is scheduled to be completed in H2 2014. As this pit has a high stripping ratio, the total material moved at Pioneer is scheduled to decrease. The amount of ore coming from this area in H2 is expected to be c.2.5 million tonnes. Andreevskaya East and pit 6.2 at NE Bakhmut are expected to be the main sources of the high-grade ore scheduled to be mined at Pioneer in H2 2014. Pit number 7 is scheduled to be the main source of the lower-grade ore.

The average grade mined in Q3 2014 is expected to be 1g/t. However, this is forecast to increase by c.70% in Q4 2014 to 1.7g/t as the Group is scheduled to expose the higher grade ores at Andreevskaya East and pit 6.2 at NE Bakhmut.

The ore from existing stockpiles sent to the processing plant is expected to double in H2 (in comparison with H1).

Forecast gold production from the Pioneer mine in H2 2014 is scheduled to remain at a similar level to production in H1 2014 with the addition of production from the mine's heap-leaching facility, which is seasonal.

Pokrovskiy

During H1 2014, Pokrovskiy produced approximately 30,300oz of gold, of which 16,100oz were produced in Q2 2014.

The principal areas mined at Pokrovskiy during H1 2014 were the Pokrovka-2 deposit and the Zeyskoye zone in the northwest part of the Pokrovka-1 pit. The bottom of the Pokrovka-1 pit was completed in Q1. Stockpile 5 was a major source of ore for feeding to both the processing plant and the heap leach during H1 2014.

At the Burinda satellite pit, work concentrated on the opening of the ore body in the Central 1 zone. In parallel, small volumes were mined in the Central 2a, Central 2b and ore zone 5. All of the ore mined in the period was stockpiled at the site for subsequent delivery to the Pokrovka plant.

In H1 2014, the main sources of feed for the Pokrovskiy processing plant were the Pokrovka pits, stockpiles and ore from the Burinda, which was mined in 2013 and delivered in H1 2014.    

H2 2014 outlook

In H2 2014, the Zeyskoye zone in the northwest part of the Pokrovka-1 pit is scheduled to be completed. This zone, together with stockpiles 5 and 6, are scheduled to be processed in H2 2014.

Mining is scheduled to recommence at Burinda in Q3. The Central 1 zone will be the main source of ore and this will be transported to Pokrovskiy in Q4 2014.

The Group is forecasting H2 2014 gold production from Pokrovskiy to be similar to H1 2014 production but with the addition of production from the mine's seasonal heap-leaching facility.

Malomir

Malomir produced approximately 46,800oz of gold in H1 2014, an increase of c.22% on the amount produced in H1 2013 (38,500oz). This was due to improved recoveries. Of the 46,800oz of gold produced, approximately 16,300oz were produced in Q2 2014.

In Q1 2014, the Quartzitovoye 1 pit was completed. Mining continued at the Quartzitovoye 2 pit and three prospective ore zones were opened in the Magnetitovoye pit. Small volumes were extracted from Ozhidaemoye and Sukhonyr ore bodies.

In line with the postponed commissioning of the flotation plant at Malomir, no work took place at the Central (refractory) pit in H1 2014, as scheduled.

H2 2014 outlook

It is planned that mining in H2 2014 will concentrate on the ore zones at Quartzitovoye 2 and Ozhidaemoye. Further development work will take place at the Magnetitovoye pit. Ore extracted from the pits will be blended with ore from stockpile 1, which is primarily lower-grade ore (1.0 -1.3 g/t) and mined in previous years from Quartzitovoye 1 and the oxidised cap of the Central pit.

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Gold production from Malomir in H2 2014 is forecast to be similar to that in H1 2014.

Albyn

In H1 2014, Albyn produced approximately 97,300oz, almost double the amount produced in the comparative period in 2013 (51,100oz). Of the 97,300oz produced, approximately 48,200oz were produced in Q2 2014 .

Mining in H1 2014 was concentrated on the eastern zone of the Central pit. Both overburden stripping and ore extraction was carried out on the lower benches of the pit. On the uppermost two benches, the north pit wall was pushed back on the west and east sides in preparation for mining in H2 2014 and in 2015 respectively.

The ore zones in the east of the Central pit are generally narrower and more difficult to mine than in the west side of the pit. Consequently, the ore mined in H1 had a lower grade than that to be mined in H2 2014.

At present, the west zone of the Central pit is being mined, exposing the wider (40-50m) ore bodies.  In July 2014, the grade of ore mined from this area is expected to be 1.88g/t.

The volume of lower grade mined and processed in H1 2014 was partially compensated for by the additional tonnages of ore being processed in the plant. This ore came from low grade ore stockpiles (0.6-0.8g/t).

H2 2014 outlook

Mining operations in the west of the Central pit will continue in H2 2014. The extraction of ore at the beginning of Q3 will concentrate on completing the less productive east flank of the ore body, and then move to the central and west flanks. The average grade of ore in H2 is expected to be 1.5 -1.6g/t and the recovery rate of the processing plant is expected to be 93-95%.

Gold production at Albyn in H2 2014 is forecast to be similar to that in H1 2014.

Alluvial Operations

Gold production commenced in May with the washing of sands. The Group's alluvial operations produced 7,700oz in H1 2014. This decrease in production compared to H1 2013 was expected due to the sale of Berelekh in Q4 2013.

The plan for H2 2014 is to produce c.25,000oz (a substantially larger amount than in H1 2014 due to the seasonality of this type of mining).

Project Development: POX Hub

In line with previous guidance, in H1 2014, work on the Group's pressure oxidation processing hub ("POX Hub") was conducted solely to fulfil existing contracts or complete essential maintenance work.

A detailed action plan prepared in 2013 was implemented to preserve equipment at completed sections of the plant and to keep facilities on standby so that full scale development could be recommenced in the future.

In H1 2014, the following work was conducted at the POX Hub: acid treatment of autoclave and flash tank inner lining, installation of agitators, work on the framework and cladding to neutralisation building, the construction of the water cooling system and completion of the air separation columns.

Exploration Report

In H1 2014, the Group continued to focus exploration on areas which have the potential to add to the Group's non-refractory resource base and which are located near its operational processing plants at Pioneer, Malomir and Albyn. This strategy will, potentially, enable the Group to improve its near-term production profile at these mines.

In addition work progressed as planned towards a JORC Mineral Resource and Ore Reserve update scheduled for release as part of the Group's Half-Year Results on 28 August 2014.

Pioneer Area

During Q2 2014, exploration at the Pioneer area concentrated on the Alexandra and Shirokaya zones situated north of the active Pioneer pits, from which the Group had received very encouraging results in 2013 and Q1 2014. Pre-stripping and additional in-fill drilling were completed at Shirokaya with a view to upgrading more of the currently estimated JORC Inferred Mineral Resources into the Measured and Indicated categories. Group geologists anticipate that additional metallurgical tests of samples from this area will facilitate the estimation of near-surface non-refractory resources which were previously classified and reported as refractory.

Group geologists established a new zone of mineralisation, Brekchievaya, situated 1.7km north-east of the maiden open pit at Alexandra. Preliminary cyanide tests have indicated the zone is similar to the neighbouring Alexandra Zone and that mineralisation is non-refractory.

In Q2 2014, further drilling was also continued at the Otvalnaya zone, which is situated c.1.6km north-west from the high-grade NE Bakhmut deposit. Otvalnaya was traced a further c.900m south-west. Geologists are currently preparing this area for inclusion in the Group's Mineral Resource estimate for Pioneer.

Group geologists estimate that further potentially-economical gold mineralisation could be situated in an area of known placer gold deposits near Brekchievaya. Two, similar, adjoining anomalies, which were established in 2013, strike towards the Gryaznushkaya stream. Results received to date are considered to be encouraging.

Albyn Area

In Q2 2014, exploration at Albyn focussed on the non-refractory Unglichikan deposit, which is situated c.15km north of the Albyn processing plant. Infill drilling, pre-stripping and bulk sampling were undertaken, improving confidence in the resource estimate. This data is being incorporated into an updated JORC Mineral Resource and Ore Reserve statement for Albyn.

Recent exploration of Unglichikan has confirmed the high-grade nature of the deposit, with a selected sample containing a bonanza grade of 3,430.1g/t Au. Group geologists expect further exploration and grade control sampling will provide better definition of the high-grade pay shoots that are clearly present at Unglichikan, potentially enabling their selective mining.  This, in turn, may offer an opportunity to improve the head grade profile at Albyn in the short- to medium-term.  A further increase in gold resources at Unglichikan is expected at its north-east extensions as well as within the parallel Amurskaya zone, situated c.500m south-east from the Unglichikan zones and yet to be included in the JORC resource statement.

In addition to this work, early-stage exploration commenced at the Afanasevskaya prospect, which is a former narrow-vein gold deposit mined on a small-scale in the 1940s and situated in the vicinity of the Albyn processing plant. Potential gold-bearing quartz veins and zones of alteration were documented in trenches, with assay results expected later in the year. Despite being previously mined, Group geologists see substantial potential at Afanasevskaya. It is believed to be a likely source of a significant placer which was extensively exploited in the Soviet era. 

Malomir Area

During Q2 2014, the Kanavinskaya Zone, an area situated between the high-grade Quartzitovoye deposit and Ozhidaemoye deposit, and Magnetitovoye, an area near the Malomir processing plant, were drilled. In addition to the results reported in Q1 2014, high-grade drill intersections were identified in Q2 2014. These results are being incorporated into a resource model and are expected to increase Malomir's non-refractory Reserve and Resource base.

Exploration continued at Berezoviy, an area c.10 km north-west from Malomir which was identified as a target in 2013. Work remains at an early stage however results received to date are encouraging. This work included exploration at the Abramovskaya zone.

Several new zones of gold mineralisation were discovered west and east of Abramovskaya.  Work on these zones remains at an early stage.  

IRC Limited ("IRC")

IRC is a producer and developer of industrial commodities with its shares quoted on the Hong Kong Stock Exchange (Stock Code 1029).

On 17 July 2014, IRC issued its second quarter trading update for the three months ended 30 June 2014. The following highlights were reported:

·      Kuranakh celebrates four years of commercial production

·      Second quarter and first half production exceed annualised target

·      K&S, IRC's wholly owned mining company, commissioning at the end of 2014; with the project now 78% complete

·      General Nice Development Limited ("General Nice") and Minmetals Cheerglory Limited ("Minmetals Cheerglory") investment commitment re-affirmed.

In addition, IRC reported that CNEEC, its main contractor for the development of K&S, has informed K&S that there will be a delay to the original planned date for the commissioning of the project until 31 December 2014. IRC and CNEEC are in discussions in regard to this latest proposed commissioning date and CNEEC is taking acceleration steps to mitigate CNEEC's exposure to potential delay penalties.

In addition, IRC announced that it expects to report a loss attributable to owners of IRC for the six months ended 30 June 2014 greater than the loss of US$11 million reported for the first six months of 2013. The increased loss for the first half of 2014 is mainly due to:

(i) Lower iron ore and ilmenite prices. These were reported in IRC's First Quarter Trading Update and the press, and have resulted in negative cashflow at the Kuranakh mine. IRC estimates that this will result in a loss of approximately US$29 million, including an approximate US$5 million write-down in the carrying value of the Kuranakh inventory; and

(ii) Also due to the lower iron ore and ilmenite prices in the spot market, IRC estimates a possible full non-cash impairment provision for the Kuranakh mine; with a carrying value of approximately US$63 million.

These result in a total approximate US$92 million loss attributable to the owners of IRC for the six months ended 30 June 2014. With a possible US$68 million of the loss due to the non-cash impairment and inventory write-down, IRC does not expect that the total loss will have any material impact on the financial strength of IRC. The Board of IRC considers that the overall financial position of IRC remains sound and solid. IRC reported that, as at the end of June 2014, IRC held approximately US$105 million of cash and US$98 million of undrawn credit under the ICBC K&S project finance facility.

In January 2013, IRC announced a two-stage transaction for a US$238 million subscription for new shares by General Nice, a member of a group of companies which collectively is one of the largest Chinese iron ore importers, and Minmetals Cheerglory, a wholly-owned subsidiary of China Minmetals Corporation. Stage 1 of the transaction was completed as planned. However, liquidity constraints in China, as documented by the international press, have resulted in a delay in the completion of Stage 2.

To date, General Nice has completed c. 80% of its planned investment in the following transactions:

·      851,600,000 new shares (including the deferred issue of 34,064,000* new shares), for HK$800.5 million (approximately US$103.1 million) in April 2013

·      218,340,000 new shares for HK$205.2 million (approximately US$26.5 million) in December 2013

·      165,000,000 new shares for HK$155.1 million (approximately US$20 million) in February 2014

·      165,000,000 new shares for HK$155.1 (approximately US$20 million) in April 2014

The transaction provides for investment from Minmetals Cheerglory once the subscription by General Nice is completed.

The Board understands that General Nice has informed IRC that they remain committed to injecting the remaining US$38m. Minmetals Cheerglory has also informed IRC that they remain committed to the transaction completion and working with IRC.

Further information may be obtained from the IRC website,www.ircgroup.com.hk.

*Please see IRC announcement dated 25 June 2014 in which IRC stated that none of the 34,064,000 General Nice Deferred Subscription Shares shall be issued to General Nice.

Enquiries 

Forward-looking statements

This release may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this release and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the Group's results of operations, financial position, liquidity, prospects, growth, strategies and expectations of the industry.  

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