IRC Limited — Interim / Quarterly Report 2016

Oct 25, 2016

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 2016

CONFERENCE CALL

A conference call will be held today at 11h00 Hong Kong time to discuss the third quarter trading update. The number is +852 2112 1700 and the passcode is 1988025#. Presentation slides to accompany the call are available at www.ircgroup.com.hk. A replay call will be available from 26 October 2016 at www.ircgroup.com.hk/html/ir_call.php.

Tuesday, 25 October 2016: 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 2016.

HIGHLIGHTS

• K&S completed first shipment of product and confirms receipt of all sales proceeds

• K&S hot commissioning continues after the completion of initial maintenance and has now resumed trial production and cash inflow

• Commercial production expected shortly and ramp up to full production capacity expected in early 2017 as previously guided

• Kuranakh care and maintenance process satisfactory

• Discussions continuing with CNEEC regarding completion of plant and delivery of takeover certificate.

THIRD QUARTER TRADING UPDATE

FOR THE THREE MONTHS ENDED 30 SEPTEMBER 2016

K&S has commenced trial production. While conducting hot tests for each part of the plants, some production and sales were recorded during the third quarter. As of 30 September 2016, the total production and sales of iron ore concentrates amounted to 24,035 tonnes and 22,529 tonnes, respectively.

Commenting on the quarter, Yury Makarov, Chief Executive Officer of IRC said , “During the third quarter, we are proud to have witnessed the successful shipment of K&S’ iron ore concentrates produced during trial production phase to customer in China. We have sold all trial products and received the sales proceeds. With the maintenance of the plant completed, we have recommenced our trial production, which means a resumption of cash inflow.

In the fourth quarter, apart from resolving the remaining issues for completion of the plant, we will focus on ramping up the production with more continuous operation to generate a stable income stream. The scale of the operation is impressive and I believe our stakeholders will soon be rewarded for their patience with a continuous, fully operating K&S.”

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MARKETING, SALES AND PRICES

Iron Ore

At K&S, the Group has sold all trial iron ore products of 22,529 tonnes to customer in China during the third quarter. The price of the product is determined with reference to the international Platts spot price of 65% Fe iron ore concentrates. While suitable short-term sales contracts have been signed with Chinese customer as required, the Company is in discussion with a number of potential customers for longer-term off-take arrangements to secure a stable income stream.

Turning to the market, the iron ore price seems to have stablised during the third quarter of 2016. The spot price of benchmark 62% iron content delivered to the Chinese port of Qingdao achieved an average of US$58 per tonne in the third quarter. Benchmark prices rose to over US$60 per tonne in August led by an improvement in the steel price during the month; and remained at about US$55 per tonne till the end of the quarter. Although concerns over the fundamentals are broadly unchanged – slowing down in demand from China and a well-supplied global market, market concensus seems to forecast that the iron ore price will stay above US$50 per tonne this year, beating previous pessimistic forecasts.

There are no sales of iron ore concentrates from Kuranakh during the third quarter since the mine has been moved to care and maintenance.

Ilmenite

As Kuranakh has been moved to care and maintenance, there are no sales of ilmenite product during the third quarter.

Foreign Exchange

The Rouble continued to remain at a weak level against the US dollar in the third quarter 2016 and averaged at around the rate of 65 during the quarter. Market analysts generally forecast that the Rouble will remain stable against the US dollar at above 60. The USD:RUB FX rate closed at 63 by the end of the third quarter. The weakness in the Rouble renders a positive impact on the Group’s operating margins as it partly offsets the effects of weak iron ore prices, with the Group’s operating costs mainly denominated in Roubles and revenues mainly in US Dollars.

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Benchmark Fe 62% CFR China VS. FX rates (USD:RUB)
Fe 62% (US$/t) FX (USD: RUB)
160 85.0
USD: RUB 62.9 80.0
140
Benchmark Fe 62% CFR China 75.0
70.0
120
65.0
100 60.0
55.0
80
50.0
60 45.0
USD: RUB 40.0
40
35.0
30.0
20 Fe 62% ($/t) 55.2
25.0
0 20.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
2014 2015 2016
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OPERATIONS

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 near to the federal highway connecting to the regional capital of Birobidzhan and 300 kilometres from Khabarovsk, the principal city of the Russian Far East.

K&S Hot Commissioning Progress

During the third quarter, K&S accomplished several milestones, namely conducting the 60% loading test; successfully selling all of its trial products; and commencing hot testing for the Drying Unit to prepare for an all-year-round production. The 72-hour run test was conducted but not completed satisfactorily as yet. During the 72-hour run test which was performed in July of this year, the Company detected some technical issues in the processing plant which, while they remain unresolved, limit the capacity of the plant significantly. These issues are required to be resolved before signing off a fully-operational K&S. Whilst IRC believes CNEEC to be responsible for fixing these issues, IRC itself has undertaken some of the remedial work during the recently announced maintenance, with a view to expediting commercial production as quickly as possible. These issues have caused a delay in the commissioning programme and IRC believes it will be able to claim certain liquidated damages from CNEEC for the delay of handing over a fully operational plant to the Company and to recover the cost IRC incurred for the remedial work. Discussions are ongoing with CNEEC with a view to resolving the outstanding issues, increasing the number of personnel from CNEEC on-site, determining the extent of delay penalties payable and agreeing with CNEEC a common position on when the takeover certificate should be delivered.

The plant has now recommenced its trial production and hot testing. Since recommencing production last week, K&S has produced c. 20,000 tonnes of trial products with the highest daily production at about 60% of the plant’s capacity. The site team is now focusing on a gradual ramp up of the plant with more continuous production.

The recommencement of trial production provides feedstock for the hot testing of the Drying Unit, which is on track to be fully operational before the cold winter weather.

Mining

Stripping and mining activities were suspended as the stockpile necessary to commence operations has already been built up. Currently, with the commercial production expected to commence shortly, the mining contractor has started preparations for restarting the mining works, 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.

Trial Production and Marketing

As a result of trial productions at K&S, during the third quarter, 101,318 tonnes of ore were fed to primary processing and 71,503 tonnes of pre-concentrate were produced. Cumulatively, as of the end of the third quarter, 24,035 tonnes of iron ore concentrates have been produced and 22,529 tonnes were sold. Currently, the Group is finalising details contract agreements with a number of potential customers. Further details will be announced in due course. In addition, all of the imported dairy cows funded by the reallocated Net Proceeds will be for the dairy farms of Qinghai Shengya and Qinghai Shengyuan.

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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.

Continued to be in care and maintenance

As previously announced Kuranakh is under a care and maintenance programme which involves limited costs and keeps the mine and plant available for re-opening if the markets permit the investment decision. The Company has reduced the number of staff at Kuranakh to minimum levels for equipment maintenance and security. The only major non-operating cost that the site will bear is domestic property taxes however relief will be sought for these. During the quarter, there was no production or sales.

CORPORATE UPDATE

Loan with ICBC and Group’s Cashflow Position

As set out in the announcement on 23 June 2016, the Group obtained loan waivers from ICBC including a waiver from the obligation of the Group to maintain cash deposits of c. US$26 million with ICBC from 21 June 2016 to 30 June 2018 (both days inclusive), and a waiver from the obligations of the Group and Petropavlovsk plc to comply with certain financial covenants from 21 June 2016 to 31 December 2017 (both days inclusive).

IRC’s cashflow position remains stable however the debt service obligations put considerable pressure on this. The unaudited cash balance at the end of the third quarter of 2016 was US$14.6 million. This figure includes US$2.0 million in the debt service reserve account, but does not include any amounts which may become payable to the Group from the US$37.0 million performance bond held with ICBC in respect of CNEEC’s construction work at K&S. Total debt outstanding was US$255 million, represented solely by the ICBC credit facility for K&S. K&S is required to make payments of principal and interest on 20 December 2016 in the amount of approximately US$26 million, the funding of which is currently expected to be met by drawing down on the CNEEC performance bond in respect of the delay penalties to which IRC believes it is entitled.

The Company is continuing to monitor its going concern status and implement measures to improve its cashflow position. In light of the delay for a fully operating K&S and the need to service the ICBC credit facility, the Group is in active discussion with ICBC for loan repayment relief and loan restructuring. As noted above, the Company may also be entitled to call the CNEEC performance bond and/or consider conducting other fund raising exercises in order to support its cash flow. In addition, IRC continues its 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. The going concern of the Group is dependent on the timely execution and completion of these measures and at present, the Board of IRC believes that the Group can continue on going concern basis.

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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. According to the media, the Chinese side of the bridge has already been completed. In early June, the regional government of the Jewish Autonomous Region announced that the Russian part of the Amur River Bridge will commence construction. A contractor agreement has been signed which stipulates the terms and timing of the construction of the Russian part of the Amur River Bridge.

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 under the subscription agreement. 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 2016.

IRC 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 IRC Limited Yury Makarov Chief Executive Officer

Hong Kong, People’s Republic of China Tuesday, 25 October 2016

As at the date of this announcement, the Executive Directors of the Company are Mr Yury Makarov and Mr Danila Kotlyarov. The Non-Executive Directors are Mr George Jay Hambro, Mr Cai Sui Xin ((Benjamin Ng as his alternate) and Mr Raymond Kar Tung Woo. The Independent Non-Executive Directors are Mr Daniel Bradshaw, Mr Simon Murray, CBE, Chevalier de la Légion d’Honneur, Mr Chuang-Fei Li and Mr Jonathan Martin Smith.

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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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