Review of Operations Reserves and Resources

In 2011, Ferrexpo was the largest exporter of pellets in the CIS and one of the top 10 pellet producers in the global seaborne iron ore market. Production continued at full capacity and a record quantity of iron units was produced and shipped in the form of pellets. On a Fe equivalent basis, the Group's output of iron units has doubled in the last 10 years of production. In addition, the average grade of its pellets has increased significantly by over 1% to 63.5% Fe.

Pellet production began at FPM in 1977 after construction of the mine, processing facilities and local town of Komsomolsk under Soviet Union ownership. The pit is open cut and approximately 330 metres deep and seven kilometres long. Some key milestones of production output have recently been reached. In December 2010, the processing facilities reached total production of 250 million tonnes of pellets, while in 2011, the mining division extracted the one billionth cubic metre of rock and ore since the start of mining activities.

FPM once again increased the amount of iron ore mined per annum. In 2011, it mined 29,637 thousand tonnes, 2.4% higher than 2010. This is in line with Ferrexpo's strategy to expand the mining capacity of the pit in conjunction with the Mine Life Extension project (see Development Capital Investment at FPM below). Stripping volumes increased in 2011 by 10.7% to 28,214 thousand tonnes reflecting the age of the mine and required pre-stripping to access new reserves as part of the mine life extension.

The FPM processing facilities have latent processing capacity of approximately 3.0 million tonnes of pellets per annum as a result of insufficient mined ore from the existing operations. During the year, 747 thousand tonnes of pellets were produced from purchased third party concentrate (2010: 998 thousand tonnes). The Group purchases third party concentrate subject to availability in the local market and will substitute this with own ore as the capacity expansion and ore from FYM comes on line.

In total, the processing facilities produced 9,811 thousand tonnes of pellets (2010: 10,031 thousand tonnes) of which 4,799 thousand tonnes were Premium 65% Fe pellets (2010: 4,879 thousand tonnes) and 5,012 thousand tonnes were Basic 62% Fe pellets (2010: 5,152 thousand tonnes).

Table 2: Production Statistics

(000t unless otherwise stated)			Change
	2011	2010	+/-	%
Iron ore mined	29,637	28,930	707	2.4
Average Fe content	30	30	–	(0.1)
Iron ore processed	29,535	29,097	438	1.5
Concentrate produced ('WMS')	11,487	11,226	261	2.3
Average Fe content %	63	63	–	(0.6)
Floated concentrate	7,241	6,195	1,045	16.9
Higher grade	4,685	4,426	258	5.8
Average Fe content %	67	67	–	(0.2)
Purchased concentrate	864	1,142	(278)	(24.4)
Average Fe content %	66	67	1	(0.7)
Purchased iron ore	–	–	–	–
Pellets produced from own ore	9,063	9,033	30	0.3
Higher grade	4,256	4,061	195	4.8
Average Fe content %	65	65	–	(0.0)
Lower grade	4,807	4,972	(164)	(3.3)
Average Fe content %	62	62	–	0.1
Pellets produced from purchased concentrate and ore	747	998	(250)	(25.1)
Higher grade	543	818	(275)	(33.6)
Average Fe content %	65	65	–	(0.0)
Lower grade	205	180	24	13.5
Average Fe content %	62	62	–	0.1
Total pellet production	9,811	10,031	(220)	(2.2)
Pellet sales volume	9,876	9,721	155	1.6
Gravel output	2,855	2,905	(49)	(1.7)
Stripping volume	28,214	25,481	2,733	10.7

There were no fatalities at FPM in 2011, and lost-time injuries reduced from 19 in 2010 to 11, reducing the LTIFR to 0.82 per million man hours worked which is the lowest rate in FPM's history (2010: 1.43 per million man hours worked). This reduced the three-year moving average to a LTIFR of 1.12 compared to the prior three average of 1.16 per million man hours worked.

* Please note: following an increased focus on safety by the Group from 2009, incidents that were previously unreported are now
  reported on and disclosed.

The management of Ferrexpo strongly encourages a culture of safety in the organisation linking safety performance to remuneration. The Group has regular internal safety audits and external audits by DuPont and is committed to following international best practice as well as to set the standard for mining companies operating in the CIS.

In 2011, FPM completed and implemented 34 projects as part of the BIP. This reduced the C1 cash cost of production by UAH68m or 1.8%, in line with its goal of 1% to 2% cost savings per annum. Of these projects, 18 concerned transportation efficiencies in the open pit, seven projects were focused on improving productivity in the processing facilities and nine projects focused on reducing downtime in the service departments. Table 3 shows the actual resource savings achieved in 2011.

Table 3: Resource Savings under BIP

Resource	Savings
Power (million kWh)	21.4
Steam (Gcal)	6,520.7
Grinding media (tonnes)	1,257.2
Diesel fuel (tonnes)	278.0
Lining (tonnes)	60.3

It is an essential part of the Group's strategy to reduce costs in order to remain in the lowest cost quartile of global pellet producers. This has been achieved through ongoing efficiency improvements and cost reductions over many years. Table 4 below illustrates the effect of these projects. Since 2005, the year before the start of the BIP, FPM has achieved savings of US$6.6 per tonne in the C1 cash cost of production.

Table 4: Improvement in Consumption Norms

Norms – examples	2005	2011	Ch %
Electricity kWh/t	205.5	179.2	(15)
Gas m3/t	22.0	16.8	(31)
Grinding bodies kg/t	6.4	5.6	(15)
Labour productivity thousand tonnes/person	0.7	1.5	53

Decrease in consumption of steel grinding media in concentration plant

Cost: no capital cost required.
Savings: 1,257 tonnes of steel grinding media, UAH8 million (at current prices).

Description of project:

A programme was designed to monitor electrical consumption of the motors on the ball mills in the concentration plant. Ball mills contain steel grinding media which are used to grind the iron ore into an optimum size for further processing. By studying the pattern of power consumption, FPM could assess when grinding media were being over or under loaded. As a result, FPM could optimise the process for consistent loading of grinding media and reduce overall power consumption.

Benefits:

1. More efficient energy management.
2. Reduction of grinding media required.
3. Consistent particle size achieved.

Reduction of power consumption at the tailings plant

Cost: UAH13 million.
Savings: 18 million kWh power; UAH11 million per annum.

Description of project:

Tailings, fine particles of waste, which are a by-product of pellet production, are stored in a tailings dam. During 2010 and 2011 FPM redesigned the piping from the dam to the processing plant to allow water to flow by gravity, instead of via electrical pumps, back to the processing area for reuse.

Benefits:

1. Lower electricity consumption.
2. Reduction in wear and tear of water pumps.
3. Recycling water.

Dispatch system in open pit

Cost: UAH28 million.

Description of project:

Trucks used in the pit to collect ore have been fitted with GPS tracking systems. This allows for better scheduling of pick-ups thereby improving overall mining efficiency. In 2011, the focus was to set up the hardware for this dispatch platform. Now that this has been achieved, the system can be expanded to monitor other performance criteria, such as the pressure and temperature of tyres and engine performance in trucks. The system can also be used in the future to evaluate the performance of other equipment in the pit such as drilling rigs.

Expected project outcomes:

1. Reduced downtime for trucks waiting to load.
2. Reduction of instances of 'zero mileage' for trucks.
3. Increase of mine fleet capacity by 7% after first year of operation.

The BIP is embedded in the Group's culture with targeted outcomes linked to operational managers' performance evaluations. Ferrexpo believes the programme is essential to ensure continued improvement in the cost reduction of its mining and processing activities.

During the period, the Group allocated US$121 million for the modernisation and debottlenecking of FPM's production facilities (2010: US$49 million).

Included in sustaining capital investment are projects to upgrade FPM's facilities to allow processing capability of 35 million tonnes of crude ore per annum by the end of 2013. This will ensure FPM can process additional ore from the FPM open pit and first ore from FYM, increasing the Group's pellet output to 12 million tonnes per year. Activities during the year focused on the redesign and reinstallation of parts of the crushing plant which were completed and commissioned in January 2012.

Sustaining capital investment also provides for the modernisation of existing assets and systems to increase operating efficiencies, benefiting the cash cost of production.

Quality Upgrade Project

Of the total pellets produced at FPM in 2011, 49% represented Ferrexpo Premium pellets (65% Fe) while the remaining were Ferrexpo Basic pellets (62% Fe). The Group's strategy is to increase the quality so that all output is Premium pellets. To achieve this, the Board approved a US$212 million investment programme in November 2010.

The FPM pit consists principally of two types of ore seams. The Quality Upgrade Programme will enable the Division to upgrade (beneficiate) leaner ore to a higher iron content through the modification of the existing flotation circuit and the installation of two additional circuits. The project also involves the upgrade and replacement of filters to remove water from the concentrate prior to it entering the pelletising plant. The project is scheduled for completion by the end of 2014.

During the year, FPM completed the majority of the engineering and design documentation and prepared the sites for the flotation sections. Long-lead orders for the vertical mills, used in the beneficiation process were placed, with delivery expected to start in mid-2012.

The FPM open pit mine has been in operation since 1977 and contains ore beyond the original planned pit limits and depths. In November 2010, US$168 million was approved for expenditure to extend the life of the mine to 2038. This project involves stripping and removal of overburden to access further iron rich ore by 2014. The project began in 2011 and is scheduled for completion by the end of 2018.

During the year, approximately 13 million cubic metres of overburden was removed in line with the plan. Higher diesel prices resulted in increased costs, however, the Group expects these costs to moderate over the remaining life of the project. Orders for a drilling rig and two excavators were placed and are expected to be delivered in the first quarter of 2012, while three dump-trucks were delivered in September 2011.

Total development capital investment at FPM in 2011 was US$49 million (2010: US$55 million).

Phase 1 – First Ore:

Capital investment at FYM during the period was US$129 million (2010: US$43 million). This project is proceeding on time and on budget (total cost US$267 million) with first ore expected at the end of 2012.

Overall, 60% of the required pre-stripping has been completed. In 2011, 16 million cubic metres of overburden was removed with 15 million cubic metres of pre-stripping remaining. Currently, five draglines, 16 CAT 789 haul trucks, five CAT 793 haul trucks and a hydraulic excavator are in operation. A further excavator and five additional CAT 793 trucks are expected to be in operation by 2Q 2012. Meanwhile, construction of permanent pit infrastructure is well under way and the Division employed 677 permanent staff as of 31 December 2011.

Once first ore is achieved Ferrexpo will be able to increase its pellet output by one third to 12 million tonnes per annum by using the facilities at FPM.

Phase 2 – Construction of Concentrating Facilities:

Ferrexpo intends to increase its total production output by over 60% to 20 million tonnes by 2016. FYM plans to produce approximately 28 million tonnes of crude ore per annum. In order to process this material, a new processing (concentrator) facility will allow the Group's output to increase from 12 million tonnes per annum to 20 million tonnes per annum.

Currently, the Group is finalising the engineering design for the concentrator to ensure it complies with international best practice and local design institute requirements. Ferrexpo anticipates final approval of the project, in its entirety, during 2012.

Although concentrate is saleable as a product in its own right, Ferrexpo recognises the benefits of producing iron ore pellets, which are of higher value to end customers. As a result, approval of the concentrator will also initiate the third phase of the project, subject to Board approval, which is to construct a 10 million tonne per annum pelletiser to be established in the most favourable location.

Since the start of the project in 2008, FYM has had an excellent safety record. There were no fatalities or lost time injuries in 2011.

The Ferrexpo Belanovo deposit has total JORC resources of 1,702 million tonnes. Drilling works and site preparation activities were undertaken in 2011 amounting to US$8 million. A Bucyrus RH340 hydraulic face shovel and five Caterpillar 793D haul trucks have been ordered for delivery in mid-2012 in order to begin stripping works. It is anticipated that in 2012 capital investment will be in the region of US$50 million, as part of the programme to reach first ore at the deposit.