Petropavlovsk PLC : 2013 Full Year & Fourth Quarter Trading Update

23 January 2014

2013 Full Year & Fourth Quarter Trading Update

Petropavlovsk PLC ("Petropavlovsk" or the "Company", or together with its subsidiaries the "Group") today issues its 2013 full year and fourth quarter ("Q4") trading update in advance of its Annual Results for the year ended 31 December 2013.

2013 Highlights

·          Annual gold production of 741,200oz, within the Company's guidance despite extensive flooding

·          736,300oz of gold sold during the year

·          US$1,519/oz average realised gold price including effects of hedging

·          Total cash costs of production for the year are expected to be in line with the Company's guidance (c.US$1,000/oz)

·          As part of its debt reduction strategy, US$69.5 million in principal amount of the 4% Guaranteed Convertible Bonds due 2015 (the "Convertible Bonds") were purchased and cancelled by the Group in Q4 2013 resulting in US$310.5 million remaining outstanding

·          Unaudited net debt of c.US$945 million as of 31 December 2013, ahead of target and down 11% year-on-year ("yoy") due to continued strong net operating cash flows and decreased capital spending

·          An increase in resources in accordance with the Russian Classification System to support consistent non-refractory production until 2019. These resources are located in proximity to the Group's operational mines

2014 Guidance

·          625,000oz forecast production (the decrease yoy is partially due to the disposal of high-cost alluvial assets in 2013)

·          Outstanding forward sales contracts of 279,100oz at a gold price of US$1,429/oz as at 31 December 2013. Subsequent to 31 December 2013, the Group entered into gold forward sale contracts to sell a further 65,115oz at US$1,250/oz. These contracts all mature in 2014

·          Continued reduction in cash costs, capital expenditure and net debt:  

o  Forecast 5% reduction in total cash costs for hard-rock production to c.US$950/oz

o  Forecast 68% reduction in development and maintenance expenditure to US$60 million

o  Forecast 27% reduction in exploration expenditure to US$34 million

Strategic Review

·          Implementation of a previously announced plan of strategic development providing for a significant unit cost reduction for 2015-2019. With some yoy variations, estimated total cash costs are forecast to be less than US$750/oz for hard-rock production (assuming 2013 prices and foreign exchange rates)

·          The Group continues to review refinancing options in relation to the Convertible Bonds

·          Further exploration programme planned, aiming to upgrade 5.7Moz of non-refractory resources reported in accordance with the Russian Classification System into JORC-compliant Ore Reserve category

·          An  exploration report and a new JORC Mineral Resource and Ore Reserve statement are planned for publication in Q1 2014

Peter Hambro, Chairman of Petropavlovsk, said:

"In 2013, gold miners and the holders of gold ETFs, bought as a hedge against economic upheavals, were caught off guard by the fall in the price of gold. It seems that this was caused by massive and unexplained short-selling of paper gold on COMEX while at the same time the demand for gold in physical, small bars from residents in China and India reached unprecedented levels.

The miners hardest hit were those who had decided, on the back of the buoyant gold market in 2012, to mine and recover gold from low grade/high strip ratio ore. The resulting high cash costs meant that the sharp decline in the price of gold made 2013 a horrendous year; and the heavy rains in the Far East of Russia could have made things even worse for the Company. Luckily, though, an adroit decision to sell forward approximately half of Petropavlovsk's production before the price collapsed and a courageous and balanced effort on the part of the operations team in its response to the effects of flooding prevented external events from producing a disaster.  This operational success has been augmented by a successful cost cutting programme and a deep strategic review of the business plan, calling for a postponement of pressure oxidation of refractory ore and a reliance on production from existing facilities, which treat non-refractory material.

The exceptional wet weather hampered exploration for new gold reserves but, thanks to the expertise of the geologists, the need for additional non-refractory ore was met and 2014 is expected to be the year in which these resources are transformed by tighter drill grids into reserves.

Pressure oxidation is still of great importance to the future of our Group and it is expected that, once the present implementation hiatus is over and cash again becomes available, this investment will be completed and will contribute substantially to the Group's economic performance.

In the meantime the cut-backs on capital expenditure, a drive to reduce operating costs and the improvement in the grades mined has enabled the Group to make a substantial reduction in its net debt.

The continuing volatility in the gold price, the difference between physical and paper markets and the looming delivery physical crisis on COMEX do not give me confidence that the financial world is in a stable state and I believe that the potential exists for a dramatic change in the price of many assets; gold included. This makes our forward planning very difficult. However I can state with some happiness that our 2014 gold production target of 625,000oz of gold is confirmed ."

Detailed Operations Report

Pioneer

Pioneer produced approximately 314,850oz of gold in 2013, of which approximately 111,540oz were produced in Q4. Production for the year was hampered due to the excessive rainfall in Q3 which flooded the pits.

The high-grade ore mined in Q4 came predominantly from the pits in the NE Bakhmut zone. This was supplemented with low-grade ore from pits 1 and 5.

The low-grade ore stockpiles were significantly decreased during the year, resulting in a substantial release of working capital.

The extension to the Andreevskaya pit commenced in Q2 and this is currently on track for completion by the end of Q1 2014.

In Q1 2013, the expansion of the absorption circuit at the RIP processing plant was completed and, during the year, the plant processed a record 6.6 million tonnes during the year with an average grade of 1.8g/t.

In 2014, Pioneer production is expected to come predominantly from the high-grade NE Bakhmut and Andreevskaya pits and from the processing of lower-grade ore through the mine's heap-leaching facility.

Pokrovskiy

During 2013, Pokrovskiy produced approximately 91,200oz of gold, including approximately 30,800oz in Q4.

During H1 2013, mining at Pokrovskiy concentrated on completing the push-back of the south wall of the Pokrovka-1 pit in order to reach the high-grade ore at the bottom of the pit. Access to the high grade ore was gained in H2 of 2013 resulting in an improvement to the head grade at the plant.

The Pokrovka-1 pit was flooded by the heavy rains in August and September and a large amount of silt and clay, which was washed into the pit, had to be removed in October and November.

Throughout the year, lower-grade ore was mined in Pokrovka- 2 and other satellite pits.

Production from Pokrovskiy in 2014 is expected to be lower than in 2013. The Pokrovka-1 pit is expected to be depleted in H1 following which all ore will come from Pokrovka- 2, stockpiles and the satellite Burinda deposit.

Malomir

Malomir produced approximately 115,520oz in 2013, including approximately 45,320oz in Q4.

The ore came predominantly from the Quartzitovoye oxide pit and the transitional zone of the refractory ore body at the Central pit. This transitional zone, between oxide and refractory ores, has a high content of sulphide. This adversely affected the processing plant recovery, which averaged 72.6% during the year.

During Q4 2013, the total mass moved decreased by 46% compared to the same period in 2012 as part of the truck fleet was transferred to Albyn. However, Q4 2013 production still increased by 137% compared to the same period in the previous year due to an increase in grades mined and processed and a better recovery rate.

The flotation plant at Malomir was 90% completed during the year but has been temporarily mothballed pending the commissioning of the POX plant at Pokrovskiy.

In 2014, the Quartzitovoye pit is expected to be depleted. Production thereafter will shift to satellite deposits, close to the processing plant, which were discovered thanks to the Group's exploration success. 

Albyn

Albyn produced approximately 134,810oz during 2013, including approximately 48,790oz produced in Q4. The increase in annual production of 51% compared to 2012 was due to the processing plant working to its full capacity throughout the year, following its ramp up in 2012.

During H1 2013, mining at Albyn focussed on advanced stripping of the central part of the deposit to prepare the ore for delivery to the plant in H2. The processed ore in H1 came from the eastern part of the deposit which has a number of thin ore bodies interspersed with waste bands, which caused high dilution. In the central area, the ore bodies are higher grade, wider and easier to mine selectively.

Production at Albyn during Q4 was negatively affected by the flood waters in the River Selemja making the river crossing impassable in October thus hindering the supplies of fuel and spare parts to the mine. Consequently, the higher-grade ores were not accessed according to plan and the average grade for Q4 was c.1.4g/t.

In 2014, production at Albyn is expected to come predominantly from the central part of the pit.

Alluvial Operations

During 2013, gold produced from the Group's alluvial operations totalled approximately 84,800oz (compared to 92,100oz in 2012). Of this amount, the alluvial operations produced 5,598oz in Q4, less than in the previous quarter as these seasonal operations came to an end in October. The sale of the alluvial operations in the Magadan region, through the sale of OJSC Berelekh, was completed during Q4 and, consequently, alluvial gold production in 2014 is expected to be approximately 50% of that in 2013.

Project Development

Development of the POX Hub

Following the drop in the gold price in Q2 2013, the Group decided to slow down the pace of development of its pressure oxidation hub ("POX Hub") by restricting its activities to those which are subject to existing contractual commitments, thereby relieving pressure on the Group's capital expenditure requirements.

Furthermore, following the success of the Group's exploration programme which established sufficient non-refractory reserves (in accordance with the Russian Classification System) to cover production until 2019, the decision was taken to postpone completion of the POX Hub facilities.

The brick lining of the four autoclaves by specialist German contractors was completed in Q4. Work on the foundations and erection of the steel framework for the neutralization building commenced during Q4. The oxygen plant is now 90% complete.

Work in 2014 on the POX Hub will also be restricted to those activities which are subject to existing contractual commitments.

Capital Expenditure

As previously announced, the Group's capital expenditure requirements will substantially decrease in 2014 to an estimated US$94 million. This will be achieved in part due to the postponement of the commissioning of the POX Hub. Capital expenditure will be split between continuing the Group's exploration programme (US$34 million) and development and maintenance (US$60 million), which will be used predominantly on existing contracts for the POX Hub and to expand tailing dams at Pioneer and Albyn.

2014 production guidance

The Group's 2014 production guidance in based on JORC-compliant Reserves of non-refractory ores and provides for 625,000oz of gold production at an estimated total cash cost for hard-rock operations of c.US$950oz, a reduction of approximately 5% of the estimated 2013 total cash costs. The decrease in production comes partially from the disposal in H2 2013 of Berelekh's high-cost alluvial assets.

Exploration

The ongoing exploration programme in 2013 resulted in a 5.7Moz increase in the Group's non-refractory resources in accordance with the Russian Classification System, in spite of works being severely hampered in Q3 due to localised flooding.

The new resources are located in the areas adjacent to existing processing facilities. It is expected that they will provide non-refractory material for these facilities until 2019.

An exploration report and a new JORC Mineral Resources and Ore Reserves statement is expected to be published during Q1 2014.

Pioneer

The new additions of non-refractory material predominantly were made in the area 5-10km north from Pioneer's active pits, at two distinct zones of gold mineralisation, namely Alexandra and Shirokaya.

They have a substantial thickness of up to 100m and lie close to the surface, thus are considered suitable for low-cost, open-pit mining with a low strip ratio. 

Exploration at the Alexandra zone is at an advanced stage and the results are expected to be included in the next updated JORC Mineral Resource and Ore Reserve statement. The area remains highly prospective for further discoveries. 

Further additions of non-refractory material were made at the western extensions of the high-grade Andreevskaya zone, where a new high-grade pay shoot was identified. 

In 2013, preliminary exploration was also undertaken on an area 70km north of the Pioneer deposit, within the Ivanovskaya licence area.  The results received to date have been promising: gold grades of up to 17g/t Au were identified in selected grab samples and up to 1.44g/t were identified in channel trench samples. The Group intends to continue exploration work here in 2014.

Pokrovskiy

The new additions of non-refractory material for processing at the Pokrovskiy RIP plant are located at the Burinda deposit, which lies c.150km by road from Pokrovskiy. 

Exploration of Burinda will continue during 2014.

Malomir

At Malomir, new non-refractory reserves were established predominantly at the high-grade, non-refractory Magnetitovoye ore body, which lies approximately 6 km east of the Quarzitovoye pit, which is being mined at present. The new reserves at Magnetitovoye have an estimated average grade of 2- 4g/t Au.

They are expected to be included in the next JORC Mineral Resource and Ore Reserve statement.  Group geologists are of the view that Magnetitovoye remains prospective for further, significant discoveries.

Albyn

During 2013, exploration work continued on the non-refractory Elginskoye area, extending known mineralisation to the west and increasing the non-refractory resource base. 

Also, work at Uglichikan, the deposit located 10-14km north-west from Albyn, indicated further potential for adding high-grade, non-refractory material to the resource base in the near future.

In addition, in Q4 2013, a high-grade narrow vein mineralisation was discovered at the Leninskiy prospect to the north-east.

Corporate Update

The following corporate activity took place in Q4 2013:

Sale of non-strategic, alluvial assets

On 17 September 2013 the Company announced the entry into a conditional share purchase agreement ("SPA") relating to the sale of the entire interest of 76.62% of the issued shares in OJSC Berelekh ("Berelekh"), a company which holds licences to mine and explore alluvial operations, to OJSC Susumanzoloto ("Susumanzoloto") for a total cash consideration of US$25 million.  Following approval of the Federal Antimonopoly Service of Russia and the Company's shareholders, the transaction was completed in Q4 2013. The consideration was used to reduce the Group's net debt.

Purchases of Convertible Bonds  

In Q4 2014, Petropavlovsk 2010 Limited (the "Issuer") purchased, through a series of individual transactions, a total of US$69.5 million in principal amount of the 4% Guaranteed Convertible Bonds (ISIN: XS0482875811), issued by the Issuer and guaranteed by the Company, for an aggregate cash consideration of US$46.2 million (being in aggregate 33.6% below the principal amount of these Convertible Bonds). These comprised 18.3% of the Convertible Bonds originally issued.

The purchases were funded out of existing cash resources. The purchased Convertible Bonds were cancelled, which resulted in US$310.5 million in principal amount of the Convertible Bonds remaining outstanding and a reduction of c.US$19.4 million in the Group's net debt.

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 22 January 2014, IRC issued its Fourth Quarter Trading Update, which reported the following highlights:

·      Kuranakh celebrates annual iron ore production above 1 million tonnes

·      2013 iron ore increases ~6.5% compared to 2012

·      2013 ilmenite production 20.3% higher compared to 2012

·      Balance sheet strengthened following General Nice Stage 1 and partial Stage 2 subscriptions by over HK$1 billion (approximately US$130 million)

·      Construction and mine development at K&S on track for first commercial production during fourth quarter of 2014

·      Expressions of interest to finance Garinskoye DSO operation following positive Bankable Feasibility Study results

In January 2013, IRC announced a two-stage transaction for a US$238 million subscription for new shares by strategic Chinese investors General Nice and Minmetals Cheerglory. 

Stage 1, which completed in April 2013, involved the subscription by General Nice for 851,600,000 new shares (including the deferred issue of 34,064,000 new shares), for US$103.3 million.

Stage 2, which involved a further subscription of an additional 863,600,000 new shares, for a consideration of approximately HK$811.8 million (approximately US$104.7 million) by General Nice andsubsequently a subscription by Minmetals Cheerglory for 247,300,000 new shares for HK$232.5 million (approximately US$30.0 million). In October 2013, General Nice provided an irrevocable notice for the exercise of the Stage 2 subscription, and following an agreed delay for completion, a personal guarantee was received in November from the General Nice Chairman to complete by the end of December. Regrettably, liquidity constraints in China, as documented in the international press, have resulted in General Nice's present ability to only partially complete Stage 2, with the subscription of 218,340,000 new Shares for HK$205.2 million (approximately US$26.5 million) at the end of December. Consequently, General Nice has already invested over 60% of its total commitments to date.

Once General Nice has completed in full its Stage 2 subscription, Minmetals Cheerglory, under the terms of the agreements, may also invest. As long-term strategic investors, IRC recognised in its Q4 Trading Update released on 22 January 2014, the challenges faced by General Nice raising the additional subscription capital at present, and whilst IRC is cognisant of its legal rights under the agreements and the personal guarantee from General Nice, it does not want to frustrate the good relations with General Nice and therefore is working with General Nice to agree a timely funding plan.

Following the subscription by General Nice on 30 December 2013, the Company's shareholding in IRC reduced from 51.16% to 48.70%. Consequently, Petropavlovsk continues to remain a controlling shareholder in IRC and IRC continues to be treated as a subsidiary "held for sale" in the Group's consolidated financial statements.

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

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.

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