IRC Limited — Interim / Quarterly Report 2016

Jan 19, 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)

FOURTH QUARTER TRADING UPDATE FOR THE THREE MONTHS ENDED 31 DECEMBER 2015

CONFERENCE CALL

A conference call will be held today at 09h00 Hong Kong time to discuss the fourth quarter trading update. The number is +852 2112 1700 and the passcode is 1057520#. Presentation slides to accompany the call are available at ircgroup.com.hk. A replay call will be available from 21 January 2016 at www.ircgroup.com.hk/html/ir_call.php.

Wednesday, 20 January 2016: The Board of Directors of IRC Limited (“IRC” or the “Company”, together with its subsidiaries, the “Group”) is pleased to provide the Fourth Quarter Trading Update for the three months ended 31 December 2015.

HIGHLIGHTS

• As previously guided, the completion of the hot commissioning of K&S is expected to be in the first half of 2016. The two remaining stages of hot commissioning – (i) the second (final) phase of the crushing and screening facilities and (ii) Processing Plant and Drying Unit – are expected to be completed around the first quarter of 2016. Production guidance of 2016 will be provided when K&S is closer to full commissioning.

• IRC continues its negotiation with CNEEC regarding its liquidated damages for CNEEC’s delay and certain claims made by CNEEC to the Company for extra works completed.

• IRC continues discussion with ICBC and Sinosure regarding potential debt service relief and covenant waivers.

• FY 2015 full year production of iron ore and ilmenite concentrate at Kuranakh exceeded targets by 24% and 21% respectively.

• In light of the current weak commodity market, the Company announced in mid December 2015 putting Kuranakh operation to temporary care and maintenance. Management resources can now be focussed at K&S, which after its hot commissioning and commercial production, should generate an operating margin even in current depressed iron ore markets.

FOURTH QUARTER TRADING UPDATE

FOR THE THREE MONTHS ENDED 31 DECEMBER 2015

At Kuranakh, 283,386 tonnes of iron ore concentrate and 49,231 tonnes of ilmenite were produced during the fourth quarter. Cumulatively, 1,114,153 tonnes of iron ore concentrate and 193,236 tonnes of ilmenite were produced respectively for the full year of 2015, compared to targets for the full year of 900,000 tonnes for iron ore and 160,000 tonnes for ilmenite. Despite good levels of production achieved at Kuranakh in 2015, due to the low price environment for iron ore and ilmenite and higher operating costs in winter, the Board decided that it would be in the interest of the Company and its shareholders as a whole to move the Kuranakh operation to temporary care and maintenance and focus its existing resources on K&S.

Iron Ore (62.5% Fe) Production (tonnes) Sales (tonnes) Average Price (US$/t) Ilmenite (48% TiO2) Production (tonnes) Sales (tonnes) Average Price (US$/t)	Q4 2015 Q4 2014 Change 283,386 253,515 +12% 304,427 237,899 +28% 46 70 -35% 49,231 46,076 +7% 50,570 50,388 0% N/A N/A N/A*	FY 2015 FY 2014 Change
		1,114,153 1,010,360 +10% 1,091,600 1,027,772 +6% 51 91 -44% 193,236 178,426 +8% 205,632 165,784 +24% 119 151 -21%

• Quarterly Ilmenite ASP not disclosed for commercial reasons

Commenting on the fourth quarter performance, Jay Hambro, Chairman of IRC said, “I am pleased to report another good quarter of production at Kuranakh despite the recently announced move to suspend operations. We can also report slow but certain progress on construction and commissioning at K&S in light of the winter weather. It is sad that Russia’s first vertically integrated titanomagnetite plant is destined to be mothballed due to the current pricing environment and I would like to record our thanks to our Kurnakh team, especially the site team.

The movement to a care and maintenance programme is ongoing and some personnel are moving their workplace to our K&S site. I am also pleased to report that our cost reduction programme across the Group continues to generate significant savings and we will persevere with this work with the expectation of further significant savings in 2016.

2016 will be a transformational year for the group as we consolidate the business to focus on the operating margin that K&S is still capable of producing. Currently, only two milestones remain until the full completion of hot commissioning of K&S and based on guidance from CNEEC, we expect that both milestones will be completed during the first half of 2016. Although the iron ore market will remain a difficult environment in 2016, there are opportunities for companies like IRC, which lies in the lower quartile of the cost curve.”

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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$46 per tonne, a 10% decrease compared to US$51 per tonne in the previous quarter and a 35% decrease compared to the US$70 per tonne in the fourth quarter 2014.

In the trading update for the quarter ended 30 September 2015, IRC reported that one of Kuranakh’s leading customers offered to use a pricing formula which would allow the mine to operate in a cashflow breakeven position. However in light of the current weak commodity market, the use of this pricing formula was suspended during the fourth quarter.

The iron ore price at the end of 2015 remained weak. The spot price of benchmark 62% iron content delivered to the Chinese port of Qingdao finished year 2015 at US$43 per tonne. The global oversupply of the raw material persists while the appetite of China, the largest bulk commodities consumer in the world, is getting smaller as its economy has entered into a “new normal” of slower growth pace. If the weak iron ore pricing prevails, the Group may need to reassess the carrying value of its assets.

Ilmenite

During the fourth quarter, ilmenite sales totalled 50,570 tonnes, in line with that in the same period last year. The ilmenite market is less transparent than other commodities but its relatively depressed outlook is consistent with the sentiment of the commodities market as a whole. For commercial reasons IRC does not publish quarterly prices. IRC remains conservative in budgeting and planning.

Foreign Exchange

The Rouble continued to remain weak against the US dollar in the fourth quarter 2015 as decline in oil prices and economic sanctions against Russia prevail. The Rouble fell to 72 against the Dollar at the end of December 2015 and the depreciation has continued into 2016. With the Group’s operating costs mainly in Roubles and revenues mainly in US Dollars, the weakness in the Rouble results in a positive impact on the Group’s operating margins as it partly offsets the effects of falling iron ore prices.

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Benchmark Fe 62% CFR China VS. FX rates (USD:RUB)
Fe 62% (US$/t) FX (USD: RUB)
160 80.0
75.0
140
70.0
Benchmark Fe 62% CFR China
120 65.0
60.0
100
55.0
80 50.0
45.0
60
40.0
USD: RUB
40 35.0
30.0
20
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
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.

Production and Financials

At Kuranakh, 283,386 tonnes of iron ore concentrate and 49,231 tonnes of ilmenite were produced during the fourth quarter. Cumulatively, 1,114,153 tonnes of iron ore concentrate and 193,236 tonnes of ilmenite were produced respectively for the full year of 2015, compared to full year targets of 900,000 tonnes for iron ore and 160,000 tonnes for ilmenite.

The Board of IRC believe iron ore prices are likely to remain stagnant for some time, and margins will remain under severe pressure across the industry. Despite considerable works to reduce costs of the Kuranakh mine that have yielded significant savings, the current low iron ore and ilmenite price environment and the higher operating costs in winter have rendered the mine uneconomic. The Company announced on 14 December 2015 that it is commencing a programme of moving the Kuranakh operation to temporary care and maintenance.

A limited number of personnel will be relocated to K&S where production will soon commence. Also, it is expected that the processing and sale of inventories, together with the sale of equipment, would generate sufficient funds to pay down the majority of the working capital facilities of Kuranakh.

The care and maintenance programme will involve a limited cost going forward. The Company intends to initially reduce the staff at Kuranakh to minimum levels in order to maintain equipment and security and then wind down the operations further. The only non-operating cost that the site will bear is domestic property taxes; however, relief will be sought for these.

Kuranakh Sales and Average Selling Prices (ASP)

Q1 2013 to Q4 2015

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SALES ASP
Tonnes US$/tonne
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 Q4’15
Iron Ore Sales Volume Ilmenite Sales Volume Iron Ore ASP llmenite ASP
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• Quarterly Ilmenite ASP not disclosed for commercial reasons. Ilmenite ASP shown above is half-yearly average price.

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Due to the Company’s plans to move the Kuranakh operation to care and maintenance, the RoM tonnage for the quarter was 672,609 tonnes, 12% less than the previous quarter in 2015.

The Crushing and Screening Plant processed 869,940 tonnes of iron ore with a grade of 28.8% Fe and 8.6% TiO2, producing 491,701 tonnes of pre-concentrate. Stockpiles totalled 23,685 tonnes, equivalent to approximately 2-day feed.

During the fourth quarter, Olekma Processing Plant processed a total of 501,150 tonnes of preconcentrate, resulting in production of 283,386 tonnes of iron ore, and 49,231 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.

K&S Hot Commissioning Progress

The main contractor of K&S, CNEEC, has reassured the Company that the operational plant will be handed over to IRC in the first half of 2016, as previously guided. After a short but efficient ramp up process, the plant is expected to commence operating at its full capacity (3.2 million tonnes per annum) during the third quarter of 2016, allowing nearly half a year to produce high grade 65.8% iron ore concentrate at full capacity. The plant is capable of being further expanded to produce 6.3 million tonnes per annum. The previously announced timetable of hot commissioning in January 2016 is subject to further delay, since CNEEC has recently guided that it would prefer to hot commission the plant when the local temperature is less extreme; however this work plan still fits within the above guideline and we are discussing remedies with CNEEC.

Despite the 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 at full capacity the K&S operation will yield premium 65.8% iron ore concentrate to the Chinese border for a cash cost of US$35.4 per tonne. After adjusting this cost to reflect the delivery of a premium product compared to the global benchmark of 62%, and including the impact of forecast cost savings from the Amur/Heilongjiang River Bridge, the operating cash costs for K&S can be as low as US$28.0 per tonne.

During the fourth quarter, it is reported that a minor accident occurred at the K&S site. On 25 December 2015, a part of the coal conveyor feeding the newly commissioned heating plant caught on fire. We are pleased to report that the on-site emergency teams acted promptly and efficiently meaning that there was no significant downtime for the plant and the replacement cost of the equipment was not substantial. Also it is important to note that there were no injuries as a result of the incident.

Discussion with CNEEC of Delay Penalties & CNEEC’s Claims on Extra Works

IRC noted in its Third Quarter Trading Update dated 12 October 2015 that the Group was encountering further delays in the construction timetable at the K&S mine. IRC’s contract with CNEEC provides robust remedies for such delays, including terms that allow IRC to claim a defined amount of liquidated

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damages for construction delays, supported by bonding arrangements. From mid-December 2015, as announced by the Company on 17 December 2015, the Company has engaged in detailed discussions with CNEEC with regard to these liquidated damages and certain claims made by CNEEC for payment for extra works. IRC has agreed with CNEEC that sufficient of the process plant works have been completed that the advance payment bond (i.e. a down-payment made by IRC to cover payments owing to CNEEC) can be released and paid to CNEEC. IRC and CNEEC continue discussions and have now agreed in principle the way forward with the aim of: (1) ensuring completion; (2) the handover of the operational plant in Q2 2016; together with (3) new deferred payment terms to assist K&S cashflow as it moves into production; (4) IRC will retain the right to claim delay penalties (backed by the bank issued performance bond to ensure payment) if the project is further delayed. Agreements between IRC and CNEEC will be subject to IRC concluding a satisfactory arrangement with ICBC and Sinosure so as to present an overall packaged solution acceptable to IRC. IRC and CNEEC remain on good terms and work at the K&S site is ongoing.

Crusher inside the Primary Crushing & Screening Plant

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Exterior of Primary and Secondary Crushing
& Screening Plant at K&S
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Mining

Stripping and mining activities were suspended as the stockpile necessary to commence operations has already been built up. When full commissioning approaches, the 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.

CORPORATE UPDATE

Discussion with ICBC and Sinosure on Loan Waivers

During December 2015, the Group engaged in discussions with ICBC and China Export & Credit Insurance Corporation (“Sinosure”) regarding waivers in respect of the Group’s project finance facility with ICBC, including obligations to maintain certain cash deposits with ICBC, and the obligations of IRC and its guarantor Petropavlovsk plc to comply with certain financial covenants. Currently, these discussions are ongoing, and a solution is being sought by IRC to be compatible with proposed arrangements with CNEEC. IRC is working cooperatively with its contractor and lenders to ensure an overall solution is in place to achieve project completion and enable the obligations under the ICBC facility to be met. If a waiver is not obtained from ICBC and Sinosure by 20 June 2016, the Company would be likely to breach payment and financial covenant obligations under the ICBC project finance facility, which would enable ICBC to call an event of default under the facility.

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IRC remains funded to complete K&S. The unaudited cash balance at the end of the fourth quarter 2015 was US$58.3 million. This figure included US$2.1 million, which was in the debt service reserve account at ICBC, and does not include the fully funded bond payments that ICBC hold and which IRC may call upon in the event certain circumstances under the contract with CNEEC arise. Total debt outstanding was US$286.9 million made up of US$276.3 million of the ICBC credit facility for K&S, and US$10.6 million of working capital facility for the Kuranakh project. Under the ICBC loan facility agreement, the Group replenished US$26 million to the debt service reserve account in January 2016.

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. It is reported that the Russian side has commenced construction work, and the Chinese side of the bridge will be finishing soon. According to the media, the construction of Amur River Bridge is expected to be completed in end of 2016 or during 2017.

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 fullcompletion 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 31 December 2015.

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 Yury Makarov Chief Executive Officer

Hong Kong, People’s Republic of China Wednesday, 20 January 2016

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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 G. Jay Hambro, 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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