Polymetal International plc

Good day and welcome to the PolyMetal final year 2020 preliminary financial results call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vitaly Nessus. Please go ahead, sir.

Thank you very much, ladies and gentlemen. Welcome to the conference call on fiscal year 2020 financial results. First, myself, Vitaly Nessus, and PolyMetal's CFO, Maxim Nazimov, We'll walk you through the results presentation briefly, and then we'll have a traditional Q&A session. Following the conventional disclaimer about forward-looking statements, let's turn to page three, and I'm very happy to state that Palmetto had an exceptionally strong year with record production and financial metrics. all of the profitability parameters have increased very significantly on the back of a 4% increase in production. So adjusted EBDA jumped by 57%, underlying EPS almost doubled, and as a result, dividend per share increased by 57% year on year. we still enjoy one of the leading dividend yields in the precious metals sector globally. And importantly, despite the COVID challenges, we managed to contain costs at stable level year on year. Turning to COVID on page four, I will not go into too many details. I think it is enough to say that right now the situation at all of our operations is and projects is stable. We continue to maintain strict protocols, and I think partially as a result of that, partially as a consequence of generally declining levels of infections in both Russia and Kazakhstan, we have seen steady, stable decline in the number of active cases and in the number of hospitalizations. So right now, I think... the threat of production disruption is insignificant, although I would like to reiterate we maintain utmost caution. Page five, in terms of probably most important metric of our performance safety, 2020 was a very significant success. It was the first year, I believe in seven, when We recorded zero fatalities among both our employees and contractors, and I would like to thank all of the team at Palmetto for such an achievement. In parallel, we recorded a significant decrease in both metrics related to safety, both in lost time injury frequency rate and also in disability days lost due to work injuries. The management team continues to focus on safety very much. This year, we will try to involve the vast majority of our contractors and all of our exploration sites into the corporate procedures related to safety. Page six, in terms of sustainability targets, focusing clearly first and foremost on greenhouse gas intensity emissions. We have achieved a 4% reduction in line with our current medium-term policy. The company also plans to announce the new medium-term targets, which will be linked to top management motivation and during our corporate markets day in late April. This will be our targets for 2020. In terms of energy intensity, water consumption, we also did very well. Particularly, water consumption has declined very significantly. And, importantly, the share of dry tailings taking place. continues to increase, and we hope to see further increases this year as NASDAQ will have dry talents. Page 7, our ESG performance has received positive evaluations from the majority of the global leading ESG and we are very proud and happy to be the first Russian member of Dojo Sustainability Index. And on all other counts, we continue to improve. Hopefully this year, with the introduction of transparent and science-based carbon reduction strategy, our ratings will improve even further. Page 8, another important result that the company has achieved during the year is clearly expansion of our reserves. We increased our reserves per share by 10%. This is significantly better than industry average, and I believe this is way better than some of the larger companies in the industry. Particularly important is this achievement because we managed to grow reserves without great dilution. And as such, we believe our investment in exploration is creating a lot of value by allowing us not only to replace but to expand reserve base while maintaining high grade, which is essential for good return on invested capital. Page nine, just the breakdown of reserves reconciliation. As you can see, the bulk of ore reserve increases came from initial ore reserve estimates. That's more or less Greenfield exploration. And again, this demonstrates the financial rewards. of our approach to continued investment and exploration. Importantly, the share of silver in ore reserves has increased from 6% to 11% on the back of the significant contribution from Prognos. Given the recent outperformance in silver, we believe this is a welcome development, particularly if you consider that Power Metal continues to use extremely conservative price assumptions for reserve assessment $1,200 per ounce gold, and $15 per ounce silver. Clearly, we have a lot of firepower in gold, but our silver business, which has shrunk for a while, I think is on the brink of coming back to play a more significant role in our portfolio. Page 10, in terms of production, a 4% increase was driven more by Kazil, where great performance was very strong, but also other assets as a group performed well, and despite a couple of significant COVID-related disruptions, the company managed not to have slippage at any of the producing aspects. And I turn the presentation over to Maxim to discuss financial highlights.

Yeah, thanks, Vitaly. So starting from page 11, which gives you all of the financial highlights in one page, we enjoyed pretty much uniform growth in all top-line and bottom-line metrics, with revenue up 28%, mostly cash. Price-driven, adjusted EBDA went up by 57%, nearly to $1.7 billion, and the EBDA margin reached 59%. We delivered total cash costs below our original guidance at $638 per ounce, and we were within the only sustaining cash cost guidance at $874 per ounce. Net earnings demonstrating even stronger growth versus EBDA, 83% growth in earnings and earnings per share. And the dividends proposed for the year are largely reflecting that with a 57% year-on-year growth. Essentially, we are distributing in dividends all of the free cash flow generated for the year. This decision made by the board yesterday is underpinned by pretty strong free cash flow performance in 2020, with free cash flow more than doubling to $610 million. And at the same time, we reduced net debt to $1.35 billion, or 0.8 times adjusted EBITDA. So we are in a very comfortable zone in terms of the balance sheet strength. Now, looking at each of the KPIs in more detail, the revenue growth was almost predominantly driven by metal price movements. In terms of physical sales volumes, they were broadly stable year on year. Looking at EBDA on page 13, again, price movements have contributed most to the EBDA growth, but there was also cost decline. in terms of the TCC 3% decrease year on year. At the same time, we saw other cash expenses increasing. This is mainly represented by COVID-related costs, as well as the social expenditures. Looking at the cash cost dynamics in more detail, page 14 shows the reconciliation between 2019 and 2020 levels. First factor and the largest factor was the foreign exchange. Obviously, rapid devaluation following the Brent's oil price decline in March 2020 has contributed to that. The average rate went from 65 rubles per dollar to 72 rubles per dollar. This was roughly half offset by the domestic inflation. which actually accelerated both in Russia and Kazakhstan. We saw 5% inflation in Russia and 8% inflation in Kazakhstan last year. And the second factor driving the costs up were the COVID related costs at approximately $25 per ounce sold. This year we are expecting, we have conservatively budgeted for continued currency measures throughout the year, and this will amount to roughly $35 per ounce produced. At the same time, growth in commodity prices also meant that the mining tax went up in line with the commodity prices, adding $23 per ounce. The offsetting factor, the internal offsetting factor, were the cost improvements at a few mature operations, notably Omelon, and Maiske, which saw cost declines beyond generic ruble devaluation factors. As a result, costs for the group went down 3% and were, as we promised, below the original group's guidance of $650 to $700 per ounce. Turning over to the structure, this is the expected structure for 2021. and 21 at budget prices of $1,500 per ounce, so the share of royalties is kind of understated here. But generally, the structure remains heavily weighed toward local currencies, 63%, and a significant component is represented by diesel fuel and fuel-driven costs. And this is actually where we see structural changes in 2021 versus 2020, as we are seeing very sharp rebounds in the oil price and also in the domestic fuel prices this year. Page 16 gives you the sensitivities of total cash costs and other financial metrics to our two key macroeconomic variables. for exchange rates and commodity prices. The sensitivities remain broadly in the same range as they were last year, and all this will have material impact on the group's financial results. As a reminder, we have budgeted for 2021 at $1,500 per ounce gold price, $20 per ounce silver, and $72 per dollar. So all of the three assumptions quite conservative against the current spot levels. Looking at individual cost performances on a mind-by-mind basis, this is only on a sustaining cash cost basis. So the bottom group, the lowest cost performers in the business, Svetla and Kizil, have seen cost pick-ups by roughly 8% each. At Svetlia, this has been driven mainly by the grade factor and access to new ore zones. At Kizil, this is mainly representing increased investment in stripping and also mine fleet renewals. And at Vora, which has already switched to processing stockpiles, the growth, which is quite stark, is represented by the grade factor. At the same time, I already mentioned a couple of operations showing very good cost performances last year ahead of ruble devaluation. This is Omelon, mainly grade-driven and mixed-driven in terms of ore process, with processed high-grade ore from Yolochka and Birkachan last year. Ducat, pretty much efficiency improvements against still slightly eroding grade profile. And Moesca, a very visible improvement versus 2019, driven by completion of processing of oxides and great improvements as well. At Albazino, the growth is mainly represented by increased investments in underground development and stripping. That's two newer ozone zones, Ecotrina 2 and Farida. And at Varvara, we enjoyed larger production volumes as a result of processing third-party material in the amount of roughly 400,000 tons last year. But this third-party material is obviously slightly more expensive than the internal feed, and that's the driver behind an 11% growth at Larvara last year. Overall, on an all-in-sustaining cash cost basis, PolyMetal remains very favorably positioned in the global cash cost curve. You can see that... We haven't nearly moved all entertaining cash cost levels year on year in 2020 and remain comfortably sitting within the second quartile of the global cash cost curve. Turning over to the balance sheet, I already mentioned we have seen pretty rapid deleveraging over the course of 2020 driven by strong revenues and strong free cash flow. Net debt stood at $1.35 billion as of 1st of January, and net debt to adjusted EBDA is just 0.8, putting us in a very comfortable position. At the same time, we also saw cost of debt declining to 3.4% on average compared to 4% last year. This is a result of both external events, mainly the rapid decrease in benchmark interest rates, but also a part of management efforts to continue to optimize the portfolio structure. In terms of maturity, you can see it's very comfortable to spread over nearly a 10-year period, with 70% of debt now at fixed interest rates and roughly 30% at floating interest rates. Importantly, we are continuing the trend to have more of green and sustainability-linked financing in our loan portfolio, which now amounts to 16% of the total outstanding debt. And this is something we are very keen to continue in 2021. Overall, looking at the capital allocation, the free cash flow, as I mentioned, was pretty strong, $610 million. And you can see, even last year, this was almost fully distributed in the form of the dividends. The board have exercised discretion in relation to $17 million of additional dividend that was available for distribution, and have come to the conclusion that at this point in the cycle, they are comfortable in distributing all of the free cash flow generated as dividends. And if you look at page 21, this puts us pretty much in the leading spot in terms of dividend for gold equivalent produced in 2020. And we looked at this from a five-year perspective. We're still within the top three of the global producers in terms of the dividends paid for gold equivalent house produced. And this is obviously ensuring the continued leadership in dividend yield, a more traditional metric. here with 4.3% representing one-year average and 4.1% representing a pretty consistent five-year average above 4%. With this, I'm handing over back to Vitaly to talk about the forward-looking guidance for this year and the years beyond 2021.

Thanks, Maxim. This guidance more or less represents the reiteration of the numbers that we have presented during full year production results call. So we plan 1.5 million ounces of production, a slight decline from the last year's level, but actually in line with the last year's guidance. We expect notable increases in both TCC and AISC. Those are predominantly driven by macro factors, such as re-appreciation of ruble and tenge compared with the average 2020 levels, and also, importantly, increased domestic diesel fuel prices. The increased competition for mining labor also, as we expect, will contribute to above CPI inflation. Capital expenditure will be slightly below 2020 levels. We will continue to invest in our key projects, and I will turn to that a bit later. And we'll also be continuing to invest in exploration, as I have mentioned during the discussion of reserves accretion. We expect significant positive free cash flow, and we will maintain the current dividend policy, which, based on the results of last year, has resulted in the distribution of 100% of free cash flow. Net debt or rejected EBDA is expected to stay well below one times. All of these numbers are based on quite conservative estimates. gold and silver price guidance, and we are quite comfortable both in terms of production volumes and in terms of cost dynamics and in terms of project execution as well. Turning to page 24, just to reiterate production outlook for the next five years. We expect the full impact of NASDAQ to be felt next year, with production rising to 1.6 million ounces. And then, despite some natural grade erosion at existing mines, the full ramp-up of POX-2 and then the addition of Veduga in 2025 – should enable us to continue growing our production to 1.75 million ounces. In terms of CapEx outlook, we again reiterate the five-year projections that we have published before. I would like to reiterate that the company will continue to prioritize project execution on schedule. We believe this makes sense given the projects will start generating cash as soon as they are ramped up and the company is prepared to incur reasonable additional costs to avoid project schedule slippage. One of the salient examples of this is using air charter transportation of both employees and contractors to avoid restrictions imposed by cross-border COVID-related protocols. This is particularly true when it relates to the representatives of equipment manufacturers and service providers outside of the Eurasian Union. We have already, for example, brought in approximately 100 people from EU to work on the various disciplines on the POCS2 site in order not to let the project slip, particularly given the upcoming summer. We'll probably see the heaviest amount of construction through the project timeline. We will continue to monitor also the macro developments as they impact the long-term outlook for capital expenditures. Clearly, the recent significant increases in steel prices, in diesel oil fuel prices, may impact our future out-years CAPEX guidance. Turning to page 26, in terms of the key milestones and use flow, we will have the annual general meeting on the 26th of April. On the 27th of April, we will have the combined capital markets and ESG day. I think ESG day this year, this time, will be focused very significantly on our carbon footprint reduction strategy, and we will try to go beyond the relatively skimpy numbers normally provided by mining companies and outline both the trajectory of carbon footprint reduction and the specific measures and investments needed to be able to arrive to our medium-term 2030 goal. Final dividend will be paid out on the 28th of May, and then obviously first half financials and interim dividend announcement in late August, We plan the second CMD in November. In terms of project updates, we are still targeting first production of concentrated NASDAQ for the first of November. The project continues to perform well, really approaching the final stretch to mechanical completion. We expect that we will publish updated oil reserves for Veduga in the fourth quarter, and by that time, we hope NASDAQ progress will allow the board to make a positive investment decision. At Prognos, we are looking at the ways to accelerate the development of this asset. We are thinking mostly in the direction of utilizing NASDAQ processing plant to facilitate take up some of the prognos or this would make sense given very high silver grades at prognos and given pretty favorable gold silver ratios which we believe will persist at least in the medium term and with this I thank you very much for your attention and we are ready to take any questions

Thank you, and if you wish to queue for a question, please signal by pressing star 1 on your telephone keypad. Again, that is star 1 to queue for a question. We'll take our first question from Alan Spence of Jefferies. Please go ahead.

Thanks. Good afternoon, guys. Fatale, you actually answered a few of my questions just in those closing months, so I've just got one. Around the Voro cash cost, I was hoping we could discuss that a little bit more. roughly $100 ounce increase, half on half, despite kind of head grades, recovery, and production relatively flat. Was the cost increase a function of the higher mind, or kind of what else for the underlying drivers there, and how do you see that progressing in 2021?

Alan, thanks a lot for the question. I think the second half increase was driven mostly by the decline in ore gray while the amount of mining has picked up as we started to mine at a satellite deposit, SAO. In 2021, we actually expect Oro to be one of the more positive places in terms of cost performance, because the grid is expected to pick up as high-grade sound ore enters the feed, so we expect a decline in world cash costs this year.

Could you give us a rough band of where that might end up in 2021?

Well, let's say maybe if you balance grid increase with the overall macro trends, maybe 10% decline.

Okay, very good. Thank you very much.

We'll take our next question from Daniel Major of UBS. Please go ahead.

Hi there. Can you hear me okay? Hi. Yep. Hi. Great, thanks. The first question on, I guess, slide 25, just on the medium-term CapEx profile, You've got Prognos Investment Decision on the horizon. Can you firstly give us a reminder of your latest thoughts on CapEx for the project? Maybe a few more details on the sharing of infrastructure or processing capacity, and I guess what that means from a perspective of the trajectory of CapEx. Is it your plan or strategy to develop the bulk of the CapEx for Prognoz after Verduga, so kind of coming in in 2025, 2026, or would those projects be developed simultaneously, resulting in a CapEx lifting meaningfully from the projections of about 400, 450 over the next few years?

Well, the current CAPEX estimate for Prognoz is probably not relevant because it assumes the construction of a new standalone concentrator on site. And we are in the process of developing a CAPEX estimate for the scenario when ore is trucked to Nezhda. We should be in a position to to complete these studies by our November capital markets date. In terms of the timing of the CAPEX, clearly in the scenario of using NASDA processing infrastructure, we will start spending next year with the goal to produce first metal from Prognos in 2023. So this will, if this project is approved, this will lead to both an increase in capex and increase in metal production.

Okay, thanks. Can you remind us how far, what's the distance from Prognos to the plant at Neustra? So how far will you be tracking the ore?

About 600 kilometers. Just to give you a sense, this is not unprecedented in Paul Mettle's practice. One of the assets within the Omolon Hub Ultra, the trucking distance is almost 500 kilometers by Winter Road. When transporting ore from Prognos to Nezhda, we for 80% of the distance, we'll be using existing permanent rules, which obviously will reduce tracking costs considerably.

Okay, thanks. So I guess on that, it's probably fair to assume the capital intensity is lower, but the size of prognosis and the cost position is slightly higher. Is that fair, given that tracking dynamics? relative to what the industry suggests.

Size-wise, yes. The original PFS called for 1 million tons per year plant. This is clearly not going to be possible in terms of trucking logistics. In terms of costs, well, NASDAQ is going to have a much larger plant with all of the following projects. size efficiencies, and importantly, NASDAQ, by the time prognosis or will be processed, will be on grid power. Prognosis is way too far from the grid to be realistically linked to it. So it's not clear whether trucking costs would be higher than the reduction in processing costs. It's not only ore will be transported, but concentrate will be transported as well, and concentrate transportation from Prognos will be materially cheaper compared with concentrate. Concentrate transportation from NESDA will be considerably cheaper than concentrate transportation from Prognos. So there are several cost elements that change when you move from on-site processing to NASDAQ processing. And one of the outcomes of the study would be to quantify the change in CAPEX, the change in OPEX, and ultimately the results in value-creating potential.

Very clear. Thanks. Look forward to that update. Just second question, slightly more modeling-orientated. Can you just quickly run us through the key sort of positive and negative deltas on production and costs at the different assets into 2021?

Well, in 2021, in terms of meaningful changes, I guess... It will be Svetloy that will see a meaningful decline, and I think Voro will probably see a meaningful increase. All other assets will be within kind of 10% of their 2020 performance as it relates to production. In terms of costs, we expect significant... macro headwinds, and Maxim may correct me, but I guess most assets, with the probable exception of Navoro, will see above 10% increases in costs.

Yeah, that's correct, assuming the macro variables stay at the level that we assumed for 2021 budget. Great, thanks very much.

We'll take our next question from Yuri Vlasov of Silver Capital. Please go ahead.

Thank you. Two questions. One is on your recent very welcoming reserve and resource addition. Could you give us any sense what was the cost of it or was it a result of ongoing expenditure as part of your revenue? And I'll ask the second question after you answer this one.

Thanks for the question. You know, the type of reserve additions were quite different. One type was at really greenfield projects like Pesherny, part of Woro, and their cost of reserve discovery was probably $10 per ounce, so very, very low. At Prognoz, if you... include the asset acquisition costs, which were quite substantial, I think it probably is close to $120 per ounce. So the spread is quite significant and obviously is a reflection of the size of the asset, the grade of the asset. I don't think you can capture... the financial attractiveness of reserve increases using just one number.

Understood. There's no easy solution. Second question is about Kutuz. There's been news in the press, in the Russian press, that Polymetal will be preparing to take part in the auction for this very large deposit in the second half of this year. Providing everything goes your way and you win the auction, and it's highly hypothetical, will there be any changes to your expansion in the Yakuza region?

You know, it's probably not a secret that Paul Mattel, along with a number of other Russian gold companies, is looking at materials for Kychus, which are in open market. in open access. It's not immediately clear what our strategy vis-a-vis this deposit will be, whether we would want to participate in the auction, how high we are prepared to go. But in any case, this is a very long-dated asset. Fully hypothetically, if Everything, you know, if we decided it's good, there is no competition, we get it cheaply, we get the license probably early next year, early 2022. I think the construction can probably start 2026 at the earliest because there is a lot of exploration that needs to be done. There is a lot of methodological testing that needs to be done. This is a complex project. deposit in terms of the mineralogical composition of ore. There's a lot of ESG work that needs to be done because the area of the deposit is the area of the traditional usage by the First Nations of the Russian North. This is not a fast project. Whoever ends up owning it would probably the earliest this deposit can produce is probably 2028.

Many thanks.

As a reminder, if you wish to ask a question, please signal by pressing star 1. We'll take our next question from Boris Sinitsin of VTBE. Please go ahead.

Hi, gentlemen. Thanks for presenting and congratulations with quite strong results. Actually, last year you were celebrating $1 billion of EVDA. This year it's $1 billion of net profit, so I wish you to get to $1 billion of equity as smoothly as you did with this once. Thank you. Basically, the question. The first one is on your clarification of your cost guidance. So, Am I right in assuming that even in case of lower door price, which you expect for 2021 in your budget assumption, right, $1,600 or something like this, you would still see increasing costs to the guided level?

Yeah, let me take this. The way we see 2021 in a very simple term is as follows. The devaluation impact is largely over, so both Ruble and Tenga are stable, slightly below their highs in 2020. At the same time, we are seeing both the general inflation in both countries picking up. I mentioned 5% and 8%, so that was essentially an acceleration in inflation versus prior years. And we see a couple of sector-specific inflationary factors that we mentioned when announcing the guidance. They're still there. Higher diesel fuel prices and higher competition for mining labor and also for construction labor. In mining, this is triggered by very favorable commodity price environments. In construction, this is mainly triggered by the limitations on cross-border travel and therefore significantly lower availability of low-skilled labor force from Central Asia. So essentially, we are seeing a year where there is no tailwind from devaluation and a few headwinds from various sources. So regardless of the way the commodity prices evolve, even if they land at our relatively conservative levels, golden filler price assumptions, we do see the cost inflation in 2021 coming in and essentially offsetting some of the devaluation benefits we saw in 2020. Got it.

Thank you. And the last question from me is on your growth projects, probably on Verduga, where you had quite a positive, quite a strong exploration success, increasing your resources. multiple times. The question is, does it affect somehow your approach to the size of the project, i.e., is it feasible or do you consider increasing the capacity of the plant provided that you have such an impressive results in exploration site?

Well, the current pre-feasibility study was done at 1.5 million tons per year. We are redoing the feasibility study right now. The new resource assessment is going to be audited by the external consultant, I think, sometime in March. We will look at 2 million tons per year, but that probably is tops. This is probably as high as we can go because now the open pit can maintain a higher processing rate. but not the other way around.

Okay, thank you.

That's good.

And there are no further questions at this time. I would like to hand the call back to the host.

We have one question on the webcast, actually. Oh, sorry. A few questions from the webcast. Let me just take them. First comes from Timur. from D2. What is company's policy regarding gold sales hedging? Has Polymetal hedged any gold sales with derivatives? If yes, could you please specify what volume and what average rate? We have actually answered this question quite a few times and the position hasn't changed since. We looked at the potential to hedge in the third quarter of 2020, and there was a pretty extensive board discussion about this, but we came to the conclusion that we don't see this as economically attractive, mainly because the volatility is high. We don't want to cap the upside for our investors in terms of their gold and silver price exposures, and just securing the downside essentially buying puts for downside protection, becomes a very expensive exercise. So with this, we are sticking with our no-hedge policy. Now the next question is from Kieran Hoshton from Pangra Gordon. Following the strong resource and reserve update this week, is it still the plan to expand the reserve base, to extend the group's overall asset life profile?

Yes, that definitely is the case. We still believe that we are slightly below the optimal average life of mine at some of our assets. And moreover, we are keen to get new assets, large assets, through our extensive greenfield exploration campaigns. So the answer is we will continue to spend significantly on exploration, and we hope that we will continue, probably not every year, but on average every year, to demonstrate significant per share reserve increases while keeping the average quality of reserves, the average grade fundamentally, at or above the current level.

Yep. And the third, actually two questions from Dennis Prime. I guess it's a news agency. Good day. Can you please provide any updates on non-core asset sale plan this year? And the second question is, if prognosis is approved, what share of silver do you expect in total gold equivalent production compared, please, with the current situation?

Well, we still have a couple of smaller assets that we may sell this year, but they're totally immaterial both in terms of their book value, their resources, and the potential proceeds. So don't expect anything meaningful. And in terms of the share of silver, in parallel with evaluating prognosts, We also expect to see shifting balances between gold and silver at Omelon. So if stars align the right way, we may be up to 20% silver in 2024.

There are no further questions on the website. Operator?

There are no further questions over the phone.

Well, thank you very much to all of the participants for your questions, for your interest in the company. Please feel free to follow up with additional queries, either with the management or with the investor relations team. I wish you all a very good and healthy day. All the best. Bye-bye.

Thank you. That concludes the call. Thank you for your participation. You may now disconnect.