Polymetal International plc

Ladies and gentlemen, welcome to the traditional quarterly production results call. I will first briefly walk you through the operational results, provide you with an update on our corporate initiatives, and then we'll conclude with the traditional Q&A session. Overall, in the third quarter of 2022, Polymetal International started to catch up with the decline in production experience in the first half of the year. In the third quarter, the gold equivalent production year-on-year increased by 7%. mostly the function of our new mine at Nashta, ramping up and first production generated at the new Kutyn Hiplich project within the Albazino hub. We expect that the fourth quarter production will continue on the uptrend, and we are cautiously optimistic about our ability to meet the original production guidance of 1.7 million ounces in 2022, despite significant challenges through the year. In terms of our development projects, they progress in line. And specifically, POCS2 is successfully overcoming challenges related to the supply chain issues. Particularly, we note that logistical hurdles presented by the COVID restrictions in China are starting to relax, which obviously helps our strategy of changing the sources of some of the materials and spares to China and other Asian countries. As you well know, the key challenge in the first half of the year has been the accumulation of unsold finished goods inventory, specifically bullion and dore. September marked the first month when we really started to draw down that inventory. And in October, we already witnessed a significant decrease in bullion inventory, pushing down our net debt compared with the peak number by about $150 million. So by the end of the October, already are actually below $2.7 billion mark. And we expect that November and December to be particularly strong in terms of free cash flow generation, thanks both to the seasonal cash inflows, but also to the continued unwinding of very significant metal stockpile that we accumulated since the beginning of the year. Clearly, this bodes well for deleveraging, and we remain cautiously optimistic that the continued strong free cash flow generation will enable us to seriously consider the resumption of dividend payments in 2023. In general, we reiterate our full year production guidance and maintain our cost guidance for the year. We also provide formal initial guidance for 2023 and 2024. In each of those years, expect stable production of 1.7 million ounces of gold equivalent. We know that supply chain risks, although continuing to mitigate, still are present, and management is applying our best efforts to ensure that they are well-contained and addressed. We will provide cost guidance for 2023 in late January 2023 together with 2022 full year production results. In terms of the corporate update, in October, we have completed shareholder votes on the share exchange offer for shares held through the National Securities Depository in Russia, and the shareholders overwhelmingly supported the share exchange. So far, about 10.5% of all companies' shares have been submitted for the share exchange and we are continuing to work with our share depository to successfully close the offer. The board also continues its search to recruit the new board members to replace the two board members that have left the board earlier in the month. In terms of our other strategic initiatives, we are continuing with our analysis of strategic options, including the option to re-domicile the company to another jurisdiction, and also the options related to the shares that will continue to be held in NSD following the completion of the share exchange offer. We will update the market as we progress our analysis of those options. And we definitely expect to have a full final understanding of where and how we are moving by the time we present full year production results in the second half of January. And I guess with this, I conclude my brief introductory remarks and would be happy to answer any questions.

We will now take our first question from Leonard Lawson. Please go ahead. Your line is open.

Thank you. So in the previous call, you mentioned that you expect by today's call to provide some information on the impact of departure mobilization in Russia. Would you be able to comment on that?

Well, thanks for the question. Obviously, I cannot give you any specific details, but generally we believe that the portion mobilization will not have a material impact on our production or cost guidance this year or next year.

All right, thank you. We'll now take our next question from Mitchell Martin from Mitchell Advisory Institute.

company please go ahead your line is open yes thank you good morning in your from your last presentation I mean you were I know you're we're projecting you know for your own internal planning higher gold prices and a better ruble dollar exchange rate now that it's not as favorable How do you see the reductions? Obviously, you're selling much more of your inventory now, which is fantastic, but given lower gold prices, less favorable dollar-ruble exchange rate than you projected, how do you see net debt going down? Has it dramatically impacted your planning for this? If you can just address that, please. Yeah.

Thanks. Thank you very much. We still expect a significant reduction of net debt by year-end. I think the optimistic number is probably close to $2 billion, but the achievement of this optimistic estimate will be contingent mostly on the ruble-dollar exchange rate. Still, you know, we believe that we can push down the current net debt number within the next few months down by $300 million, $400 million. So the substantial deleveraging will definitely be achieved. And also, I think this deleveraging will continue into the first quarter of the next year, because although we will be able to monetize more or less all of our bullion and DORE stockpiles this year, some of the concentrate stockpiles will only be cashed in the first quarter of the next year. So we will retain some of the positive cash flow momentum into the start of the next year. So I think in general, despite the macroeconomic variables being slightly worse than what we expected at the beginning of the year or a couple of months ago, we're still in very good shape.

Thank you. That's music to my ears. Thank you very, very much. Great job. Thank you.

All right. We have one more question. We have Mr. Oliver from Barenburg. Please go ahead, sir. Your line is open.

Hi. Thank you. Just one question from me, please. When do you expect the recovery rate at NESDA to kind of get towards the design level, please? Thank you.

Well, NASDAQ is currently operating at design levels, both in terms of throughput, grade, and recoveries. The only deviation from our original plan is the fact that some of the high arsenic concentrate is temporarily unmonetizable, so we are stockpiling this content rate in anticipation of the startup of POX2. However, even with this complication, the asset is free cash flow positive starting from this quarter, and the accumulation of the content rate will be resolved once the POX2 is fully operational in 2024.

That's very helpful. Thank you.

Well, actually, we have quite a few questions from the webcast, so we'll try to go through them. First question is, in the news update on 22nd September, you stated you had supply chain issues. Have you managed to resolve this, especially the procurement of equipment and critical spare parts? This is a very good question. I think that in terms of short-term impact on the operations and on the projects, we have no critical issues. We managed to secure both operational consumables and equipment from alternative sources. mostly in Asia but also from Russia. Longer term we will need to continue hard work to find alternative sources mostly of underground mine equipment in China, Turkey, other countries. But I think the situation is well under control and unless there is further substantial tightening of sanctions regime, we believe that the supply chain issues will not impact our production guidance, although we will face some of the cost headwinds mostly related to sometimes decline in productivity and mechanical availability of non-European, non-Western equipment. Due to the sanctions on Russian banks, will you be able to pay back all your debt due in 2023? The short answer is yes. First of all, we are fully compliant with all of the relevant sanctions, and this is our critical intention to continue to be in full compliance. We believe that the payments due in 2023 and beyond the time horizon will be fully compliant with the sanctions. Any update on reciting the Pacific box in Kazakhstan? Yes, we more or less have identified the border region in which we want to locate this project. And the final decision about the specific site will be made by the end of this quarter. We will announce the site together with our full year production update in late January. I hope you can keep the company together and keep the Russian assets. What are the chances of keeping the Russian assets? As we have said during the shareholder meeting, sale of the Russian assets is no longer an option. We're not even considering it. So the goal is to preserve the shareholder value by not selling the assets, but by rather the optimal scenario. is the legal separation of assets into two different jurisdictions, which would allow the shareholders to retain full exposure to the value of assets in both countries. What can you tell us about sales of the concentrates to China? Do you think that normalization will last? Yes, I think normalization that we have been observing for the last couple of months will last. The logistical hurdles are slowly being relaxed. Definitely, we are not back to full normal pre-COVID status. but I'm optimistic that within the next three months we will see a full resolution of all constraints and this would actually be helpful in terms of reducing the shipment times and freeing up some working capital from the concentrates path to the final bar. Please comment on the decision of temporarily suspending activity at Nasdaq open pit. And the same with open pit mining at some. These are mostly the measures that relate to our desire to reduce our current operating expenditures and to monetize substantial or stockpiles that have accumulated at the respective operations as you may remember we have aggressively pre-stripped nasdaq during the project build up stage so now we can actually reduce mining activity without any serious impact on production and actually with an improvement in economics. So more or less we are catching up our active investment during the construction stage. Can you see AISC retreating back in the future to levels of two years ago? Would the resolution in Ukrainian-Russian conflict translate into very significant decline in costs? I think most likely there is no way back to pre-COVID levels, mostly because of the global inflation. Structurally, definitely peaceful resolution would be helpful, but I don't think it will be able to fully neutralize the accumulated cost creep over the last three years. Any news about future underground equipment? Could you comment on Yekaterina II underground mine transition to carrying maintenance? Well, it's a similar story to NASDAQ. We have a substantial accumulated stockpile of ore, so putting one of the underground mines on temporary carrying maintenance will not impact future production and we'll be able to buttress our free cash flows thanks to inventory monetization. Now, yes, partially this decision is related to our desire to have extra level of security in terms of underground equipment. We are transitioning to mostly Chinese kit but it will take some time. So we are consciously idling some of the current underground equipment in order to use the older units as sources of spares for the newer units. So we are consciously cannibalizing some of the equipment. We will need two to three years to effect a full-scale transition to non-Western underground equipment. Throughout this period, we will need to have this additional level of safety in our underground mine equipment availability. What is your outlook for gold prices? Honestly, I don't have a strong opinion. Definitely will hope that gold price will go up, but this is by no means certain. What moves you to accelerate the execution of the second stage of the euro floatation project and to delay other projects? We are prioritizing the projects that are short-term and less capital-intensive. Currently, the leverage definitely is very much on the top of the list of management concerns. so longer dated more capital intensive projects are pushed down on the list of priorities and we are trying to execute smaller and shorter scheduled projects with the goal to strengthen our free cash flow generation From the point of view of the traditional kind of NPV calculations, that may be suboptimal, but realistically, we are responding to the environment which, in effect, demands higher discount rate from our investments. And higher discount rate prioritizes shorter-lived, fast-payback projects, hence our decision to slow down Viaduga and to accelerate the second stage of U.S. rotation. What do you expect the debt level to come down? What will be the new optimum debt level? And when do you expect dividend resumption? Well, I believe we can push down the absolute debt level below the absolute $2 billion mark and definitely be below two times net debt over EBITDA. And in terms of dividend resumption, the board traditionally considers the ability to pay dividend in March. And definitely a lot will depend on the macroeconomic variables at the time. But I think, I hope it will be a substantive discussion because the financial position of Palo Meto by that time should improve enough to make dividend payment possible from the point of view of financial strength. Is Kazakhstan still in the list of possible candidate countries for new registration of PolyMetal International? Yes, it definitely is. It's one of the top contenders. If we don't exchange our shares and we keep them in the LSC, we will lose our dividend in 2023. No, definitely not. In general, regardless of the decision we make in terms of changing the potential change in domicile of the company, the management intends to keep the LSC listing. So this is one of the priorities that we pursue as we evaluate various options. So LSC listing is not at risk, we hope, and dividends of shares listed on the LSC are not at risk. Would you consider acquisitions in Africa? No. Do you expect meaningful changes in head grades in 2023? Well, I just announced the stable production guidance for the next year, and given the fact that the processing volumes will roughly stay the same, that more or less means that the head grades are roughly stable. There will be some fluctuation at the individual mine levels, but company-wide, the head grade is likely to stay more or less stable. How can you comment your positive LTIFR dynamics? Well, I think we had a small uptick, nine months year on year, but in general, I am with our safety performance year to date. We had no fatalities, no serious accidents, and definitely we will continue to view the safety of our employees and contractors as our top priority. When is the next mine opening? Well, our next mine is very likely still to be Veduga. We originally planned to launch it in 2025. Right now, we believe the realistic start-up date for that asset shifted to 2027. Do you have any updates on POX-3, especially after the statement on provision of land in the Khabarovsk region by the Federal Agency for State Property Management? Well, that land acquisition has been long time in the works and is kind of the delayed impact of our activities on the site in the Khabarovsk region. Right now, POX3 siting is definitely in Kazakhstan, so that land for now will be kept on the back burner with no project specifically linked to it. Is there a risk of not receiving dividends on shares held at NSD? Yes, there is such a risk because currently, As far as we understand, the Euroclear does not allow the PASS and ELF dividends to NSD. Do you hear me?

We can hear you loud and clear.

All right, thank you. So going back to the dividends on shares held at NSD, this is one of the thorniest issues the management faces. And obviously, we understand that all shareholders sign title to dividends. On the other hand, we can't really do anything with Euroclear, really. So we are... currently working closely with our legal counsel and with our corporate brokers to try to find a solution to this issue. Now, we will do our best to ensure that when dividend payment is resumed, shareholders holding shares at NSD should have access. However, I would like to highlight the risk that the position of the EuroClear vis-a-vis NSD will make this difficult or impossible. If we are in sanctioned nations, how will we receive our dividends? Well, the entity paying the dividends is located in Jersey. right now, and post potential redone, it will be located in a jurisdiction which is not Russian. So there should be no issue with paying dividends either out of Jersey or out of the new jurisdiction. Can you please remind us who you sell your gold to, split by geography, and how this changed over the past year? Well, we used to the last year we sold most of our gold through Russian banks to London and in Kazakhstan we sold our gold to the National Bank of Kazakhstan. Presently we continue to sell our gold in Kazakhstan to the National Bank of Kazakhstan and our Russian gold is sold to a variety of buyers in Asia. several countries, I would prefer not to split up the geographies because it's now a pretty competitive market, and being able to sell to several jurisdictions is important to ensure the robustness of the sales channels. What is the implication of the transfer to non-Western equipment on CAPEX and OPEX? I think it's a very good question. I think in terms of CapEx, we may expect a slight decline, but in terms of OPEX on the mining side, particularly on the underground mining side, we expect increase in OPEX because the Chinese equipment is less productive and has lower availability, so we can expect more units needed to be used for the same volumes and more expenditures on maintenance. We are trying to proactively address this challenge. For example, at Minesquare, we have commissioned the conveyor transportation system for moving material underground. We are studying similar options at a couple of our other underground operations. But in general, yes, this is the source of some cost pressures in our underground mines. Couple of questions on Kazakhstan. We keep our production forecast for Kazakhstan at 500,000 ounces for the next two years. None of the minor lost time incidents in the third quarter happened in Kazakhstan. And no Kazakh shareholders exchanged their blockchains recently because Kazakh shareholders that I know of, they all held their shares either in London or through our listing at the Astana Stock Exchange. So they were not really subject to restrictions related to NSD. Have you completely seized Russian mined gold sales locally? The main reason is the discount to global prices. We currently do not sell any gold within Russia. The main reason is our desire to ensure full sanctions compliance, because the majority of the Russian banking system is under some type of international sanctions. We want to be 100% sure that we don't come into commercial relationships with sanctioned Russian banks, even if it's through an intermediary. In terms of the speed with which we are closing our gap between sales and production, yes, we actually started to do this a bit later than we expected at the end of the second quarter. So only in the second half of September, we really started to move gold in big volumes. But right now, there is no issue to sell gold or silver bullion, either in Russia or in Kazakhstan. Do Kazakh authorities have any issues against processing Kizil concentrate in Amurs because of the sanctions? What is the ratio now between the amounts of Kizil concentrate sent to China and to Paks The ratio is approximately 60% goes to Pox and 40% goes to China. This is gold-containing, not physical tonnage of concentrate. And no, there are no issues in terms of processing Kizil concentrate at Pox. Gold in Kizil concentrate is Kazakhstan gold, and it is not subject to international sanctions. In what order of priority is net debt reduction? Well, I think we want to decrease our net debt enough to be able to resume dividends. This is the key priority. So obviously we don't want to pay dividends while having a debt level which is either unsustainable or dangerous. And I think the key metric to consider is net debt over adjusted EBD. I think two times would be the level which we need to pass moving down in order to seriously consider paying dividends. Do you see growth potential in near future? No, I don't see growth potential in near future. The growth potential is substantial only over the timeframe of, let's say, five years with the startup of that event. Any outlook for inflation in Russia and Kazakhstan? Well, I think inflation in Russia has calmed down. I think it's now trending below 12%. Kazakhstan is a bit higher. In terms of outlook, I think a lot will depend on the moves by the Fed and other central banks. So we don't really have any outlook. We are penciling in 10% for Russia and 12% for Kazakhstan in next year's budgets. Do you expect any promising junior exploration projects at the upcoming competition? Yeah, we will hold our fifth junior contest in a couple of months. We have received so far only a handful of applications, but I expect strong interest and I confirm that we continue to be interested in finding and funding the right type of exploration properties in both Russia and Kazakhstan. You say you aim to get to net debt over EBITDA two times with a net debt of $2 billion. That would suggest a $1 billion EBITDA. I think no. I think those broadly are kind of, these are broad estimates, and I definitely don't suggest a $1 billion EBITDA because this number depends hugely on gold price and on ruble dollar exchange rate. I think $2 billion is something we definitely can aspire to short term, mostly on the heels of substantial sell-down of inventory, and two times is a longer-term metric that we will benchmark ourselves against in order to ensure that our dividend payment doesn't jeopardize the financial health of the company. Would dividend payments be made even if shares held on the NSD could not receive them? That's a very good question. I would say that my gut feel is the answer is yes. We hope to successfully complete the recent share exchange of some of the shares through NSD. We'll do our best to continue the unlocking of MSD shares in the future. Obviously, even if some shareholders will continue to be stuck, we will not be able to continue to disenfranchise all of the shareholders from the ability to receive the dividend. Okay. I see no further questions in the webcast. Any questions from the line?

All right. We have Oliver from Barenburg again for the question. Just give me a moment. Please go ahead, sir. Your line is open.

Thank you. Could you provide an update on what the latest is with the Comtour Rare Earths deposit, please? Thank you.

The Rare Earths project is currently on complete hold, and we're not really spending anything on it, just maintaining a skeleton crew and actually transferred some people to Paul Metal. And honestly, I don't expect any change in this status quo for some time. Thank you.

Thank you, Mr. Oliver. Once again, if you would like to ask a question, please press R1 on your telephone keypad. It appears there is no further questions at this time, sir. I would like to turn the conference back to you for any. All right. We have Joe as a private investor for the next question.

Hello. I'd just like to ask. Hello. In your Q2 results, you did say that you would close the gap between the production and sales by Q3, and this has now been moved back to the end of the year. I'm wondering, are you struggling to sell this gold at the current price? Are you considering cutting the price of the gold? Thank you.

Well, I actually tried to answer this question. We have started the full-blown sales of gold bullion a bit later than we originally planned, hence the move of the target date to sell all of the accumulated bullion. This is not related to pricing. This is related to the compliance considerations Now we wanted to ensure that we sell gold in such a way that there is absolutely no sanctions compliance risk. And right now we are selling our gold and our silver more or less with no discount to gold prices. And we will not consider a price cut. We believe our current sales channels, multiple sales channels, provide us with ample opportunity to sell our product at full price. Thank you. Well, thank you very much for active participation. Please feel free to send us further questions, either to top management or to the investor relations team, and have a very nice day. Thank you very much. Bye-bye.