IRC Limited — Interim / Quarterly Report 2015

Oct 12, 2015

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)

THIRD QUARTER TRADING UPDATE FOR THE THREE MONTHS ENDED 30 SEPTEMBER 2015

CONFERENCE CALL

A conference call will be held today at 09h00 Hong Kong time to discuss the third quarter trading update. The number is +852 2112 1700 and the passcode is 3869012#. Presentation slides to accompany the call are available at ircgroup.com.hk. A replay call will be available from 13 October 2015 at www.ircgroup.com.hk/html/ir_call.php.

Monday, 12 October 2015: The Board of Directors of IRC Limited (“IRC” or the “Company”, together with its subsidiaries, the “Group”) is pleased to provide the Third Quarter Trading Update for the three months ended 30 September 2015.

HIGHLIGHTS

• K&S commissioning phase continues. First stage of crushing and screening has now been successfully hot tested, remaining parts of the project flowsheet are now moving toward completion with rail infrastructure and second stage of crushing and screening expected shortly.

• K&S construction contractor has advised new schedule of completion which will delay commencement of full production at K&S. IRC is assessing and negotiating schedule with contractor to make sure of viability and to analyse remedies. IRC will advise on the 2016 production forecast in the Fourth Quarter Trading Statement.

• Third quarter production at Kuranakh exceeded the annualised target however the strategic review of Kuranakh’s future is ongoing. Kuranakh has reached a positive discussion point with one of its leading customers for the use of a pricing formula which could allow Kuranakh to operate in a cashflow breakeven position for a period of 6 months.

THIRD QUARTER TRADING UPDATE

FOR THE THREE MONTHS ENDED 30 SEPTEMBER 2015

IRC is pleased to announce a solid quarterly production performance at the Kuranakh Mine.

At Kuranakh, 264,418 tonnes of iron ore concentrate and 48,303 tonnes of ilmenite were produced during the third quarter. Accumulatively, 830,767 tonnes of iron ore concentrate and 144,005 tonnes of ilmenite were produced respectively for the nine months ended 30 September 2015. This is equal to 92% of the 900,000 tonnes annual iron ore target and 90% of the 160,000 tonnes annual ilmenite target.

Iron Ore (62.5% Fe) Production (tonnes) Sales (tonnes) Average Price (US$/t) Ilmenite (48% TiO2) Production (tonnes) Sales (tonnes) Average Price (US$/t)	Q3 2015 Q3 2014 Change 264,418 252,974 +5% 252,124 272,817 -8% 51 83 -39% 48,303 45,657 +6% 44,494 46,196 -4% N/A N/A N/A*	YTD Sept 2015 YTD Sept 2014 Change 830,767 756,845 +10% 787,172 789,873 0% 53 98 -46% 144,005 132,350 +9% 155,062 115,396 +34% N/A N/A N/A*

• Quarterly Ilmenite ASP not disclosed for commercial reasons

Commenting on the third quarter performance, Jay Hambro, Executive Chairman of IRC, said: “We are fortunate that Kuranakh continues to work well at the reduced unit cost and that its production is sufficiently attractive that in difficult markets it is now able to operate in a cashflow breakeven position for at least 6 months.

Whilst there is significant progress at the K&S site to report, we are frustrated by the slow progress of construction at K&S and the receipt of a new delayed schedule from CNEEC making this year’s production target of 500,000 tonnes unachievable. We are reviewing the viability of the renewed programme and looking for options to accelerate the construction intensity, and to determine the time when the plant will have ramped up to its full design capacity. Based on our current preliminary estimates, the high case is Q1 2016, and low case is Q2 2016.

The bulk commodity markets remain a troubled area but even at these depressed levels the K&S mine will be capable of achieving a significant operating margin so we shall continue to realise all our energies toward getting it into production as quickly and efficiently as possible. We are pleased to report the successful completion of the open offer by IRC in August with net proceeds about US$50 million, providing the necessary funding for the full completion of K&S.”

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MARKETING, SALES AND PRICES

Iron Ore

Sales for 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, IRC’s average achieved selling price for iron ore was US$51 per tonne, a 4% increase compared to US$49 per tonne in the previous quarter and a 39% decrease compared to the US$83 per tonne in the third quarter 2014.

While the strategic review of Kuranakh mine is still ongoing, Kuranakh has succeeded in reaching a positive discussion point with one of its leading customers for the use of a pricing formula which could allow Kuranakh to operate on a cash flow breakeven position for at least 6 months. This agreement is governed by a memorandum of understanding and has been operational since the beginning of September.

Sales volume of iron ore totalled 252,124 tonnes in the third quarter of 2015, a 8% decrease compared to the same period last year and 10% behind the previous quarter due to some short interruptions with wagons traffic in late August-early September, caused by heavy rains and flooding. That problem was resolved and normal traffic was fully restored mid of September. Kuranakh expects that it will be able to ramp up with planned annualised shipments volumes in October.

During the third quarter, the iron ore price dipped to the lowest price of US$44 per tonne in early July but recovered quickly and rallied around US$55 per tonne throughout the quarter. Despite investors’ worries about China’s slowing economy and also oversupply in the market, unlike many analysts’ forecasts, the iron ore price did not fall as low as US$40 per tonne. Falling port stockpiles in China and supply disruptions due to tropical cyclones have helped iron ore prices stabilise in the quarter.

Average Monthly Tianjin Iron Ore Spot Price

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US$/t
150
$128
$121
$112 [$115]
$101
100 $93 $96 $93
$82 $80
$73
$69 $67
$63 $60 $62
$57 $51 $52 $55 $56
50
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
2014 2015
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Ilmenite

During the third quarter, ilmenite sales totalled 44,494 tonnes, a 4% decrease compared to same period last year. The ilmenite market is less transparent than other commodities but its relatively depressing outlook is in line with the sentiment of the commodities market as a whole. For commercial reasons IRC does not publish quarterly prices. We hope that the market fundamentals will not support further declines in the price and note some encouraging signs of potential demand growth. However IRC remains conservative in budgeting and planning.

Foreign Exchange

During the quarter, Rouble continued to remain weak following the sharp depreciation against the US dollar in December 2014. This partly offsets the effects of falling iron ore prices. With the Group’s operating costs mainly in Roubles and revenues mainly in US Dollars, this has resulted in a positive impact on our operating margins.

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75 USD: RUB
70
65
60
55
50
45
40
35
30
25
20
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
2014 2015
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OPERATIONS

Kuranakh (100% owned)

Kuranakh is located in the north-east Tynda District of the Amur Region of the Russian Far East and comprises both the original Saikta open pit and the later established Kuranakh open pit processing facilities and an onsite railway spur connecting to the BAM and Trans-Siberian Railways. The Kuranakh Mine is the largest regional employer, bringing a much needed boost to the local economy through fiscal contributions and stakeholder and biodiversity conservation programmes.

Ilmenite product to be loaded to wagons for shipment to IRC’s customers

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Magnetic Separators at Olekma Processing Plant in Kuranakh

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Production and Financials

At Kuranakh, 264,418 tonnes of iron ore concentrate and 48,303 tonnes of ilmenite were produced during the third quarter. Accumulatively, 830,767 tonnes of iron ore concentrate and 144,005 tonnes of ilmenite were produced respectively for the nine months ended 30 September 2015. This is equal to 92% of the 900,000 tonnes annual iron ore target and 90% of the 160,000 tonnes annual ilmenite target.

While the cash cost of production at Kuranakh has been significantly lowered compared to a year ago thanks to our successful cost optimisation programme, nevertheless, given the prevailing conditions in commodity prices, the future of the Kuranakh operation remains subject to review. Stakeholders are once again advised that a temporary or permanent move towards a care and maintenance status at Kuranakh is a real possibility unless the market prices for iron ore or ilmenite improve or further cost savings can be achieved. In the event that operations at Kuranakh are suspended, a limited number of personnel could be relocated to K&S where production will soon commence. In the event of a shutdown, it is expected that the processing and sale of inventories, with the sale of equipment, could generate sufficient funds to pay down the working capital facilities.

Kuranakh Sales and Average Selling Prices (ASP)

Q1 2013 to Q3 2015

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SALES ASP
Tonnes US$/tonnes
350,000 350
300,000 300
250,000 250
200,000 200
150,000 150
100,000 100
50,000 50
0 0
Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14 Q3’14 Q4’14 Q1’15 Q2’15 Q3’15
Iron Ore Sales Volume Ilmenite Sales Volume Iron Ore ASP
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Mining works were conducted in accordance with the revised optimised mining plan, keeping the grades and consequently production yields on a stable level.

RoM tonnage for the quarter was 767,315 tonnes, 16% less than the 910,412 tonnes removed in third quarter 2014.

The Crushing and Screening Plant processed 767,315 tonnes of iron ore with a grade of 29.1% Fe and 8.9% TiO2, producing 466,935 tonnes of pre-concentrate. Stockpiles totalled 220,386 tonnes, equivalent to approximately 26-day feed.

At the Olekma Processing Plant a total 479,388 tonnes of pre-concentrate was processed, resulting in production of 264,418 tonnes of iron ore, and 48,303 tonnes of ilmenite concentrate.

K&S (100% owned)

The K&S Mine is located in the Jewish Autonomous Region (EAO) of the Russian Far East. The operation is 4 kilometres from the town of Izvestkovaya, through which the Trans-Siberian Railway passes. It is also 130 kilometres from the federal highway connecting to the regional capital of Birobidzhan and 300 kilometres from Khabarovsk, the principal city of the Russian Far East.

At K&S, the final stages of commissioning are ongoing, however the project is encountering delays in the construction timetable. Our main contractor, CNEEC, has recently advised that hot commissioning of the Main Processing Plant will be delayed due to an extension and delay to certain parts of the commissioning schedule. According to CNEEC, the commissioning schedule has been extended mainly due to delays in the arrival of third party engineers who are responsible for fine tuning the crushing equipment, as well as delays in the installation of some cabling works. The new schedule provided by CNEEC also shows that the automation process will take about one month longer than was previously estimated. Due to these reasons, commissioning has not been finalised within the original timeframe of the end of Q3 2015 and is now anticipated to be finalised in Q4 2015 instead. Accordingly, full production at K&S will not commence in Q4 2015 and the previously announced production estimate of 500,000 tonnes for 2015 is now unlikely to be achieved. Nonetheless, IRC is working with CNEEC to optimise this latest revised construction programme from CNEEC and IRC is looking for options to accelerate the construction intensity and move towards a ramp up to its full design capacity. Based on our current preliminary assessment, the high case is Q1 2016, and low case is Q2 2016.

Although there is a slippage in the final commissioning schedule for commercial shipments, the Group anticipates that it will be able to announce the completion of the hot commissioning of the following milestones soon:

• Second (final) phase of Crushing and Screening Plant – allows production of pre-concentrate;

• On-site rail infrastructure – connects to Trans-Siberian Railway and allows transfer of final products to end-customers;

• Processing Plant and Drying Unit – allows production of final product

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It should be noted however that the above are based on IRC’s current estimates based on information available to it at this time, and further updates will be made as construction progresses.

IRC is frustrated with these delays to the construction timetable by CNEEC, particularly as IRC had been assured by CNEEC that K&S commissioning would happen in Q3 2015. Despite the fact that all major equipment items have been at site for some time now and the contractors have been going through a process of final installation, testing and automation, CNEEC has not managed to complete as much work as they had originally targeted, and consequently now need a longer period for the final commissioning than CNEEC had previously advised.

IRC is analysing the new schedule provided by CNEEC with its legal advisors, and is being advised on all remedies available to IRC under the EPC contract with CNEEC and will pursue such remedies as it considers appropriate to ensure proper completion of the works contracted for.

Nevertheless, despite volatile commodities environment, K&S is still one of the lowest operating cost iron ore projects in the world. In view of the previously announced cost optimisation analysis on K&S (based on market assumptions as previously guided), it is estimated that an average for a period of full capacity operation will yield premium 65.8% iron ore concentrate to the Chinese border for a cash cost of US$35.4 per tonne. If restating this cost per global benchmark for 62% material and including the impact of forecast cost savings from the Amur/Heilongjiang River Bridge, the operating cash costs can be as low as US$28.0 per tonne.

Primary Crushing & Screening Plant (hot commissioning completed)

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Exterior of K&S Processing Plant connecting to railing infrastructure

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Mining

Stripping and mining activities has been halted during the quarter because the stockpile necessary to commence operations has already been built up. When full commissioning approaches, mining contractor will start preparations for mining works recommencement. Firstly with drilling and blasting operations to prepare ore volumes in the open pit, and later with excavation and hauling operations to replenish Ore stockpile that will be used for Plant feeding.

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CORPORATE UPDATE

Fundraising

On 29 June 2015, IRC announced its equity fund raising plan in order to finance the completion of construction at the Company’s K&S Project and bring it into full commercial production and for providing general working capital to the Group. The fund raising was conducted by way of an open offer to qualifying shareholders on the basis of 4 offer shares (“Offer Shares”) for every 15 existing shares held by the qualifying shareholders on the record date. The offer shares were offered at the subscription price of HK$0.315 each. On 5 August 2015, the Company announced the completion of the open offer. 1,295,976,080 ordinary shares were allotted and issued on 7 August 2015 with net proceeds of approximately US$49.4 million. Full details of this transaction can be found in the prospectus published by the Company on 17 July 2015 and the results of the open offer announcement on 5 August 2015.

Following receipt of these funds, unaudited cash balance at the end of the quarter was US$95.6 million. This figure includes US$28.3 million in the debt service reserve account and not including the US$30.0 million of fully funded bonded payments that ICBC hold on IRC’s behalf as down payments on construction work at K&S. Total debt outstanding was US$309.5 million made up of US$297.5 million of the ICBC project loan and US$12.0 million of working capital facility for the Kuranakh project.

Amur/Heilongjiang River Bridge

The project to build a railway bridge across the Amur river border between Russia and China, was first launched by IRC in 2006, and later sold to Russian and Chinese development Funds in November 2014.

Currently, the bridge construction is progressing well, with the Chinese side finishing over 60% of their share. Meanwhile, on the Russian side, the construction progress of the Amur River Bridge has been reaffirmed by the Russian government. Deputy Prime Minister, Russian President’s Envoy in the Far East, Yuri Trutnev, previously declared to a Russian media that the construction of the Russian part of the railway bridge over the Amur River will begin in the year 2015 and will finish in about 1–2 years.

IRC’s K&S Mine is situated approximately 240 kilometres from the bridge site and IRC’s nearest customer within China is approximately 180 kilometres away from the bridge. Thus, IRC will benefit from the project with reduced transportation distance and shipment time. The bridge could halve the transport costs of K&S and further confirming IRC as one of the lowest cost iron ore projects in the world.

General Nice and Minmetal Cheerglory Strategic Investment

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.

To date, our strategic partner and second largest shareholder, General Nice has invested approximately US$170 million. This represents more than 80% of their total subscription obligation under the strategic investment agreement entered into in 2013. Although full-completion of the investment from General Nice and Minmetals has been delayed, General Nice has agreed to commence paying interest on the outstanding investment amount of US$38 million from December 2014 onwards, although no interest payments have been made by General Nice to IRC as at 30 September 2015.

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The Company continues to be in discussions with General Nice, Mr Cai Sui Xin (Chairman of General Nice) and Minmetals Cheerglory about completion of General Nice’s subscription obligations and the settlement of the interest due to date and other potential alternative options.

By Order of the Board G. Jay HAMBRO Executive Chairman

Hong Kong, People’s Republic of China Monday, 12 October 2015

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

IRC Limited

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

For further information please visit www.ircgroup.com.hk or contact:

Shirly Chan

Manager – Communications & Investor Relations Telephone: +852 2772 0007 Mobile: +852 9688 8293 Email: sc@ircgroup.com.hk

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