13 Oct 2009 10:43

Petropavlovsk reaches agreement with Xuan Yuan to develop K&S iron ore field

MOSCOW. Oct 13 (Interfax) - Petropavlovsk plc, formed from this year's merger between Peter Hambro Mining plc mineral resources developer Aricom plc, has signed a cooperation agreement with China's Xuan Yuan Industrial Development Co. Ltd (XY-Group) which foresees the two parties jointly developing the Kimkan & Sutara (KS) iron ore project in Russia's Far East, Petropavlovsk said in a press release.

XY-Group will finance the construction of a mining and beneficiating operation at KS to produce 3.2mtpa of 65% iron ore concentrate in stage one of the project.

They will proceed to review the development of stage two, for the expansion of the 3.2mtpa operation to exploit further resources at KS and 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 KS.

Stage three involves the construction of a metallurgical plant at KS 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 one 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 loan for the stage one development in the form of a project finance facility with a term of approximately ten years with repayment in the seven years following Stage 1 commissioning and with interest payable at an approximate rate of LIBOR plus 5% on funds drawn.

XY-Group may also choose to invest in new shares in the Petropavlovsk subsidiary that owns the KS 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 one during the term of the Loan at a price to be determined using the Western Australian benchmark plus a transport premium.

This is a binding cooperation agreement that forms the basis for full EPC, offtake and loan agreements that are expected to be finalised in the next six months, the press release said.

XY-Group is one of the most successful private enterprise groups in China and is currently the largest Chinese investor in Russia, it 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," Peter Hambro, Chairman of Petropavlovsk, said in Beijing.

"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 KS as envisaged in this agreement, I believe the opportunity for Petropavlovsk to build a substantial position in the iron ore market is now achievable," Hambro was quoted as saying.