RNS Number : 6552A
13 October 2009
Petropavlovsk agreement with Xuan Yuan Industrial Development Co. Ltd.
to develop the K&S iron ore project
Petropavlovsk PLC ("Petropavlovsk") announces the signing of a cooperation agreement (the “Agreement”) with Xuan Yuan Industrial Development Co. Ltd.（”XY-Group”） which foresees the two parties jointly developing the K&S iron ore project.
The key elements of the Agreement include the following provisions:
- XY-Group will finance the construction of a mining and beneficiating operation at K&S to produce 3.2mtpa of 65% iron ore concentrate (“Stage 1”);
- The parties will proceed to review the development of:
· Stage 2 – the expansion of the 3.2mtpa operation to (a) exploit further resources at K&S and (b) to construct a mining and processing operation at the Garinskoye deposit from where the ore would transported to and beneficiated at an enlarged processing operation at K&S;
· Stage 3 - the construction of a metallurgical plant at K&S with a total annual production capacity of 2.5Mt of Direct Reduced Iron (DRI) and the consumption of 3.75Mt of iron ore concentrate;
- The Stage 1 development is expected to incur US$375m of capital expenditure. XY Group will provide at least 70% of the funding by the way of a loanfor the Stage 1 development in the form of a project finance facility with a term of c.10 years with repayment in the 7 years following Stage 1 commissioning and with interest payable at an approximate rate of LIBOR plus 5% on funds drawn (the “Loan”);
- XY-Group may also choose to invest in new shares in the Petropavlovsk subsidiary that owns the K&S project which would result in XY-Group holding a minority stake in the project; any such subscription funds are expected to provide a part of the balance of the project funding cost;
- Upon completion of the project financing agreement, it is intended that XY-Group will enter into an iron ore offtake agreement for all production from Stage 1 during the term of the Loan at a price to be determined using the Western Australian benchmark plus a transport premium;
- This binding cooperation agreement forms the basis for full EPC, offtake and loan agreements that are expected to be finalised in the next six months.
XY-Group is one of the most successful private enterprise groups in China and is currently the largest Chinese investor in Russia. For more information please visit www.xy-group.com.
Commenting on the announcement from Beijing, Peter Hambro, Chairman of Petropavlovsk, said:
"We are delighted to have achieved an agreement with XY-Group which delivers significant progress on our 3 key objectives in iron ore – funding, construction and offtake. XY-Group is the largest Chinese investor in Russia and enjoys a strong track record of project development and investment and I look forward to building a successful partnership together.
“This agreement is the first step in realising the significant value that I believe is contained in our portfolio of non-precious metal assets. With Kuranakh reaching full production in 2010 and a busy construction programme at K&S as envisaged in this agreement, I believe the opportunity for Petropavlovsk to build a substantial position in the iron ore market is now achievable.”
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