Polymetal International plc (OTCPK: POYYF) Third Quarter 2022 Results Conference Call 4 November 2022 7:00 AMm. ET
Participating companies
Vitaly Nesis – Group Chief Executive Officer
Conference Call Participants
Oliver Grewcock-Berenberg
Vitaly Nesis
Ladies and gentlemen, welcome to the classic call of quarterly production results. I will first briefly provide operational results, provide an update on our corporate initiatives, and then conclude with the classic and responses session.
Overall, in the third quarter of 2022, Polymetal International began to catch up with the production decline recorded in the first part of the year. In the third quarter, year-over-year equivalent gold production increased by 7%, basically due to ramping. commissioning of our new mine in Nezhda and the first production generated from Kutyn’s new heap leaching allocation in the Albazino centre. We expect fourth-quarter production to continue ahead of schedule and are cautiously positive about our ability to miss the initial production target of 1. 7 million ounces in 2022 despite significant demanding situations this year.
As for our progression projects, they are moving online. And more specifically, POX-2 effectively overcomes demanding situations similar to supply chain issues. In particular, we note that the logistical hurdles presented by COVID restrictions in China are beginning to diminish, which is notoriously helping our strategy of converting resources from certain spare fabrics and portions to China and other Asian countries.
As you well know, the biggest challenge in the first part of the year was the accumulation of inventories of unsold finished products, especially bullion and doré. September marked the first month we really started leveraging that inventory. And in October, we already saw a significant low in bullion inventories, reducing our net debt from a record of around $150 million. So, by the end of October, we are already below the $2. 7 billion mark, and we expect November and December to be particularly strong in terms of generating loose cash flow. Thanks to seasonal inflows, but also to the continuous liquidation of the huge steel inventory we have accumulated since the beginning of the year. Clearly, this bodes well for deleveraging, and we are again cautiously confident that continued strong generation of loose cash flow will allow us to seriously resume end-of-division bills in 2023.
Overall, we reiterate our full-year production gains and our loading direction for the year. We also get official initial forecasts for 2023 and 2024. In both years, we expect solid production of 1. 7 million ounces of gold equivalent. . Now, we note that the risks of the chain of origin, while continuing with mitigation, are still present. And control makes an effort by one and both to make sure they are well contained and addressed. We will have source cargo forecasts for 2023 by the end of January. 2023, as well as production effects for the year 2022.
Regarding the corporate update in October, we have finished shareholder votes in the percentage exchange offer held through the national securities depository in Russia and shareholders will receive overwhelming support through percentage exchange. To date, approximately 10. 5% of all percentages of the Company has been subject to percentage exchange and we continue to work with our percentage custodian to effectively close the stock offering. We have also, and the Council is also moving forward in its search, to recruit the new members of the Council to update the 2 members. of the Council that left the Council earlier this month.
With respect to our other strategic initiatives, we are advancing our strategic features research, adding the option to re-domicile the business in some other jurisdiction. And also the inventory characteristics that will continue to be maintained in NSD after the final touch of the inventory exchange program. We will update the market as we move forward in our research of those characteristics. And we hope to have a complete and definitive understanding of where and how we are going at the time when we provide the year-round production effects in the current part. of January.
And I suppose that concludes my brief opening remarks and we will be satisfied with your questions.
Q&A session
Operator
Now we will take the first one from Lannett Lawson [ph]. Continue. Your line is open.
unidentified analyst
So, in the previous call, he discussed that he hoped today’s call would provide information about the effect of partial mobilization in Russia. Could you comment on that?
Vitaly Nesis
Well, thanks for the question. Obviously, I can’t give you specific details. But overall, we believe partial mobilisation will not have a significant effect on our production or cargo forecasts this year or next.
Operator
Very well. Now we’ll take the next one from Mitchell Martin of Mitchell Advisory Company [ph]. Continúe. Su line is open.
unidentified analyst
Yes, thanks. In your – since your last introduction, I mean, you were – I know you are – we plan your own internal plans, higher gold costs and a higher ruble-dollar exchange rate. Now that it’s not so favorable, how do you see the discounts?Obviously, he is now promoting a lot more of his actions, which is fantastic. Did it have a massive effect on your plans for this?If you can answer that, please.
Vitaly Nesis
Thank you. Thank you very much. Well, we still expect significant relief in net debt through the end of the year. I think the positive figure is probably close to $2 billion, but whether that positive estimate will be achieved will basically depend on the ruble-dollar exchange rate. However, we believe we can reduce existing debt: the number of net debt in the next 2 months to $300 million, $400 million. Substantial debt relief will therefore be achieved. And also, I think deleveraging will continue in the first quarter of next year, because while we’re going to be able to monetize more or less all of our bullion and gold stock this year, some of the concentrate stock will only be collected in the first quarter of the following year. Therefore, we will maintain some of the positive monetary momentum at the beginning of next year. So, I think, overall, despite some slightly worse macroeconomic variables than we expected at the beginning of the year or a few months ago, we’re still in very smart shape.
unidentified analyst
Gracias. Es for my ears. Thanks a lot. Good job. Thank you.
Operator
Alright, we have a question. We have Mr Oliver de Berenberg. Keep going, sir. Your line is open.
Olivier Grewcock
Hello thanks. Just a query from me, please. When do you think the recovery rate in Nezhda will succeed at the design level, please?Thank you.
Vitaly Nesis
Well, lately Nezhda operates in design grades, either in terms of performance quality and recovery. The only deviation from our original plan is the fact that some of the high-arsenic concentrate is temporarily not monetizable. So we stopped stockpiling this concentrate in anticipation of starting POX-2. However, even with this complication, the asset has positive loose money as of this quarter. And concentrate backlog will be resolved once POX-2 is fully operational in 2024.
Olivier Grewcock
That’s very helpful. Thank you.
Vitaly Nesis
Well, actually, some internet streaming queries, so we’re going on to check to go through that. The first query is in the Sept. 22 update, he said he has problems with the source chain. Have you controlled to solve this problem?especially the acquisition of critical appliances and spare parts?
That’s a very smart question. I think in terms of short-term impact on operations and the project, we don’t have any critical issues. We have monitored the safety of operational consumers and equipment from select sources, mainly in Asia, but also in Russia. In the longer term, we will have to keep working hard to locate sources of choice, basically underground mining apparatus in China, Turkey and other countries. But I think the situation is well under control. The sanctions regime, we believe that supply chain problems will not have an effect on our production forecasts, although we will face some headwinds, basically similar to a rare decline in productivity and mechanical availability of non-European, non-Western products. .
Due to sanctions against Russian banks, will it be able to pay off all its debt in 2023?
The short answer is yes. First of all, we fully comply with all applicable sanctions. And it is our essential goal to continue to comply fully. We, bills due in 2023 and beyond this time horizon, will fully comply with the penalties.
What about the recycling of Pacific Park in Kazakhstan?
Yes, we know more or less the wider region in which we must implement this allocation and the final resolution on the express site will be taken until the end of this quarter. We will announce the site with our full-year production update at the end of January.
I hope you can maintain the team spirit of the company and keep Russian assets. What are the chances of holding Russian assets?
As we said at the AGM, the sale of Russian assets is no longer an option. We are not even contemplating it. Therefore, the objective is to maintain the shareholder price by not promoting the assets, but the optimal situation is the legal separation of the assets in two other jurisdictions, which would allow shareholders to maintain full exposure to the price of the assets in either country.
What can you tell us about pasta sales in China?Will normalization last?
Yes, I think the generalization we’ve noticed in recent months is going to last. Logistical hurdles are slowly relaxing. We certainly haven’t gone back to general pre-COVID logistics. But I’m sure that in the next 3 months we’re going to see a complete solution of all the limitations and that would be helpful in terms of reducing shipping times and freeing up by running capital from the pasta path to the last bar.
Would you like to comment on the resolution to suspend Nezhda’s open-pit operation and the same with Saum open-pit mining?
These are primarily moves similar to our preference to decrease our ongoing operating expenses and monetize the truly extensive ore inventories that have accumulated in the respective operations. As you may recall, we aggressively dismantled Nezhda during the construction phase of the project. So now we can really decrease mining activity without any serious effect on production and actually with an improvement in the economy. So, more or less, we are catching up with our active investment during the structure phase.
Can you see, as I see it going back in the long run to the degrees of two years ago, the resolution of the conflict in Ukraine and Russia will result in significant cost relief?
Maximum maximum I probably think there is no way to go back to pre-COVID levels, basically because of headline inflation. Structurally, a definitely nonviolent solution would be useful, but I don’t think it’s to absolutely neutralize the accumulation of prices accumulated over the last 3 years.
Any news about long-lasting underground equipment?Could you comment on the transition from the Ekaterina-2 underground mine to care and maintenance?
We have a really extensive accumulated ore stock, so putting one of the underground mines under existing transient maintenance will not have an effect on long-term production and we will be able to strengthen our loose money flow. , thanks to the monetization of shares. Now, in part, this resolution is similar to our preference for having one more point of protection in terms of clandestine apparatuses. We’re switching to a more common Chinese kit, but it will take time So we consciously slowed down some of the existing clandestine gadgets so we can use the old sets now as spare portion resources for the new sets.
So we consciously cannibalized some of the equipment. It will take us 2 to 3 years to fully transition to non-Western underground equipment. And during this period, we will desire this additional point of safety in the availability of our underground mining equipment.
What is your outlook for gold prices?
Honestly, I don’t have a strong opinion. Certainly, we expect the price of gold to rise, but it is by no means soon.
What drives you to drive time-level execution of IPO allocation and wait assignments?
We prioritize short-term, less capital-intensive projects. Currently, leverage is arguably the most sensitive on management’s list of concerns. We are looking to execute smaller and shorter projects in an effort for our loose cash flow generation.
The classic kind of NPV calculations that would possibly be suboptimal, but realistically, we are responding to the environment that effectively demands a higher rate of reduction of our investments and a higher reduction rate prioritizes faster recovery projects with a shorter useful life. Hence our resolve to slow down Veduga and accelerate the momentum level of its rotation.
Would you expect the point of indebtedness to be transmitted?What will be the new sweet spot of indebtedness?When do you expect the dividend to resume?
Well, I think we can bring the absolute debt point below the $2 billion absolute mark and actually below 2 times net debt relative to EBITDA. And in terms of dividend recovery, the board historically considers the ability to pay a dividend in March. And, in fact, much will depend on the macroeconomic variables of the moment. But I think – I hope it’s a substantive discussion because Polymetal’s monetary scenario at that time deserves to improve enough to make it imaginable to pay a dividend from the point of view of monetary strength. .
Is Kazakhstan still on the list of conceivable candidate countries for a new Polymetal International registration?
Yes definitely. It is one of the contenders.
If we don’t industrialize our shares and keep them on the LSE, we will lose our dividend in 2023.
No, probably not. In general, regardless of the decisions we make regarding a possible replacement in the domicile of the company, the control intends to maintain the board of directors in the BVL. So that’s one of the priorities we pursue when we compare options. That is why we expect that the board in the LSE is not threatened and that the dividends of the shares indexed in the LSE are not at risk.
Would you make acquisitions in Africa? No.
Do you expect significant adjustments in the most sensitive notes in 2023?
Well, I just announced the solid production forecast for next year. And since processing volumes will remain more or less the same, that means pretty much that most sensitive notes are pretty solid. There will be fluctuations in individual mines. throughout the enterprise, the main grade is still more or less solid.
How can you comment on your LTIFR dynamics?
Well, I think we had a small backlog of 9 months year after year. But, overall, I am satisfied with our protection functionality since the beginning of the year, we have had no fatalities, no serious accidents. And certainly, we will continue to make protecting our workers and contractors our most sensible priority.
When will the mine open?
Well, our next mine will probably still be Veduga. We had originally planned to launch it in 2025. At present, we know that the realistic start-up date of this asset has been pushed back to 2027.
Do you have any updates on POX-3, especially after the provision of land in the [indistinguishable] domain through the Federal Agency for State Property Management?
Well, this land acquisition has been in process for a long time and it is as if the delay will affect the activities of our site in the [indistinguishable] region. At the moment, the location of POX-3 is definitely in Kazakhstan. Therefore, this plan for now will be put on the back burner without any similar particular project.
Is there a threat of receiving dividends on shares held in NSD?
Yes, there is such a threat because currently, as far as we know, Euroclear allows the movement of dividends to NSD. [Technical difficulty] Can you hear me? [Technical difficulty]
Operator
We hear you loud and clear.
Vitaly Nesis
It is ok. So when it comes to going back to dividends on stocks held in NSD, this is one of the thorniest issues facing management. And, of course, we perceive that all shareholders have signed the right to dividends. On the other hand, we can. Lately we are working a lot with our legal counsel and corporate agents to find a solution to this problem.
From now on, we will do everything we can to ensure that when dividend bills resume, shareholders holding shares in NSD will have to pay dividends. However, I would like to emphasise the threat that Euroclear’s position vis-à-vis NSD will make this complicated or impossible.
If we are in sanctioned countries, how will we receive our dividends?
Well, the entity that will pay the dividends is located in Jersey right now, and after an imaginable review, it will be located in a jurisdiction that is not Russia. Therefore, it does not deserve any challenge with the payment of dividends from Jersey or the new jurisdiction.
Can you remind us who you sell your gold, damaged across geography, and how it has been replaced over the past year?
Well, we used to: last year we sold the maximum of our gold in London through Russian banks. And in Kazakhstan, we sold our gold to the National Bank of Kazakhstan. Currently, we continue to sell our gold in Kazakhstan to the National Bank of Kazakhstan and our Russian gold is sold to a variety of buyers in Asia, several countries, I would prefer not to divide geographical spaces because it is now a competitive market and being able to sell in several jurisdictions is vital to ensure the strength of sales channels.
What is the implication of the move to non-Western devices in CapEx and OpEx?
I think that’s a very smart question. I think in terms of CapEx, we may be expecting a slight decrease. But in terms of OpEx on the mining side, especially on the underground mining side, we will be expecting a buildup in OpEx because the Chinese apparatus is less productive. And it has reduced availability, so we may be expecting more games to be used for the same volumes and more maintenance costs. We are looking to address this challenge proactively. For example, in Mayskoye, we order the formula of the conveyor conveyor to move underground tissues. We are exploring features in some of our other underground operations. But in general, yes, it is the source of some load pressures in our underground mines.
We maintain our production forecast for Kazakhstan at 500,000 ounces for the next two years. None of the minor incidents with lost time in the third quarter occurred in Kazakhstan. And no Kazakh shareholder has traded the shares en bloc recently because the Kazakh shareholders I know had all their shares in London or through our board on the Astana Stock Exchange. Therefore, they were not subject to NSD’s restrictions.
Have you stopped promoting gold from Russian mines locally?
The main explanation for why is the reduction compared to world prices. Lately we do not sell gold in Rusia. La main explanation of why it is our preference to ensure full compliance with sanctions, since most of the Russian banking formula is under some form of sanctions. We need to be one hundred percent sure that we will not engage in business relations with sanctioned Russian banks, even if it is through an intermediary.
In terms of how temporarily we close the gap between sales and production. Yes, we started doing it a little later than planned at the end of the current quarter. So it wasn’t until mid-September that we literally started moving gold. in giant volumes. But at the moment there is no challenge to promoting gold or silver in Russia or Kazakhstan.
Does the Kazakh government have problems with the processing of Kyzyl concentrates in Amursk due to sanctions?What is the relationship between the quantities of Kyzyl concentrates shipped to China and POX?
The ratio is about 60% for POX and 40% for China. This is gold content, not physical tonnage of Array. And no, there are no disorders in terms of processing Kyzyl in POX. The gold contained in Kyzyl is oro. de Kazakhstan and is not subject to foreign sanctions.
In what order of precedence is debt relief?
Well, I think we want to reduce our net debt enough to be able to recover dividends. That is the key priority. So, obviously, we don’t want to pay dividends as long as we have a debt point that is unsustainable or dangerous. And I think the key metric is net debt to adjusted EBITDA. I think 2x would be the point we want to go beyond to pay dividends seriously.
Do you see an expansion prospect in the near future?
Non. Je sees no prospect of expansion in the near future. The prospect of expansion is only really extensive over a period of, say, five years with the start-up of Veduga.
Inflation in Russia and Kazakhstan?
Well, I think inflation in Russia has gone down. I think it now moves below 12%. Kazakhstan is a little higher. As for the outlook, I think a lot will depend on the decisions of the Fed and other central banks. So I have no prospects. We are allocating 10% to Russia and 12% to Kazakhstan in next year’s budget.
Do you expect promising junior exploration projects in the next competition?
Yes, we will: we will celebrate our fifth youth festival in a few months. So far, we’ve won a handful of applications. But I expect a lot of interest and verify that we remain interested in locating and investing the right kind of exploration progress in Russia and Kazakhstan.
You say you have net debt above 2x EBITDA with net debt of $2 billion. That’s just the $1 billion EBITDA.
I don’t think so. I think it’s kind of. . . Those are general estimates. And, in fact, I don’t recommend an EBITDA of $1 billion because that figure largely depends on the value of gold and the ruble-dollar exchange rate. I think $2 billion is all we can actually explore in the short term, essentially as a result of a really extensive stock sale and 2x is a longer-term measure that we’ll compare ourselves to to make sure our dividend payment doesn’t jeopardize the monetary strength of the company.
Would dividend bills be made even if shares held in the NSD could get them?
That’s a very smart question. I would say my intuition is: the answer is yes. We hope to complete the exchange: the recent percentage exchange of certain percentages through NSD. We will do our best to continue unlocking NSD percentages in the future. Obviously, even if some shareholders will remain blocked, we will not be here to continue depriving all shareholders of the opportunity to obtain the dividend.
It is ok. I don’t see any other questions in the webcast. Line questions?
Operator
It is ok. We have Oliver de Berenberg on our back. Just give me a moment. Please continue, sir. Your line is open.
Olivier Grewcock
Could you provide an update on the latest news related to Tomtor’s rare ground deposit please?Thank you.
Vitaly Nesis
The infrequent allocation of land lately has been completely suspended. And we don’t spend anything on it, just to maintain a small team, and in fact, for that, some other people have been transferred to Polymetal. And, honestly, I don’t expect any replacement in this prestige quo for some time.
Olivier Grewcock
Thanks.
Operator
Thank you, Mr Olivier. [Operator Instructions] It turns out that there are no more questions at this time, sir. I would like to give you back the convention for everything. Okay, we have Joe as a personal investor for the next question.
unidentified analyst
I would just like to ask, hello, in your current quarterly results, you said that you narrowed the gap between production and sales in the third quarter and that has now been postponed until the end of the year. I’m just looking – I wonder, are you having trouble selling this gold at the current price?Are you making plans for the value of gold? Thank you.
Vitaly Nesis
Well, I really tried to answer that question. We started full sales of gold bars a little later than originally planned, therefore we changed the deadline to sell all accumulated bullion. It is not similar to price. This is similar to compliance considerations. Now, we sought to make sure that we were selling gold in a way that there was surely no threat of sanctions enforcement. And right now, we’re selling more or less our gold and silver without a reduction in the value of gold. And we won’t consider a value cut. We want our existing sales channels, the multiple sales channels, to now offer us many opportunities to sell our product at full value.
Operator
Thanks.
Vitaly Nesis
Well, thank you very much for your active participation. Feel free to send us more questions to the senior control or investor team and have a wonderful day. Thanks a lot. Good bye.