Petropavlovsk PLC : - Potential investment in IRC by new shareholders

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17 January 2013

Potential US$238 million investment in IRC by new shareholders

Petropavlovsk PLC ("Petropavlovsk" or the "Company" or, together with its subsidiaries, the "Group") is pleased to announce a potential US$238m investment in IRC Limited ("IRC") by General Nice Development Limited ("General Nice") and Minmetals Cheerglory Limited ("Minmetals Cheerglory") to fund production growth. IRC will also enter into long-term off-take arrangements.

Transaction Highlights

n   IRC, a company in which Petropavlovsk holds a 63.1% stake, today announced the entry into conditional agreements with:

-     General Nice, a member of a group of companies which collectively is one of the largest
  Chinese iron ore importers: and

-     Minmetals Cheerglory, a wholly-owned subsidiary of China Minmetals Corporation, one of
  China's largest state-owned metals and mining corporations (collectively, the "Investors");

n   Transaction: The Investors to invest up to US$238 million in IRC through the subscription (the "Placing") for new IRC shares to fund production growth and an agreement to enter into long-term off-take arrangements.  The transaction comprises a two-stage potential investment:

-     Stage 1: Subscription by General Nice for 851,600,000 new IRC shares (of which up to 34,064,000 IRC shares will be allocated and issued at a later date) at a subscription price of HK$0.94 per IRC share, raising US$103.3 million, with completion expected in March 2013;

-     Stage 2: Subscription by General Nice and Minmetals Cheerglory, exercisable at the option of General Nice, of up to an additional 1,110,900,000 new IRC shares at a subscription price of HK$0.94 per IRC share, raising US$134.7 million, with expected completion by the end of the third quarter 2013. Minmetals Cheerglory's subscription is conditional on its receipt of the required Chinese approvals and on General Nice exercising its option to make this further subscription. If the transaction is fully implemented, provided no additional IRC shares are issued, the Investors will hold c.36% of IRC's issued shares  with the Company holding c.40%;

n   Off-take: The long-term off-take arrangements with the Investors will, proportional on the level of investment by the Investors, provide sales volume and cash-flow security to IRC. The basic term of the off-take arrangements is 15 years from first iron ore concentrate production from the K&S Project, subject to certain conditions.

Rationale and Use of Proceeds

n   Deal Rationale: The transaction provides IRC with a strategic partnership that aligns its production growth in Russia with the trading experience of General Nice and Minmetals Cheerglory in China, reinforcing IRC's position as a Sino- Russian champion.  Once completed, the transaction will benefit Petropavlovsk by reducing its potential financial requirements in relation to IRC, whilst enabling the Company to share in the upside from IRC's strong growth potential;

n   Use of Proceeds: Following Stages 1 and 2, IRC will receive a total consideration of US$238.0 million in cash from the Investors for the issue of 1,962,500,000 new shares, representing a 36% interest in the enlarged IRC, resulting in a total number of IRC shares in issue of 5,456,534,301. The transaction proceeds will be used towards the development of the K&S Project including the Phase 2 expansion and to advance with the development of the Garinskoye Project.

Impact on Petropavlovsk

n   ICBC Loan: The Company has entered into a Shareholders' Agreement with the Investors and an Indemnity with General Nice, which will come into effect upon completion of Stage 2. The Indemnity addresses the situation that the Company will remain liable to guarantee all K&S obligations under IRC's loan facility with the Industrial and Commercial Bank of China ("ICBC"). Although the Company will remain liable to ICBC under this bank guarantee, it will have a contractual right to recover a proportion (based on the relative holdings of the Company and General Nice in IRC) of any sums paid under the guarantee through the Indemnity if Stage 2 takes place. A fee will become payable by IRC to Petropavlovsk in respect of the provision by Petropavlovsk of the bank guarantee if IRC is de-consolidated from Petropavlovsk in its accounts; this fee will be shared with General Nice under the indemnity arrangements;

n   Shareholdings: If the transaction is fully implemented, provided no additional IRC shares are issued, the Company will hold c.40% of IRC's issued shares. Thus it is expected that IRC will cease being a subsidiary of the Group and will no longer be consolidated in the Group's financial statements. 

Approvals

n   Conditions Precedent: The transaction requires approval by Petropavlovsk and IRC shareholders. During the course of February, a circular is expected to be sent out to the Company's shareholders convening a General Meeting to be held in due course for this purpose.

Information on IRC

IRC is an established explorer, developer and producer of iron ore and other industrial commodities. IRC's main production and development sites produce iron ore concentrate products and are located in the Amur Region and the EAO, near the Chinese border. The carrying value attributable to the gross assets of IRC was c.US$918 million as at 30 June 2012 and the loss attributable to IRC for the 6 months ended 30 June 2012 was c.US$14 million. Mr. Jay Hambro, Chairman of IRC, Mr. Yuri Makarov, Chief Executive Officer of IRC, and Raymond Kar Tung Woo, Chief Financial Officer of IRC, will all remain in office following completion of the transaction.

Categorisation of holding in IRC

During the year, as a result of the potential investment in IRC by the new shareholders, the Group took a decision to support new investment into IRC and to accept the resulting dilution of its holding in IRC to a non-controlling interest and accordingly the Group's investment in IRC will be treated for accounting purposes as "held for sale" as at 31 December 2012. As a result, the carrying value of the entire IRC net assets will be adjusted to fair value, less any costs to sell. Based on IRC's share price of HK$1.170 as at close on 31 December 2012, the estimated net adjustment, would be  a c.US$225 million non-cash fair-value impairment, to be shown within the results for the year ended 31 December 2012 with c.US$147 million allocated to equity holders of  Petropavlovsk and c.US$78 million to non-controlling interests.

Further information

Further information can be found in IRC's announcement on IRC's website, http://www.ircgroup.com.hk

Commenting on the announcement, Peter Hambro, Chairman, said:

"I am delighted to report on the potential significant investment in IRC by General Nice and Minmetals Cheerglory, an investment which will provide IRC with additional financing for its flagship K&S project and Garinskoye. It also delivers off-take arrangements, marketing infrastructure and cash-flow security, which is expected to substantially underpin IRC's development.

As Petropavlovsk will continue to be a major investor in IRC, this investment will enable the Company to share in the upside of IRC's growth potential. In addition, I hope that it will allay shareholders' fears about additional financing requirements relating to IRC as, upon the full completion of the investment, the Company will have a pro rata indemnity from General Nice in respect of its contingent liabilities for IRC bank debt. The first stage of this transaction is expected to complete shortly after Petropavlovsk and IRC shareholder approval is obtained."

Conference Call

There will be a conference call today to discuss the announcement at 11:00GMT.* 

To access the call, please dial [phone]if calling from the UK or elsewhere.

Please then give the participant pin code 31251561#to be transferred to the call.

IRC's management will also be holding a conference call today at 09:00GMT (17:00 Hong Kong time) to discuss details of the potential investment.*

The number is [phone]and passcode 948554#.

A presentation to accompany the call is available at ircgroup.com.hk.

* The conference calls may include information relating to the shares and convertible bonds

Enquiries

Petropavlovsk PLC	[phone]
Alya Samokhvalova
Rachel Tuft
College Hill	[phone]
David Simonson
Matthew Tyler
Anca Spiridon

IMPORTANT INFORMATION

Past performance cannot be relied on as a guide to future performance.

Some figures may be rounded.

Forward-looking statements

This release may include statements that are, or may be deemed to be, "forward-looking statements". Generally, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans","targets", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, targets, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this release and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the Group's results of operations, financial position, liquidity, prospects, growth, strategies and expectations of the industry.  

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the development of the markets and the industry in which the Group operates may differ materially from those described in, or suggested by, any forward-looking statements contained in this release. In addition, even if the development of the markets and the industry in which the Group operates are consistent with the forward-looking statements contained in this release, those developments may not be indicative of developments in subsequent periods. A number of factors could cause developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in law or regulation, currency fluctuations (including the US Dollar and Russian Rouble), the Group's ability to recover its reserves or develop new reserves, changes in its business strategy, political and economic uncertainty.  Save as required by the Listing and Disclosure and Transparency Rules, the Company is under no obligation to update the information contained in this release.

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