IRC Limited — Interim / Quarterly Report 2014

Apr 23, 2014

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement. The information set out below in this announcement is provided for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for shares in the Company.

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(Incorporated in Hong Kong with limited liability) (Stock code: 1029)

IRC: FIRST QUARTER TRADING UPDATE TO 31 MARCH 2014

Wednesday 23rd April 2014. IRC Limited (Stock Code 1029) (‘‘IRC’’ or the ‘‘Company’’, together with its subsidiaries, the ‘‘Group’’) today announces its Trading Update for the First Quarter of 2014, to 31st March 2014.

SUMMARY

IRC is pleased to announce a strong start to 2014 with quarterly production exceeding annualised targets at the Kuranakh Mine, and good progress at K&S ahead of first production later this year.

At Kuranakh 253,616 tonnes of iron ore concentrate and 40,928 tonnes of ilmenite were produced during the first quarter 2014. This is equal to 28% of the 900,000 tonnes annual iron ore target and 26% of the 160,000 tonnes annual ilmenite target.

Construction activities at K&S continue to progress well, with a noticeable ramp-up at the end of March and into April as spring arrives in the Far East of Russia. Development remains on track for first commercial production during the second half of 2014. Plant contractor CNEEC indicated that there soon will be approximately 700 workers on site, working around the clock.

GROUP HIGHLIGHTS

• . Kuranakh celebrates over 3 million tonnes of iron ore production since operations commenced

• . First quarter iron ore production exceeds annualised target — production lower than first quarter 2013 due to exceptional grade ore during that period

• . First quarter ilmenite production exceeds annualised target

• . Construction and mine development at K&S on track for first commercial production during second half of 2014

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Commenting on the performance in the First Quarter, Jay Hambro, Executive Chairman of IRC, said:

‘‘I believe we can be proud of our performance in 2013 and I am pleased to report that this is continuing into 2014 with a good quarter in terms of both production and construction activities. As we celebrate iron ore production of over 3 million tonnes from Kuranakh we can report good yields and grade, partly as a result of pit optimisation carried out over the past twelve months. We are nearing completion at K&S and construction works are picking up pace. CNEEC has commenced a programme to move toward twenty-four hour workdays and this will increase progress accordingly. With this commitment from CNEEC, we remain confident in our ability to deliver commercial production during 2014.

The iron ore and ilmenite markets remain interesting places to operate within. Iron ore has seen short term volatility at almost unprecedented levels but we believe the longer term fundamentals remain positive. We hope that the ilmenite market will not remain at the ongoing depressed levels for the remainder of the year as the long-term repercussions could result in considerable issues for end users.’’

RESULTS SUMMARY

	Products	Q1 2014	Q1 2013	Change
Production (tonnes)	Iron Ore (62.5% Fe)	253,616	280,837	–10%
	Ilmenite (48% TiO2)	40,928	40,933	0%
Sales (tonnes)	Iron Ore (62.5% Fe)	262,212	273,002	–4%
	Ilmenite (48% TiO2)	22,032	32,248	–32%*

• Reduction in sales is primarily due to concentrates in transit to IRC warehouses at Chinese ports as part of a new sales strategy.

There will be a conference call today at 10h00 Hong Kong time to discuss the First Quarter Trading Update. The number is +852 2112 1700 and the passcode is 1412023#. Presentation slides to accompany the call are available at ircgroup.com.hk. A replay call will be available from 24 April 2014 at www.ircgroup.com.hk.

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MARKETING

Chinese demand for iron ore for the first quarter started strong as end-users built stocks ahead of the Chinese winter and the Chinese New Year. Following the Chinese New Year, many steel mills destocked sending prices considerably lower. The destocking cycle this year was deeper than in the past due to liquidity constraints in China. Despite the buildup of port inventories that ensued, prices improved at the end of March and into April. IRC sold all of the iron ore that it produced in addition to some inventories to customers in Heilongjiang, suggesting good demand for IRC iron ore concentrate. Discussions with potential customers for K&S and Garinskoye products continue, with a wide variety of interest by end-user type and geography.

Chinese demand for imported ilmenite concentrate deteriorated in the first quarter of 2014. Chinese TiO2 producers preferred to buy local ilmenite concentrates, thus cutting down their expenses. Despite this trend many of them show significant interest in IRC ilmenite due to its high quality, and current availability in Chinese ports. Moreover, negotiations and trial shipments with several new potential customers are ongoing.

IRC has commenced a programme of Chinese domestic ilmenite sales to capture a greater profit margin and provide its superior quality product to a broader customer group. IRC has shipped considerable tonnage of finished product to Qingdao, Zhenjiang and Ningbo ports and has begun selling the material from warehouse space. To date we believe this has been a constructive exercise and will continue to trial this strategy as a complement to the existing Russian, Chinese and international sales methods.

Sales Volumes

Sales volumes for Q1 2014 were good with all production and some inventories being sold. A total 262,212 tonnes of iron ore was sold, a 4% decrease compared to the same period last year and 22,032 tonnes for ilmenite; in addition to the readiness of material for sale from Qingdao and Zhenjiang.

A reduction in ilmenite sales was recorded, primarily due to concentrates in transit to IRC warehouses at Chinese ports as part of the new ilmenite sales strategy.

Prices

The benchmark iron ore price for delivery to China averaged just over US$120 per tonne, about 11% lower than the fourth quarter 2013 and 18.2% lower than the first quarter 2013. Sales for IRC iron ore concentrate from the Kuranakh Mine are secured under a long-term offtake agreement and prices are calculated on the INCOTERM ‘‘DAP’’ (Delivered at Place) basis. During the quarter, the average achieved selling price for iron ore was US$114 per tonne, a 3% decrease compared to US$118 per tonne in the previous quarter and a 11% decrease compared to the US$128 per tonne in the first quarter to 2013. The price formula is based on averages for preceding periods and therefore lags the spot price.

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The price for ilmenite concentrate (a titanium dioxide product) continued to be weak into early 2014. The market for ilmenite is characterised by few producers with limited supply, demand and pricing information. Consequently, whilst IRC has disclosed it’s quarterly achieved selling price, IRC’s customers have requested that such frequent disclosure be reduced, and consequently, IRC will now only disclose the average achieved selling price every six months.

Average Monthly Tianjin Iron Ore Spot Price, April 2013 to March 2014 (US$/t)

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Source: Bloomberg

Note: This is a generic China 62% Fe CFR market price for iron ore and not the actual price achieved by IRC.

IRC together with General Nice and Minmetals Cheerglory have entered into a conditional 15-year offtake arrangement covering production from K&S, Garinskoye and future projects. IRC has full discretion to sell by either a dry-port or a seaborne arrangement. The Dry-Port Arrangement will incur a 5% marketing fee on sales revenue payable to the Chinese strategic investors and subject to a 65% cap, i.e. sending 100% of material to the dry-port incurs a 3.25% fee. Alternatively, IRC may choose to sell its products via the seaborne market with a guaranteed take-or-pay off-take arrangement thereby providing flexibility and a guaranteed revenue stream if it is considered preferable to sell its concentrates via the seaborne market. Using this option, concentrate would be sold at the then prevailing Platts CFR China price subject to a 7% discount.

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During the quarter the Rouble weakened against the US Dollar, opening at 33.1 and closing at 35.2 to the dollar, though having risen to 36.6 in mid-March. The weakness was due to geo-political uncertainty in the Ukraine and Crimea and ongoing inflation concerns.

Russian Rouble — US Dollar Rates April 2013 to March 2014

Source: Bloomberg

Outlook

Positive conjecture around Chinese urbanisation and infrastructure development following the Third Plenary Session of the 18th CPC Central Committee in November 2013 and a potential mini-stimulus have buoyed markets and lifted prospects for stronger demand in steel and therefore iron ore. Ongoing supply constraints due to geological, production, infrastructure and financing challenges will continue to hinder overly optimistic supply growth forecasts in the long-term. Concerns around the capital liquidity and current high interest rates in China could also limit the availability of credit for iron ore trading in the short-term and Chinese project financing in the long-term, thereby giving rise to price volatility. Commentators suggest that this does not necessarily reduce consumption, but instead tightens it on a short-term basis.

With these factors in mind and cognisant of the downside risks, we continue to believe that the iron ore market remains robust, and should provide support for prices further into 2014.

With the current depressed market for ilmenite, IRC is considering reducing production levels or simply stockpiling finished product to preserve margins.

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OPERATIONS

Kuranakh (100% owned)

Kuranakh celebrated a new milestone during the first quarter when it achieved 3 million tonnes of iron ore production since operations began. Kuranakh is the first vertically integrated titano-magnetite operation in Russia, operating in a remote location with harsh winters. This achievement is testament to the hard work of the Kuranakh labour force, and demonstrates that IRC has the skills and experience to bring on its larger K&S operation later in 2014.

Kuranakh is located in the Amur Region of the Russian Far East comprises both the original Saikta open pit and the more recently established Kuranakh open pit processing facilities and an onsite railway spur connecting to the BAM and Trans-Siberian Railways.

Mining

During the first quarter, mining production and development activities progressed well. Mining works were conducted in accordance with the revised mining plan, keeping the grades and consequently production yields on a stable level. Production for the quarter was 854,901 tonnes of ore removed, 29% more than the 663,164 tonnes removed in first quarter 2013. Whilst operational efficiency did improve, the majority of the increase was due to only a partial downscale of mining operations during the Christmas and New Year period compared to last year when mining operations were temporarily suspended.

Processing & Production

For the quarter, the Kuranakh Crushing and Screening Plant processed 956,900 tonnes of iron ore with a grade of 26.4% Fe and 8.1% TiO2, producing 490,456 tonnes of pre-concentrate. Stockpiles totalled 402,009 tonnes, equivalent to 38 days feed.

At the Olekma Processing Plant a total 475,178 tonnes of pre-concentrate was processed, resulting in production of 253,616 tonnes of iron ore, and 40,928 tonnes of ilmenite concentrate.

2014 Production Targets

With good progress at Kuranakh already achieved during the first quarter, it is encouraging to report that mine production is comfortably on track to achieve annual production targets. For the first quarter 2014, 253,616 tonnes of iron ore concentrate was produced, 28% of our annual target. The increase in production capacity of ilmenite to 160,000 tonnes is complete. Ilmenite production was 40,928 tonnes in concentrate for the quarter, 26% of the annual target.

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Costs

Russian inflation decreased marginally, though continues to run high at approximately 6.2% during the first quarter. Following the reduction in transportation costs in 2013, cost-saving initiatives in both production and administrative expenses are ongoing.

First Quarter 2014 & 2013 Production and Sales

		Q1 2014	Q1 2013	Change
Production (tonnes)	Iron Ore (62.5% Fe)	253,616	280,837	–10%
Sales (tonnes)	Iron Ore (62.5% Fe)	262,212	273,002	–4%
Average Price (Fe 62.5%)	US$/t	US$114/t	US$128/t	–11%
Production (tonnes)	Ilmenite (48% TiO2)	40,928	40,933	0%
Sales (tonnes)	Ilmenite (48% TiO2)	22,032	32,248	–32%

K&S (100% owned)

Construction activities at K&S continue to progress well through the first quarter.

Mining

Stripping and mining rates intensified through the first quarter following the mobilisation of a local contractor in the fourth quarter 2013. The contract covers both mine development and preparation of stockpiles ahead of commercial production, and full-scale ore production thereafter.

A total 946,830 m[3] of material was removed resulting in a total of 11.7 million m[3] of material moved to date of the required 14.5 million m[3] of overburden required ahead of the operation start-up, and comfortably in-line with the mine plan at this stage.

At the end of the quarter, ore stockpiles ready to feed the processing plant increased by 991,700 tonnes to a total 2,943,250 tonnes, representing approximately 92% of the required start-up stockpile. This is a solid achievement and provides comfort that the mine will be ready for the start-up of plant operations and demonstrates IRC’s ability to prepare a larger scale open-pit mining operation.

Processing Plant

Good progress was made during the quarter with the processing plant building. Progress over the quarter includes:

Main Processing Building: Overall completion progress is estimated to be 76%. Indoor equipment foundations and platforms are nearly completed; main technological equipment including installation of the ball mills is on track for early installation in the second quarter.

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Primary Crushing Building: Overall completion progress is estimated to be 66%. The building is fully covered and indoor works are in process; primary crushing equipment, in particular the jaw crushers and feeders have been installed.

Ore Sorting Building: Overall completion is estimated to be 78%. The building is fully covered and equipment foundations are close to completion. All equipment is now on site and scheduled to be installed during the second quarter.

Secondary and Fine Crushing Ore Building: Overall completion progress is estimated to be 63%. All equipment, including the cone crushers is on site and is ready for installation during the second quarter.

Dry Magnetic Separation Building: Overall completion progress is estimated to be 53%. The internal equipment foundations are in progress; and all equipment is on site ready for installation during the second quarter.

IRC is targeting commercial production at K&S during the second half of 2014; a formal production target will be provided nearer the time.

Garinskoye (99.6% Owned)

The Garinskoye Project is located in the Amur Region of the Russian Far East, approximately 190 kilometres from the Chinese border. Following updated exploration work completed over the last 4 years, a JORC-compliant mineral resource of 177mt at 33.4% Fe on an indicated basis and a further 86mt at 32.5% on an inferred basis were established. The original intention was to build a large-scale open-pit mining 10mt and yielding 4.6mt of concentrate for 20 plus years. Whilst IRC still intends to develop a large mining operation, due to capital constraints, an intermediate plan to exploit value in the near-term with a smaller scale DSO-style operation has been developed.

The full Bankable Feasibility Study for the revised DSO-style operation has been undertaken and once third-party verification and a fatal flaws analysis are completed, it will be announced. In the meantime, potential funding opportunities are ongoing, with several potential project partners having been identified and a full expression of interest for project financing received from a multi-lateral banking institution. The Company intends to announce funding options during mid-2014.

Corporate Update

In January 2013, IRC announced a two-stage transaction for a US$238 million subscription for new shares by strategic Chinese investors General Nice and Minmetals Cheerglory.

Stage 1, which completed in April 2013 involved the subscription by General Nice of 851,600,000 new shares (including the deferred issue of 34,064,000 new shares), for HK$800.5 million (approximately US$103.3 million).

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Stage 2, for a further subscription of an additional 863,600,000 new shares, for a consideration of approximately HK$811.8 million (approximately US$104.7 million) by General Nice and subsequently a subscription by Minmetals Cheerglory for 247,300,000 new shares for HK$232.5 million (approximately US$30.0 million). In October 2013, General Nice provided an irrevocable notice for the exercise of the Stage 2 subscription, and following an agreed delay for completion, a personal guarantee was received in November from the General Nice Chairman to complete by the end of December 2013. Regrettably, liquidity constraints in China, as documented in the international press, have resulted in General Nice’s present ability to only partially complete Stage 2, with the subscription of 218,340,000 new Shares for HK$205.2 million (approximately US$26.5 million) at the end of December 2013 and a further subscription of 165,000,000 new Shares for HK$155.1 million (approximately US$20 million) in February 2014. Consequently, General Nice has already invested over 70% of its total commitments to date.

Once General Nice has completed in full its Stage 2 subscription, Minmetals Cheerglory, under the terms of the agreements, may also invest. As long-term strategic investors, IRC recognises the challenges faced by General Nice raising the additional subscription capital at present, and whilst the Company is cognisant of its legal rights under the agreements and the personal guarantee from General Nice, it does not want to frustrate the good relations with General Nice and therefore is working with General Nice to agree a timely funding plan. Please refer to the ‘‘General Nice Further Subscription Update’’ announcement of today for more details.

The proceeds from the subscription are being used for the continuing development of the K&S Project and for the consideration of the Board to advance with the development of the Garinskoye Project, thereby unlocking the value in IRC’s extensive portfolio of development projects. The transaction also includes off-take and marketing arrangements, providing IRC with both sales volume and cash-flow security.

Following completion of the first stage of the transaction the Board announced the appointment of Mr Cai Sui Xin, Chairman of General Nice and Mr Liu Qingchun, Managing Director of Minmetals Cheerglory Limited as non-executive Directors of the Company.

Petropavlovsk will continue to remain a controlling shareholder of the Company as defined under the Listing Rules, and based on the prevailing applicable accounting standard, the Company will continue to be treated as a subsidiary of Petropavlovsk. As a consequence, the Guarantee Fee under the Recourse Agreement will only become payable by the Company to Petropavlovsk when completion of the General Nice Further Subscription and Minmetals Cheerglory Subscription occurs.

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RISK FACTORS

The Group is exposed to a variety of risks and uncertainties which could significantly affect its business and financial results. From the Board, to executive and operational management and every employee, the Group seeks to undertake a pro-active approach that anticipates risk, seeking to identify them, measure their impact and thereby avoid, reduce, transfer or control such risks. The Group’s view of the principal risks that could impact it for the remainder of the current financial year are substantially unchanged from those of the previous years. A summary of these key risks is set out below:

• . Operational risks such as delay in supply of/or failure of equipment/services/contractors and adverse weather conditions.

• . Financial risks such as commodity prices, exchange rate fluctuations, funding and liquidity and capital programme controls.

• . Health, safety and environmental risks such as health and safety issues, legal and regulatory risks, licences and permits, restatement of reserves and resources, and non-compliance with applicable legislation.

• . Legal and Regulatory risks such as country-specific risks.

• . Human Resources risks such as the ability to attract key senior management and potential lack of skilled labour.

This should not be regarded as a complete or comprehensive list of all potential risks that the Group may experience. In addition, there may be additional risks currently unknown to the Group and other risks, currently believed to be immaterial, which could turn out to be material and significantly affect the Group’s business and financial results.

By Order of the Board G. JAY HAMBRO Executive Chairman

Hong Kong, People’s Republic of China Wednesday, 23 April 2014

As at the date of this announcement, the Executive Directors of the Company are Mr G. Jay Hambro, Mr Yury Makarov, and Mr Raymond Kar Tung Woo. The Non-Executive Directors are Mr Simon Murray, CBE, Chevalier de la Légion d’Honneur, Mr Cai Sui Xin and Mr Liu Qingchun. The Independent Non-Executive Directors are Mr Daniel Bradshaw, Mr Jonathan Martin Smith and Mr Chuang-Fei Li.

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For further information, please contact:

Nicholas Bias

Head of Communications Telephone: +852 2772 0007 Mobile: +852 9088 1029 Email: nb@ircgroup.com.hk

Shirly Chan (中文查詢) Investor Relations Co-Ordinator Telephone: +852 2772 0007 Mobile: +852 6623 3450 Email: sc@ircgroup.com.hk

Registered Office

IRC Limited 6H, 9 Queen’s Road Central Hong Kong Office: +852 2772 0007 Fax: +852 2772 0329 Email: ir@ircgroup.com.hk Website: www.ircgroup.com.hk

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