23 April 2013

Interim Management Statement and Production Update for Q1 2013

Petropavlovsk PLC ("Petropavlovsk", "the Company", or, together with its subsidiaries, "the Group"), is today pleased to issue its Interim Management Statement for the period from 1 January 2013 to date, in accordance with the UK Listing Authority's Disclosure and Transparency Rules.

Key points:

n  During Q1 2013, the Group produced 136,800oz of gold, a record for Q1 and an increase of 13% on the comparative period in 2012;

n  The Group re-iterates its full-year production target of 760,000-780,000oz with unit costs per tonne of ore processed and per cubic metre of material moved for all hard-rock mines to remain approximately in line with 2012;

n  The pressure oxidation hub ("POX Hub") currently remains on track for commissioning in Q1 2014 and the related Malomir flotation plant remains on track for commissioning in Q3 2013;

n  Encouraging additional exploration results have been received from the Pioneer area;

n  The Company has launched a comprehensive cost-cutting programme and continues to review operating scenarios to accommodate a potential continuation of low gold prices;

n  Petropavlovsk has prepared effectively for the current volatility in the gold price via forward sales contracts and achieved a combined average selling price of US$1,639/oz in Q1 2013. Approximately 46-47% of the Group's forecast production over a period of 14 months ending March 2014 is hedged through forward sales contracts to be cash settled at an average price of US$1,663/oz;

n  Stage 1 of the equity investment into IRC Limited ("IRC") was completed in April 2013; Stage 2 remains on track for completion in Q3 2013;

n  Management believe that  the Company continues to operate within its financial covenants at current gold prices; and

n  The Group restates its plan to repay a substantial amount of its debt by 2019.

Chairman Peter Hambro said:

"Operationally, the year has begun positively for Petropavlovsk with output on track to achieve the previously guided production target.  

The focus for 2013-14 has been to complete our major capital spending programmes and then commence the process of driving down the debt incurred to pay for those projects. However, the sharp reduction in the gold price - which has fallen from approximately US$1,700/oz at the beginning of January to a recent low of US$1,380/oz - is causing us to review our short to medium term strategy. 

One option is to conserve cash by restricting discretionary capital and exploration expenditure whilst redoubling our efforts to move newly identified, non-refractory resources at Pioneer into mineable reserves so as to de-risk the production schedule for 2014 - the year of scheduled commissioning of the POX Hub - and perhaps for longer.

A further option would be a temporary slowdown of the implementation of the POX Hub and flotation plant at Malomir which would release greater amounts of cash and permit earlier debt repayment.  Under this scenario, the POX Hub would not be operational until 2015.

The Group's Operations Committee is currently holding its scheduled meeting in Blagoveschensk and is reviewing these and other scenarios in detail and the market will be updated on the final decision in due course.

The forward sale of half of our output, which has a further 11 months to run, allows flexibility in our decision making process."

Summary

Operational update for Q1 2013

n  The increase in production in Q1 2013 to 136,800oz of gold versus the comparative period in 2012 was due to an increase in gold produced at the Pioneer and Albyn plants, which were both expanded in Q2 2012;

n  Production at Malomir declined yoy in line with the Group's expectations as the mine moves to processing refractory ores;

n  Production from Pokrovskiy was lower than in the comparative period in 2012 as the mine draws closer to the conversion of its facilities into the POX Hub.

Gold sales

n  In February 2013, the Company announced that the Group had entered into forward contracts to sell at an average price of US$1,663/oz a total of 399,000oz of gold over a period of 14 months ending in March 2014, approximately 46-47% of the Group's forecast production for that period;

n  In Q1 2013, the Group sold c.146,400oz of gold (13% increase yoy) at an average price of US$1,639/oz (including the effect of its hedging position). The hedging position of the Group contributed an additional US$23/oz to realised gold price;

n  For the remainder of the year, the Group has in place forward sales contracts for a further 302,100oz of gold to be cash-settled at an average price of US$1,663/oz.

Development of the POX Hub

n  The development of the POX Hub and the related Malomir flotation plant is currently on track for commissioning in Q1 2014 and Q3 2013 respectively;

n  The Group is reviewing its short- to medium-term development plans for the POX Hub in response to the recent significant drop in the gold price. This may result in a delay to commissioning, but is not anticipated to materially impact production for the Group and would allow the Company to preserve cash.

Net Debt

n  Estimated consolidated Net Debt as at 31 March 2013 was US$1.2 billion, c.10% higher compared to 31 December 2012 and in line with the profitability profile of the Group, which is skewed towards the second half of the year, and its continuing investment programme;

n  In Q1 2013, the Group renegotiated repayment of certain bank facilities, shifting contractual maturity of approximately 50% of the debt principal previously repayable in 2014 (US$337.3 million as at 31 December 2012) to the years 2016 and 2017;

n  The Group's principal bank covenants are tested at half year and year end and none of them are directly related to the gold price. The Group currently trades within these covenants and a number of mitigating actions are available to the Group to maintain headroom against its covenants if the low gold price prevails.

Total cash costs

n  Group total cash costs for Q1 2013  for hard-rock mines were approximately US$950/oz;

n  The Group re-iterates that it expects 2013 unit costs per tonne of ore processed and per cubic metre of material moved for all hard-rock mines to remain approximately in-line with 2012 levels in spite of inflationary pressures;

n  In light of the processing of low-grade stockpiles, FY 2013 average total cash costs are expected to be US$900/oz - US$950/oz and that this will release a significant amount of working capital.  However the Group is working on new measures to reduce total cash costs in light of the lower gold price.

Exploration

n  During Q1 2013, exploration at Pioneer confirmed the presence of further high-grade, oxide mineralisation. The Group's geologists are working on defining mineral reserves in these areas;

n  At Albyn, Q1 2013 exploration identified extensions to the Elginskoye mineralisation. Exploration commenced on the Uglichikanskoye deposit, which is anticipated to become an additional source of high-grade ore for the current processing plant at Albyn;

n  At Malomir, exploration focused on two structures parallel to the high-grade Zone N55 at the Quartzitovoye deposit. Newly-identified resources are expected to extend RIP production into 2014..

Third-party investment into IRC

n  In January 2013, the Company announced that it had entered into agreements for a potential US$238 million equity investment in IRC by new shareholders;

n  Following approval of the Company's and IRC's shareholders, and with no further approvals outstanding, on 11 April 2013 the Group confirmed that General Nice Development Limited ("General Nice") had subscribed for 817,536,000 new IRC shares at a subscription price of approximately US$0.12 per IRC share, representing Stage 1 of the investment;

n  Stage 2 of the investment is the subscription by General Nice and Minmetals Cheerglory Limited (together the "Investors"), exercisable at the option of General Nice, of up to an additional 1,110,900,000 new IRC shares at a subscription price of US$0.12 per IRC share, for a total consideration of US$134.7 million. This is expected to be completed by the end of Q3 2013, as planned;

n  Upon completion of both transactions, the Company's stake in IRC would be reduced to c.40% with the new shareholders holding c.36% (provided no additional new shares are issued) and a pro-rata indemnity on the existing guarantee with the Industrial and Commercial Bank of China, reducing the Company's exposure under the guarantee, would be implemented.

Conference Call

There will be a conference call today to discuss the announcement at 08:30 BST.* 

To access the call, please dial +44 (0)20 3139 48 30.

Please then give the participant pin code 17756489# to be transferred to the call.

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

Enquiries

Operational Update: Pioneer

Pioneer continues to be the Group's flagship mine, producing 83,400oz of gold in Q1 2013, an increase of 27% compared to Q1 2012.

The increase in production at Pioneer compared to the comparative period in 2012 was due to an increase in the ore milled following the commissioning of the plant's fourth milling line in June 2012.

During Q1 2013, the average grade of the ore mined was 2.1g/t, an increase on the comparative period in Q1 2012. The ore mined was predominantly from the NE Bakhmut deposit. As planned, this ore was blended with lower grade stockpiles.  Processing the latter will create an artificially high TCC but is expected to release substantial working capital in 2013.

Operational Update: Pokrovskiy

During Q1 2013, Pokrovskiy produced 12,600oz of gold. This was slightly less than the amount produced in Q1 2012 (14,700oz) as the mine is being prepared for the conversion into the POX Hub in 2014.

During Q1 2013, total material moved at Pokrovskiy increased by 77% compared to the same period in 2012, reflecting the push back of the south wall at the Pokrovka 1 pit. Following this pushback, mining of ore at Pokrovka 1 is scheduled to commence in Q2 2013 with grades around 3g/t; the 59,000t of ore mined during Q1 2013 was from the Pokrovka 2 deposit.

It is anticipated that the processing of the higher-grade ore from the Pokrovka 1 deposit and the contribution from the mine's seasonal heap-leach facility will increase production from Pokrovskiy in Q2 2013 compared to Q1 2013.

Operational Update: Malomir

During Q1 2013, Malomir produced 17,200oz of gold in line with the Group's expectations as the processing of the Group's non-refractory ore winds down ahead of the commissioning of the flotation plant in Q3 2013.

Total ore milled in Q1 2013 was 636,000t, an increase of 50% compared to the comparative period in 2012, reflecting the expansion of the sorption line in Q1 2012. Nevertheless, gold recovered was less than in the comparative period in 2012 due to a scheduled decrease in head grade and a lower recovery rate of 66.1%, in line with H2 2012, as the mine continued to process some transitional ores.

Operational Update: Albyn

During Q1 2013, Albyn produced 23,600oz of gold, an increase of 199% on the comparative period in 2012, reflecting the fact that the mine is now working to its full capacity.

During Q1 2013, grades mined and processed were 1.0g/t and 0.9g/t respectively. This was lower than in the comparative period in 2012, when the grades mined and processed were 1.7g/t and 1.4g/t respectively. However, it is expected that grades will significantly increase in H2 2013 once planned stripping work has been undertaken. To assist with this stripping work, two new 15m³ excavators are being deployed in Q2 2013.

During Q1 2013, the recovery rate at Albyn was 92.1%. This was in line with the Group's expectations as Albyn ore is highly amendable to direct cyanide treatment.

Development of the POX Hub

Construction work at the POX Hub at Pokrovskiy has been progressing according to schedule and the project currently remains on track for commissioning in Q1 2014.

During Q1 2013, the structure of the autoclave building was largely completed and the four autoclaves were installed on their foundations. Work has now commenced on the foundations for the neutralisation building.  

At Malomir, construction on the related flotation plant has been progressing and the plant currently remains on schedule for commissioning in Q3 2013.

The Group is reviewing its short- to medium-term development plans for the POX Hub and Malomir flotation plant in response to the recent significant drop in the gold price. This may result in a delay to commissioning, but is not anticipated to materially impact production for the Group and would allow the Company to preserve cash.

Exploration

Pioneer Area

During Q1 2013, exploration work at Pioneer continued on the highly promising Otvalnaya, Shirokaya, Alexandra and Perspektivnaya zones which appear similar to high-grade Nikolaevskaya, Andreevskaya and Bakhmut ore bodies. All four zones are located at, or near, the surface and should be amenable for low-cost, open-pit mining and can be quickly brought into production. They are expected to contain non-refractory mineralisation, suitable for processing at the existing RIP plant and heap-leach facility.

The data from this exploration work is expected to be included in the next Group's JORC mineral resource statement. 

Albyn Area

On-going exploration extended the known mineralisation at Elginskoye by 320m in a western direction. At the western side of the ore body, potentially-economical mineralisation has also been extended 400m in down dip direction.

Drilling commenced at the Uglichikanskoye deposit which is situated c.14km north-east of the RIP plant at Albyn. With its historical mineral resources of c.600,000oz at c.4.2g/t Au, it is anticipated that Uglichikanskoye will become an additional source of high-grade ore for the current processing plant at Albyn.

Malomir Area

Exploration continued east of the Quartzitovoye pit on the two north-south striking structures parallel to the high grade zone No 55, that has been a primary non-refractory mining target at Quartzitovoye. It is expected that exploration at these zones will be completed during the remaining months of 2013 and that they will be included in the production plan during 2013 allowing for extension of oxide production at Malomir into 2014.

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.