Q3 Production Report and IMS

20 October 2011

Production Report for Q3 2011 and Interim Management Statement

Petropavlovsk PLC ("Petropavlovsk" or the "Company", or together with its subsidiaries "the Group") today issues its interim management statement for the period from 1 July 2011 to date, in accordance with the UK Listing Authority's Disclosure and Transparency Rules. 

Highlights

Gold Production Report for Q3 2011

1. See end of document for definition of attributable production

Operations and production

§ The Group's total attributable gold production for Q3 2011 was 228,100oz, a 65% increase on the same period in 2010 and a 59% increase compared to Q2 2011;

§ The Group's total attributable gold production during the first nine months of the year totalled 447,200oz, 47% higher than the equivalent period in 2010;

§ Good performance at Pioneer, Malomir and Pokrovskiy continues through October with all mines on schedule, and accordingly the Group is confident of meeting its full-year production target of 600,000oz.

Development

§ Construction work at Albyn has been progressing ahead of schedule and has now reached an advanced stage. It is expected that the mine will be commissioned in the last quarter of 2011;

§ Work on the development of the pressure oxidation ("POX") hub at the Pokrovskiy mine and the flotation lines at Malomir and Pioneer remains on schedule.

Gold sales, costs and financial position

§ Total gold sold during the first nine months of 2011 was 485,200oz at an average realised gold sales price of US$1,587, which was 33% higher than the price achieved during the same period in 2010;

§ The average realised gold sales price in Q3 2011 was US$1,750;

§ Total cash operating costs during Q3 benefited from the devaluation of the Rouble against the US Dollar;

§ Petropavlovsk has entered into a new US$200mln, 3 year banking facility at Libor +5% per annum with VTB Group; otherwise, the financial position of the Company as at 20 October 2011 has not materially changed from that reported at 25 August 2011.

Outlook for 2012

§ The Group's 2012 production guidance will be announced in January 2012;

§ The guidance will take into account the optimisation of the mining schedules following recent additions to the Group's reserves and resources base.

Corporate update

§ The Company paid a final dividend of 7 pence per share on 28 July 2011 to shareholders on the register as at close of business on 1 July 2011 and on 24 August 2011, the Board of Directors approved an interim dividend of 5 pence per share, which will be paid on 11 November 2011 to shareholders on the register as at close of business on 7 October 2011;

§ In August 2011, as previously announced, the Board welcomed Dr David Humphreys as a Non-Executive Director. The Board continues to work with external consultants to appoint an additional Non-Executive Director.

IRC

On 12 October 2011, the Group's 65.6% owned subsidiary, IRC, announced its Trading Update for the Third Quarter to 30th September 2011. Highlights included:

§ The continued ramp-up of the Kuranakh mine, with full production capacity of iron ore now being achieved on a sustainable basis;

§ Record production levels were reported at Kuranakh at record prices for magnetite and ilmenite concentrate;

§ Further progress has been made at K&S;

§ Strong cash balances with no significant external funding requirements forecasted;

§ Drawdown of ICBC loan to fund K&S development commencing in near-term.

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

"I am delighted to report that the Group has enjoyed another strong quarter, delivering record production levels which see us on track to achieve our annual production targets.

This was a result of a significant improvement in the Group's operational performance and efficiencies at every site when compared to the previous year, including a 15% increase in total volumes of mining works at Pioneer compared to the beginning of the year.

With Albyn nearing completion and our POX hub development progressing well, our development plans are also on track.

Our balance sheet is healthy and has again been strengthened by the strong gold price environment during this year and an additional significant facility from VTB Group.

Looking ahead, we intend to provide the market with production guidance for next year in January 2012 together with our final operational results for 2011.

In the context of the high volatility and still uncertain outlook in the international markets, it is pleasing to be reporting such a strong performance, and a confident operational outlook for the full year."

Conference Call Details

There will be a conference call today to discuss the announcement at 10:30 (BST).*

To access the call, please dial:

810 800 292 73011 if calling from Russia;

1 631 510 7490 if calling from the US;

+44 (0)20 3140 0668 if calling from the UK or elsewhere.

Please then give the participant pin code 208227# to be transferred to the call.

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

ENQUIRIES

Operations and gold production: Pioneer

During the first nine months of the year Pioneer produced 234,300oz, 77% higher than the comparative period in 2010. 117,700oz was produced during Q3 2011, representing an increase of 177% on the same period in 2010. These increases reflect: a set of measures implemented during the year to improve on-site efficiencies, the mining and processing of higher grades during Q3 2011 as planned and the contribution to the full nine months of the year of the third resin-in-pulp ("RIP") processing line, which was commissioned in April 2010.

During the first nine months of the year, 22.6mln m3 of material was moved, which represents an increase of c.70% on the total material moved during the first nine months of 2010 (13.3mln m3), reflecting the contribution made by the delivery of the final additions to the mining fleet at the beginning of 2011 and changes to the organisation of mining works at the site following a comprehensive review at the beginning of the year.

The overall strong performance at Pioneer during the first nine months of the year indicates that it remains on track to produce its full-year guidance of 323,500oz.

Operations and gold production: Malomir

During the first nine months of the year, Malomir produced 60,100oz, with 22,200oz produced in the third quarter. 

The second crushing and grinding line, commissioned in July 2011, has been ramping up as planned, increasing capacity by c.63% compared to H1 2011. Due to increased capacities, the schedule of mining works has been altered and ore with a lower head grade was processed through the mill. Initial ramp up has also caused a slight decline in overall recovery rates for the third quarter, which were 81% compared to a recovery rate of 84.5% during the first half of the year.

Both factors were offset by the earlier commissioning of the new crushing and grinding line and increased capacities of the plant keeping the Group's production target of 93,300oz for Malomir mine intact.

Operations and gold production: Pokrovskiy

During the nine months to 30 September 2011, Pokrovskiy produced 70,100oz with 28,200oz produced in the third quarter. This result was slightly ahead of the Group's target for Pokrovskiy. Accordingly, management remains confident in Pokrovskiy's full-year production guidance of 96,200oz.

Group operations report: Alluvial production

During the first nine months of the year, the Group's alluvial operations (including placer extraction at Tokur) produced 82,700oz, with the majority (60,000oz) produced in the third quarter. As alluvial production is seasonal, it is estimated that the contribution in the fourth quarter will ensure that the Group's full-year production target of 87,000oz is achieved.

Development

Albyn

Construction work at Albyn has been progressing ahead of schedule and has now reached an advanced stage. It is expected that the mine will be commissioned before the end of the year.

Additional processing lines

Following recent exploration success during the first half of the year, the Group is evaluating the viability of bringing forward the commissioning of the second 2.0mtpa RIP processing line at Albyn and a fourth 2.0mtpa RIP processing line at Pioneer. The Group intends to report on the outcome of this review in January 2012.

POX hub

The commissioning of the POX hub at Pokrovskiy and the flotation lines at Malomir and Pioneer remains on schedule. Work on plant buildings, foundations and site preparations continues as planned. The majority of contracts for the equipment have now been signed and it is expected that all equipment will be delivered on-site by the start of 2013.

The Group is conducting further detailed tests on ore samples at its pilot plant in Blagoveschensk in order to confirm optimal processing parameters. A comprehensive staff training programme is being undertaken at the pilot test plant, supplemented with courses at the Pokrovskiy Mining College (a specialist educational institution established by the Group in 2007 to train future group employees).

Exploration

The focus of the Group's exploration programme during Q3 2011 continued to be on areas within or adjacent to existing projects. The Group expects to publish an updated Reserves and Resources statement reflecting 2011 exploration work in February 2012. 

Corporate Update

Dividends

The Company paid a final dividend of 7 pence per share on 28 July 2011 to shareholders on the register as at close of business on 1 July 2011. On 24 August 2011, the Board of Directors approved an interim dividend of 5 pence per share, which will be paid on 11 November 2011 to shareholders on the register as at close of business on 7 October 2011.

Changes to the Board of Directors

On 24 August 2011, Dr David Humphreys was appointed as a Non-Executive Director with immediate effect. Dr Humphreys replaces Mr Peter Hill-Wood who retired as a director following the conclusion of the Company's Annual General Meeting on 19 May 2011. Dr Humphreys has a broad range of experience within the global mining industry as a consultant, lecturer and writer. He has extensive knowledge of the Russian mining industry, having been Chief Economist at Norilsk Nickel, Russia's largest mining company, from 2004 to 2008. Prior to this, Dr Humphreys was Chief Economist of Rio Tinto for eight years.

The Board continues to work with external consultants to appoint an additional Non-Executive Director.

US$380,000,000 4 per cent Guaranteed Convertible Bonds due 2015 (the "Bonds")

The articles of association of Petropavlovsk 2010 Limited, the issuer of the Bonds, and a subsidiary of Petropavlovsk, provide for adjustments to be made to the exchange price of the Bonds (the "Exchange Price") if a capital distribution is paid or made to holders of ordinary shares of the Company, provided that such adjustment (rounded down if applicable) would be equal to, or more than, 1 per cent of the Exchange Price then in effect. The dividend payable to shareholders on 11 November 2011 will not result in any such adjustment as such adjustment would be less than 1 per cent of the Exchange Price and is therefore not required. This dividend will however be taken into account when calculating the Exchange Price for future dividend payments.

IRC Update

On 12 October 2011, the Group's 65.6% owned subsidiary IRC, announced its Trading Update for the Third Quarter to 30th September 2011.

Production has continued to ramp up at the Kuranakh mine, with full production capacity of iron ore now being achieved on a sustainable basis. Record production levels of iron ore and ilmenite were reported at Kuranakh at record prices. Significant progress has been made at K&S and strong cash balances with no significant external funding requirements have been forecast. The drawdown of the ICBC loan to fund K&S development is commencing in the near-term.

Important information

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

Definitions

Total Attributable Gold Production

Total attributable gold production, as stated throughout this document, is comprised of 100% of production from the Group's subsidiaries and, where applicable, the relevant share of production from joint ventures and other investments. Figures for the comparative period are restated accordingly. The Group has held a c.1.1% interest in Rusoro Mining Ltd since March 2009; no attributable ounces are included in the Group's figures. The Company's direct and indirect interest in Pokrovskiy Rudnik (the holder of the Group's Pokrovskiy and Pioneer interests) is 98.61%. Cumulative gold production, as stated throughout this document, consists of gold physically recovered and gold in circuit. Accordingly, gold produced in the year consists of gold recovered during period and adjusted for the movement in gold still in circuit. 

Production from alluvial operations for H1 2011 includes production from the assets previously held by the Omchak Joint Venture, which was a 50/50 joint venture prior to the acquisition of 32.5% and 7.5% of the issued capital of the Omchak Joint Venture from Susumanzoloto and Shkolnoye respectively in H2 2010. Production from these assets is now 100% attributable to the Group.

Production from joint ventures and other investments includes production from the Omchak Joint Venture prior to its acquisition in H2 2010. Following the termination of the Odolgo Joint Venture in 2011, the Group no longer operates any joint ventures.

Production from Q3 2011 refers to the period from 1 July until 30 September 2011, in line with the above definition.

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", "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, 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 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.