Operational and POX update

Group on track to deliver its 2011 production target

Detailed plans for pressure oxidation ("POX") facility at Pokrovskiy outlined

21 June 2011

Petropavlovsk PLC ("Petropavlovsk", "the Company" or, together with its subsidiaries, "the Group") is pleased to announce an operational update and give further details on the pressure oxidation processing facility ("POX hub") at the Pokrovskiy mine.

HIGHLIGHTS

POX Hub and future development plans

  The internal feasibility study for the POX hub, including the pressure oxidation plant ("POX plant") at Pokrovskiy and the flotation plants at Malomir and Pioneer, has been finalised;

  The POX plant will be developed in two stages - the first four vessels for processing concentrate from Malomir is planned for Q1 2013 and additional two vessels for Pioneer concentrate will be commissioned in Q3 2013;

  Final capacity of the Pokrovskiy POX plant has been defined as c. 600kt of concentrate per annum;

  The study indicates POX operating cash costs similar to current levels for Pioneer and Malomir;

  Contracts for the delivery of key long-lead time equipment, including the first four of six 60m³ autoclaves, have been signed with Outotec (Finland) Oy ("Outotec");

  The Group is budgeting to spend a total of US$181 million on the POX hub for the years 2011 to 2015.

Operational Update

  The Group remains on-track to deliver its 2011 production target of 600,000oz of gold;

  During April and May 2011, combined total gold production from Pokrovskiy, Pioneer and Malomir amounted to 83,500oz and production for the first five months totalled 158,900oz, ahead of the Group's forecast and 33% higher than the comparable period in 2010. Production in H2 2011 is scheduled to be higher than H1 2011 due to the contribution from alluvial operation and heap-leach operations and higher head grades at Pokrovskiy and Pioneer plants;

  The volume of stripping works undertaken to access ore planned for processing in H2 2012 is on schedule;

  Grades are above forecast at Pokrovskiy and Pioneer although they are marginally lower at Malomir;

  A more detailed breakdown of the Group's production during the first half of the year will be provided in the Company's Trading Update, which is scheduled to be released on 21 July 2011.

Gold sales and costs

  Total gold sold for the first five months of 2011 was 197,700oz (versus 120,600oz for the same period in 2010), an increase of 64%. The strong gold price for the year to date, less the associated increase in royalty payments, more than makes up for industry-wide inflationary pressures and foreign exchange effects on operating costs.

Funding

  Since the start of the year, the Company (excluding IRC) has entered into new loan agreements totalling US$270 million. This is in addition to the cash in hand of US$96 million and the undrawn facilities in place of US$70 million at 31 December 2010. This means that all capital programmes are fully funded.

Project development

  The commissioning of the second resin-in-pulp ("RIP") plant at Malomir is ahead of schedule and expected in the first half of Q3 2011;

  Construction work at Albyn, the Group's fourth hard-rock gold mine, is on schedule ahead of expected commissioning in Q4 2011.

Long-term production forecast

  The Group is currently in the process of re-evaluating its long-term production forecasts for 2012-2015, considering recent positive exploration results. Further details will be provided together with the Group's 2011 half-year results, scheduled for publication on 25 August 2011. To summarise:

Pioneer

  Drilling in the NE Bakhmut area has confirmed further north-east extensions to the ore body. An estimated 96,000oz of gold in high-grade mineralisation suitable for the existing RIP plant at Pioneer has been defined; 

  The additional tonnage of the oxidised material may increase production output from Pioneer in 2012/13 and may extend the life of the RIP plant beyond 2014;

Albyn

  The Group is incorporating the latest drilling results into an updated ore reserve estimate and will consider bringing forward the commissioning of the second 2.0Mtpa RIP plant at Albyn;

Malomir

  On-going exploration has located further non-refractory resources. The Group is currently updating its ore reserve estimate and mine plan in order to reflect these findings;

Pokrovskiy

  Encouraging exploration results from the Pokrovka 2 and Pokrovka 4 deposits, located in close proximity to the existing Pokrovskiy RIP plant, have indicated that these deposits may further extend the mine life.

Commenting on the announcement, Peter Hambro, Chairman of Petropavlovsk PLC, said:

"We decided to hold a technical seminar on the pressure oxidation of refractory ores and to explain the effect of this technology on the future of the Group to allow the market to understand fully the opportunities associated with this technology.  At the same time we thought it worthwhile updating our shareholders with the progress of our gold mining activities. A full half-year trading statement will be made, as planned on 21 July 2011 and will incorporate an update on our subsidiary, IRC Limited.

The creation of a pressure oxidation hub at Pokrovskiy will propel the Group into a new and exciting phase of development and give Petropavlovsk a strong competitive advantage in this highly prospective field. Russia has a significant reserves and resources base, which primarily consists of deposits containing refractory ore. We see our future Pokrovskiy hub, located in close proximity to excellent infrastructure, as the key to unlocking the value in a number of dormant, inexpensive assets requiring this technology.

As the birth place of our business, Pokrovskiy was a natural choice for the proposed POX hub. We already have a large workforce employed at Pokrovskiy and established infrastructure, including haul roads, milling and smelting facilities and a plentiful power supply. Situated just 14km by road from the nearest station on the Trans-Siberian railway, we will be able efficiently to transport flotation concentrate to the site, not just from the Amur region but, looking ahead into the future, also from other regions in the Russian Far East. We believe that when built, the sheer scale of the hub means that it will be the largest operating in Russia. 

I am confident that we have the expertise to deliver this project on schedule. Our research and development centres, led by first-class experts in this field, have been conducting extensive research into processing various types of refractory ore for the past five years. In 2009, we commissioned a pilot test plant and added autoclave facilities in 2010 to create the first facility of its kind in Russia.  This allows us to test recoveries under similar conditions to that of real production. This extensive research has also led us to design a facility which will allow us to process a variety of types of refractory ore.

Our strategic partner, Outotec, is a leading and established global provider of process solutions, technologies and services for the mining and metallurgical industries. Outotec's strong market position and leadership in technology is based on knowledge and experience derived from the operations of two major mining and metals companies, the Outokumpu Group and Lurgi Metallurgie GmbH (formerly Metallgesellschaft AG). It is a pleasure to work with Outotec on this project.

Looking into the immediate future, I am delighted to report that our second mill at Malomir is ahead of schedule and is expected to be commissioned in the first half of Q3 2011. This is an impressive feat in itself but when combined with our work towards the commissioning of Albyn, scheduled for Q4 2011, it is further testimony to the professionalism of our in-house expertise.

During the presentation, which is available on the website (www.petropavlovsk.net) we set out the basic parameters of the gold Company's cash flow and I am pleased to note that, based on these forecasts there is no need for additional funding for the company to complete its ambitious capital expenditure plans.

Finally, I am very pleased to report that mining and processing works at Pokrovskiy, Pioneer and Malomir have continued to perform well, meaning that we remain on-track to produce 600,000oz of gold this year, the base-case production scenario that we gave to the market at the start of the year."

Background

Proposed POX plant

The key parameters of the Group's feasibility study for the POX hub, including the pressure oxidation POX plant at Pokrovskiy and the flotation plants at Malomir and Pioneer, have been finalised. The design of the POX plant at Pokrovskiy and the flotation plants at Malomir and Pioneer has been completed by Outotec in conjunction with PHM Engineering Ltd, a wholly-owned subsidiary of the Group, and is based on extensive testing and research undertaken by the Group's subsidiaries Gidrometallurgiya and Irgiredmet, and at the Group's pilot test plant in Blagoveschensk. This research has indicated combined gold recoveries of between c.80% and 84%.

Pokrovskiy

The design allows for the installation of six 60m³ pressure oxidation autoclaves at the Pokrovskiy mine, with four planned for the processing of flotation concentrate from Malomir and two for the processing of flotation concentrate from Pioneer. The plant will be developed in two stages: the commissioning of the first four vessels for the processing of flotation concentrate from Malomir is planned for Q1 2013 and the commissioning of the additional two vessels for the processing of flotation concentrate from Pioneer is planned for Q3 2013. Metallurgical tests have confirmed that both concentrates may be blended and processed together.

The total final capacity of the POX plant will be c.600kt of concentrate per annum of which 330Ktpa is expected to be used to process concentrate from Malomir and 240Ktpa to process concentrate from Pioneer. The remaining capacity may be used to accept concentrate from third parties for toll treatment.

The contract for the delivery of key autoclave equipment for the POX plant including the first four 60m³ autoclaves has been signed with Outotec with a contract price of c.  30 million (to be paid in 2011 and 2012). In addition, the Group has signed a non-binding five year strategic co-operation agreement with Outotec to provide engineering consulting services in Russia, CIS and other countries. Further contracts for equipment are being negotiated and are expected to be signed in Q3 2011.

A contract for the design and equipment of the oxygen plant has been signed with LLC Premium Engineering, a subsidiary of Red Mountain Energy Corporation, for a contract price of c.  22 million.

Malomir

The flotation plant at Malomir is planned to be constructed in three stages with a total design capacity of 6.0Mtpa.

The first flotation line at Malomir is on-track to be commissioned in the middle of 2012 and will have a design capacity of 2.0Mtpa. Work on this first line has already begun. The first stage will utilise the grinding section of the existing RIP plant at Malomir and its supporting infrastructure, allowing substantial capital cost savings. The second stage envisages an additional 2.0Mtpa flotation line, to be commissioned in Q4 2012. Work on this line will begin in Q3 2011. A further 2.0Mtpa line is expected to be commissioned in Q3 2013.

The contract for construction and installation of the flotation plant at Malomir has been signed with Outotec, with a contract price of   24 million.

Pioneer

The transition to processing refractory ore at Pioneer is also envisaged to occur in three stages, also taking the final design capacity to 6.0Mtpa.

The first flotation line is planned to be commissioned in Q2 2013 and will have a design capacity of 2.0Mtpa. Work on this line will begin in Q1 2012. The second stage envisages the addition of a further processing line of a similar design, also with a capacity of 2.0Mtpa. It is planned that work on this stage will commence in Q3 2012 and commissioning is anticipated for Q4 2013. Work on the final flotation line is currently planned to start in Q1 2013 with commissioning expected for Q1 2014. However, exploration work at Pioneer continues to find further material suitable for direct cyanide leaching at the existing RIP plant. It is therefore likely that a part of the RIP plant will remain in use beyond 2014 before it is finally converted to produce flotation concentrate, postponing the commissioning of the third stage.

Capital Expenditure

The Group is budgeting to spend a total of US$181 million on the POX hub.  Of this US$181 million, US$77 million is budgeted for 2011, US$101 million will be spent in 2012 and US$3 million will be spent in 2013.

Workshop

Petropavlovsk PLC is holding a workshop on its planned methods for the processing of refractory material today at 09:15 (BST). Speakers will include members of the Group's senior management and representatives from one of the Group's research and development centres, PHM Engineering and Outotec.

A live webcast of the workshop will be available in English and in Russian on the Company's website www.petropavlovsk.net.  

The webcast will be followed by a dial-in question and answer session. Participants without access to the internet may also dial in to listen to the workshop. To access this facility, please dial +44(0) 208 817 9301. When prompted, please enter the confirmation number 5099935 for English or 5099946 for Russian.

A playback of the webcast and the question and answer session will be available to view later today on www.petropavlovsk.net. Transcripts will be available on request.

A PDF of the presentation will also be available on www.petropavlovsk.net.

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.