Polymetal International plc

Ladies and gentlemen, thank you for standing by, and we would like to welcome you to PolyMetal's first half 2021 financial results call. Today's hosts are PolyMetal CEO Vitaly Nesis and CFO Maxim Nazimov. At this time, all participant lines are in listen-only mode. The format of today's recorded call will be a presentation by PolyMetal's management team, followed by a question and answer session. So without further ado, I would now like to pass the line to Mr. Vitaly Nesis. Please go ahead, sir. The floor is yours.

Thanks a lot. Ladies and gentlemen, welcome to the call on first half 2021 financial results for Polymetal International. Please make note of the disclaimer containing information about the forward-looking statements. And let's start with the highlights of the financial results. First half was quite successful for Polymetal. we produced 714,000 ounces of gold equivalent. This is 1% down year-on-year, but slightly above our own production budget, and we believe that strong performance will continue into the second half. On all profitability measures, we have improved materially year-over-year, starting from EBDA and completing with Most importantly, dividend that we have declared for the first half. 45 cents per share is what will be paid on the back of the results for the first half. Costs in the first half have increased by 16% year-on-year. Part of that was predictable. stamps from the planned great decline at some of our operations, but also we're increasingly facing significant general inflationary headwinds within the global economy. More on that later in the presentation. The highlights of the progress in the first half in terms of the capital projects, both POX2 and NASDAQ have progressed very well. NASDAQ is now mechanically complete and in the middle of the commissioning stage. We still maintain the plan to produce first concentrate on November 1st, 2021. And in general, despite significant challenges related to cross-border transportation and massive fires in Yakutia, the region where NASDAQ is located, Now, we stuck to the plan in terms of both mining and construction activities. At POCS2, again, we faced significant challenges in terms of disruptions to the global sea transportation, including the crisis in the Suez Channel and then the global shortage of containers and container ships. All large-sized equipment of oxygen station and autoclave section per se have arrived and has been installed. And we believe that by the end of the warm season of this year, we'll complete all earthworks and external foundations, which will enable us to continue construction at brisk pace when the winter arrives. The first half of the year also marked significant progress in terms of our ESG initiatives. We have published a detailed carbon footprint reduction strategy, complete with action plan, and received $400 million of climate transition loans, which will support us on this journey. Our efforts have been rewarded by several upgrades in our ESG readings and inclusion in the S&P Sustainability Yearbook. In terms of corporate governance, we maintain best practice here, fully compliant with all of the requirements and recommendations of various regulatory bodies. And I think the sign that the institutional investors support our efforts in that respect is a very high percentage of approval for our remuneration report at 98%. Turning to COVID, still remaining probably the most pressing short-term challenge for the company, particularly for the operations. As of today, there are 64 active cases of COVID-19 among Palo Alto's workforce. Unfortunately, one of our colleagues died two weeks ago from the disease and the threat of the pandemic remains very much prominent in everything that we do. In July, the Kubaka processing plant at Omolon suffered a significant COVID-19 outbreak. The management on site reacted very swiftly and appropriately, and we managed to contain the outbreak without any interruption in production and without any people suffering significant damage to health. There are still 41 active cases on site, mostly among contractors, which is down significantly from the peak number of more than 100. All other operations and projects continue undisrupted. The level of fresh cases and deaths in both Russia and Kazakhstan remains elevated, and we maintain all of the precautionary protocols and measures to ensure that risk reduction and health protection. Vaccinations continue at the group sites and offices. the company decided that the vaccinations should be fully voluntary and have not implemented any policies aimed at discriminating those who do not vaccinate. Currently, 30% of employees have received at least one vaccination shot. We believe this number is low and continue to use soft influence measures to ensure that people continue to get vaccinated and the COVID agenda unfortunately will remain probably front and center of the management's attention for some time to come. To safety in the first half unfortunately we suffered a fatality at one of our exploration drilling contractors in July. This is not first half of the year, but it is very sad to report this occurrence. In general, in the first half, we saw more than doubling of the lost time injury frequency rate. Now, this is off a very low base in the first half of the last year and we believe this is partially a reversal to the mean and partially a reflection of employees' growing fatigue with anti-pandemic measures and general burnout due to continued stress of working in the pretty stressful environment. you know obviously remains our top priority the federal accident the contractor will be examined thoroughly and we definitely will learn our lessons in general safety among contractors is becoming more and more central for our health and safety efforts as the number of contractors grows and the share of mining performed by contractors is also increasing. We will do our best to spread our best practices to our partners and colleagues. In terms of ESG leadership, just to reiterate that everything we do starting from operating practices and towards investment projects and remuneration structures is linked to ESG and I think we have been recognized by a variety of external readings and rankings providers as one of the leaders in the field for the mining industry management continues to press on within the field and definitely at all of our new projects considerations related to carbon footprint, water intensity, impact on various stakeholders take center stage and are in no way secondary to the requisite strong financial performance. And I complete my section with a couple of words on production. We have seen a great decline at Kazil, which was not offset by increases in throughput and recovery. And more or less this decrease in our flagship operation was not offset by pretty strong performance across other assets. And we recorded a 1% decline in production in the first half. I would just like to remind you that our production guidance for this year presumes 3% decline year on year for the full year. So this 1% decline is actually slightly better than our production guidance. And now I think Maxim will walk you through the details of our financials.

Yep. We'll start with a quick look on all of the key KPIs in one place. So we have, as Vitaly mentioned, a very decent growth. In both the top line and the bottom line metrics, revenue grew 12%. Adjusted EBDA grew 8%. Against growing revenue, we had an offsetting impact from the growth in total cash costs. Total cash costs remain within the guidance range at $712 per ounce, yet this represents a 12% growth year on year. In terms of all in sustaining cash costs, the growth was slightly higher, 16%. We'll look in detail at the driving factors behind this growth. However, as we stated in the announcement today, we expect the all in sustaining cash costs to be back within the guidance range, which is $925 to $975 per ounce. Net profit grew 15%, and in line with that, dividends and the underlying EPS grew proportionately so we will be paying 45 cents on a share in September in the interim dividends in line with the policy in terms of cash flow the free cash flow for the first half was a small negative number 27 million dollars some of this is a traditional seasonal factor which is working capital build-up which is traditionally released in the second half, but some of this was also driven by the growth in capital expenditure, and we will look at the factors behind that during this presentation. Nevertheless, net cash from operations actually grew quite strongly by 22%. In terms of net debt, we have ended the half-year period with $1.8 billion of net debt, again, a seasonal spike. yet we remain within the comfort zone in terms of the leverage ratios, net debt to adjusted EBITDA comprised 105 times. Moving on to look at each of the key numbers in more detail, I'll start with revenues. As you can see from the slide here, revenues were mildly impacted by the sales volume changes. Sales moves pretty much in line with production, yet with a lag to production, which is again typical for the first half of the year. We had concentrated build-up at a couple of operations, most notably Kizil and Ducat. Both build-ups are expected to be reversed in the second half. And then obviously the metal prices movements with 8% increase in gold realized price and actually more than 50% increase in silver realized price. because as you will recall in the first half of 2020 silver experienced very meaningful weakness in performance. Turning over to EBDA, again the bulk of EBDA growth was driven by prices. The offsetting impacts came from the increase in total cash costs and other cash expenses increased Nevertheless, EBD of $660 million and 8% growth, which is, we think, a very good performance. Turning over to the more challenging issues, costs remain under macro pressure. Here we have tried to present a few driving factors behind this. The first one is just the general consumer inflation growth, which has accelerated in Russia quite strongly. The June 2021 number came at 6.5%. Oil price continued the upward trend in the first half of 2021. And even more pronounced was the inflation in all other key consumables. You can look at the steel price dynamics. and then we are just giving you a few examples of other items like concrete works plus 40% pipeline laying services 28% and electrical materials driven by very strong growth in metals prices more than a two-fold increase so this is the pressure we are seeing from the master now turning over to our own performance Total cash costs were at $712 per ounce in the first half. We were in a way helped by the gold and silver ratio change. Silver grew stronger than gold, so we ended up producing and selling more gold equivalent ounces as a result. Rubel and Tenge were slightly weaker than in the first half of 2020. Again, helping us to reduce the cost levels. And then the offsetting factors were first and foremost the change in average grade process. Roughly half of this number of $63 per ounce is represented by the grade decline at Kazil. And in parallel, we saw those impacts also at Albazina and Duca. Domestic inflation is just the CPI generic inflation factor. Change in sales structure at material operation plus $27 per ounce is mainly represented by higher share of purchased ore and concentrate. In our production in the first half we have seen very good production performance at Varvara thanks to our ability to purchase more third-party ore and much in the same way at Vora we were able to purchase third-party concentrate for processing and that has driven production up But at the same time, third party materials are obviously more expensive compared to the . Mining tax change was driven by growth in commodity prices. And then plus $16 per ounce of other is essentially representing the impact of above CPI inflation in the mining sector that we are experiencing. The cash flow structure remains roughly the same. pretty much unchanged, 65% denominated in local currencies, roughly 17% fuel-related, and 18% foreign currency denominated. This also includes royalties that we are paying as taxes. Page 15 shows the key sensitivities of our costs and bottom line metrics to the changes in macro parameters, currencies, commodity prices, and we have also added a sensitivity to the increases in royalties, because this is a topic which is still widely discussed both in Russia and Kazakhstan, so we thought it might be useful to give you the information about the potential impacts if those changes come in force, say, in 2020. Turning over to all in sustaining cash costs, as I mentioned, the growth here was higher compared to the total cash cost growth. Apart from the TCC increase, what we are seeing is inflation in the SG&A and other expenses as well as in sustaining capex. And in addition to that, the first half was characterized by some of the acceleration in fleet renewals and other projects at existing mines. This factor has added roughly $35 per ounce. As I will explain, some of those increases are actually accelerations, so they will not be recurring in the second half. And as a result, as you can see from the chart here, the completion of those projects will drive reduction in all sustaining cash costs in the second half of the year. The largest items here Kazil Fleet Renewal. We have undergone major fleet renewal at Kazil first time since we launched the open pit operation in 2016. And then at Omolon we were progressing quite strongly with the dry stacking facility combined with the installation of the solar power plant, which will be one of the main power sources for this facility. And traditionally, in the second half, we will see volume increasing, both in terms of production and in terms of sales. MyScare had almost zero sales in the first half, but also we will be bridging the sales to production gap for concentrates at Ducat and Kizil in the second half. So the volume increases will actually help us to spread the fixed costs across higher amount of ounces. And as a result, by the end of the year, we believe we will be back within the guidance range, $925, $975 per ounce. This is obviously subject to the exchange rate dynamics. So far, this has been roughly stable and partially playing to our favor. Looking on a mind-by-mind performance in terms of oil and sustaining cash costs, We're not reporting traditionally not reporting cash costs in the first half because the amount of ounces produced and sold was very small. So the numbers would not be meaningful. In terms of Svetlaya, very good performance actually. So actually displaying a lower than inflation growth in all and sustaining cash costs of just 3%. At Kazil, I already mentioned the grade decline, essentially reversal to the average reserve grade, coupled with the major fleet renewal program that I have just discussed. At Woro, all-in sustaining cash costs grew 43%, driven by mainly two factors. One, purchase of third-party material. Historically, Woro hasn't been engaged in this business to any large scale. And in addition, we were pre-stripping at two of the newer deposits, Saum and Picherni. At Ducat, 18% holding sustaining cash cost growth driven mainly by continuous grade decline. However, again, some of this is explained by sales to production gap that we experienced in the first half. Varvara, stable actually slightly lower cash costs compared to first half of 2020. Amursk-Albazina we saw growth in all in sustaining cash costs above one thousand dollars per ounce mainly driven by great declines but also by accelerated development of the underground mines at Albazina as we are essentially nearing open pit mining completion there and switching to underground at the main Anfisa zone. In addition, we have started stripping mining at the Farida pit. And then finally at Omolon, the increase was driven mainly by the construction costs of the dry stacking facility at Omolon. So I would expect for Omolon very material reversal back to normal. in terms of oil and sustaining cash costs in the second half of the year. Looking at our cost curve positioning among peers, although the costs have been higher, this is something of an industry trend as well. So, polymer metal now remains within the second quarter of the global cash cost curve. And as I mentioned, we expect visible reduction in oil and sustaining cash costs. in the second half. Page 19, I will turn over to Vitaly to talk about the capital expenditure guidance.