IRC Limited — Interim / Quarterly Report 2018

Jan 25, 2018

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 2017 THREEFOLD INCREASES IN ANNUAL PRODUCTION AND SALES

CONFERENCE CALL

A conference call will be held today at 14h00 Hong Kong time to discuss the fourth quarter trading update. The number is +852 2112 1888 and the passcode is 4209525#. Presentation slides to accompany the call are available at www.ircgroup.com.hk. A replay call will be available from 26 January 2018 at www.ircgroup.com.hk/html/ir_call.php.

Thursday, 25 January 2018: 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 2017.

HIGHLIGHTS

K&S

• Annual production and sales of 2017 increased 339% and 325% respectively

• Russian railway congestion issues gradually being resolved

• Signed long-term offtake contract with Russian customer, providing stable source of revenue and alleviating railway congestion issues

• Continues to generate positive cash flow while the Drying Unit ramps up

• Successful loading test at 90% production capacity; current steady capacity of more than 60%

Kuranakh

• Care and maintenance process satisfactory

FOURTH QUARTER TRADING UPDATE FOR THE THREE MONTHS ENDED 31 DECEMBER 2017

Iron ore concentrate – Production (tonnes) – Sales (tonnes)		Quarterly	Change –16% –15%	Year Ended 31 December	Year Ended 31 December	Year Ended 31 December
	Q4 2017 395,698 386,913	Q3 2017 469,937 453,601		2017 1,563,066 1,539,146	2016 356,142 361,940	Change
						+339% +325%

During the fourth quarter, K&S’ ramp-up progressed gradually with efforts focusing on ramping up the Drying Unit to fullscale operation. Earlier, K&S plant has proved to be capable of operating at load, having successfully completed a 24hour loading test at 90% capacity when the Drying Unit was not required to be in use. While the Drying Unit is currently operating at a reduced capacity due to poor quality workmanship by the contractors to the K&S project, the K&S site team is in the process of resolving the issues identified and the need for the Drying Unit as part of the K&S production process will gradually be reduced in the first quarter of 2018 as the winter weather subsides.

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Also, as announced in the third quarter trading update, K&S has experienced some delays in the transportation of products to customers due to unusual and non-recurring railway congestion issues caused by heavy torrential rain. While the railway issues are gradually being resolved by the Russian railway authority, K&S has signed a long-term offtake contract with a Russian customer to provide a stable source of revenue to IRC and to alleviate the impact of the railway congestion issues.

Despite the aforesaid issues, K&S still managed to operate at about 50% of its production capacity in the fourth quarter to produce 395,698 tonnes iron ore concentrate with sales amounted to 386,913 tonnes. For the full year 2017, annual production and sales of IRC have increased by 339% and 325% respectively, illustrating the contribution that K&S has made to the Group as the plant continues to ramp up. If the iron ore price environment continues to be maintained at the current price level and the railway and commissioning issues are resolved in a timely manner, IRC expects that K&S will continue to bring positive cashflow to IRC. IRC continues to monitor its going concern status and is seeking to implement measures to improve its cashflow position.

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

Commenting on the performance of the fourth quarter, Yury Makarov, Chief Executive Officer of IRC said, “During the quarter, we are pleased to have entered into a long-term offtake arrangement for K&S which will secure continuous cashflow streams to IRC. Despite the setbacks in the ramp-up programme of the Drying Unit, affecting our fourth quarter performance, K&S has proven to be capable of operating at 90% capacity at the time when the Drying Unit is not required to be in use. While the K&S site team is resolving the bottlenecks of the Drying Unit, these technical issues are non-recurring and their impact is expected to be short term. More importantly, despite not operating at full capacity, K&S continues to bring positive cashflow to IRC. I am also pleased to report the threefold increases in the Group’s annual production and sales, demonstrating the transformation that K&S brings to IRC.”

MARKETING, SALES AND PRICES

Iron Ore

During the fourth quarter, K&S has sold 386,913 tonnes of iron ore concentrate to its 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 remains positive during the last quarter of 2017. The benchmark 65% Fe Platts spot price index averaged US$84 per tonne during the quarter and averaged US$81 per tonne for the year 2017. It closed slightly up at c.US$90 per tonne at the end of the quarter and continues to remain strong at the beginning of 2018. Market analysts explained that the recent improvement in iron ore prices may be due to China’s new policy of allowing some rebuilt of new steel capacity to replace the obsolete ones at some of China’s key steel production regions – an outcome that supported the steel prices and hence pushed up the iron ore prices. 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.

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The upside trend of the premium spread of 65% Fe iron ore price market over the benchmark 62% Fe iron ore remains above 20% as the premium products continue to be more preferred by the market. During the fourth quarter, the average price of 65% Fe has a price premium of c.28% (or c.US$19 per tonne), giving K&S an added advantage. There were also 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 Seo Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Seo Oct Nov Dec Jan
2016 2017 2018
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There were no sales of iron ore concentrate from Kuranakh since the mine has been moved to care and maintenance.

Ilmenite

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

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Foreign Exchange

The Rouble remained weak against the US dollar in the fourth quarter of 2017. Similar to the last quarter, it averaged at 58 against the dollar during the fourth quarter (Q3: US dollar vs RUB averaged 59). During the year, Rouble depreciated to an average of 58 against the dollar. 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$/t) FX (USD: RUB)
160 85.0
USD: RUB 80.0
140 57
75.0
70.0
120
USD: RUB (RHS)
65.0
100 60.0
55.0
80
50.0
60 45.0
40.0
40 Benchmark Fe 62% CFR China (LHS)
35.0
Fe 62% ($/t) 30.0
20 US$77
25.0
0 20.0
2014 2015 2016 2017 2018
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 Oct Nov Dec Jan
----- End of picture text -----

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 Ramp-Up Progress

During the fourth quarter, K&S’ ramp-up progressed gradually, with efforts focusing on ramping up the Drying Unit to full-scale operation. K&S plant has proved to be capable of operating at load, having successfully completed the 24-hour loading test at 90% capacity earlier in the year when the Drying Unit was not required to be in use. Although the Drying Unit is currently operating in a reduced capacity due to poor quality workmanship by the contractors to the K&S project, the K&S site team is in the process of resolving the issues identified and the need for the Drying Unit as part of the K&S production process will gradually be reduced over the first quarter in 2018 as the winter weather subsides. Meanwhile, the plant is currently operating at a steady capacity of more than 60%. If the iron ore price environment continues to be maintained at the current price level and the railway and commissioning issues are resolved in a timely manner, K&S will continue to bring positive cashflow to IRC.

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Also, during the quarter, K&S has signed a long-term offtake contract with a Russian customer which will provide a stable source of revenue to IRC and can alleviate the impact of the railway congestion issues. As announced in the third quarter trading update, K&S has experienced some delays in the transportation of products to customers due to unusual and non-recurring railway congestion issues caused by heavy torrential rain. While the railway issues were gradually being resolved by the Russian railway authority, the newly-signed offtake contract can help alleviate the aforesaid transport situation.

Mining

During the fourth quarter, the mining contractor decreased the mining scale to match with the reduced production volume of K&S permitted by the Drying Unit. 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 70,126 meters were drilled, 2,480,630 cubic meters were blasted and 2,147,900 tonnes of ore were mined.

Production and Marketing

K&S Production (tonnes) Sales (tonnes)	Q4 2017 395,698 386,913	Q3 2017 469,937 453,601	Changes
			–16% –15%

In 2017, K&S has produced and sold over 1.5 million tonnes of iron ore concentrate. During the fourth quarter, 1,297,740 tonnes of ore was fed to primary processing and 896,712 tonnes of pre-concentrate was produced. Finally, 395,698 tonnes of iron ore concentrate was produced and 386,913 tonnes was sold, representing a decrease of 16% and 15% respectively over the previous quarter.

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 in 2017 has not yet reached an optimal level – the relevant figure will be announced in the coming Annual Results for the year ended 31 December 2017. 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 at about US$40 per tonne on a 62% Fe basis when full scale operation at K&S is achieved.

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.

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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.

CORPORATE UPDATE

Loan with ICBC and Group’s Cashflow Position

The unaudited cash and deposit balance at the period ended 31 December 2017 was c.US$11.1 million. The total debt outstanding was c.US$235.2 million as at 31 December 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 continues to monitor its going concern status and is seeking to implement measures to improve its cashflow position, including potential fund-raising exercises if considered appropriate.

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. 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.

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 31 December 2017.

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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, 25 January 2018

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 Benjamin Tze For Ng, and Mr Chi Kin Cheng. The Independent Non-Executive Directors are Mr Daniel Bradshaw, Mr Chuang-Fei Li, Mr Simon Murray, CBE, Chevalier de la Légion d’Honneur, Mr Jonathan Martin Smith and Mr Raymond Kar Tung Woo.

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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