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Ladies and gentlemen welcome to Polymetal Fourth Quarter 2018 Production Results Conference Call.I now hand over to your host, Mr. Vitaly Nesis, Group's CEO. Sir, please go ahead.
Thanks a lot. Ladies and gentlemen, thank you (sic) [ welcome ] to the traditional conference call on the production results for the fourth quarter and full year 2018 for Polymetal International. I'm very pleased to report the strong fourth quarter results, which cap a very successful year for our company.The fourth quarter gold equivalent production increased 23% year-on-year to a record of 497,000 ounces of gold equivalent, that was driven by the full ramp up at our new Kyzyl mine. And I'm very happy to report that Kyzyl in its second full quarter of production has already exceeded the design parameters and started to deliver very strong free cash flows for the company.In terms of the full year production, Kyzyl produced 96,000 ounces of gold. Now that is only gold which has been shipped to outside customers or processed through our own in-house pressure oxidation facility, that is above the original 80,000 ounces guidance.As a result, we actually managed to meet and slightly exceed our production guidance for the year. And full year gold equivalent production was 1,562,000 ounces, which is 9% higher compared with 2017 and that exceeded our original production guidance of 1,550,000 ounces. 2018 marked the seventh consecutive year when the company exceeded the original production guidance.What is also very pleasing, the fourth quarter saw very strong free cash flows. And net debt in the period fell by roughly $300 million to slightly above $1,500 million. The strong free cash flow was mostly driven by first revenues at Kyzyl, seasonal destockpiling at Mayskoye, but was also helped by proceeds from the disposal of noncore assets. We had no fatalities or major accidents in the fourth quarter, despite the fact that we cannot be fully satisfied with our full year safety results. We had a fatality at our Kapan mine back in March. Still, the statistics demonstrate a meaningful improvement year-on-year. One fatality among our employees and no fatalities among contractors in 2018 compared with two in-house fatalities and one contractor fatality in 2017. In terms of lost time injury frequency rate, also 2018 saw a meaningful improvement. We will continue to strive to achieve our strategic goal of no harm to life and health of our employees and contractors going forward. In the fourth quarter, importantly, following the Board approval and the receipt of all government approvals, we have started active development at Nezhda, which will be our next producing mine with first production expected in the end of 2021. Open-pit mining in the form of pit access road construction and the construction of the processing plant and infrastructure have commenced at Nezhda. Turning to guidance, we expect the 2018 cost guidance for TCC and AISC to be comfortably met, closer to the bottom of the guidance range, which is $650 per ounce for TCC and $875 for AISC. In terms of the 2019 and 2020 production guidance, we reiterate the previously released numbers of 1.55 million ounces and 1.6 million ounces for those 2 years, respectively. In 2019, production will be expected to be essentially flat versus 2018. The first full year of production at Kyzyl and an increase in grades at Omolon are expected to be offset by the fact that we have sold 2 smaller producing assets, Khakanja and Kapan. And also, we expect to see some planned grade declines at Albazino, Voro and Dukat. In terms of costs, we provide the guidance in terms of total cash costs in the range of $600 to $650 per ounce of gold equivalent, with AISC number in the range of $800 to $850 per gold equivalent ounce. Obviously, the decrease in costs will be primarily driven by the increased share of production from Kyzyl, as well as the disposal of relatively high-cost Kapan and Khakanja operations. I would also like to note that the company will host the pressure oxidation workshop on the 11th of February in London. The primary objective of this event directed mostly towards investors and research analysts is to provide an update on the POX-2 project and to -- try to provide an overview of the POX technology for the investment community. And with this, I guess, I will close my introductory remarks, and we'll be pleased to answer any questions.
[Operator Instructions] Our first question is from Daniel Major from UBS.
Couple of questions. Firstly, on Kyzyl, I believe your previous guidance was around 300,000 ounces for 2019. Clearly, looking at the run rate in the fourth quarter in terms of the concentrate production, it -- that potentially looks conservative. Can you give us any update on specific guidance for Kyzyl? Also, would it be fair to assume next year, you catch up that differential in terms of sort of sales versus production looking at the 96,000 of gold production versus the 134,000 of gold in concentrate? That's the first one.
Dan, thanks for the question. Yes, definitely, we'll be looking to close down to reduce the shipment gap because definitely as we establish the shipments which were seen during the ramp-up, we hit a few hiccups, but we definitely expect the working capital to unwind in 2019. In terms of the guidance per se, I think the first quarter of the year will be very illustrative in terms of whether the positive grade reconciliation, which drove much of the outperformance in the fourth quarter will continue. January results are looking quite optimistic. We continue to get materially positive grade reconciliation. Thanks to the presence of very compact, high-grade areas or parts, as we call them. So to ramp up, yes, there is an upside risk in terms of Kyzyl production guidance for 2019.
Just a quick follow-up on that. Is the ground conditions were certainly very soft when we visited the site in November, is that still the case? And is that causing any -- sort of any challenges in terms of mining?
Well, we are now in the winter times, so geotechnical concerns are significantly less pronounced. You may call them nonexistent for this period. So I think we'll need to wait till April, actually May, when the situation may present challenges. However, we have proactively addressed the change in geotechnical conditions. And now we are in the process of redesigning the open pit, particularly the access -- route to the access scheme. And by the end of 2019, most likely by the time we hold our Investor Day in November, we expect actually to present the new life-of-mine development plan for Kyzyl, which will, as has been previously flat, involve a significant increase of the open pit and a significant increase of the open pit of our reserves. So part of the work that we are currently doing to address the footwall instability will actually be very helpful because of the new pit outline, which will be wider than the current designed pit.
So the next question on the POX-2 event in a couple of weeks. Would it be fair to assume you're getting close to the potential to approve this project to the board, and maybe that could be something that comes out...
Yes. We actually -- we plan to conclude the Board discussions next week. And the management is reasonably optimistic that the Board will support the project, although the final say will rest with the Board. And in preparation for this board decision, we plan to follow up their decision with a thorough and focused investor education.
Our next question is from Yuriy Vlasov from Sova Capital.
Two questions from my side. One is grade at Dukat. We see relatively stable grade at this asset. Where do you see production level and the grade this year? And the second question is on Kyzyl and Amursk POX. With Kyzyl fully ramped up, would you see third-party or processed Amursk fully eliminated? Or will it still be a room for some third-party volumes?
Yuriy, thanks for the question. In terms of Dukat, we expect to see further erosion in grades in 2019 versus 2018, maybe to the tune of 5% to 6%. So it will not be until Perevalnoye deposit is up and running and contributing significantly to the fleet when we expect to really see grades starting picking up a bit. And Perevalnoye is expected to generate first or close to the end substantial amounts of -- close to the end of this year, but we most likely will see the full impact of contribution from the deposit only in the second half of 2020. In terms of the composition of fleet at Amursk POX, we currently have very little material in the production plant from third parties. Pretty much everything is picking up by Albazino, then Kyzyl, and then material from Veduga. But there may be opportunities to do some kind of swaps. Although I have to say, this is looking increasingly unlikely because we have the possibility to increase the share of low carbon material in the overall Kyzyl production mix. So if we see that Amursk POX outperforms in terms of capacity, we probably will decide that the best way to fill up capacity is to shift more Kyzyl production towards POX rather than to buy third-party material.
[Operator Instructions] We have a follow-up question from Daniel Major from UBS.
Just wondering if there is any update on the additional proposed asset sales that you highlighted in the Analyst Day presentation in November, in terms of updates on the process, I guess, for Lichkvaz in terms of timeline or any update there?
Well, to be frank with you, the M&A team was fully focused on the closing of transactions for Khakanja and Kapan. Khakanja happened in mid-January. We pretty much will fully close Kapan in a couple of days' time. I think after this is done, we'll kind of redirect our transactional resources towards other assets on that noncore list. So, so far, the progress has been very, very limited, not because there is lack of interest for the assets, just because we were busy with something else. But give us 3 months, and I think there will be some traction in terms of kind of the second tier of the assets for disposal.
Great. Just a quick -- you received all of the cash from Khakanja, Kapan in the first half of '19.
Khakanja, we received all of the cash before the New Year. And Kapan, we expect to receive all of the remaining cash next week.
Our next question is from Nikolay Sosnovskiy from Prosperity.
A couple of strategic questions on the M&A front as well. You've mentioned some next wave of asset disposal. So can you please outline what could be the potential targets for these assets? And also, I presume that at some stage, Polymetal will still be buying some assets from the market. And if so, what could be the ideal target for your next acquisition in terms of region, size and other features?
In terms of the next wave of disposals, the assets which we are currently concentrating on, there are 4 of them: Lichkvaz in Armenia, Kutyn in the Russian Far East, Maminskoye in the Urals, and our stake in Veduga deposit in Central Siberia. So those are the 4 assets, which we will flip out of the next wave of potential disposals. We're currently not looking at any acquisitions whatsoever. We don't have any appetite. The only thing I can say that we remain committed to the former Soviet Union. There is no intention even very long term to venture outside of our core markets.
And once again on the strategic front, how do you see these megamergers in the gold space? Did you think there is or -- at some stage, there will be any pressure from shareholders to grow bigger in Russia or joining forces with someone else outside of Russia?
I think from the point of view of Polymetal, the pressure from, at least, some of our shareholders has been to grow smaller or to grow more focused to reduce the number of the assets in our portfolio. I struggle to recall even a single setback saying that we need to get bigger, we need to consider M&A. I just -- we don't have -- we didn't have that experience.
And what is your view on this potential path because I assume Polymetal has been kind of, throughout its history, creating the story ahead of shareholders and then delivering value as a result of this, not vice versa kind of following the demands.
Well, I think it would be pretty naïve to assume that we created value because the management is so smart. We created value also because we strive to listen to our shareholders and to reflect their views and preferences in our approach. We believe the company and the management of the company needs to take onboard the key feedback because we are all fallible, and we definitely benefit from the outside view. And we cannot just ignore what the shareholders are saying. And one of the most frequent feedbacks that we have received over the last couple of years that the portfolio of the company has become too sprawling and needs trimming. And precisely, because of that feedback, which coincided with the internal view, we embarked on the program of asset rationalization and sold 2 producing mines. So yes, we, historically, have been active acquirers. And we do not rule out making new acquisitions in the future, but I would say not in 2019.
Our next question is from Anna Antonova from JPMorgan.
A small follow-up question on the production guidance for this year from us. So given the current developments at Mayskoye that you outlined in the press release, how should we think about production from the assets this year?
I think -- thanks for the question. I think the plan at Mayskoye is slightly above 2018 result, mostly on the back of continued working capital, destockpiling through some of the gold, which was produced in the form of carbon from the oxide circuit is still in the form of work in progress, and we just expect to complete the processing of that gold. Other than that, the underground mine and the open-pit mine are pretty stable, so we don't expect significant changes.
[Operator Instructions] We have no further questions. Dear speakers, back to you for the conclusion.
Well, thank you very much for active participation in the call. We would be happy to answer follow-up questions. If you have any, please contact our Investor Relations team or the management, and we'll try to accommodate your queries. Again, thank you very much and have a very nice day. Goodbye.