Polymetal International PLC

LSE:POLY

Earnings Call Transcript 2022-Q4

[Operator]

Good day and thank you for standing by. Welcome to the Polymetal Preliminary Results Financial Year 2022 Conference Call. At this time all participants are in a listen only mode, after the speakers’ presentation there’ll be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, Vitaly Nesis, CEO. Please go ahead.

[Vitaly Nesis, CEO]

Thank you very much. Ladies and gentlemen, welcome to the call on the financial results for 2022. I'm joined at the call with Maxim Nazimok, CFO for Polymetal, we will walk you through the key results now for 2022. We'll also discuss the current status of things regarding strategic concerns the company is facing. And then at the end, we'll have Q&A session.

I also urge you to consult the frequently asked questions summary that is posted on the company's website. And I would just like to remind you that there will be a number of forward-looking statements contained in the presentation. And I give you a typical disclaimer that these statements are based on estimates.

Let's start with the key figures for 2022, definitely the year was very challenging in terms of the result that the company was able to achieve. Despite the overall steady production performance parliament suffered significant deterioration in all of the key financial metrics, as costs increased very significantly.

Total cash costs jumped by 29% to $942 per ounce, and oil in sustained costs increased roughly in line, that led to big drop in adjusted EBITDA, now by 31% to $1.17 billion, a big huge decrease in free cash flow, as now decreased profitability was matched was actually now made even worse by significant increase in capital expenditures and the big build-up in working capital. And consequently, the underlying earnings per share declined almost more than by half. And the leverage ratio of net debt over adjusted EBITDA increased more than twofold to 2.35 times.

Not a pretty year, but now we hope that this is now behind us and we look forward into 2023 with more. Now on page 4, I would like to stress one of the key positive achievements Polymetal made in 2022. Now for the third year in a row, Polymetal had no fatalities among group employees, and we actually didn't have any fatalities even including contractors. The statistics in terms of lost time incidents and this loss to work related injuries have also improved very considerably. That demonstrates, our firm commitment to safety. Now that is our top priority, regardless of the external circumstances.

Page 5. I'm also proud to report that despite the external challenges we are making good on all of our promises in terms of sustainability. Greenhouse gas intensity to rounds of gold equivalent decreased by 7%. And actually, we are above the planned trajectory to cut our emissions by 2030.

Now we marked the third year in a row when we are steadily decreasing the GG intensity. And in general, we are now approximately 5% below the target trajectory. In terms of both water consumption and the share of dry stack tailings, we also have made significant progress, and again that demonstrates the critical importance we describe to sustainability, despite external pressures.

In terms of ore reserves, dynamics in 2022. Unfortunately, the sanctions imposed against Russia have significantly disrupted the summer exploration season in Russia. Now we more or less failed to pursue all of the key reserve increased targets. We did better, with earlier stage prospects in terms of resources, but reserves more or less decreased inline with the depletion, but also, we have revalued some of our deposits following sharp increase in sharp depreciation of ruble and increase in costs.

The minus 9% in reserves year-on-year, obviously, it's not a pretty result, but the management is optimistic that, this year we will be able to catch-up both with the physical volumes of exploration and with the evaluation of reserves following those results. In terms of production, despite the planned decreases across our portfolio of mature assets, we had very strong first full year of production from Nezhda.

Even difficulties in placing our concentrate in the Chinese market, did not detract from our ability to produce significant amounts of gold from our newest mine. And as a result, production increased 2% year-on-year and we successfully bid our pre-war production guidance of 1.7 million ounces. I think that is a strong testament to the company's ability to operate net E&V environment of unexpected significant challenges.

And with this, I turn it over to Maxim who will go through the financial details of our results.

[Maxim Nazimok, CFO]

Thank you. Just recapping on the key financial highlights, so the revenue was near a further small decline for volume driven -- 15% price driven. The adjusted EBITDA is down by 30% but still was about $1 million dollars’ mark. The lower margins in the business were driven by significantly higher total cash costs and all in sustaining cash costs, which both metrics grew approximately 30% and we will see the drivers later on.

Yet, the company has reported positive underlying net earnings of $440 million which is a $0.93 per share. While we saw negative free cash flow and net debt increasing, it was almost an obvious decision by the Board, not to propose any dividend in respect of 2022.

We hope that in 2023, we'll deliver both positive free cash flow and then this reduction, which will allow to potentially resume the dividend statements. Capital expenditures came slightly above the guidance at $794 million, just 5% above the 2021 level as we were actively building key projects such as POX-2. And new launch, a closer look at driving is, the first half was generally weak because we had to basically stop and restructure the sales.

However, Q3 and especially Q4, saw a very strong catch up in terms of volume of gold sold. So as a result, we finished the year with significantly lower stock piles of unsold metal inventory. Yet there was still a gap between the gold and silver produced and gold and silver sold.

In terms of adjusted EBITDA, as I have mentioned the cost increases combined with gold and silver price movements were the two most important factors. Out of the $1.070 billion, $660 million was generated in Russia. And the rest was generated by the Kazakhstan operations.

In terms of cash cost dynamics, you can see here that the double digit inflation, which, as a reminder was 12% in Russia and 20% in Kazakhstan, probably the largest factor, in addition, there were, you know, some specific inflation refreshers related to sanctions and related logistics difficulties, and the need to replace certain pieces of supplies, in terms of purely internal factor, I would probably single out the schedule grade declines at Albazino and Kyzyl, and obviously in general, Forex, that wasn't helpful because really the US dollar rate was actually weaker, and so removal was stronger, compared to the full year of 2021.

In terms of cost structure, this is an indicate 2023 structure. But this will be very similar to 2022 with one exception. The royalties in Kazakhstan which are going up this year, 50% compared to last year. But everything else is roughly the same. You can see that foreign currency denominated costs are not very significant. However, the domestic inflation of the last year was quite meaningful. So that was the major factor of this incident, thus, behind the cost.

Page 13 just shows you the sensitivities to the key -- to the two key most important variables. One is the gold price, and the other is the ruble dollar exchange rate. You can see maintain quite significant exposure to both. Right now the situation looks better than it was in 2022 for both variables. Actually, gold is higher, by approximately a hundred dollars per ounce compared to last year. And ruble so far has been already meaningfully weaker than in the second half of 2022.

Turning over to individual cost dynamics at our operations, Brazil remains the lowest cost operation in the portfolio. These are AISC, so this includes sustained capital expenditure. However, most of the dynamics that was actually ruined by operating costs per on basis increase because of the grade decline, and pretty much same applies to the next mine, so therefore which still all at the same cash costs, crossing the 1000 lower threshold.

Varvara, delivered very steady performance last year. So essentially higher grade and higher volume were offsetting all of the inflation -- related inflation with Russia plus Pangea [ph] was depreciated, not appreciated. At Dukat, great dynamics is actually the single most important factor behind the cost dynamics, and same applies to Omolon.

We saw a meaningful increase at Voro, which hopefully will be actually reversed this year, because this is mainly represented by the capital expenditures encouraged to build the flotation, flow sheet at Voro, which is expected to launch this year and bring high grade ore into production.

At Albazino, also behind the both dynamics was mainly the great decline, but also, some of the increased capital expenditures, namely the power line construction, that is now ongoing and is expected to deliver material cost savings upon launch in 2025 [ph].

Likewise, at Mayskoye, we have launched the conveyor system, and we are progressing the project on shifting to backfill method of mining. Both have an increased material, the sustained in CapEx and also Mayskoye was actually the mine we suffered most on the strong ruble because the other sales at Mayskoye, which are occurring in a very short timeframe between August and November, coincided with the strongest ruble over the course of the year.

Initial all sustaining cash flows at Svetloye came at 1,750 which was largely expected because there was still an increased capital stripping bill at Nezhda completion, some of the minor projects. Plus, as Vitaly mentioned, we had experienced difficulties in placing the goal for the concentrate Chinese updates. So, some of this had to be stockpiled and the cost were spread over the smaller amount of assets.

Now turning over to the balance sheet, net debt has been reduced over the second half of 2022 to $2.4 billion. Yet this is still materially higher than at the start of 2022. This equates to another EBITDA of 2.35 time. You can see the maturity chart on the slide. Essentially, all of the 2023 repayments are covered by available cash balances, which is not applicable to 2024 onwards. So, we are continuing efforts to gradually finance the loan portfolio as opposed to you and actually starting to increase majorities.

Unfortunately, we are shifting to alternative currencies from Europe and dollar -- specifically dollar, which was the major bordering currency historically, yet still 65% of our loan portfolios and dollars 27% is in rubles and the CNY emerging as a new border in currency with 8% of the portfolio.

We have been able to maintain still very competitive cost of debt of 5.5% on average. Unfortunately, we knew that is coming slightly more expensive plus base rate setting volume over the course of 2022. Yet still 55% of the loan forward is a fixed interest rate and some of this is pretty long-term. So, this is providing a solid basis for further refinancing efforts and limitation on that process.

Turning to 2023 guidance. We are expecting steady production at 1.7 million ounces. We also expect more or less the same level of total cash costs and all in sustaining cash costs. The ranges are $950 to $1,000 and $1,300 to $1,400 per ounce respectively. These numbers are based on the budget, where the ruble dollar exchange rate was back at 65 rubles per dollar.

So now we are facing the macroeconomic environment that's better, then what we budgeted for. At the same time, the inflation processes in both Russia and particularly Kazakhstan, are very significant. You may have seen the reports that in February annual inflation and CapEx stand around at 20% plus. So, we need to balance the upside in terms of weaker domestic exchange rates against the downside in terms of higher domestic inflation.

In terms of capital expenditures, we expect a slight decrease of $700 million to $750 million. Now we are continuing to push on the POX-2 project, and that obviously presents significant difficulties, given the fact that, almost all of the, not only equipment but also construction materials have fallen under the sanctions. We are working hard to source the materials from mostly China. And we remain confident that, this crucial project will get across the finish line in 2024.

And the last but not least, a brief update on the potential installation process that the company is continuing to evaluate. It's still work-in-progress. We would like to emphasize that, the key objective of any potential redo installation is to preserve and enhance shareholder value, restorability to pay dividends and increase the strategic flexibility to conduct our operations. Risk reduction in terms of potential political interference is also a very important consideration.

We currently continue to evaluate all available options to modify the Group's asset holding structure. And we may be treading less quickly than we originally expected, but that is due to the fact that, we have encountered multiple unforeseen difficulties. The preferred option is still the potential redo installation of the parent company Polymetal International into the Astana International Financial Centre in Kazakhstan. Still, I would like to stress that no decision has been made, and there will be no certainty that the company will proceed with or ultimately complete a re-dom.

This is a plan, but not yet the reality. As one of the key work streams, now within this whole process, is the strategy of a continued public trading of the re-dome company. Polymetal has attempted to secure the services of a DI provider in order to continue trading on the LSC, on the premium segment.

However, the providers that we talked to declined for various reasons the majority of which are quite obvious to provide statutory arrangements, therefore the depository interest program, more or less we have abandoned as an option to remain on the LSC.

Now still we continue to actively pursue other options of maintaining liquidity following the re-dom.

And definitely, to wrap up I would like to emphasize once again that the company will continue to take into consideration the interests of its stakeholders prior to making a decision. Therefore, any decision that's recommended by the Board will be put up for shareholder vote. And the timing of this vote will definitely be adequate for the shareholders to express the opinion on the matter.

Thank you very much for your attention. And we would be, thrilled to answer any of your questions.

[Operator]

[Operator Instructions] There are no questions on the phone line at the moment, so I'll hand over to you to manage questions from the web.

[Vitaly Nesis, CEO]

There was a number of questions from the webcast that relate to the future of the shares post re-dom and first of all, I would like to direct the -- those who ask these questions to our web page with the list of frequently asked questions, which provide in some cases, quite a detailed overview of what may happen.

And secondly, I think when we are ready to finally put up the recommendation of the Board for the shareholder decision, we will definitely explain in the shareholder circular in great detail what options are available for various categories of shareholders, dependent on the structure and the product in which they hold their Polymetal shares.

This is quite a technical discussion. So, I think this call is probably not an appropriate place to answer this relatively technical questions.

Again, generally, I would like to stress that our top priority is preserving a stakeholder interest, including shareholder interest, and we'll make every effort to ensure that the shareholders don't lose the value of our shares.

In terms of more kind of business-oriented questions, I will start with probably the most topical one. Can you comment on the rumors that Highland Gold Owner Weighs Buying Polymetal assets?

I would like to stress that we are not in negotiations to sell any of the operating mines that the Polymetal owns. And definitely, we plan to continue on with the same portfolio of operating assets that we currently have.

And then more detailed questions. What is your AIFC plan for Nezhda?

We expect that this year, there will be a big drop probably to the level of somewhere around $1,200 per ounce.

What is your net debt split between Russia and non-Russian?

[Unidentified Analyst]

Yes. So out of gross debt of roughly a 3 million and 2.2 belongs to the Russian operations and then 800 belongs to Kazakhstan operations.

[Vitaly Nesis, CEO]

What percent of approval from shareholders do you need to proceed with re-dom to Kazakhstan?

The resolution needs to carry 75% of votes from those voting.

Will Russian shareholders in NSD also vote?

Unfortunately, given the sanctions imposed an NSD, the NSD shareholders will not be able to vote.

What do you plan to do, if shareholders do not approve for the installation in Kazakhstan?

I think it is definitely number 1 priority for the management to put up to the shareholder vote a proposition that will be suitable for the super majority of shareholders. Definitely, we have a plan B, but I think we are so concentrated and relatively confident in the success of Plan A that I'd rather not discuss it.

You mentioned that you would be hopeful of reinstating dividends in 2023. Just to clarify, do you mean in this calendar year or 2023, '24 trading year, please?

I think our original intention was to seriously consider paying a dividend after the re-dom is completed on the back of first half 2023 results. Again, the re-dom itself is still not a dumb thing. But I think first half financials will be the point when the Board will be seriously considering the possibility of paying a dividend, the current trading and the current cash flow dynamics so far in the year are quite positive.

In case there are some issues with debt refinancing, can CapEx be decreased, if so, to what extent?

Of the $700 million to $750 million planned CapEx for the year, the split is approximately 65%, 35% between what I would call non-discretionary and discretionary CapEx. Whatever projects that we have already started, we will definitely do whatever it takes to push across the finish line. And that means, first and foremost, POX-2, but also, the backfill plant at Mayskoye, the flotation plant at Voro and the new Prognoz silver mine.

On the discretionary CapEx side, Veduga and the power line to Albazino are the projects where we have a high degree of confidence in their financial sense, but we may elect to postpone the execution if the financial situation becomes too stressful.

Can you provide a brief comment on the current terms for processing concentrate in China at this time? Has there been any material change in recent months?

No. There have been no changes. We don't really see any difficulties in selling the regular material, I duly concentrate, we have hard time selling and thus need to resort to blending in many cases. But overall, the situation in China and particularly logistical situation has improved to such an extent that the concentrate sales channels into China are currently not viewed as a significant operating risk for the company.

Do you have any hedge contracts derivatives on gold and silver?

No, we have not.

Do you see a big jump in interest rate when refinancing, if so, is this better to pay off before paying a dividend?

Well, we don't see a dramatic jump, although it's definitely increasing, but I have to remind that we are now moving in alternative currencies on borrowing rubles, we are paying a high interest rate, but we are also taking on the possibility of further ruble devaluation, which seems quite possible. So this kind of compensate each other.

If so, is this better to pay off the debt before paying a dividend?

I would say, inevitably, we need to bring the leverage levels down below the kind of internal comfort level before considering it. So some deleveraging definitely needs to happen before we are considering the resumption of the dividend pays.

Well, this actually leads nicely into the next question about the inventory reduction and the current net debt levels.

I think we will provide net debt update together with our first quarter production results, which will be closer to the end of April. And in terms of inventory reduction, it is proceeding quite well. And normally, for the last seven, eight years, first quarter, was the weakest cash flow quarter of the year. But this year, given the significant destock piling we are seeing some very positive trends.

And as Maxim has mentioned, the leverage definitely needs to go below 2 and hopefully closer to 1.5 net debt over EBITDA in order for the Board to approve the dividend without looking as if we are compromising the robustness of our financial position. So the current cash flow dynamics and cost dynamics are quite positive.

Still, I have to admit that a significant chunk of this positivity is linked to the devaluation of the ruble and the largest threat dividend resumption from the point of view of business performance definitely comes from the exchange rate dynamics. If ruble strengthens, that will depress the likelihood that we will be resuming dividend this year.

How advanced are you in terms of substituting providers from western countries by non-western ones?

I think in addition to inventory unwind, this is probably number 1 operating priority for the management. We have created the whole new department of import substitution and staffed it with the best people combining skills from the procurement, production and engineering. And so far, I think the progress made was very good. I think in terms of consumables, we currently don't see any threats. We managed to substitute the consumables, mostly for the Chinese ones.

In terms of equipment, I think the largest area of concern is underground equipment. We have contracted late last year and this year, more than 40 units of underground mine equipment from China, Turkey and Latin America. And we are also implementing the program of concentrating the existing Western European fleet of various brands at specific sites.

So overall, I think in a couple of years, the underground mining equipment will be more or less majority replaced by the equipment from countries, which currently have not imposed sanctions against Russia.

To make the long story short, we don't expect the shortages of equipment of spares to impact production from the existing mines. And in terms of new projects, we will just design them to start with the equipment from Russia, China and other countries that have not imposed sanctions.

Could you provide an update on the plans for POX-3?

We are in the process of securing the land tenure for this site of the potential plant. This should be a relatively large land plot, actually two land plots, one for the facility itself and second, for the tailings. It's obviously a pretty complicated process to ensure that there are no conflicts with other regional municipal stakeholders and also to ensure that it's fully compliant with the relevant environmental regulation.

We expect that the process of actually getting the actual long-term lease rights for the plant will be completed in the third quarter of this year. In parallel, we have contracted our traditional engineering partner, Hatch, to push on with basic engineering. Now we are currently evaluating options to modify the flow sheet implementing at POX-2 in order to take into account different water balance in the area. And different feedstock makeup.

Again, this probably will be finalized by the end of the third quarter, so we should enter 2024 with basic engineering completed. And with the land plot fully secured. So 2024, we can do fully bankable feasibility study, targeting the investment decision at Q4 2024 [ph].

[Unidentified Analyst]

Should we expect sales to niche production in 2023?

[Vitaly Nesis, CEO]

Yes.

Given that AIFC are going to be very similar to 2022 and CapEx also similar to 2022, how is it possible that the company is likely to route to profitability unless there is a significant change in gold price. Surely, there will be very limited free cash flow and given the very significant debt repayment due in 2024, paying a dividend is not only likely, but also on wise.

I think the second part of the question we've already covered. In terms of profitability, I will probably mention two factors. Whereas costs are expected to be roughly the same and production is expected to be roughly the same. The costs are currently estimated at RUB65 per dollar. So we already see some devaluation benefits coming in.

But more importantly, we expect 2023 to be different from 2022 on free cash flow generation means because there will be no inventory buildup in terms of unsold hopefully. And also, there will be no inventory buildup in terms of security stops of consumables and stairs, which actually took quite a significant working capital chunk in 2022. So there will be unwind on the working capital against the backup of the same profitability. This will mean a reversal to positive free cash flow.

[Maxim Nazimok, CFO]

Just to give you a sense, if you look at our cash flow statement, the outflows from working capital in 2022, we're close, I think, to $350 million or $400 million. And we expect that this will not only not repeat, but this should reverse probably not fully because some of the inventory buildup is long term. I mean more in the consumables and spare parts, but the buildup in the saleable goods, saleable finished products inventory will definitely go down.

So we may have -- we may end up with the same underlying net earnings and the same CapEx, but the direction of working capital flows will grow sharply, which if we have a bit of luck from exchange rates, will -- may enable us to pay dividends.

[Vitaly Nesis, CEO]

Again, we have a number of questions about the technical details of the potential re-dom, we honestly don't have full visibility currently. And this visibility will be needed before we launch the final circular to secure shareholder approval. And that's why we are not launching the circular right now because the decision has not been taken and some of the important aspects of the potential future transaction are not known currently.

I also again ask you to look at the FAQ section on our website, where we have tried to provide detailed questions to some of the technical issues related to the potential re-dom.

And one question that I think I should refer to, although I don't have an answer, POLY shares on MOEX traded at significant premium to LSE. Could you please explain this premium?

And the answer is I don't have an explanation, but I thought it would be unfair not to mention that there is this question, which is perplexing to us as well because given the sanctions on NRV [ph], the shares of MOEX are more or less blocked from dividends and from holding as long as the company remains a resident interest.

We more or less out of the questions on the web. So maybe in the mid to -- if there are any questions from the call.

[Operator]

Not at the moment. [Operator Instructions].

[Vitaly Nesis, CEO]

All right. I'll say there is one more question from the web, what's the biggest risk to successful on-time ramp-up of POX-2?

That remains to be the procurement of construction materials, specifically stainless steel piping to complete the construction. All of the equipment is already on site, but a lot of the piping needs to be acquired, definitely Western European suppliers are no longer available. So we are working with the alternatives in Russia, China and India to try to buy that stuff.

We are optimistic about the ultimate success of our efforts but in terms of timing, I think the risk is there that procuring those items will be slower than currently envisioned in the schedule, and it may push the start-up somewhere into the future. But again, I'm fully confident that this potential slip up in timing will not be very significant, and we will launch and ramp up POX-2 in 2024.

And with this, I would like to thank all of the participants for questions. Please refer to your further inquiries to our Investor Relations team in London, where you can write directly to the top management. Thank you very much, and have a very good day.

[Operator]

Thank you. This does conclude today's conference. Thank you for participating, and you may now disconnect.