Polymetal International plc

Good day and welcome to the PolyMetal FY 2021 results conference call. This call is not for media. If you are a media representative, please disconnect now. At this time, I'd like to turn the conference over to Vitaly Nesist. Please go ahead, sir.

Ladies and gentlemen, welcome to the conference call on PolyMetal International results for year 2021. For the obvious reasons, we will be concentrating not so much on the historical results, but on the present situation. We are all at power metal shocked and appalled by the war going on in Ukraine. The related economic and political developments are likely to require a lot of management efforts to maintain company performance. However, despite a wide range of uncertainties we will be working under in 2022 and maybe longer, it is our current intention to operate as normally as possible in order to preserve shareholder value, but also to address the needs and concerns of other stakeholders, including our employees and communities where we operate. Today's call will be structured differently compared with the traditional results calls. I will first brief you on the current situation that Palmetto finds itself in. Then I will go through the briefly financial highlights for 2021 and current outlook, and we will conclude with Q&A. Today, two language lines for questions will be available, both English, which will come first, and then Russian. In terms of the current situation, again, I would like to stress an unprecedented for the team level of uncertainty. However, presently, all of the operations are continuing normally. operating activities are continuing and the project execution is also ongoing. In terms of the financial and liquidity situation, the Central Bank of Russia has announced on Sunday that it will resume the domestic purchases of gold and silver bullion and We believe we have sufficient channels of sales from our Russian operations to ensure that we are both liquid and solid. In terms of the direct sanctions impact, so far we don't see any direct sanctions. sanctions impact. We believe that the sanctioned counterparties that we have dealt with can be discontinued and replaced, if needed, by non-sanctioned entities. In terms of the supply chain, we currently don't see any threat to operations as We so far haven't seen any sector-specific trade sanctions, and we also already for several years have backup plans to replace the imported consumables by domestic or Chinese consumables in case the sanctions will be expanded and will include the goods that are necessary for the continuation of our activities. Currently, the largest challenge that we expect to face in the coming months is the logistical challenge related to significant disruption of container ship service to and from Russia. The management is very busy evaluating different options. I would like to stress that This situation is not expected to have any impact on the current performance, given pretty significant stock levels, which we have accumulated during the COVID pandemic, but also because we have backup plans in terms of consumables and critical equipment. Now, let me conclude with the 2022 outlook. Again, the devastating war in Ukraine is likely, is certain to require significant management efforts to maintain our performance. We will do our best to serve the interests of all of our stakeholders while maintaining company values. The group reiterates the current production guidance of 1.7 million ounces of gold equivalent for the current year. Traditionally, production will be weighted towards second half due to seasonality at several operations. We do not expect that the scope of operational activities will change materially in the light of recent developments. We also don't expect that the current capital project advancement will change materially. I refer to the projects which are more than 20% completed. Still, the management is in the process of project review. Now, for the projects not completed by more than 20%, and the results of this review will be provided within four weeks of this call. Also, I'm forced to suspend both CAPEX and OPEX guidance for 2022, CAPEX mostly because of the potential changes to the new projects, and TCC and AIC guidance mostly due to the unpredictable path that the exchange rates and domestic inflation will take in 2022. Having reiterated production guidance and suspended cost guidance, I'm pleased to say that we maintain our commitment to adhere to the previously announced carbon footprint reduction trajectory, which calls for the reduction by 30% by 2030, and we continue to plan to release our long-term GAG reduction goals by the end of the year. And in terms of the outlook, last but not least, we currently plan to pay a regular annual dividend. And this will come for approval at the AGM at the end of April to be paid by the end of May. However, citing again the aforementioned uncertainties, the management and the board reserve the right to exercise judgment and discretion and to postpone or partially postpone or cancel the dividend if the political and sanctions situation changes significantly. So much for 2022 outlook. In terms of 2021 highlights, just several bullet points. The year was successful in terms of our production and project advancement results. We did our production guidance we advanced our projects on schedule despite very significant COVID related challenges. Total cash costs and all the sustaining costs were up significantly year on year by 15 and 18% respectively. And that was the combination of factors reflecting mostly high inflationary pressures, particularly in the capex. And then net earnings declined by approximately 15%, but still stood at about $900 million, mostly reflecting the higher costs that I talked about. CapEx was probably the biggest disappointment because we had to revise our capital guidance, CapEx guidance for the year a couple of times, mostly due to the significant and somewhat unforeseen pressures affecting global supply chains as an indirect consequence of the COVID pandemic. We also continue to invest in pre-stripping at the range of our projects, which, as we see now, will be extremely helpful in terms of weathering potential uncertainties and instability in the operating environment. Net debt increased through the year, and we paid $635 million of dividends, a record amount in the company's history. I would like to stress that the group generated very significant free cash flow in 2021, and although the net debt increased, that mostly represented a significant pace of capital investment in future production, which should maintain the company at our growth path going forward. I would also like to stress that we are ahead of our plan in terms of greenhouse gas emissions intensity reduction. we reduced it by 9% compared to 2019, mostly thanks to energy efficiency initiatives and the implementation of local and grid renewable energy sources. In terms of safety, last but not least, we are on the one hand satisfied that We didn't have any fatalities among company employees in 2021, although we regret to report that one of our contractors lost his life at war operation. We intend to continue to position ESG criteria front and center in terms of priorities and drivers for management compensation. in 2022. With this, I conclude my introduction. Please refer to the presentation available on the webcast, and you can ask questions both relating to my speech and to the presentation.

Thanks. Ladies and gentlemen, If you'd like to ask a question, you can do so by pressing star one on your telephones. That's star one if you would like to ask a question. We will now take our first question from Christian Agarwal from Citi. Please go ahead, the line is open.

Hi, thanks a lot for taking my question. Indeed, some difficult times. Can you please elaborate on your ability to conduct the bullion sales into U.S. dollars, which you also alluded in your release? I mean, I can see that you're comfortable in terms of your guidance of 1.7 million ounces, but how should the market think about getting the gold sold in the market and realizing the pricing? That's my first question.

Well, thanks for the question. It's a good one. Internal bullion sales in Russia have always been conducted in rubles at the prevailing market gold price and at the prevailing foreign exchange rate. The central bank announcement on Sunday specifically mentioned that gold will be sold at LME close and at prevailing forex rate. So we will receive rubles, which we then will apply to pay our domestic bills. In terms of the hot currency that we need, we have substantial external sales except bullion, concentrates for example, and we also are evaluating restarting direct exports to third countries. So first, we don't think sanctions against the central bank will anyhow impact the ability to pay it, because the transactions will be in rubles. And secondly, we will be able to procure the hot currency required, be it for imports of consumables and equipment or for debt payments or for dividend payments, although the latter so far is suspended by the government decree.

Okay. In that context, can you help us breaking down how much of the sales is dollar denominated as of now and how much is in the rubles? and also the proportion of the expenses operating costs?

If we take the group in general, Russia plus Kazakhstan, I would say that approximately 40% of sales and 25% of expenses other than debt repayment and dividends are denominated in dollars. So we have a pretty sizable kind of currency gap between dollar receipts and dollar outlays, which is sufficient to cover our requirements for capital returns, even if ruble dollar trade in Russia becomes somehow illiquid with decoupled from the market.

Got it. And then so far you don't have an indication that the sales to the central bank in Russia is going to be disrupted or is there kind of a pace is going to come down from the central bank purchases in Russia?

Well, we don't sell directly to the Russian central bank. We sell to commercial banks in Russia. And I think the other trend we will see very shortly is a pickup in physical demand from individuals locally again as a way to diversify away from the dollar and buy safe-haven assets, especially given the fact that generally the equity market where a lot of Russian individuals were active has suffered quite significantly. So we don't see any imminent risk here.

Even if we can deal with the central bank directly because of the sanctions, I repeat Maxim's point. We can deal with the banks, and we can also sell bullion through the Russian commodity exchange. It has been quite a calm place for many years. But now we expect rapid rejuvenation of activity given the range of sanctions against Russian entities.

Got it. My last question is on FOX2. I remember from memory that you had a few of the equipment pending to come from Europe. How should we think about those equipment availability and then any kind of a timeline slippages for the POCS 2 commissioning in 2023?

Well, definitely the risks to the schedule for POCS 2 have increased significantly. These risks probably come not from the delivery of equipment because the bulk of equipment and definitely all of the difficult and complex equipment has already been delivered to site. We are still awaiting a lot of pipes and quite a bit of electrical appliances, et cetera, which are currently not subject to the trade sanctions. However, we can reasonably expect delays, including delays, for example, in getting the commissioning personnel on-site. We believe that all these complications can be addressed in the worst-case scenario by switching some of the materials to the sources outside of the sanctions realm, so to speak, but the risk to the timeline is quite palpable, and we expect to have more transparency about the potential slippage within the next couple of months as the practice of actually maintaining certain trade sanctions is observed. Because, for example, Europe has banned the exports of dual-use equipment and materials, but obviously this definition is not specific enough to understand how it will be implemented in practice. So we need several months to understand the impact of the sanctions on the schedule. However, we remain quite confident that the project will be brought to the finish line. although maybe later than currently expected. Okay, got it.

Thanks a lot. That's it from my side. Thank you. We will now take our next question from Alan Spence of Jefferies. Please go ahead. The line is open.

Hi, guys. Thanks for taking the question. To the first one, just around the dividend, if you were to try to pay that today, Is there any impact from the SWIFT ban on some of the banks? Or just kind of, if you could help talk around maybe some of the technicals about how you would pay that dividend, or if there's no impact at this point.

Well, to start with, SWIFT is irrelevant for the physical ability to move funds. So switching off SWIFT Switching Russian banks off SWIFT doesn't make transactions impossible. It just makes them much more expensive in terms of transaction costs. So money still can be moved around. Why we are being very cautious about the ability to pay dividends, this is not really about our ability to move money. This is more about the risk of increasing capital controls in Russia and the potential disconnect between the global gold price and the domestic gold price. Or, in general, further tightening of the sanctions, which would lead to more significant trade bans or logistical challenges. So this is, in essence, the risks and uncertainties which underpin our cautious approach to dividends. In terms of liquidity and current ability to move money, this is not an issue.

Thanks. That's very helpful. In the second one, just on the FX exposure, on the CapEx side, how much of 2022 CapEx would be renewable or paying first dollar?

Seth, you know, honestly, I can't really answer you because a ruble was 75 rubles per dollar a couple of weeks ago. And over the last three days, it was anywhere from 90 to 115. And the domestic inflation trends, you know, totally unpredictable. Before Before the war started, the budget called for the split of approximately 60% ruble, 40% dollar and euro.

Okay. Thank you very much, Vitaly. I appreciate plenty of moving parts. That's it from my side. Thanks, guys.

Thank you. As a reminder, if you would like to ask a question, you can press star 1 on your telephones now. We will now take our next question from Boris Simis from Renaissance Capital. Please go ahead.

Hi, gentlemen. Thanks for the presentation and the opportunity to ask questions. Basically, a few from my side, please. Firstly, in terms of your reiterated production guidance, just probably to push you a bit on this, does it really mean that you are quite confident in achieving these numbers despite potential disruptions, or it's still subject to? That's the first one.

Well, hello Boris. This is a very good question. If you remember our previous call, we used to have 2023 guidance, and now we pulled 2023 guidance, because we are no longer certain in 2023 But we are confident in 2022. We believe that we have enough kind of fat, it's not a perfect word, but have enough of a buffer to take us through this year, even in the quite negative scenario, implying further deterioration of the sanctions. For 2023, situation becomes more challenging, mostly because of the potential logistical difficulties. That's why we kind of, for now, are not reiterating 2023 guidance. We believe that we have very good clarity in terms of consumables, equipment availability, et cetera, for this year. for the next year we are more cautious.

Thank you. That's very clear. Second question from my side is on management attitude towards buybacks. Has it changed recently? Would you consider buyback in addition to dividends for this year?

Well, the board discussed buybacks

yesterday, actually. And more or less, the unanimous opinion was they don't make any sense. Right now, both the board and the management are committed to maintaining the stability of the company and managing the company, the business, not managing the share price.

Thank you. And actually, two last questions for you. Firstly, what was your TCC at Nasdaq in the second half of last year And the last question on Viaduga, the fact of sanctioning of the EU counterparty with deposit, does it change anyhow your timing in terms of consolidation? Thank you.

Yeah, so on TCCs and NASDAQ, we haven't formally recorded any sales in the fourth quarter. So therefore, we don't have TCC numbers. We have so-called TCP numbers, which is total cost of production. But as you might imagine, just right after the startup, these were, you know, quite elevated to the level of approximately $1,300 and $1,400 per ounce. But that's obviously not indicative of the full ramp-up performance that we observe right now. Regarding the transaction, we are not prepared to initiate an accelerated buyout at the moment for clear reasons. We will discuss with VTB whether they would be prepared to structure the transaction that would satisfy all of the involved parties' interests.

But, you know, realistically, right now we don't have the money.

And we are not pressed to transact from a legal perspective either.

Okay, that's very clear. Thank you so much. That's it.

Thank you. We will now take our next question from Jonathan Guy from Burenberg. Please go ahead. The line is open.

Hi, guys. Thanks very much for doing the call this morning. A couple of things. Firstly, just in terms of the Kazakh elements of the business, can you just say how those are positioned relative to the Russian elements and whether ultimately you may look at having to split those out into a separate entity? And secondly, can you just discuss the balance sheet, where the debt lies in terms of European, Russian, Japanese and other entities at the moment and what the strategy will be around putting in new debt from within Russia or from within China moving forward?

In terms of the first part of your question, obviously this is the line of inquiry which is very active right now, both from analysts and from institutional investors. Frankly speaking, the management has been so busy fighting fires, figuratively speaking, over the last week that we didn't have time to give a proper, to undertake a proper analysis of this opportunity, although intuitively it makes sense from the point of view of very different risk profiles that the two jurisdictions we operate in currently now have. But given the legal and the financial and the political repercussions of such a potential transaction, we are not really prepared to opine whether such a transaction is feasible, although the management is definitely committed to evaluating the potential benefits and costs of such an approach.

Yeah, and Jonathan, regarding the second question, our loan portfolio right now is represented roughly in 60% by the largest European banks, none of them SDMs. And then there are quite a few European banks, the likes of IMG, General Wright-Python, and Unicredit. We don't have any meaningful exposure to Japanese banks at the time. One thing we did We're actually in January, and we actually borrowed from available credit lines to increase cash balances. So that will cover all of the repayments over the course of the next 12 months. So actually, against the 2022 repayments, we have cash readily available. So far, we see, you know, that funding is available from both categories, European banks and local banks. The prices have obviously skyrocketed, but we are not pressed with what I've just said. We are not pressed to borrow any cards at the moment, even for the short term. We will try and wait until, you know, this situation comes down. and then re-evaluate the funding strategy.

Okay, thank you very much.

Thank you. Okay.

Right, shall we move to the webcast questions, which I will probably try and read out. Question number one is from Ger Paolo. I apologize if I'm mispronouncing this. Are you currently experiencing difficulties or impediments in selling and settling gold via the usual channels? So I think this question we have already covered. Second question is, what is your perceived risk of ending up in the U.S. sanction list, potentially losing depository bank or similar counterparty essential to settlement on the London Stock Exchange, and therefore being delisted?

We definitely cannot rule out such an eventuality, but we view this as very unlikely. So far, all of the persons and entities sanctioned have had a very specific and objective link to the Russian Russian government in general, broadly. We are essentially a public company with the largest shareholder holding less than 25%. So on the list of the potential risks that the group faces, I would rate this particular one

as a relatively low priority. Operator, we can switch to the Russian line now.

Thank you. We will now move to the Russian line. We will take our first question from Alexey. Karakov, please go ahead. The line is open.

Good afternoon. In terms of any capital controls. Hello? Hello?

Well, in terms of capital controls, the currently imposed controls are material for us in only one respect. The Russian entities are currently banned from paying dividends to offshore shareholders. So Russian operational entities cannot pay dividends to our Cyprus-based holding company. Clearly, if this situation persists, we will be limited in our ability to raise money for dividend payment from Russia, but currently not from Kazakhstan. How long the situation will persist is unclear.

However, from the current dividend requirements, the free cash flow from Kazakhstan is actually covering this. Which company and where?

Like the simple answer is no.

Vladislav Azarov, good afternoon, thank you for the presentation.

Vladislav Azarov, hello and thank you for your presentation.

Vladislav Azarov, hello and thank you for your presentation. Vladislav Azarov, hello and thank you for your presentation. So what are the limitations related to blocking the GDR trade and can this affect your ability to pay dividends? and liquidity. So the short answer is we don't have GDRs. We actually have primary shares listed in three stock exchanges, London Stock Exchange, Moscow Stock Exchange, and Astana International Exchange. Moscow Stock Exchange is currently inoperational with regards to the equity market. The two other exchanges continue trading. So we are not blocked as an issuer. It's just the trading at MOEX, which is blocked. We don't see this having an impact on our ability to pay dividends. And this obviously does not affect our liquidity.

Well, ladies and gentlemen, thank you very much for your attention and for your questions. we stand ready to answer further questions directly addressed to the investor relations team or to the top management. Have a good day. Thank you. Bye-bye.

Ladies and gentlemen, that will conclude today's call. You may now disconnect.