16 October 2012

Production Report for Q3 2012 and Interim Management Statement

Petropavlovsk PLC ("Petropavlovsk" or the "Company", or together with its subsidiaries "the Group") today issues its interim management statement for the period from 1 July 2012 to the date of this release ("the Period"). 

Summary

n  Q3 gold production of 219,400oz, 39% higher than the previous quarter

n  9 month gold production of 498,500oz up 11% on the corresponding period in 2011

n  On track to achieve full year production target of at least 700,000oz of gold

n  9 month average realised gold price up 4% on the corresponding period in 2011

n  Total cash costs for the full year are expected to remain in line with H1 2012

n  Development of the Pressure Oxidation Hub continues to be on schedule

Highlights

Note: Numbers may not add up due to rounding

Operations and production

? Gold production for the first nine months of the year was 498,500oz, an increase of 11% compared with the same period in 2011 (447,200oz);

? Gold production for 1 July to 30 September 2012 ("Q3 2012") was 219,400oz, 39% higher than Q2 2012 (158,000oz) and in line with the Group's expectations;

? Production for Q3 2012 was 4% lower than production from the comparative period in 2011 due to a scheduled decrease in production from the Pioneer mine.

2012 production guidance

? The Group is re-iterating its full-year production target of a minimum of 700,000oz.

Gold sales, costs and financial position

? Gold sales during the first nine months of the year totalled 505,600oz, an increase of 4% on the comparative period in 2011 (485,200oz). The average realised gold sales price for the first nine months of 2012 was US$1,658/oz, an increase of 4% on the price achieved for the comparative period in 2011 (US$1,587/oz);

? During Q3 2012, the Group sold 219,500oz of gold, an increase of 41% compared to the amount sold in the previous quarter (156,100oz). The average realised price for Q3 2012 was US$1,683/oz, 5% higher than for the previous quarter (US$1,596/oz);

? In August 2012, the Company concluded its 170,000oz short-dated hedging programme, leaving no further gold hedging transactions outstanding;

? Total cash costs for the full year are expected to stay in line with H1 2012;

? As at 30 September 2012, the Group had total undrawn facilities of US$506 million with US$238.2 million attributed to its gold projects and US$267.8 million attributed to IRC.

Development of Pressure Oxidation Hub

? Good progress was made towards the creation of a pressure oxidation processing hub at the Pokrovskiy mine with construction of the oxygen plant now complete and ready for fitting out and with the construction of the autoclave building on schedule;

? At Malomir, work continues on the flotation plant and the Group anticipates this to be in place to produce flotation concentrate from Q1 2013; 

? The transportation of equipment to the Pokrovskiy site is progressing as per the project schedule prepared in conjunction with Outotec and the Group's selected contractors. Some equipment items are already on site and further items are scheduled to be delivered in Q4 2012 and 2013.

Exploration update

? Exploration during Q3 2012 continued to focus on areas close to the Group's existing processing facilities;

? Exploration identified potential new resources at the Malomir, Pokrovskiy and Pioneer mines. The Group is currently interpreting these results in order to publish an updated gold reserves and resources statement for the Group in February 2013; and

? Exploration also identified further exploration targets at Albyn (Elginskoye and Kharginskoye), Pioneer, Pokrovskiy and Nimanskaya.

Commenting on the announcement, Peter Hambro, Chairman, said:

"During Q3 2012, the Group produced 219,400oz of gold and is pleased to confirm its target of at least 700,000oz of gold for 2012.  I am pleased to report that so far our flagship mine, Pioneer, is performing ahead of schedule, as is our first mine, Pokrovskiy. The good performance of Pioneer and Pokrovskiy will compensate for some shortage in production from Malomir as, during Q3 2012, Malomir was partly processing transitional ore, which impacted recovery rates. We expect that improvements to our mining plan will have beneficial effects in Q4 2012 and anticipate that bringing the flotation circuit into production will help us to increase the recoveries from these transitional blocks of ore when they are encountered in the future.

The exploration target areas during the Period have been close to our existing processing facilities in order to increase reserves for these projects and I am pleased by the progress made on this front during Q3, particularly at Pioneer, Malomir and Pokrovskiy where we have identified potential for new reserves and resources. An updated reserve and resource statement is intended for publication in February 2013. Looking further ahead, as a result of the work done during the Period, our Group geologists have identified further promising targets that they intend to continue to explore into 2013.

Development of the Pressure Oxidation Hub continues according to plan and, during the Period, the main body of the oxygen plant was completed and progress was made on the construction of the autoclave building.. Key items of equipment continue to be delivered to the site and we remain on schedule with the development of this project."

Enquiries

Operations and gold production: Pioneer

Pioneer produced 80,800oz in Q3 2012 and during the first nine months of the year, the mine produced 206,100oz. Although less than the comparative periods in 2011, Pioneer's performance has been in line with the Group's mine plan due to the scheduled processing of lower grades.

During Q3 2012, the total material moved was 11,499,000m³. The increase compared to the comparative period in 2011 reflects the mining of more ore to feed the expanded processing plant. This figure also includes stripping to access the higher-grade areas of ore scheduled for processing in Q4. 

During Q3 2012, the total material milled increased by 24% to 1,471,000 tonnes versus the comparative period in 2011 (1,189,000 tonnes), reflecting the commissioning and subsequent full ramp up of the fourth processing line in June 2012.

Operations and gold production: Malomir

During the first nine months of the year Malomir produced 84,200oz, a 40% increase on the amount produced during the comparative period in 2011 (60,100oz), due to the full contribution of the second processing line which was commissioned in July 2011.  

Production from Malomir in Q3 2012 was 18,100oz. This was less than the comparative period in 2011 (22,200oz) due to a scheduled decrease in grades processed and lower recoveries (59% for Q3 2012 versus 81% for Q3 2011). Recoveries were affected by the continued blending of ore from the higher-grade Quartzitovoye deposit with transitional ore from the Central pit, which is being stripped in preparation for the mine's transition to refractory ore processing.

During Q3 2012, 4,565,000m³ of material was moved at the mine, this included stripping of the Central refractory ore body, preparing the mine for conversion to processing refractory ore and stripping at the Quartzitovoye deposit in order to access the high grade areas scheduled for processing towards the end of Q4 2012.

Operations and gold production: Pokrovskiy

During the first nine months of the year, Pokrovskiy produced 67,600oz, in line with the comparative period in 2011 and with the Group's 2012 mine plan.

During Q3 2012, Pokrovskiy produced 30,200oz of gold, a 7% increase on the amount produced in the comparative period in 2011 (28,200oz). The ore mined came from the Pokrovka 2 and Zheltunak satellite deposits.

During Q3 2012, the Group continued to push back the south wall of the pit at the Pokrovka-1 deposit in order to access the higher-grade areas scheduled to be mined in Q4 2012.

Operations and gold production: Albyn

During Q3 2012, Albyn produced 31,800oz, nearly double the amount produced in Q2 2012 (16,200oz) and 32% higher than in the whole of H1 2012 (24,100oz). This was due to the commissioning of a second 1.8Mtpa processing line in June 2012, which ramped up to full capacity during Q3 2012..

During September, mining at Albyn was hampered by severe wet weather which made access to the pit and dumps difficult. However, this is not expected to have a material effect on the mine's ability to reach its full-year production target.

Group operations report: Alluvial production

During the first nine months of 2012, gold production from the Group's alluvial operations totalled 84,700oz in line with production for the comparative period in 2011 (82,700oz). Of this amount, 58,500oz were produced in Q3 2012, also in line with production for the comparative period in 2011 (60,000oz).

Development of the Pressure Oxidation Hub

During Q3 2012, significant progress was made towards the creation of the Group's Pressure Oxidation Hub at the Pokrovskiy mine and the related flotation plant at the Malomir mine. The Group continued to work in association with Outotec (Finland) Oy ("Outotec") on the project, engaging leading international manufactures for the supply of equipment.

At Pokrovskiy, construction and installation work progressed in accordance with the schedule. The main body of the oxygen plant building has now been completed and the installation of equipment has commenced. Construction on the autoclave building is continuing.

During Q3 2012, Shanghai Morimatsu Pressure Vessel Co. Ltd completed the manufacture of the four autoclaves, eight flash tanks and eight receivers required for processing flotation concentrate from Malomir and specialists from DSB Saurebau GmbH fitted the eight flash tanks with the required polymeric membranes. All equipment was independently tested prior to shipping to Pokrovskiy in two consignments. Four flash tanks and four receivers have already been delivered. Two autoclaves have passed through customs at the port in Vladivostok, are being transported to the Pokrovskiy site by rail and are expected to arrive at the station in Tygda, a town near Pokrovskiy, within three weeks. Separately, 59 containers of equipment manufactured by DSB Saurebau GmbH for the inner lining of the autoclave vessels and eight containers from Shanghai Mortmatsu have also been dispatched. Of these, 30 containers have already arrived on site and the remainder have arrived in Vladivostok for customs clearance and will be transported by road. This equipment will be installed under the supervision of specialists from Outotec and DSB Saurebau GmbH. The further two autoclaves, four flash tanks and four receivers will be dispatched by the end of the month. The thickeners, press-filters, valves, high pressure pipes and reactors are being prepared for dispatch during Q4 2012 and Q1 2013. Additional items of equipment will be delivered in 2013, as per the project schedule prepared in conjunction with Outotec and the Group's selected contractors.   

At Malomir, the main structure of the flotation plant building has been completed and the Group anticipates that this facility will be in place to produce flotation concentrate from Q1 2013.

Exploration

Exploration during Q3 2012 has continued to focus on areas close to the Group's existing processing facilities.

Pioneer

At the Group's flagship mine, Pioneer, exploration in Q3 2012 continued to deliver positive results. The Group's programme focussed on establishing new reserves and resources and the identification of potential new targets.

As a result of exploration conducted during 2010, in Q1 2011 the Group established JORC-compliant Mineral Resources for the Nikolaevskaya zone. During Q3 2012, the Group continued to drill this area on a 50mx50m grid spacing. The results received to date have been very promising, with grades varying from 1.0g/t to 13.7g/t Au and the apparent thickness varying from 1.5m to 17m. As the zone remains open in a down-dip direction, having been explored to a depth of 180m, the Group's geologists consider this area to be very prospective. Work in Q4 2012 will focus on incorporating this area into the Group's reserves and resources statement.

During Q3 2012, exploration also continued at Alkagan-Adamovskaya, a licence area acquired by the Group in 2010 which surrounds the main Pioneer site. Drilling confirmed the presence of a gold-bearing zone previously identified as a potential exploration target by geochemical survey. The new zone is situated 3km north from the high-grade NE Bakhmut zone currently being mined by the Group. Group geologists believe the part of the zone yet to be explored offers significant exploration potential and could hold higher-grade pay shoots.

During Q3 2012, exploration also continued at Alkaganskiy, an area situated 10km north-north-west from the Yuzhnaya zone. Drilling was undertaken to verify previously known geochemical anomalies. The best intersection identified so far indicated a grade of 7.1g/t at an apparent thickness of 1.2m.

Malomir

Exploration continued to focus on potential non-refractory zones of mineralisation which could be processed in the current resin-in-pulp plant at Malomir before its conversion to refractory ore processing. As a result of this strategy, additional non-refractory mineralisation was identified in zones west of Ozhidaemoye deposit. A preliminary internal resource estimate suggests 700kt of ore at an average grade of 3g/t Au (c.65,000oz of contained gold). The zones are still open in the eastern direction.  Further non-refractory resources are being explored near the Central open pit and within zones numbers 40, 46 and 47 near Quartzitovoye pit. The results of this work are expected to be incorporated in the Group's reserves and resources statement.  

Pokrovskiy

Zheltunak

Zheltunak is an ore body 20km from the Pokrovskiy plant. In Q3 2012, exploration at Zheltunak identified a new, previously unknown mineralised zone, situated approximately 1km south-east from Zapadnaya, a zone mined in H1 2012. The new zone is a shallow dipping structure situated 14m to 40m below the surface and potentially suitable for open-pit extraction. The zone has been drilled on a 20mx20m drill spacing and the results are being interpreted and incorporated into a new resource model and estimate.  Drill intersections include 8.3m at 2.33g/t, 5.6m at 1.21g/t, 12.9m at 1.88g/t with some assays still pending. The Group expects to incorporate this zone into the 2013 mine plan for Pokrovskiy.

Albyn

Elginskoye

During Q3 2012, exploration continued at Elginskoye, a highly prospective 325km² licence area 15km west of the RIP processing plant at Albyn. The Group conducted its first metallurgical tests on the Elginskoye and Grozovoye zones within the licence area, confirming that mineralisation is amenable for cyanidation with estimated recoveries of between 70-96% to a depth of at least 30-50m.  Exploration has indicated some very promising grades.

Karginskoye

Kharginskoye is a licence area which boarders Albyn to the south. Exploration of this licence area has previously identified several "Albyn-style" zones of mineralisation, which could be suitable for processing in the current RIP plant at Albyn.

During Q3 2012, exploration focused on the eastern extensions of known Albyn zones and also zones south of the Albyn open pit. Assay results from this work are still pending.

Nimanskaya

During Q3 2012, the Group continued exploration of Nimanskaya, a licence area 90km south of Albyn. Nimanskaya is a well-known area of extensive alluvial mining with historical production exceeding 3Moz of gold, thus the area is considered to be very prospective for the discovery of bulk, hard-rock gold deposits suitable for open pit extraction. Exploration of this area remains at an early stage however the results received to date have been encouraging.

IRC Update

Petropavlovsk holds a majority stake in IRC, the Group's former Non-Precious Metals Division prior to its listing on the Stock Exchange of Hong Kong Limited.

Third Quarter Trading Update

IRC is intending to release its third quarter trading update on 18 October 2012. The update will include details of production at the Kuranakh Mine and a progress update on the construction of the K&S Mine.. Further information may be obtained from the IRC website, www.ircgroup.com.hk.

Completion of Bolshoi Seym transaction

During the Period, IRC announced the completion of the transaction to acquire the remaining 51% ownership of the high-grade ilmenite Bolshoi Seym deposit resulting in 100% ownership. Its geology is attractive, with the deposit containing approximately 331.5Mt of reserves and resources and located adjacent to IRC's established Kuranakh mine, suggesting potential for economies of scale and synergies.

Molybdenum exploration

During the Period, IRC announced that it had completed an agreement to acquire a controlling 50% plus one share stake and acquired an option over all remaining shares in a molybdenum exploration project situated in the Amur Region. This is a low cost entry into a new project with significant exploration upside. The acquisition will provide IRC with an attractive industrial commodity development opportunity whilst enhancing its commodity and regional diversification.

Corporate update

Dividend payments

As previously announced, on 26 July 2012, the Company paid a final dividend for the 2011 financial year of ?0.07 per share to shareholders on the register as at close of business on 29 June 2012. On 8 November 2012, the Company will pay an interim dividend of ?0.05 per share to shareholders on the register as at close of business on 5 October 2012.

US$380,000,000 4 per cent Guaranteed Convertible Bonds due 2015 (the "Bonds")

The articles of association (the "Articles") of Petropavlovsk 2010 Limited, the issuer of the Bonds, and a subsidiary of Petropavlovsk, provide for adjustments to be made to the exchange price of the Bonds (the "Exchange Price") if a capital distribution is paid or made to holders of ordinary shares of the Company, provided that such adjustment (rounded down if applicable) would be equal to, or more than, 1 per cent of the Exchange Price then in effect. As a result of the payment by the Company of cash dividends to shareholders, an adjustment to the Exchange Price was made pursuant to Condition 8(b)(iii) of the Terms and Conditions of the Bonds and Article 2.4.6(b)(i)(3) of the Articles. With effect from and including the first date on which the ordinary shares of the Company traded ex-the cash dividend on 3 October 2012, the Exchange Price was adjusted to ?12..21 (rounded down to the nearest ?0.01).  All other Articles and Terms and Conditions of the Bonds remain unchanged.

IMPORTANT INFORMATION

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

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","targets", "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, targets, 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 Russian 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.