Petropavlovsk : Half-year Report

2016 Half-Year Trading Update

Petropavlovsk PLC ('Petropavlovsk', or the 'Company' and, together with its subsidiaries, the 'Group') today issues its Trading Update for the period from 1 January 2016 to 30 June 2016 ('the Period' or 'H1 2016') in advance of its 2016 Half-Year Interim Results, which are expected to be published on 28 September 2016.

H1 2016 Highlights and FY 2016 Outlook

Production

· H1 total gold production of 187,400oz (H1 2015 240,200oz: 22% decrease). The decrease was mainly caused by the scheduled processing of lower grade material and the impact of severe flooding

Gold Sales

· Physical volumes of gold sold of 195,400oz (H1 2015 229,700oz). Gold sales were higher than production due to a reduction in gold in circuit in Q1 2016

· Average realised gold price of US$1,194/oz including hedging effect. As at 30 June 2016, the Group had outstanding hedging contracts for c.119koz of gold at an average price of US$1,269/oz

Net Debt

· The Group's focus remains the further reduction of its net debt

· Net debt as at 30 June 2016 of c.US$598mln (preliminary unaudited), or c.US$12mln lower than US$610 million audited net debt as at 31 December 2015

· Gross debt as at 30 June 2016 of c.US$616mln (preliminary unaudited), or c. US$22mln lower than US$638mln audited gross debt as at 31 December 2015

· In line with its strategy, the Group disposed of OOO Ilyinskoye (project Visokoe) and of its remaining interest in ZAO Verkhnetisskaya for total cash consideration of an equivalent of US$20 mln, payable in tranches during 2016. Payments totalling an equivalent of US$15.5mln were received for this disposal as of 30th June

· Preliminary term sheets have been received from both Sberbank and VTB which include, among other things, an extended debt maturity profile with a significantly relaxed near-term repayment schedule. While negotiations of the terms are ongoing, Sberbank and VTB have agreed to defer repayment instalments of principal under respective facility agreements during the period April to October 2016

FY 2016 Outlook

· Production is now expected to be at the lower end of the original guidance of c.460,000-500,000oz due to the effects of severe flooding in the region, which has already affected part of June and July production

· The Group reiterates its full year 2016 capital expenditure target of c.US$70mln, split between c.US$60mln development and maintenance and c.US$10mln exploration. This target includes c.US$35mln for development of the POX Hub subject to the approval of the POX JV with GMD Gold

· Estimated TCC for the full year of c.US$700/oz. Due to a weak rouble (average 70.54RUR/USD in H1 2016 vs average 58.06RUR/USD in H1 2015) and continuous improvement in the efficiencies of its operations the Group anticipates preliminary TCC in H1 2016 to be c.US$690/oz (H1 2015 US$767/oz)

· Estimated FY2016 year-end Net Debt of c.US$570mln reiterated based on a forecast gold price of US$1,200/oz

Corporate Update

Proposed POX Joint Venture

· The announced proposed creation of a joint venture to develop the Group's Pressure Oxidation project ('POX JV') with Limited Liability Company GMD Gold is progressing well and the Company expects to publish a circular to shareholders relating to the transaction during the third quarter of 2016

Proposed Acquisition of Amur Zoloto ('AZ')

· Petropavlovsk has today published a recently received Competent Persons Report ('CPR') prepared by SRK Consulting on the assets of AZ:

Ø The CPR identifies in the Measured, Indicated + Inferred categories c.1.86Moz of JORC compliant Mineral Resources of which 1.35Moz are Ore Reserves; these include c.1.21Moz at an average grade of 1.81g/t at AZ hard rock assets and 0.14Moz at an average grade of 0.5g/m3 at AZ alluvial operations

Ø The post-tax net present value of the mineral assets owned by AZ is estimated by SRK Consulting to be US$170mln assuming a discount rate of 10% and gold price of US$1,100/oz

· The c.1.35 Moz of ore reserves confirmed by the CPR is c.13% lower than the 1.55 Moz previously announced on 28 April 2016 which had been based on a preliminary review of AZ by SRK Consulting, due principally to (a) different approach to 'top-cutting' at resource calculations and (b) a stricter formal requirement to have certain technical studies in the new JORC (2012) Code to support the conversion of Measured and Indicated Mineral Resources into Proved and Probable Ore Reserves

· A committee of independent non-executive directors of Petropavlovsk has been formed and will obtain a fairness opinion from an independent financial advisor in connection with the proposed acquisition, to support the Board's final recommendation of any revised proposal

· Petropavlovsk continues to see a compelling strategic rationale for the transaction including (a) the acquisition of an attractive asset base that complements, diversifies and de-risks the company's future production profile, (b) operational synergies and (c) economies of scale that help to deliver a stronger balance sheet and improved financial flexibility from lenders

· Implementation of the proposed acquisition in any form remains subject to shareholder approval and Petropavlovsk expects to publish a combined circular and prospectus in due course

Discussions with Renova regarding Kamchatka Gold

· As announced on 13 June 2016, Petropavlovsk is engaged in discussions with Renova, the Group's largest shareholder regarding the acquisition of Kamchatka Gold, which are Renova's assets in Kamchatka, Far East of Russia. These discussions are ongoing and a further announcement will be made when appropriate

Exploration

· A new 370m (open in one direction) ore zone identified at Pioneer with a thickness of up to 97.0m and grades ranging from 1.03g/t up to 18.79g/t, with potential to add new reserves and resources of rich, non-refractory ores for underground operations as well as average grade (1.3-1.7g/t) refractory ores for open pit mining

· Otvalnaya zone (Pioneer) exploration expected to add to non-refractory reserves both for open pit and in particular for underground mining

· 500m extension of Brekchievaya zone (Pioneer) with 1.4m to 1.7m thickness and grades between 9.05g/t and 12.15g/t was confirmed

· A feasibility study supported by exploration works being undertaken for the part of Elginskoye deposit scheduled for the near-term production. It is expected to confirm current 2.7Moz internal and unaudited estimate of reserves in accordance with JORC (2012) Code by the end of 2016. The reserves were defined only for part of the Elginskoye deposit, whilst the rest of the zone remains under exploration

IRC

· IRC announced on 18th July 2016 that, as of 15 July 2016, first production of more than 1,000 tonnes of iron ore concentrates have been produced and stored in the wet concentrate storage while waiting for the stockpile of concentrates to accumulate to a more significant level. K&S is on track to produce 65.8% Fe product with an annual production volume of 3.2mln tonnes. IRC's announcement can be found athttp://www.ircgroup.com.hk/html/ir_announcement.php

· ICBC project finance facility - conditions precedent to the grant of the ICBC waivers have been fulfilled and the waivers are now effective

Commenting on the announcement, Pavel Maslovskiy, CEO, said:

'We have made progress on our core strategy of debt reduction and managing our financial flexibility through reducing costs and managing capital expenditures to ensure solid free cash flow generation and through making progress on our negotiations with our lenders.

Lower Total Cash Costs (Preliminary 1H 2016 c.US$690/oz vs 1H 2015 TCC- US$767/oz) were achieved despite the substantial decrease in grades of processed ore, via consistent optimisation of our unit costs, both at the mining and processing stages of the operations. A more detailed mine by mine update of the unit costs will be provided in our Interim Results.

In terms of our future production profile, our flagship Pioneer deposit consists of a number of bulk tonnage low grade (1g/t) ore bodies, which contain columns of high grade material. That is why in 2016, as in previous years, the production output during the year will be distributed unevenly, with stripping carried out throughout the year to access high grade material and the bulk of production is expected in Q4 when the higher grade material is accessed. Going forward, accessing the high grade reserves will require underground mining and hence the Pioneer mine is scheduled to start underground production this year.

Torrential rain (with, for example, five times the monthly average rainfall in June) and severe flooding temporarily compromised our fuel and other logistics during the second quarter and that is why we are guiding production to be around the bottom end of our guidance for the full year. Though work at the pits was not stopped and the performance of the processing plants is in line with our schedule, in particular the mining works and stripping works have been less intensive. In addition, flooding of the northern rivers has meant the delivery of supplies for Albyn and Malomir has been hindered or at times has not been possible. With weather conditions remaining uncertain it is difficult to estimate the total impact on our current year total forecast production. For this reason we decided to take a conservative approach to our guidance. Our lower production at projected gold prices is sufficient to meet our debt repayment obligations.

During the period we embarked on a series of exciting new corporate opportunities, which if successful, would dramatically increase, diversify and de-risk the Company's gold production with minimum financial outlay from existing shareholders and are generally in line with our debt reduction strategy.

The proposed POX joint-venture with GMD Gold in relation to the Group's POX Hub will unlock c.4 Moz of previously untapped refractory gold reserves and add materially to the Group's mid-term gold production and profitability. Meanwhile the commencement of underground mining at Pioneer is planned to increase the supply and the quality of non-refractory gold to the Pioneer processing facility. Work is under way to progress these opportunities as well as the previously announced possible acquisition of Amur Zoloto. In connection with this it is welcome that we are able to publish today the CPR by SRK on the Amur Zoloto assets, and we look forward to engaging with the AZ Contributors on the terms for the transaction.'

Operations Report

Pioneer

During H1 2016 the ore was sourced predominantly from pits 10 -11 of the Alexandra ore body as well as pit 2 (Promezhutochnaya) and pit 7 (Vostochnaya). At the Andreevskaya zone (pit 5) stripping works were carried out in H1 to access high grade ore for production in Q4 and some ore was blended from stockpiles. Heap leach operations commenced in Q2 (April), with a one month delay due to cold weather. In H2, ore is expected to be produced from the Alexandra, Bakhmut and Vostochnaya zones. At the Andreevskaya zone stripping works to access high grade areas will be continued through Q3 with production of the material at the average grade of 8.4g/t scheduled for Q4.

Pokrovskiy

During H1 2016, ore at Pokrovskiy was extracted mainly from pit 1 (Zeyskoye ore body), from the Zheltunak satellite pit and from pits 2 and 3 (Rucheynoye ore body). Heap leach operations commenced in Q2 (May) with a one month delay. In H2 ore is expected to be produced from the same areas as in H1.

Malomir

During the period ore was mined at Quartzitovoye 2. Mining and stripping was carried out throughout the whole of H1 at the Magnetitovoye pit and at Quartzitovoye 1. The remainder was blended using existing stockpiles.

In H2, ore production will continue from Quartzitovoye 2. At the Magnetitovoye zone, production of the main volumes of ore scheduled for 2016 is expected to commence in Q3, in line with the schedule of stripping works. At the Quartzitovoye 1 zone stripping works will be continued with ore production scheduled at the end of Q4.

Albyn

During H1 2016, the majority of ore was sourced from the Eastern section of the pit as well as from stockpiles, whilst stripping works were carried out at the Northern section of the ore body. H2 2016 production is expected to come primarily from the Northern section, where ore is scheduled to become available from August onwards. In H2, minor tonnages are also scheduled from the Eastern Section and from the stockpiles.

Exploration

During H1 2016, most exploration works were carried out for the purposes of underground mining at Pioneer and Malomir, completing exploration of the Elginskoye deposit (Albyn flanks), and confirming all non-refractory targets at all deposits.

Pioneer:

· Bakhmut

At the point where the Promezutochnaya and Bakhmut zones meet, a new thick lateral mineralised ore zone has
beeninitially identified.

It deepens 45 to 65 to the north and its length so far confirmed is 370m. The average thickness varies from 10.9 to 97.0m, at average cross sections grades of 1.03 to18.79g/t. Inside the structure there are two distinct ore columns, c.200m apart from each other:

Ø At ore column 1, four ore bodies with thickness between 1.0 - 12.4m and average cross-sections grades between 1.61 - 18.68g/t have been identified. These include18.68g/t at 5.1m, 12.7g/t at 6.8m and 6.99g/t at 12.4m

Ø At ore column 2, five ore bodies have been identified with thickness between 0.9 -20.6m, at 1.98 to 78.0g/t including 12.8g/t at 9.0m, 10.3g/t at 4.0m and 78.0g/t at 1.0m

Initial estimates show that the new ore structure will add new R&R of rich non-refractory ores for underground operations, alongside average refractory ores for open pit mining.

· Otvalnaya

This zone is located at the left bank of the Ulunga River, 1.6km north of NE Bakhmut.

In 2016, exploration of Otvalnaya's south-west flank was carried out. The zone is deposited in a north-west direction and deepens at 50 - 65. The ore zone consists of a main ore body with separate sub-parallel ore bodies. It has been followed for 500m along the strike with a thickness of 18.0m at 5.26g/t. The thickness of loose sediments within the explored interval is 3.5 - 26.5m and narrows towards a south-west direction; it opens along 360m downwards. The results of technological sampling show 70% recovery rates.

Initial estimates indicate that the Otvalnaya zone will provide non-refractory ore both for open and underground mining, in particular:

Ø The part of the ore zone suitable for open pit mining (depth 130m) has a thickness of 0.8 - 15.4m at average grades of 0.88-3.4g/t, including 3.28g/t at 15.0m, 3.04g/t at 7.5m and 5.26g/t at 1.6m

Ø At deep horizons beyond the designed pit, cross-sections of 3.8-7.5m at average grades of 2.0-6.0g/t (up to 18.0g/t in some samples) have been identified

· Brekchievaya

A 500m continuation of the zone to the east has been identified at an average thickness of 1.4-1.7m at 9.05-12.15g/t; exploration work here continues.

Albyn:

· Elginskoye

At Elginskoye the exploration works are being finalised at the part of the deposit scheduled for near-term production and a feasibility study including R&R is being prepared. The current preliminary internal resource estimate at a cut off 0.5g/t has 2.7Moz of gold at an average grade of 1.34g/t in C1+C2 Russian categories.

In the second half of the year we plan to update Elginskoye JORC Mineral Resource and Ore Reserve numbers in line with the new data. The reserves were defined only for the part of Elginskoye Zone that is scheduled for production first, the rest of the zone keeps being explored and further reserves are expected to be calculated in the next feasibility study.

Malomir:

· Quartzitovoye

In H1 2016, exploration for underground operation at deeper horizons continued. The previously exhausted ore zone 55 was confirmed to extend 200m beyond the pit. At a cut-off grade of 1.7g/t, the thickness of this zone is 1.4-12.9m at an average grade of 5.79-68.3g/t. In some drill holes it is 68.3g/t at 1.4m, 5.79g/t at 12.9m and 22.18g/t at 3.7m.

Apart from the main ore body 55, 150m to the east another two subparallel ore bodies were identified. They are suitable for underground treatment and have an average thickness of 1.1-3.9m at average grades of 6.14-10.55g/t; work here continues.

Project Development

Underground Mining at Pioneer

In H1 2016, preparation works were carried out to commence underground production from the NE Bakhmut zones. In particular, the following works have been performed:

- Completed design for underground mine access development and initial underground ore mining

- Preparation for decline portal completed including access road, site levelling, power and water supply

- Following a tender procedure, a Russian underground mining contractor has been appointed for mine development and ore mining

The underground contractor has started moving the necessary machinery and equipment to the Pioneer site. Development of the underground decline is expected to start in August 2016, with first ore production from the underground mine expected in Q1 2017. We plan to complete 29,915m³ of underground development during H2 2016 at an average contracted cost of 13,100 RUR/m³.

Exploration, targeting mineral resources for underground mining at NE Bakhmut as well as at other Pioneer zones, is expected to continue simultaneously with the mine's development.

Outlook for FY 2016

Production is now expected to be around the bottom end of the original guidance of c.460,000-500,000oz due to the effects of severe flooding in the region, which has already affected part of June and July production and adds a degree of uncertainty with regards to H2 production.

Total capital expenditure for gold projects in 2016 of c.US$70mln (c.US$10mln exploration programme and c.US$60mln development and maintenance), mainly focused on completion of the POX Hub (c.US$35mln) which is subject to the approval of the Group's proposed POX JV with GMD Gold.

The Group expects a year on year decrease in its total average cash costs of production in 2016 to c.US$700/oz and to c.US$690/oz in H1 due to its further cost-cutting programme and the weakness of the rouble.

In line with the Group's strategy of debt reduction, net debt is expected to decrease to c.US$570mln by the end of 2016. That is excluding any effect of the proposed acquisition of Amur Zoloto.

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).

K&S

Following successful testing of the K&S plant as of 15 July 2016, more than 1,000 tonnes of iron ore concentrates have been produced and stored in the wet concentrate storage while waiting for the stockpile of concentrates to accumulate to a more significant level. K&S is on track to produce 65.8% Fe product with an annual production volume of 3.2 million tonnes and is expected to fully ramp up to design throughput and first commercial iron ore concentrate deliveries to customers to take place during Q3 2016.

ICBC waivers obtained

Following discussions with ICBC and China Export & Credit Insurance Corporation regarding waivers in respect of the Group's project finance facility with ICBC, the Group is pleased to confirm that all conditions precedent to the grant of the waivers have been fulfilled and the waivers are now effective.

The full text of IRC's announcements and further information may be obtained from the IRC website,www.ircgroup.com.hk.

Note: Figures in this release may not add up due to rounding

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.

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the development of the markets and the industry in which the Group operates may differ materially from those described in, or suggested by, any forward-looking statements contained in this release. In addition, even if the development of the markets and the industry in which the Group operates are consistent with the forward-looking statements contained in this release, those developments may not be indicative of developments in subsequent periods. A number of factors could cause developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in law or regulation, currency fluctuations (including the US dollar and Rouble), the Group's ability to recover its reserves or develop new reserves, changes in its business strategy, political and economic uncertainty. Save as required by the Listing and Disclosure and Transparency Rules, the Company is under no obligation to update the information contained in this release.

Past performance cannot be relied on as a guide to future performance.

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