Investment Case

A Clear strategy for Growth

IRC is a vertically integrated
producer of industrial
commodities, notably...

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  • 1: What is IRC?

    IRC is a vertically integrated producer of industrial commodities, operating in the Russian Far East and North-Eastern China. We are characterised by our industry leading cost-position and low-risk growth profile. We have more than 20 years of successful track record as a commodities producer and are listed on the Stock Exchange of Hong Kong (stock code: 1029.HK) in October 2010.

    IRC is unique in the iron ore market due to its combination of competitive advantages, namely superior geology and direct access using established world-class infrastructure to China, the world’s largest iron ore consumer.

  • 2: Where are your operations located?

    Our mines are located in Far East of Russia, near the north of Heilongjiang Province at the China-Russia border. In terms of geographical location, our operations are actually closer to China than to the principal cities in Russia. Our operations are located right at the beginning of Sino-Russian Economic Corridor of China's One-Belt-One-Road initiative.

    The Trans-Siberian railway, the main artery of trade through the Far East of Russia, runs parallel to the border and near to our mining assets, bringing with it power, water, people (skilled and unskilled labour) and the support service for heavy industry. Most importantly, it is a world class infrastructure allowing us to deliver our products directly into China and to be closer to our Chinese customers, providing them with an unparalleled logistics service, which is beneficial for both us and them.

  • 3: How many people does IRC employ?

    IRC is a significant employer in the regions in which we operate, and employs a total of approximately 1,515 employees (excluding contractor, as of 31 December 2018).

    As a member of the Petropavlovsk Alliance, IRC enjoys a solid reputation in Russia that attracts the very best individuals. Furthermore, there is also a good supply of quality labour in the Far East of Russia. In addition, the attractiveness of IRC's projects has enabled us to draw some of the best mining, metallurgist, logistics, procurement and project management miners from across Russia who have considerable experience in iron ore, bulk, hard rock and cold climate mining conditions.

  • 4: At what stage of operation/development are the mines?

    IRC has a series of assets that are at different stages of development, providing us with a productive pipeline of producing and developing mines, backed up by longer-term exploration projects.

    Due to current market condition, IRC has move our first mine in operation - Kuranakh (100% owned), to care and maintenance status until market conditions improved and proven economical for Kuranakh to re-open again. K&S Project (100% owned) is our second and larger mine, Phase one of the Project is already in commercial production. The operation is targeting an annual production capacity of 3.2 million tonnes of high-grade iron ore, with the opportunity to nearly double to 6.3 million tonnes in the medium term, under Phase two. Once completed, the K&S Project will be one of the lowest-cost mine in the world; and a significant and exciting milestone for the Group.

    Our third project is the larger Garinskoye Deposit (99.6% owned), which under current market condition, the project development is put on hold. Garinskoye has the opportunity of developing into either a direct shipment ore operation producing an annual 1.9 million tonnes, or a larger, rail dependent open pit operation, producing 4.6 million tonnes. The project is located between the Trans-Siberian and BAM Railways.

    We also have a diverse exploration portfolio including iron ore and ilmenite optionality both in green and brown field projects. In addition, IRC continued its participation and lobbying for the development of a port in the Special Economic Zone of Sovetskaya Gavan.

  • 5: What is the Mining Process for Iron Ore and Ilmenite?

    The flow sheet for mining and processing iron ore as a bulk commodity is simpler than it is for many base and precious metals. Because we only mine by open pit methods, the technology that IRC employs is largely "off-the-shelf" and therefore easier to install and manage.

    At Kuranakh, we process titanomagnetite ores for both iron and ilmenite concentrates, whereas at K&S we only produce iron ore concentrate. The flow sheets are broadly similar, involving mining, crushing, screening and concentrating through dry and wet magnetic separation. The concentrates are then prepared, and in the case of ilmenite, bagged before being loaded onto wagons for rail transport directly to customers in China, Russia, and internationally, through the Pacific Ocean Ports.

    Our final products are high grade concentrate and attract competitive global iron ore prices because of their location. However, as Kuranakh has been moved to care and maintenance at the end of 2015, so IRC does not produce any iron ore and ilmenite now.

  • 6: What is ilmenite? And where is it most commonly used?

    Ilmenite is the raw material used as feedstock for titanium, and is ultimately used as a pigment or as a metal. Pigments are typically used for whitening, such as in paint; i.e. the greater the amount of ilmenite in a paint, the whiter it can be.

    As a metal, it is used largely in modern aircraft, such as the Boeing Dreamliner and the Airbus A380, because it is less dense. However, ilmenite can be equally as tensile as high density steels, making it a more efficient material for aircraft. Ilmenite also has applications as a metal in jewellery, electrical components and desalination plants. Kuranakah mines produced ilmenite as a by-product of iron ore concentrate, the nameplate production volume is about 160,000 tonnes. However as Kurnakah is moved to care and maintenance at the end of 2015, IRC currently does not produce ilmenite.

  • 7: What is the annual production target for IRC?

    IRC has consistently delivered on its production capacity targets, having beaten its iron ore targets for five consecutive years. However, IRC has announced moving Kuranakh Mine to care and maintenance status at end of 2015 due to weak iron ore pricing environment.

    When the K&S Mine comes on full capacity, production will be bolstered by 3.2 million tonnes of higher grade 65% iron ore concentrate.

    Looking to the longer term, when market conditions and investment sentiment improve, IRC has the potential to produce over a further 6 million tonnes, notably 3.1 million additional tonnes from an expansion at K&S Phase 2, and 2.1 million from the DSO style operation at Garinskoye, bringing the total group potential to over 8 million tonnes of iron ore.

  • 8: How is iron ore and ilmenite transported to customers?

    IRC enjoys an unrivalled location along the China-Russia border and is able to use both the Baikal Amur Mainline (BAM) and the Trans-Siberian Railway to deliver its products to China. The ore passes through the land crossing at Suifenhe for onward shipment to steel mills in China's Northeast. In addition, when the Sino-Russian Amur River Railway Bridge completes construction, IRC will be able to halve the transportation cost of K&S, further ensuring K&S as one of the lowest cost iron ore producer in the world.

    IRC can also use the railway to transport its products to the ports of Nakhodka and Sovetskaya Gavan for maritime shipping to Japan and Korea, and even as far as Europe.

  • 9: How is iron ore priced?

    The pricing mechanisms for iron ore have changed dramatically in the last 5 years. Historically, iron ore was priced on the basis of annual contracts, with the price remaining the same for an entire year. This made budgeting very easy. However, it was felt by customers that the price did not reflect the changes in market dynamics over the year. Subsequently, the market shifted towards spot pricing, and today we see already that nearly 10% of the market has settled with spot pricing. The development of spot pricing is interesting because many contract prices are settled based on historical averages of the spot market, which can be more marginal.

    In general, IRC's commodity selling prices are settled on a monthly basis, approximately representing the average of the preceding month's spot market prices. There are multiple ways to price iron ore, depending on the product and logistics. IRC prices are based on a DAF basis (delivered at frontier); this cost includes shipping to China, and therefore it is important to compare this cost with other international suppliers; CFR (Cash and Freight).

  • 10: How is IRC funded?

    IRC is funded through a combination of equity and debt. The equity is derived from the Company's Hong Kong IPO in October 2010 of approximately US$240 million as well as cash flow from operations. The Group also has a project financed debt facility from ICBC for the construction of the K&S processing plant.

    In January 2013, General Nice, a large Chinese steel raw materials trader and producer, and Minmetals Cheerglory, a subsidiary of one of China's largest state owned metals and mining enterprises, agreed to invest a total of approximately US$238 million in IRC in exchange for new shares. This strategic partnership aligns IRC's production growth in Russia with the investors' operating and trading experience in China. The placement proceeds are used to fund IRC's K&S Project Phase I. The partnership includes off-take and marketing arrangements, providing IRC with both sales volume and cash-flow security.

    As of 31 December 2015, General Nice has completed over 80% of their subscription. Also, according to the agreement, the Minmetals Cheerglory Subscription cannot take place until completion of the General Nice Further Subscription. Consequently, the Minmetals Cheerglory Subscription Completion did not take place.

    In March 2019, the ICBC loan was fully repaid by utilising the proceeds from the two Gazprombank facilities for an aggregate amount of US$240 million. The Gazprombank Facilities are conditional on certain conditions precedent, including Petropavlovsk, a substantial shareholder of the Company, guaranteeing K&S’s obligations under the Gazprombank Facilities and, in this respect, Petropavlovsk entered into five guarantee agreements with Gazprombank on 15 February 2019.

  • 11: Who are your biggest customers and who do you sell iron ore to?

    IRC sells its iron ore concentrates to Chinese and Russian customers. We are fortunate to work with the largest and the most modern steel mills in the regions, enjoying long term off-take relationships.

    As the K&S operation comes on stream, IRC can potentially diversify its customer base within China, Russia and internationally. So far, the materials from K&S have been tested by many potential customers and all have confirmed the suitability of the feed for their plants.

  • 12: What is IRC's competitive advantage?

    Our competitive advantages are a unique combination of heritage, geology, geography and infrastructure.

    By heritage, we mean our 20-year successful track record in Russia, which gives us deep knowledge of the country's operating environment, as well as strong in-house capabilities, built up over the decades, in geology, metallurgy, technology, R&D and administration.

    In terms of geology, we have approximately 1.4 billion tonnes of high quality magnetite resources in the ground, of which around 30% are good grades reserves (as of 31 December 2018).

    Our geographic proximity to China gives us access to the world's largest and fastest growing market, as well as ports for transporting to customers beyond China. Our K&S mine is situated approximately 240 kilometres from the Amur River Rail Bridge, which translate to three to five days to the Chinese border, much faster and reliable than our peers who depend on freight transport.

    And finally, in terms of infrastructure, we enjoy access to Russia's long-established, world class rail connections, water supply, power supply and skilled labour force, enabling us to develop our operations quickly, efficiently and to the highest skill level.

  • 13: What is the political risk surrounding Chinese-Russian Relations?

    Russia is an established player in the global mining community. The country enjoys a large pool of skilled labour to provide both support and professional services in many areas including mining, metallurgy, logistics, administrative, legal and accounting. In addition, Russia's financial system is well established, with clear and comparatively low tax rates. All of this provides a distinct advantage to developing projects in a timely manner and to a high standard in Russia, which IRC believes is a key positive to operating in the country as compared to other parts of the world.

    Looking to the future, IRC believes that trade between China and Russia will grow significantly, with Russia having the resources and China having high levels of demand fueled by its urbanisation and infrastructure growth projects. It makes sense that cross-border trade between the two nations will increase, in part as China looks to its neighbours for supply rather than to the traditional and far-away oligopoly of Australia and Brazil that currently dominates seaborne iron ore supply.

    Given the context of the One-Belt-One-Road Initiative by the Chinese government, the trade links between China and Russia has been further strengthened. As our assets lies at the Far East of Russia, close to the boarder of North-East China, we believe IRC is well-positioned to benefit given its unique advantage of being the leading China-Russia producer of high quality steel raw materials.

  • 14: Who (are) is your largest investor(s)?

    As of 31 December 2019, Petropavlovsk continues to be our largest shareholder, holding a 31.0% stake.

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