17 January 2013
2012 Full Year & Fourth Quarter Trading Update
Potential US$238 million Investment in IRC by New Shareholders
Petropavlovsk PLC ("Petropavlovsk" or the "Company" or, together with its subsidiaries, the "Group") today issues its 2012 full year and fourth quarter trading statement as an update and in advance of its Annual Results for the year ended 31 December 2012, which are expected to be issued on or around 27 March 2013.
In addition, the Company announces a potential US$238 million investment in IRC Limited ("IRC") by General Nice Development Limited ("General Nice") and Minmetals Cheerglory Limited ("Minmetals Cheerglory") to fund production growth, in respect of which a separate announcement is being made.
Given the implications for the Company of this transaction, the Company has decided to issue its Trading Update concurrently.
Summary
n 2012 gold production of 710,400oz - a year-on-year increase of c.13% and exceeding the
guidance of 700,000oz
n Average realised gold sales price up c.3% to US$1,670/oz
n 2013 production target of between 740,000oz and 780,000oz - a year-on-year increase of
between 4% and 10%
n Strong operating cash flow during H2 2012 - preliminary unaudited estimates indicating that net
operating cash flow increased approximately five times in H2 2012 in comparison with H1 2012
to US$230 million
n The Pressure Oxidation ("P-OX") Hub on schedule for commissioning in Q1 2014
n Promising results from brownfield exploration conducted around existing mine sites, in
particular from Malomir and areas close to the Albyn plant
n Announcement of a potential US$238 million investment in IRC by new shareholders to support production growth, which would reduce the Companys holding in IRC to c.40% with the new shareholders holding c.36%, in each case assuming no additional shares in IRC are issued and that all IRC shares are issued in accordance with the subscription agreements.
A pro-rata indemnity on the existing guarantee with the Industrial and Commercial Bank of China ("ICBC"), reducing the Companys exposure under the guarantee, will be implemented on full completion of all stages of the investment, which is expected to be in Q3 2013.
Highlights
Gold production
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Q4 2012
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Q4 2011
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Year ended 31 December 2012
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Year ended 31 December 2011
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000oz
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000oz
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000oz
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000oz
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Pioneer
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127.6
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124.8
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333.6
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359.1
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Malomir
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19.1
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28.4
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103.3
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88.5
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Pokrovskiy
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24.5
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21.7
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92.1
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91.8
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Albyn
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33.4
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1.1
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89.3
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1.1
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Alluvial operations
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7.4
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6.9
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92.1
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89.6
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TOTAL
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211.9
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182.9
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710.4
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630.1
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Operational Update
n In 2012, the Group produced 710,400oz of gold, c.13% more than in 2011 (630,100oz) and
exceeded its production target of 700,000oz;
n Total gold sold in 2012 amounted to c.703,000oz, a c.4% increase compared to total gold sold in 2011 (676,000oz);
n The average realised gold sales price in 2012 was US$1,670/oz, c.3% higher than the average realised gold sales price in 2011 (US$1,617/oz);
n Estimated total cash costs for the hard rock deposits (including Albyn) for the Group for FY 2012
were approximately 7% higher than in H1 2012 (US$740/oz), largely due to the processing of transitional ore at Malomir during the year which resulted in lower than budgeted recoveries, particularly during H2 2012.
Potential US$238 million Investment in IRC by New Shareholders
n IRC, a company in which Petropavlovsk holds a 63.1% stake, today announced the entry into
conditional agreements with 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, one of Chinas largest state-owned
international metals and mining corporations) (collectively, the "Investors"), for the Investors to
invest up to US$238 million in IRC through subscription for new IRC shares to fund production
growth and an agreement to enter into long-term off-take arrangements;
n If the transaction is fully implemented, providing no additional IRC shares are issued, the
Company will hold c.40% of IRCs issued shares.
Thus, it is expected that IRC will cease being
a subsidiary of the Group and will no longer be consolidated in the Groups financial
statements;
n A pro-rata indemnity from General Nice in relation to the Companys existing ICBC guarantee
will be implemented on full completion of the transaction, reducing the Companys present
exposure under the guarantee;
n The transaction provides IRC with a strategic partnership that aligns its production growth in
Russia with the trading experience of General Nice and Minmetals Cheerglory in China,
reinforcing IRCs position as a Sino-Russian champion;
n Once completed, the transaction will benefit Petropavlovsk by reducing its potential financial
requirements in relation to IRC, whilst enabling the Company to share in the upside from IRCs
strong growth potential;
n Further information on the transaction, the implementation of which will require, amongst other
things, the approval of the Companys shareholders, is set out in a separate announcement
being issued by the Company.
Financial Position
n During H2 2012, the Groups operating cash flow was strong, with preliminary unaudited estimates indicating net operating cash flow increasing approximately five times in H2 2012 in comparison with H1 2012 to US$230 million;
n The net debt* position of the Petropavlovsk Group, excluding IRC, was c.US$1.1 billion at 30 June 2012 and remained c.US$1.1 billion at 31 December 2012.
The net debt position of IRC changed from c.US$68 million at 30 June 2012 to an estimated c.US$110 million at 31 December 2012;
n As at 1 January 2013, the Group had c.US$153 million worth of committed, but undrawn, debt facilities*;
n During Q4 2012, in line with the Groups strategy, the Group disposed of certain non-core assets through the sale of 65% of the issued shares in CJSC ZRK Omchak ("Omchak").
As previously announced, this transaction, will result in an aggregate cash receipt of US$21.65 million during 2013 and an estimated non-cash accounting loss of approximately US$30 million, reversing the fair value gain of approximately US$26 million which arose in 2010;
n In line with the Groups strategy of focusing on exploration near its producing mines, the Group is reviewing the carrying value of all of its exploration and development assets and this may result in non-cash impairments of an estimated further US$75 million to US$100 million when the accounts for the year ended 31 December 2012 are finalised;
n During the year, as a result of the potential investment in IRC by the new shareholders, the Group took a decision to support new investment into IRC and to accept the resulting dilution of its holding in IRC to a non-controlling interest and accordingly the Groups investment in IRC will be treated for accounting purposes as "held for sale" as at 31 December 2012.
As a result, the carrying value of the entire IRC net assets will be adjusted to fair value, less any costs to sell.
Based on IRCs share price of HK$1.170 as at close on 31 December 2012, the estimated net adjustment would be a c.US$225 million non-cash fair-value impairment, to be shown in the financial results for the year ended 31 December 2012, with c.US$147 million allocated to equity holders of Petropavlovsk and c.US$78 million to non-controlling interests.
* Net debt and committed, but undrawn, debt facilities for the Group are not comparable to prior periods because of a change in accounting basis
Development of the P-OX Hub at Pokrovskiy and Malomir Flotation Plant
n At Pokrovskiy, the construction of the autoclave building and the oxygen plant has been
progressing according to plan with commissioning scheduled for Q1 2014;
n All major equipment for the autoclave building has arrived on site.
The four autoclaves have been installed on their foundations.
Work is planned to commence on the construction of maintenance platforms, engineering communications, linings and branch pipes during the remainder of H1 2013;
n Following promising exploration results from Malomir, with preliminary estimates showing an approximate additional 240,000oz of oxide resources contained in an ore body parallel to Quartzitovoye, the Group will continue to process non-refractory ore at Malomir during 2013 and has accordingly rescheduled the commissioning of the flotation plant to the start of Q3 2013.
Exploration
n Throughout 2012, the Group continued to focus on developing a reserves and resources base suitable for processing at its current operational production facilities;
n During 2012, exploration continued, as in previous years, to extend the oxide mineral base and identified additional oxide material at all operating mines.
Further details are set out later in this trading update;
n The Group has received some promising results from brownfield exploration conducted around existing production facilities, in particular from Malomir, with the discovery of c.240,000oz of additional oxide resources, and from areas close to the Albyn processing plant;
n The Group intends to publish an updated reserves and resources statement on 28 February 2013.
2013 Outlook and Production Target
n The Groups gold production target for 2013 is 740,000oz - 780,000oz, an increase of between 4% and 10% on the amount of gold produced in 2012;
n The 2013 production target reflects:
- The ramp up of the first and second milling lines at Albyn, which was completed in Q3 2012;
- The expansion of the processing plant at Pioneer and the incorporation of new reserves discovered at Pioneer in 2012 into the mine plan;
- The processing of the low-grade stockpiles at Pioneer.
This is expected to release
c.US$90 million in working capital and is expected to affect positively operating cash
flow during the year; although it will put upward pressure on the total cash cost at
Pioneer;
- The planned decline in production from Pokrovskiy as the mine site is being converted
into the P-OX hub in H2 2013;
- The exclusion of the gold flotation concentrate scheduled to be produced at the Malomir
flotation plant from Q3 2013.
The Group intends to stockpile the concentrate for later
processing through its P-OX plant at Pokrovskiy but may market this product
temporarily if conditions are suitable;
- The exclusion of any potential upside from recent discoveries of oxide reserves at
Malomir into the mine plan;
n As with previous years, production will be weighted to the second half of the year, reflecting the contribution of heap-leach and alluvial operations, which only operate during the warmer months of the year.
Commenting on the announcement, Peter Hambro, Chairman, said:
"Our team has achieved its tenth consecutive increase in annual gold production and has exceeded our production target in spite of 2012 being a challenging year.
Over the past 14 months, the Group brought into production its fourth new mine - Albyn - which went through its ramp-up phase; seven months after the first processing line commenced its work, we commissioned a further milling line, thereby doubling Albyns processing capacity.
In addition, we also commissioned a fourth milling line at Pioneer.
This success helped to mitigate the negative effect of the processing of so-called "transitional" ore at the Malomir mine.
As the first stage of Malomirs development, the processing of oxide ores through a conventional resin-in-pulp plant, has been drawing to an end, the shift towards the planned processing of refractory ores through the flotation plant is scheduled for the beginning of Q3 2013.
The resultant treatment of transitional material, so called because it is neither fully oxidised nor fully refractory and is what one expects to meet as the transition from oxide to refractory ore takes place, caused a drop in recovery rates at the plant, negatively affecting overall production and cash costs.
However, due to the multi-mine nature of our business, we were able to offset this in part by good performances at the Pioneer and Pokrovskiy mines.
I am delighted to report on the potential significant investment in IRC by General Nice and Minmetals Cheerglory, an investment which will provide IRC with additional financing for its flagship K&S project and Garinskoye.
It also delivers off-take arrangement, marketing infrastructure and cash-flow security, which are expected to underpin substantially IRCs development.
As Petropavlovsk will continue to be a major investor in IRC, this investment will enable the Company to share in the upside of IRCs growth potential.
In addition, I hope that it will allay shareholders fears about additional financing requirements relating to IRC as, upon the full completion of the investment, the Company will have a pro-rata indemnity from General Nice in respect of the Companys contingent liabilities for IRC bank debt.
The first stage of this transaction is expected to complete shortly after Petropavlovsk and IRC shareholder approval is obtained.
Looking ahead into 2013 - which we expect will be a transformational year for the Group - I am confident in the teams ability to manage the goals we have set ourselves this year in an efficient and timely manner.
During 2013, we are planning to finalise the construction of our P-OX Hub, with planned commissioning at the beginning of 2014.
We believe that the Hub will transform the Group into one of the leaders in the sector, using the tried and tested modern technology to recover gold from refractory ore.
The majority of equipment for the future Hub has already been delivered to the Pokrovskiy site.
Our exploration policy of looking for new sources of gold close to existing production facilities has resulted in the identification of some oxide gold occurrences close to the Malomir plant that may be available for mining in the latter half of the year. We will, as usual, announce our updated reserve and resource numbers in February 2013."
Conference Call
There will be a conference call today to discuss the announcement at 11:00 GMT.*
To access the call, please dial + 44(0)20 3139 4830 if calling from the UK or elsewhere.
Please then give the participant pin code 31251561# to be transferred to the call.
IRCs management will also be holding a conference call today at 09:00 GMT (17:00 Hong Kong time) to discuss details of the potential investment.
*
The number is +852 3027 5500 and passcode 948554#.
A presentation to accompany the call is available at ircgroup.com.hk.
* The conference calls may include information relating to the shares and convertible bonds
Enquiries
Petropavlovsk PLC
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+44 (0) 20 7201 8900
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Alya Samokhvalova
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Rachel Tuft
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College Hill
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+44 (0) 20 7457 2020
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David Simonson
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Matthew Tyler
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Anca Spiridon
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Operations and Gold Production: Pioneer
During 2012, Pioneer produced 333,600oz of gold.
This was 17% higher than the 286,000oz target set at the start of the year due to the inclusion of new exploration results into the mine plan, and the earlier than planned commissioning of the plants fourth 1.8Mtpa milling line.
In addition, the heap-leach facility was expanded during the year and processed 946,000 tonnes of ore, an increase of 134% over the amount processed in 2011.
The second tailings dam was successfully commissioned in April 2012.
Metallurgical recovery at Pioneers resin-in-pulp ("RIP") plant was 3% higher compared to 2011, despite the processing of lower-grade material and the commissioning of the new milling line.
The increased capacity of the processing plant will enable the cost-efficient treatment of low-grade stockpiles accumulated on site, which stood at approximately 5.3Mt as at 1 January 2013.
It is expected that a significant proportion of the stockpile reserves will be processed during 2013, releasing approximately US$90 million in working capital which will positively affect operating cash flow during the year, although adversely affecting the total cash costs for the mine.
The high stripping volumes, required in 2012 to access high-grade oxide material for the plant, are expected to decrease significantly when the mine starts treating refractory ore in 2015, thus reducing the cost of mining operations.