IRC Limited — Interim / Quarterly Report 2017

Oct 19, 2017

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 the Hong Kong with limited liability)

(Stock code: 1029)

THIRD QUARTER TRADING UPDATE FOR THE THREE MONTHS ENDED 30 SEPTEMBER 2017 23% INCREASE IN PRODUCTION OVER THE LAST QUARTER

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 1888 and the passcode is 3132119#. Presentation slides to accompany the call are available at www.ircgroup.com.hk. A replay call will be available from 20 October 2017 at www.ircgroup.com.hk/html/ir_call.php.

Thursday, 19 October 2017 : 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 2017.

HIGHLIGHTS

K&S

• Record production of over one million tonnes to date in 2017

• Quarterly production and sales increased 23% and 20% respectively compare to last quarter

• Substantial year-to-date production and sales increases of 450% and 376% respectively compared to same period last year

• Continue to generate positive cashflow

• K&S production ramp-up ongoing with loading tests now at 80% capacity and expectation for close to full capacity by year-end as scheduled

Kuranakh

• Care and maintenance process satisfactory – ongoing analysis to assess re-opening at increased prices

THIRD QUARTER TRADING UPDATE FOR THE THREE MONTHS ENDED 30 SEPTEMBER 2017

Iron ore concentrate – Production (tonnes) – Sales (tonnes)		Quarterly	Change 23% 20%	Year-to-date	Year-to-date
	Q3 2017 469,937 453,601	Q2 2017 380,661 376,821		Q3 2017 1,167,368 1,152,233	Q3 2016 212,146 241,881	Change
						450% 376%

During the quarter, K&S experienced some delays in the transportation of products to customers due to congestion of the Russian railway system. The railway usage, which was originally already burdened by the high traffic of thermal coal shipments during the winter, became more congested due to the unusually heavy torrential rain in the region, Maintenance and reconstruction works of the railway system are required to mitigate the impact. Despite this unusual and non-recurring setback, K&S achieved satisfactory operating results with total production and sales of iron ore concentrate amounted to 469,937 tonnes and 453,601 tonnes respectively, representing a quarter-to-quarter increase of 23% and 20% respectively. The plant is currently operating at a steady capacity of around 60% but it is envisaged that it would be producing at about 70% capacity if the congestion issue had not occurred. IRC believes that the congestion issue will be gradually resolved as maintenance works conducted by Russian Railways complete. The congestion will also be eased as the peak season for the thermal coal shipments comes to an end before the winter period.

IRC is also pleased to note another production milestone of K&S with its production of iron ore concentrate leaping over 1,000,000th tonne since the beginning of 2017.

Kuranakh continues to be in care and maintenance with no production or sales from the mine during the third quarter of 2017.

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Commenting on the performance of the third quarter, Yury Makarov, Chief Executive Officer of IRC said, “I am delighted to report that K&S has sold over 1,000,000 tonnes of iron ore concentrate since the beginning of 2017, marking another milestone in the ramping up programme. I am also proud that despite the hiccup in the railway transportation, K&S has achieved satisfactory results with production and sales increasing 23% and 20% respectively over the last quarter. During the quarter, the 65% iron ore spot price market averaged US$91 per tonne. K&S continues to capitalise on this relatively strong market situation and generate positive cash flow to IRC.

The ramping up process of K&S continues to make progress and the teething issues are gradually being resolved. K&S is on track to operate at close to its full capacity by the end of 2017.”

MARKETING, SALES AND PRICES

Iron Ore

During the third quarter, despite the sales at K&S being affected by a rare condition of congestions of the Trans-Siberian Railway, 453,601 tonnes of iron ore concentrate was sold to customers in China and Russia. The price of the product was determined with reference to the international Platts spot price of 65% Fe iron ore concentrates. The achieved selling price of IRC is not published for commercial reasons.

Overall, the iron ore price market improved during the third quarter. The benchmark 65% Fe Platts index averaged US$91 per tonne during the quarter and soared to over US$100 per tonne near the end of August. Market analysts explained that the improved iron ore price level was mainly due to Chinese steel producers boosting steel production to benefit from good margins. This triggered the restocking of raw materials, especially the 65% Fe products which provided better production efficiencies with less pollution to comply with the Chinese environmental regulations. Although there could be some price volatility in the future as some analysts are concerned with the fundamentals of more supply to market in the long run, the 65% Fe iron ore products continue to be more resilient in terms of pricing and market demand.

The upside trend of the premium spread of 65% Fe iron ore price market over the benchmark 62% Fe iron ore continues to widen as the premium products continue to be more preferred by the market. The 65% Fe carries a price premium of over 28% (or c.US$20 per tonne during the third quarter), giving K&S an added advantage. There were solid demands for K&S’ products from the market. With a diversified customer base, all products that K&S produced were effectively sold immediately.

Platts 62%Fe & 65%Fe iron ore price index

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$120.00
65% vs 62% variance
Iron ore Platts 65%
$110.00
Iron ore Platts 62%
$100.00
$90.00
$80.00
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$-
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
2016 2017
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There were no sales of iron ore concentrate from Kuranakh since the mine has been moved to care and maintenance.

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Ilmenite

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

Foreign Exchange

The Rouble remained weak against the US dollar in the third quarter of 2017. Similar to the last quarter, it averaged at 59 against the dollar during the third quarter (Q2: US dollar vs RUB averaged 58). Rouble was at 58 against the dollar at the end of the quarter. The weakness in the Rouble has a positive impact on the Group’s operating margins as the Group’s operating costs are mainly denominated in Roubles and revenues mainly in US Dollars.

Benchmark Fe 62% CFR China VS. FX rates (USD:RUB)

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Fe 62% (US$/t) FX (USD: RUB)
160 85.0
USD: RUB 80.0
140 58
75.0
70.0
120
USD: RUB (RHS)
65.0
100 60.0
55.0
80
50.0
60 45.0
40.0
40 Benchmark Fe 62% CFR China (LHS)
35.0
30.0
20 Fe 62% ($/t)
US$61 25.0
0 20.0
2014 2015 2016 2017
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 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
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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.

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K&S Ramp-Up Progress

During the quarter, K&S’ ramp up progress was satisfactory. A notable milestone is the success of a 5-day loading test during which the plant operated continuously at about 80% capacity. The ramp-up progress which hinges on the production rate of the plant was disrupted by a rare condition of railway congestion. The railway usage, which was originally already burdened by the high traffic of thermal coal shipments during the winter, became more congested due to the unusually heavy torrential rain in the region. The railway authority is currently resolving the congestion matters by carrying out the related maintenance and reconstruction works. IRC believes that the congestion issue will be gradually resolved as maintenance works conducted by Russian Railways complete. The congestion will also be eased as the peak season of the thermal coal shipments comes to an end before the winter period.

As there were insufficient wagons arriving at K&S for timely delivery of products as a result of the railway congestion, the production at K&S was slowed down after its storage warehouse was full. During the affected time, K&S made use of the downtime to perform maintenance works of the plant. The plant is currently operating in a stable and continuous manner, producing at a steady capacity of about 60%. It is envisaged that the plant would have been operating at about 70% capacity if the railway congestion had not happened. K&S continues to aim at operating the plant at close to full capacity by the end of 2017.

Mining

During the third quarter, the mining contractor increased the mining scale to match with the increased production volume of K&S. The process of drilling and blasting followed by excavating and hauling of the open pit continues to replenish the stockpiles which are used for plant feeding. During the quarter, a total of 2,040,600 tonnes of ore were mined (1,213,700 tonnes in Q2 2017); 92,857 metres drilled (66,340 metres in Q2 2017), and 2,124,350 cubic metres of rock mass were blasted (1,757,244 cubic metres in Q2 2017).

Production and Marketing

K&S Production (tonnes) Sales (tonnes)	Q3 2017 469,937 453,601	Q2 2017 380,661 376,821	Changes
			23% 20%

Since the start of K&S’ trial production and up to the end of September 2017, K&S has cumulatively produced and sold over 1.3 million tonnes of iron ore concentrate. During the third quarter, 1,621,700 tonnes of ore was fed to primary processing and 1,073,903 tonnes of pre-concentrate was produced. Finally, 469,937 tonnes of iron ore concentrate was produced and 453,601 tonnes was sold, representing an increase of 23% and 20% respectively over the previous quarter.

For the marketing of K&S products, IRC aims at further diversifying its customer base to have more Russian customers, which will not only put K&S in a stronger position to negotiate for better sales terms but will also help mitigate the logistic risks.

Update of Estimated Unit Cash Cost

In view of the fact that K&S has not yet reached full production capacity, the cash cost per tonne has not yet reached an optimal level. Taking into account the potential Rouble depreciation to previous lows and the opening of the Amur River Bridge in 2018 which would reduce transportation costs, the Group considers that K&S’ cash cost is expected to remain below US$40 per tonne on a 62% Fe basis when full scale operation at K&S is achieved.

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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 to keep 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, although relief will be sought for these. During the quarter, there was no production or sales.

IRC has been conducting an on-going assessment of the option to restart the operation of Kuranakh, which will mostly depend on the market price levels of iron ore and ilmenite.

CORPORATE UPDATE

Loan with ICBC and Group’s Cashflow Position

The unaudited cash balance at the period ended 30 September 2017 was c.US$19.3 million. The total debt outstanding was c.US$233.8 million as at 30 September 2017. As previously announced, ICBC has agreed to restructure the principal repayment schedule of K&S’ project finance facility which fully relieves K&S from principal repayments in 2017. IRC’s present cashflow position remains stable and the Company continues to monitor its going concern status and implement measures to improve its cashflow position, including potential fund raising exercises if considered appropriate.

Amur River / Heilongjiang Bridge

The project to build a railway bridge across the Amur River border between Russia and China was first launched by IRC in 2006. The project was sold to Russian and Chinese development funds in November 2014. In early June 2016, the regional government of the Jewish Autonomous Region announced that the Russian part of the Amur River Bridge would 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.

The Russian side of the construction has started while the Chinese side of the bridge is almost completed. According to a government report, the bridge is expected to be operational in 2018, with June being the earliest time of completion. The operating capacity of the Bridge is 20 million tonnes per annum, which will comfortably cover K&S’ full capacity of 3.2 million tonnes of iron ore concentrate per annum.

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 confirm IRC’s success as a Sino-Russian iron ore producer.

After the completion of the Amur River Bridge, in the unlikely event of railway congestion occurring again, the bridge will be able to mitigate the situation and ease the traffic towards the Chinese border.

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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 not to date occurred, 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 2017.

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.

• Figures in this announcement may not add up due to rounding. All tonnes of the Group unless specify refer to wet metric tonnes. All dollars refer to United States Dollar unless otherwise stated.

By Order of the Board IRC Limited Yury Makarov Chief Executive Officer

Hong Kong, People’s Republic of China Thursday, 19 October 2017

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 (Mr Benjamin Ng as his alternate), Mr Raymond Kar Tung Woo and Mr Cheng Chi Kin. 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.

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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