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.

This is probably the least pleasant page in the whole presentation. We, as a management team, apologize for once again raising the CapEx guidance. And I think I'll spend a bit more time to try to explain why we are increasing our capital guidance for the year by roughly $140 million and now setting the range of $675 to $725 million for 2021. The first group of changes are really scope changes. where the business decisions has prompted us to incur additional spending on new items. First is the scope changes at POCS2. I would like to highlight three main things. First is our decision to significantly upgrade all of the instrumentation and automation equipment sensors throughout the production facilities complete with the private LTE network which will be among the first in Russia we believe this makes sense given the rapid growth of various digitalization technologies and I think a significantly stronger instrumentation will help us later on to capitalize on the emerging products and technologies in this space. Second is the new regulation in Russia in terms of seismicity prevention which more or less forced us to include additional structures and supports to address a potentially catastrophic earthquake at the facility which is deemed to be industrially dangerous because of the presence of the high-pressure vessel, the autoclave. And thirdly, given persistent and varied problems with railway transportation in Russia, mostly due to the huge flow of thermal coal to the Pacific coast, we decided to significantly revamp and expand our railway spur we now provide for more storage at the railway spur we now have facilities that you quickly unload containers because shipping concentrate in containers now appears to be the preferred option as bulk transportation is subject to significant uncertainty because of coal volumes container transportation takes the priority and hence our decision to invest in this infrastructure. So overall, POCS II would require $30 million more. The board of directors of Palo Metal also approved the scoping study or really something in the middle between scoping study and pre-feasibility study for POCS III or Pacific POCS. This is a multi-year program And the $25 million for this program will be spent this year. We believe preparing for the potential Pacific Fox construction well in advance makes sense. Given the current situation in the world, the projects of this magnitude and complexity take many years to engineer and build. and we decided that we can do preparatory work for Pax 3 before Pax 2 completion. This will not tax our organizational and financial resources too much and potentially can reduce the completion time for the new project by up to two years. Needless to say, the raison d'etre of the Pacific Pox remains very much prominent given recent rumors about the tightening import regulations of gold concentrates in China and also continuous flow of news from the Russian government about the potential restrictions on gold concentrate exports. We also bumped up our investment in Verduga and Prognos because Prognos has been formally approved and Verduga is approaching the investment decision with the management continuously increasing the probability that this decision will be taken before year-end. So again, we decided to bump up Prestrip and start detailed engineering ahead of the board decision. And the second group of factors behind CapEx guidance upgrade is the general inflation, which I think is well documented across the globe. Materials inflation, mining contract inflation, and wages inflation, all very prominent in the Russian mining sector. Maxim highlighted several commodities, structural steel. cement. More recently we have seen runaway price increases for everything related to chips, semiconductor chips, and to fine electrical wires and equipment. So this obviously is a major factor. Wages inflation are not really related so far to the increase in CPI in Russia. This is still the impact of continued significant cross-border travel restrictions driven by COVID. We still can't get labor, construction labor, from traditional sources in Central Asian republics, and we need to rely a lot on much more expensive construction labor from Western Russia. This obviously leads to a higher construction cost. Overall, to sum up, a major bump in CAPEX guidance, and this is unpleasant, but on the other hand, this willingness to take on additional CAPEX leads to more certainty in the timely execution of all of our growth projects and enables us to retain firm view of our future production growth upside.

A few things remain to look at. In terms of net debt dynamics, here we have a reconciliation of what has driven net debt up from roughly 1.35 billion to 1.83 billion despite very strong operating cash flow. even the changes in working capital were not as big as we had it, for example, last year. What has really driven the increases in net debt was the acceleration of capex, as we've just discussed. And in addition to this, the first half is the time when we pay the final dividends for the previous year, and the final dividend is roughly two times as high typically compared to the interim dividend. So 422 million paid in dividends to shareholders have seasonally driven the net debt up. In addition, 26 million of other cash flows, which is mainly represented by the royalty payments for the deferred considerations for asset purchases. are mainly royalties payable for Comar and Omola. Turning over to the balance sheet structure, we feel we remain comfortably funded. We have secured 400 million of climate transition loans in the first half, bringing the total share of green and sustainability-linked financing to 40% of our total outstanding debt. Net debt to adjusted EBDA is at 105 which is still our comfort zone and we expect this number to go again below one times adjusted EBDA by the year end as the bulk of free cash flow will be generated in the second half. One other thing I would like to draw your attention to is the historical low cost of debt. The average cost of debt stood at 2.7%, a decrease from 3.6% a year earlier. This is a result of both the lower benchmark interest rates, but also it speaks about our ability to negotiate competitive margins. And then a few concluding remarks on the share price performance and the dividend yield. As you can see, we continue to deliver a 4% plus dividend yield on a sustainable basis. So the five-year average dividend yield stands at 4.1%. And this is obviously contributing to sector-leading total shareholder return. Whatever period you take, three years, five years, we continue to be among the leaders in the gold mining sector well exceeding the performance of our key peers and the relevant indices. Even if we look at the year-to-date performance, despite the 6% increase in gold price, Polar Metal continues to perform quite strongly compared, let's say, to GDX, which delivered a negative return of 14%, and FTSE Gold Mines, which delivered a negative return of 16%. So hopefully with stable commodity prices, continued delivery on our production and financial targets, we will continue to deliver strong dividend yield and the shareholder return to our shareholders. I will turn over back to Vitaly for concluding remarks on the guidance

2021 guidance, with the exception of the CAPEX upgrade, stands as previously announced. We are quite comfortable with both production and OPEX. And in terms of free cash flow dividends and leverage, we believe we are well within the comfortable band of operations. And in terms of key milestones for the remainder of the year, we, as Maxim mentioned, expect to pay the semiannual dividend by the end of September. And an important event will be the Capital Markets Day, which is scheduled for the 17th of November. It will traditionally be focused on investment projects. We will cover the progress on the startup of Nezhdar and we will report in detail on Veduga and Prognos and give you an update on Pacific Fox as well. In terms of the news flow about the actual business, clearly Nezhdar startup and first production will be the key event in the second half. And if successful, this should be followed pretty quickly, I believe, by the final investment decision on that reconstruction. Thank you very much for attention, and we will be happy to answer any questions.

Thank you very much for the presentation. We will now move to the Q&A part of the call. If you are dialed in via the telephone, please press star 2 on your keypad and wait for your name to be called. If you are dialed in via the web, you may also ask a voice or a text question. We'll now give a moment or so for the questions to come in. Thank you, our first question comes from Mr. Krishan Argawal from Citigroup. Please go ahead, sir, your line is open.

Hi, thanks for taking my question. Can you briefly discuss about the prognosis project ore processing, how much of the ore you're going to mine there, and then how much is the capacity or spare capacity available at NESDA, which has sort of enabled you to take a decision of processing the ore at NESDA rather than going for a standalone processing infrastructure. Just a brief amount of detail would be helpful here.

Thanks for the question, Prishant. We plan to process approximately 250,000 tons of ore per year from prognost at NASDAQ. This will not compromise the processing capacity for NASDAQ ore because the concentrated NASDAQ has been upgraded in the process of construction. That was one of the scope changes that drove actually capex increases for NASDAQ. And in terms of the life of mine, it will be approximately 20 years just from the open pit. And approximately 120 million ounces of silver equivalent will be produced over those 20 years.

Understood. That's better. And then on the sales volume, I mean, there is a bit of a lag. And as you highlighted, there's a lot of supply chain disruptions. in terms of cross-border movement. So have you seen any kind of a normalization into the sales volume in the month of July and August, or the problems are persisting to have impact on the full-year sales volume?

We believe that we will catch up by the year-end. The problems persist, but we moved quite quickly to address them. The key problem Counteraction is the change from bulk shipment of concentrate to the ports to container shipment. It will increase costs of transportation relatively significantly, but it will ensure that our material gets to the ports ahead of any coal clogging up the network, because as I have mentioned, the containers have the priority movement rights compared to bulk cargo on Russian railways.

Okay. Thanks a lot.

Thank you very much. Our next question comes from Tyler Broda from RBC Capital Markets. Please go ahead, sir. Your line is open.

Great. Thanks very much for the time today. Three questions from my side. I guess the first one I just want to touch on is you're just mentioning the changes potentially that are coming through in China to concentrate imports. In a scenario where that was to change, I'm just wondering from the current setup before POCS 2 gets completed, what are sort of the contingencies or the plan B, as it were? Yeah, I'll ask the other questions afterwards. Thanks.

Thanks a lot. This is probably the key uncertainty as we look into 2022. We know that something is coming relatively shortly, but still we don't know the specifics other than that high arsenic concentrates will attract a certain penalty. The key uncertainties include the level of penalties whether it will be a blanket ban or maybe an import surcharge on dirty material and the second key uncertainty would be related to the potential blending procedures be the so-called paper blend allowing just to kind of mix clean and dirty concentrate in the same shipment lot and get to a certain average level or alternatively what level of variance will be tolerated in physical blends. We're still waiting for the clarification from the Chinese. In the worst case scenario, I think it will be the physical blending that is the stopgap measure before the POX-2 comes on stream. Obviously, this will require some additional OPEX and maybe some CAPEX. But, again, the details currently are too few to say anything specific.

That's very helpful. In terms of the Pacific POX coverage, here. Obviously, you've had experience now with the first POX, POX2, going forward. I guess, in terms of the scale from a size and CapEx perspective, how are you looking at that right now, and what learnings can you push through on a Pacific POX at this point?

Well, our general intention is to use as much of the engineering knowledge as possible from the POTS2 facility. So same equipment, same layout, etc. In terms of the CAPEX projections, I think one of the key objectives of this pre-feasibility or scoping study is to get to a high confidence CAPEX estimate because in addition to the equipment and general layout, clearly specific conditions of the location and infrastructural situation in the location also impact CAPEX. So I think we will need at least a couple of years before we can say what the total capital requirement for POTS3 may be. And again, another thing is in the environment of global price instability, it's very difficult to extrapolate based on similar facilities built in the past. The world has moved on in terms of input prices. And I think references to plus events can be misleading.

Yeah, no, I think that sounds completely fair. I guess that sort of leads to my final question, if you don't mind. 40% of the CapEx increase roughly was due to the inflationary forces. How much do you see potential for that to unwind going forward, or is that something we should see as sort of a base level in the future?

Well, this is the $100 million question. If I knew the answer to that question, I would be betting all my money on stock market. But to be serious, I think so far the only sign that the inflationary pressures may unwind came from the construction steel market, where several Russian producers have announced notable price decreases starting from this September. I'm not sure how sustained they will be. In all other markets, we currently see no sign of price pressures relancing. And in some important markets, the prices continue to rise. Container shipment is one, and everything electronic is the other one. So on the balance, if you ask me, do I expect any relief of the inflation pressure, I would say no. I actually, as a baseline, I would expect more inflationary pressures rather than less inflationary pressures.

Yeah, well, I guess the natural hedge of being a precious metals producer through that provides a bit of comfort. But thanks very much for the answer, Sally. Very helpful.

Thank you. Thank you. Our next question comes from Nina Dragunova from Goldman Sachs. Please go ahead, ma'am. Your line is open.

Good day. Thank you very much for the presentation. I have a couple of questions. First one relates to your next year's guidance. In the press release, you mentioned that CAPES guidance can be updated during the CMG in November. And the current range is quite low for next year. It implies a significant decline from this year base. So given the accelerating cost inflation and accelerated work on some of the key projects, do you see risks of CapEx next year standing closer to this year levels? That is my first question and the second I will ask after the answer.

I think in terms of CAPEX estimates going forward, we really need to do our homework and incorporate the current macro environment in our estimates going forward. We will try and present the new CAPEX, medium-term CAPEX outlook at our CMD. Right now, frankly speaking, we are not prepared to give you the numbers with a sufficient degree of confidence.

Understood, thank you. And the question, the second question relates to POCS3. You started this coping study, so when can we expect completion of this coping study?

Well, the study is timed in such a way that it will be completed approximately when the POX-2 is up and running in full capacity. We do not want to deviate from the overall strategy of not running more than two large projects in parallel. So, Veduga comes after Nasdaq is up and running. POX-3, the construction stage, will come only after POX-2 is up and running. The whole purpose of this pre-fusibility study is to shorten the subsequent period it takes to build and launch Pox3. So two years roughly for pre-fus. And then hopefully in the end of 2023, POCS 2 has demonstrated that it's okay and we can make an educated investment decision on POCS 3 after receiving very detailed engineering information and pretty precise estimates of capex based on the results of the pre-feasibility study.

That's fair, thank you. And the last question from me, part of the CAPEX revision this year comes from acceleration of the and prognose projects. Will this have any effect on your estimate of project timelines?

Accelerated start.

Well, Prognoz definitely will be coming into production earlier than previously expected because previously the concept was that we will start building the concentrator maybe in three years' time. So it wasn't really in the five-year guidance. So, we will provide the updated medium-term production guidance at the capital markets day as well, and we will incorporate additional production from prognosis into that guidance. No, we will not accelerate production compared to what is currently in our production guidance. It's more the acceleration of pre-stripping, which we believe will de-risk the project in terms of the startup and the ramp-up. So the ultimate thought of production and the production profile would remain the same.

Very clear. Thank you very much. Special words for the analysts.

Alan, your line is open. Please go ahead.

Oh, hey, guys. Most of my questions have actually been asked already, but I've got two left. The first one around prognosis. You've given us some life of mine, all of sustaining cost estimates. Could you tell us what that would be on a cash cost basis?

Total cash cost would be around just $1 lower. There is not a lot. So I think it's around $12 per ounce of silver equivalents.

All right, perfect. The second one is perhaps quite small. But listen, there's an accounting change as of January 1 related to unrealized profits related in how is impacting segmental adjusted EBITDA. It looks like the restatement for the first half of last year is about $6 million. Do you have a sense, just very roughly, if it would be similar scale in the first half of 21? Or if it was perhaps any larger?

Alan, maybe let me come back to you offline on this.

I guess this is really a very technical question. Yeah, no problem at all. I figured that might be the response. That was it for me. Thank you, guys.

Thank you very much. Our next question is from Mr. Anton Firatov from Bank of America. Please go ahead, Anton. Your line is open.

Hello, and thank you very much for the presentation. I have two questions. My first question relates to a great dynamic. You said that you had some great decrease in Brazil in the first half of this year. Do you expect any major changes to your production grades in the second half of this year? And maybe you have some outlook for the next year as well. And my second question relates to the taxation changes in Russia and Kazakhstan. When do you expect the taxation changes to be finalized? When should we have the final decisions? And what's your current thoughts about the likelihood of an increase in Kazakhstan and Russia? Thank you.

Anton, thanks a lot for the questions. In terms of the first one, I think second half group-wide will be very similar to first half in terms of grades. Looking forward, we expect next year continued great challenges at Kazil as the operation will be processing significantly more or compared with the design. 2.2 versus 1.8 million tons per year, and 2.4 million tons is the target for 2023. This increase in throughput will come at the expense of lower grades. And group-wide, we expect this to be compensated, particularly starting from 2023, as the new projects at my score and war will come on stream. But I think both 2022 and 2020, 2022 will be slightly lower than 2021. And in 2023, we should get a bump back. Now coming probably to the big question for gold mining in Russia and Kazakhstan about the taxes. I think the likelihood of tax increases in Kazakhstan is very high. And probably, as it was announced in media by the head of government revenue service, it will amount to a 60% increase in mineral extraction tax. So the rate will go from 5% to 8%. In Russia, despite a lot of noise, we still have no clarity. I think everybody agrees that the export tariff on base metals currently in place will be replaced by some form of increase in MET, but that's for base metals. What will happen with precious metals? We heard the conflicts and opinions ranging from no increases to maybe halfway between no and the full rate hike experienced by base metals. So I would say that it's likely. in Russia, but the jury is still open and definitely when everybody comes back from summer vacations, there will be intense consultations among industry participants and government officials on what tax changes, if any, will be implemented. I really cannot say with certainty what will transpire in Russia.

Thank you.

you very much our next question comes from mr dan shaw from morgan stanley please go ahead sir hi thanks um yeah most of mine actually been been answered uh just first one a quick clarification uh slide 31 on the production outlook um if i understand correctly this will also be updated right at the capital markets day um to to include prognos there so we should tag on perhaps just under 100,000 ounces additional from 2023 onwards? Is that the way to think about that?

No, production in 2023 will be significantly lower because it won't be a full year of operation. I think 2024, the number is about right, but the impact in 2023 will be relatively small.

Okay, great. Thank you. And then the second one, just more of a sort of conceptual question, how are you feeling about the additional pressures on your time from running more projects simultaneously with Vertigo and Prognos, especially with the portfolio expanding as well with Nasdaq and also planning for Pacific Pox? Just interested in your thoughts there. Thank you.

Well, one of the reasons why we decided not to do a standalone concentrator at Prognoz was precisely the desire to preserve the management bandwidth. And we internally tried to assess the kind of labor management, labor intensity of Prognoz with concentrator versus Prognoz as a mine only. and the rough estimate is it's only about 20 percent of the full project so prognos as a mine will be relatively simple relatively straightforward and will be mostly managed out of our original office in yakutsk so i don't think it will tax the management company in saint petersburg Again, Veduga will supplant NASDAQ, and POX3 will only transfer to a really intensive construction stage after POX2 is completed. And to answer the second part of your question, definitely the increase in the number of the assets is a challenge in terms of keeping the flow of information and the focus. And the response to that is the continued process of delegating authority and responsibility to our regional business units, if you will, in Magadan, Khabarovsk, and Yakutsk. And I believe this has worked really well in terms of continued stable, reliable performance of operating mines. And I believe against the COVID background, the decentralization has actually ensured that we so far touchwood got off quite lightly in terms of the impact of the pandemic on production. I think decentralization ensures a swift and context driven response. As a result, the management in the head office, you know, frees up time and energy to pursue growth initiatives, and the production is being taken care of by the original guys. So overall, I would say for me personally, the capital projects probably take up two-thirds of my time compared with one-third for steady operations. So the increase in the number of operating mines doesn't worry me. The increase in the number of investment projects would have been much more serious and that's one of the reasons we have decided to dumb down prognos and to extend the execution timeline for part three. So it's kind of the load on the management time and effort is more smoothed out.

That's very helpful. Thank you very much.

Thank you very much. Just a reminder, once again, star two for any additional questions. In the meantime, we have two text questions that came in from Boris Sinitsyn from Renaissance Capital. I'll just read them out. First question, does accelerated CapEx on Prognos, Vaduga, POX3 mean faster delivery on the project, earlier startup? And number two, do you see any one-off items in 2021 maintenance CapEx?

I think the first question has more or less been answered before in terms of one-off items in maintenance CapEx. Maxim mentioned the fleet renewal at Kizil and the construction of dry stack tailing facility complete with the solar power plant at Omolon. Those would be, I guess, two meaningful projects, each accounting for, I guess, approximately 20, 25 million dollars.

Thank you very much for that. I'm seeing no further questions at this point, so I'll pass the line back to you for concluding remarks.

Ladies and gentlemen, thank you very much for active participation. Please feel free to follow up with questions and inquiries either with the top management in St. Petersburg or with our IR team in London and St. Pete. Have a very nice day. Stay healthy. All the best. Bye-bye.

Thank you very much. We'll be closing all lines now.