26 January 2012

2011 Full Year & Fourth Quarter Trading Update

Petropavlovsk PLC ("Petropavlovsk" or the "Company" or, together with its subsidiaries, the "Group") today issues its 2011 full year and fourth quarter trading statement as an update and in advance of its Annual Results for the year ended 31 December 2011, which are expected to be issued on 28 March 2012.

Highlights

Total Attributable Gold Production¹

¹See end of document for definition of attributable production.

²Following the termination of the Odolgo Joint Venture in Q2 2011, the Group no longer operates any gold joint ventures; the reference to joint ventures refers to 2010 figures only. Production from the assets previously held by the Omchak Joint Venture was 50% attributable to the Group in H1 2010 and, following its acquisition by the Group in July 2010, 100% attributable in H2 2010 and FY 2011.

Operations and Gold Production

n  The Group's total attributable gold production for 2011 amounted to 630,100oz, exceeding the Group's full year production target of 600,000oz and a 24% increase compared to 2010;

n  Production at the Group's flagship mine, Pioneer, yielded 359,100oz representing a 56% increase from 2010 following effective improvements to mining operations;

n  Following successful commissioning in November 2011, the plant at Albyn has been ramping up steadily as planned and produced its first gold in December 2011;

n  Pokrovskiy, Malomir and the alluvial operations performed broadly in line with management's expectations.

Gold Sales and Costs

n  Total gold sold during 2011 was 676,000oz, a 51% increase compared to 2010. The strong sales figures reflect the high amount of gold sold at the start of the year as a result of the Group's high production levels in Q4 2010;

n  The average realised gold sales price was US$1,617/oz in 2011, 29% higher than the average price of US$1,253/oz achieved for 2010;

n  In Q4 2011, the average realised gold price was US$1,693/oz, a 23% increase compared to US$1,381/oz for the same period in 2010;

n  Total cash costs for hard-rock deposit production during H2 2011 were slightly lower than in H1 2011 (US$/659oz) due to the efficiencies implemented since the beginning of 2011 coming into effect and higher grades at the Pioneer mine;

n  Total cash costs for the Group (including cash costs for the alluvial assets) for H2 2011 were marginally higher than H1 2011, due to a substantially higher proportion of alluvial production.

Development

n  Work on the development of the pressure oxidation ("POX") hub at the Pokrovskiy mine and the flotation lines at Malomir and Pioneer remains on schedule;

n  A decision was taken to bring forward commissioning of the second 1.8Mtpa resin-in-pulp ("RIP") processing line at Albyn to Q3 2012 from its previously planned commissioning date in 2014 due to the increased reserves and resources at the deposit;

n  A decision was taken to bring forward the commissioning of a fourth 2.0Mtpa processing line at Pioneer to Q3 2012 from its previously planned commissioning date in 2014 due to the increased reserves and resources of non-refractory material at the deposit;

n  The Group has sufficient cash and undrawn facilities to meet all of its development plans.

Reserves and Resources

n  The Group intends to publish an updated reserves and resources statement on 23 February 2012.

Corporate Update

n  In December 2011, following his appointment as Senator and Member of the Federation Council of Russia, Dr Pavel Maslovskiy relinquished his role as CEO, in line with Russian legislation, and was replaced by Mr Sergey Ermolenko. Mr Ermolenko, a shareholder in the Company, was one of the members of the Group's founding management team and was previously employed as General Director of Management Company Petropavlovsk;

n  In order to retain Senator Maslovskiy's knowledge and experience, the Board conferred on him the title of Honorary President. In this capacity, which is not remunerated, Senator Maslovskiy is able to advise the new CEO and also attend, but not vote at, meetings of the Board;

n  Mr Martin Smith, previously Technical Director, was appointed Deputy CEO to Mr Ermolenko.

2012 Production Guidance 

n  The Group's 2012 target is 680,000oz, an increase of 11% compared to 2011 and a compound annual growth rate of 26% since the Group first listed in 2002. In line with the Group's conservative approach to forecasting, this target excludes the scheduled expansions at Pioneer and Albyn. 

IRC Limited ("IRC")

On 12 January 2012, the Group's 65.6% owned subsidiary, IRC, announced its 2011 Q4 Trading Update. Highlights included:

n  Production targets were exceeded at the Kuranakh mine with the production of the millionth tonne of iron-ore concentrate;

n  K&S project construction and operations are on track;

n  The Industrial and Commercial Bank of China ("ICBC") project finance facility drawdown commenced ensuring K&S funding; and

n  Steady year-end cash balances.

Commenting on the announcement, Sergey Ermolenko, CEO, said:

"2011 was a successful year for the Group. We produced 630,100oz, beating our previous record by 24% and exceeding the guidance we gave at the start of the year.

Our production success was achieved, in part, thanks to the improved performance of our flagship mine at Pioneer, where management was able to resolve the problems and difficulties experienced in 2010, bringing the mine to world-class standards of efficiency in its operation and production. During the year, the stripping backlog at Pioneer was cleared. The enhanced production capability is an important achievement for the future as exploration works at Pioneer continued to delineate new reserves and resources, thereby extending the potential mine life. The resultant enhanced capacity at the mine will stand us in good stead for the future, particularly as exploration works at Pioneer have continued to delineate new reserves and resources, thereby extending the potential mine life.

Additionally, increases to the reserve and resource base of Pioneer's oxidised material in 2011 enabled us to review our development plans for the mine. On the back of this, we decided to bring forward to H2 2012 the commissioning of Pioneer's fourth milling circuit, which is expected to increase the processing capacity of the Pioneer mine to 7.2Mtpa. Furthermore, additions to the reserves and resources base at Albyn have enabled us to accelerate the commissioning of our second 1.8Mtpa RIP line from the previously planned 2014 to Q3 2012.

During the year, the Group's construction team was also successful with its two big development projects: Malomir mine's expansion and the commissioning of our fourth hard-rock gold mine at Albyn were both completed on target. I am pleased to report that the second mill at Malomir continued to perform well during the last quarter of the year and I am delighted that we were able to produce our first gold at Albyn in December. These projects presented many logistical and climatic challenges and I am proud of the way in which the operational teams were able to overcome them. .

At the corporate level, some changes have been made to the management structure following Pavel Maslovskiy's election as a Senator. Although we will all miss working with Pavel on a day-to-day basis, I am delighted that he has agreed to accept the role as Honorary President of the Board, which will ensure that we will be able to retain his experience and expertise as the Group continues to move forward. It is a great honour that his achievements in the Russian Far East have been publicly recognised.

2012 is poised to be another milestone year in the development of the Group. It will see the commissioning of the previously mentioned additional RIP circuit at Albyn and the fourth circuit at Pioneer as well as the flotation plant at Malomir. I am confident in our ability to develop our POX hub at Pokrovskiy in line with the targets we have set ourselves. I look forward to updating shareholders on the development of this exciting new growth phase in the Group's history later on in the year.

We expect all the main inflationary pressures which were prevalent during 2011 to continue into 2012. Together with the scheduled decline of grades at all our mines, they are expected to result in some further increases to the Group's costs of production. The Group's management will continue to focus on our cost control programme which was successfully implemented during 2011.

It should be remembered, though, that growth in production can only come as the result of substantial investment and shareholders should recognise that we have decided to advance the capital expenditure so as to take advantage of the strong gold price. I am pleased to say that we have sufficient resources to cover the cost of our investments.

Our investment in IRC continues to show promise. On its first anniversary since listing, IRC delivered a major milestone with the first million tonnes of iron ore production from the Kuranakh Mine.  It is also pleasing to note the development progress at the K&S Project, which recently secured long-term funding through to completion from a large Chinese bank.  Iron ore and ilmenite prices in particular are strong, boding well for IRC as production continues to ramp-up."

Commenting on the announcement, Pavel Maslovskiy, Honorary President, said:

"I am very pleased to note that during a short period of time our team has managed to accomplish a remarkable turnaround at almost every level of our operations, transforming the Group into a world-class, multi-mine business with very good prospects, experienced management, strong technology and a pipeline of exciting projects. As I take up my role as Senator, I can be confident that the Group is in a good shape.

This is especially important for me at a time when, due to my Senatorial duties, I will have a less intense involvement in the Group's day-to-day activities. While this situation exists, I am leaving the management to my long-term colleague and friend Sergey Ermolenko, with whom I have been working since the inception of this Group. I am also confident in the younger generation of top management who have grown up together with the Group and acquired an enormous amount of experience in the process of its active development and expansion.

It is important to emphasise that this is the team who have been responsible for the impressive organic growth of the business over a short period of time and against a background of economic instability, strong inflationary pressures and a shortage of prospective projects in the gold mining industry worldwide. I am confident that the Group is in good hands.

Our focus on new technologies and investment in the latest scientific developments should provide the Group with a strong competitive advantage in the current challenging environment.

I am also extremely excited about the geological prospects of the Group. The synergies of working in one of Russia's most prospective gold mining regions, supported by a highly qualified team of local geologists, using the latest cutting-edge technology, will assist in the continued growth of our reserves and resources base and increasing our confidence in future discoveries. It is due to the continued success of our exploration programme at Albyn and Pioneer that we have decided to accelerate the commissioning of additional RIP lines at these mines from 2014 to Q3 2012.

I firmly believe that the hard work of the team to date has laid a solid foundation for the Group's long term future as an industry leader and I am grateful to the shareholders for their support through the years."

Conference Call Details

There will be a conference call today to discuss the announcement at 09.30 (GMT).* 

To access the call, please dial:

+ 7 499 270 0354 if calling from Russia;

+ 1 631 638 5256 if calling from the US;

+ 44 (0)20 7075 6551 if calling from the UK or elsewhere.

Please then give the participant pin code 881746# to be transferred to the call.

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

ENQUIRIES

GROUP OPERATIONS REPORT

Pioneer

Pioneer's overall performance in 2011 was strong, with the mine producing 359,100oz of gold, a 56% increase on 2010. This increase reflects a set of measures implemented during 2011 to improve on-site efficiencies, the mining and processing of higher grades during Q3 2011, as planned, and the full contribution of the third RIP processing line, which was commissioned in April 2010.

During 2011, 31,615,000m³ of material was moved, which represents an increase of 61% on the total material moved during 2010 (19,600,000m³), reflecting the contribution made by the delivery of the final additions to the mining fleet at the beginning of 2011 and changes to the organisation of on-site mining works which were implemented following a comprehensive review at the beginning of 2011. Due to the volume of stripping work conducted during 2011, the backlog of stripping at the end of 2010 was cleared.

In line with the Group's mine plan, Pioneer produced 124,800oz in Q4 2011.

Malomir

Malomir produced 88,500oz in 2011, a significant increase since 2010, due to its successful expansion programme in 2011. The second processing line at Malomir, which was commissioned in July 2011, continued to operate at its design capacity during Q4 2011. 

A slight decrease in recovery rates during 2011 was caused by the inclusion in the ore processed of refractory ore bordering the oxide ore and mined as dilution. The tailings from the processing of the refractory ore are stored separately and will be treated in the flotation plant in 2012.

Pokrovskiy

Performance at Pokrovskiy was strong throughout 2011. The mine's total production for the year was 91,800oz. This was a scheduled decrease compared to 2010 as the mine approaches the end of its mining life.

Albyn

Following the commissioning of Albyn in November 2011, ahead of schedule, the RIP plant has been ramping up to its design capacity of 1.8Mtpa.

Alluvial and JVs Production

During 2011, the Group's alluvial operations and joint ventures produced 89,600oz. Of this, only 6,900oz was produced in the fourth quarter of 2011 due to the seasonal nature of alluvial mining.

Costs and Average Realised Gold Sales Price

During the second half of the year, the total cash cost of production was significantly impacted by continuous strong inflationary trends, with diesel prices up 40% and other input costs significantly higher than in 2010. In spite of this, total cash costs for hard-rock deposits production during H2 2011 were slightly lower than in H1 2011 (US$659/oz) due to a number of efficiencies implemented at the mines taking effect, including optimised mining and handling operations, and the higher grades processed at Pioneer. Total cash costs for the Group (including cash costs for the alluvial assets) for H2 2011 were marginally higher than H1 2011 due to a substantially higher proportion of alluvial production.

Total cash costs also benefited from the depreciation of the Russian Rouble against the US Dollar (RUB/US$28.6 in H1 2011 vs. RUB/US$30.2 in H2 2011).

The average realised gold price in Q4 2011 was US$1,693/oz, an increase of 23% compared to US$1,381/oz for the same period in 2010. This resulted in the average realised gold sales price of US$1,617/oz in 2011, 29% higher than the average price achieved for 2010.

Group Production Target and Outlook for 2012

The Group's base case production target for 2012 is 680,000oz.The target takes into account:

n  the commissioning of the new milling line at Malomir in July 2011;

n  the commissioning of Albyn in November 2011;

n  the optimisation of the mining schedules following recent additions to the Group's reserves and resources base; and

n  the Group's new approaches to mine planning and production forecasting adopted in Q4 2010.

The target does not take into account the decision to bring forward the scheduled expansion of Pioneer and Albyn from 2014 to Q3 2012.

In line with the previous year, the Company intends to issue a mine-by-mine production breakdown together with its Annual Results on 28 March 2012.

Development

Work on the flotation lines at Pioneer and Malomir, and the POX hub at Pokrovskiy, is continuing as planned. The Group remains on schedule to commission the flotation plant at Malomir in H2 2012 with the foundations having already been laid.

Additional processing lines at Albyn and Pioneer

Following a review of exploration results obtained during 2011, the Group intends to bring forward the commissioning of its second 1.8Mtpa RIP processing line at Albyn from 2014 to Q3 2012 and will commission a fourth 2.0Mtpa processing line at Pioneer in Q3 2012. Work on these projects has already commenced; essential equipment has been ordered, and ground at Albyn has been cleared ready to lay the foundations.

Reserves and Resources Update

Initial exploration data has indicated a further uplift in the Group's total JORC reserves and resources base (before depletion). The Group expects to publish updated reserves and resources estimates in accordance with the JORC Code (2004) on 23 February 2012.

Corporate Update

Changes to the Board of Directors

As a consequence of his appointment as Senator and Member of the Federation Council of Russia (Upper House of the Russian Parliament), Senator Pavel Maslovskiy resigned from his longstanding role as CEO in December 2011. Under Russian law, Senators are prohibited from holding a business office that is remunerated or which has a management as opposed to an advisory role. There are also restrictions on the ownership of business assets where conflicts of interest occur. Accordingly, in order to retain the benefit of Senator Maslovskiy's knowledge and experience, the Board conferred on him the title of Honorary President. In this capacity, which is not remunerated, Senator Maslovskiy will be able to advise the new CEO and also attend, but not vote, at meetings of the Board.

Mr Sergey Ermolenko, aged 58, a shareholder and General Director of Management Company Petropavlovsk (the Group's main operating company in Russia) since its inception, was appointed CEO and a member of the Board and the Executive Committee. Mr Ermolenko was one of the original members of the Group's founding management team and has been Dr Maslovskiy's most important operational deputy. Mr Ermolenko has held top managerial positions with the Group since its foundation in 1994. In his previous capacity as Director of Pokrovskiy Rudnik, he was responsible for bringing the Pokrovskiy mine into production. He was appointed General Director of Management Company Petropavlovsk in 2004, and in this capacity has led the expansion of the Group into a multi-mine operator. Mr Ermolenko began his mining career in 1974 as an underground miner and shift leader in the Tokur mine, Amur region, working his way up to Head of Operations for the Tokur Mine. Mr Ermolenko's role is based predominantly in Moscow and in Blagoveschensk and, as a limited English speaker, he will rely on his senior team to assist him with the Group's investor relations efforts.

Mr Martin Smith, aged 56, previously the Group's Technical Director, was appointed Deputy Chief Executive Officer. Mr Smith, who is stationed at the Group's Far East head office in Blagoveschensk, has been with the Group since 1994, when he joined the management team on secondment from Kier International.  In 2006, he joined Aricom PLC as Technical Director and, following Aricom's merger with the Company in 2009, Mr Smith became Group Head of Technical Services and was appointed Technical Director in January 2011. Mr Smith has over 30 years' experience in the global natural resources industry, commencing  his career as a mining engineer at Anglo American Corporation,  South Africa and later leading projects for Kier International, Costain Mining and Shell International.

Further changes to Board of Directors

In January 2011, Mr Andrey Maruta was appointed to the Board as Finance Director (Russia) having been a senior executive at the Company for the past nine years and Dr Alfiya Samokhvalova was appointed Strategic Director having been with the Company for the past 11 years. In addition, Dr David Humphreys was appointed Non-Executive Director in August 2011, replacing Mr Peter Hill-Wood who retired from the Board at the conclusion of the Company's Annual General Meeting on 19 May 2011. Dr Humphreys has extensive knowledge of the Russian mining industry, having been Chief Economist at Norilsk Nickel, Russia's largest mining company, from 2004 to 2008. Prior to this, Dr Humphreys was Chief Economist of Rio Tinto for eight years.

IRC Update

On 12 January 2012, the Group's 65.6% owned subsidiary, IRC, announced its 2011 Q4 Trading Update. Highlights included:

n  Production targets exceeded at Kuranakh Mine with production of millionth tonne;

n  K&S Project construction and operations on track;

n  ICBC project finance facility drawdown commenced ensuring K&S funding; and

n  Steady year-end cash balances.

Important information

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

Some figures may be rounded.

Definitions: Total Attributable Gold Production

Total attributable gold production, as stated throughout this document, is comprised of 100% of production from the Group's subsidiaries and, where applicable, the relevant share of production from joint ventures and other investments. Figures for the comparative period are restated accordingly. The Group has held a c..1.1% interest in Rusoro Mining Ltd since March 2009; no attributable ounces are included in the Group's figures. The Company's direct and indirect interest in Pokrovskiy Rudnik (the holder of the Group's Pokrovskiy and Pioneer interests) is 98.61%. Cumulative gold production, as stated throughout this document, consists of gold physically recovered and gold in circuit. Accordingly, gold produced in the year consists of gold recovered during the period and adjusted for the movement in gold still in circuit. 

Production from Q4 2011 refers to production from 1 October 2011 to 31 December 2011, in line with the above definition.

Forward-looking statements

This release may include statements that are, or may be deemed to be, "forward-looking statements". Generally, 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.