Polymetal International plc

Good day and thank you for standing by. Welcome to the Polymetal Preliminary Results Financial Year 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1 and 1 on your telephone, and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Alternatively, you may submit your questions via the webcast. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Vitaly Nessis, CEO. Please go ahead.

Thank you very much. Ladies and gentlemen, welcome to the call on the financial results for 2022. I'm joined at the call with... We will walk you through the key results for 2022. We'll also discuss the current status of things regarding strategic alternatives the company is facing. And then at the end, we'll have a Q&A session. I also urge you to consult the frequently asked questions summary that is posted on the company's website. And I would just like to remind you that there will be a number of forward-looking statements contained in the presentation, and I give you a typical disclaimer that these statements are based on estimates. Let's start with the key figures for 2022. Definitely the year was very challenging in terms of the result that the company was able to achieve. Despite the overall steady production performance, Palmetto suffered significant deterioration in all of the key financial metrics. As costs increased very significantly, total cash costs jumped by 29%. to $942 per ounce, and all in sustained costs increased roughly in line. That led to a big drop in adjusted EBD by 31% to $1,017,000,000. A big, huge decrease in free cash flow as decreased profitability was matched, actually now made even worse by significant increase in capital expenditures and the big buildup in working capital. And consequently, the underlying earnings per share declined almost more than by half, and the leverage ratio of net debt over adjusted EBITDA increased more than twofold to 2.35 times. Not a pretty year, but we hope that this is now behind us and we look forward to 2023 with more. On page four, I would like to stress one of the key positive achievements Palo Metal made in 2022. For the third year in a row, Palo Metal had no fatalities among group employees. and we actually didn't have any fatalities, even including contractors. The statistics in terms of lost time incidents and days lost to work-related injuries have also improved very considerably. That demonstrates our firm commitment to safety that is our top priority, regardless of the external circumstance. Page five, I'm also proud to report that despite the external challenges, we are making good on all of our promises in terms of sustainability. Greenhouse gas intensity per ounce of gold equivalent decreased by 7%, and actually, We are above the planned trajectory to cut our emissions by 2030. Now, we marked the third year in a row when we are steadily decreasing the GHG intensity. And in general, we are now approximately 5% below the target trajectory. In terms of both water consumption and the share of dry-stacked tailings, We also have made significant progress, and again, that demonstrates the critical importance we ascribe to sustainability despite the external pressures. In terms of oil reserves dynamics in 2022, Unfortunately, the sanctions imposed against Russia have significantly disrupted the summer exploration season in Russia. We more or less failed to pursue all of the key reserve increase targets. We did better with earlier stage prospects in terms of resources. but reserves more or less decreased in line with the depletion, but also we have revalued some of our deposits following sharp increase in appreciation of ruble and increase in costs. Minus 9% in reserves year on year obviously is not a pretty result, but the management is optimistic that this year we will be able to catch up both with the physical volumes of exploration and with the evaluation of reserves following those results. In terms of production, despite the planned decreases across our portfolio of mature assets, we had a very strong first full year of production from NASDAQ. Even difficulties in placing high arsenic concentrate in the Chinese market did not detract from our ability to produce significant amounts of gold from our newest mine, and as a result, production increased 2% year on year, and we successfully bid our pre-war production guidance of 1.7 million ounces. I think that is a strong testament to the company's ability to operate in the environment of unexpected significant challenges. And with this, I turn over to Maxim, who will go through the financial details of our results. Thank you. Just recapping on the key financial highlights. So the revenue was near a small decline through volume driven and to a certain extent price driven. The adjusted EBITDA down by 30% but still was above $1 billion mark. The lower margins in the business were driven by significantly higher total cash costs and only sustaining cash costs, which both metrics through approximately 30 systems. And we'll see the drivers later on. Yet the company has reported positive underlying net earnings of 440 million, which is 93 cents per share. While we saw negative free cash flow and net debt increasing, It was almost an obvious decision by the Board not to propose any dividend in respect of 2022. We hope that in 2023, we'll deliver both positive free cash flow and debt reduction, which will allow to potentially resume the dividend payments. Capital expenditures came slightly above the guidance at $794 million. just 5% above 2021 level as we were actively building key projects such as POX2 and new launch. A closer look at revenues. The first half was generally weak because we had to basically stop and restructure the sales. However, Q3 and especially Q4, saw a very strong catch-up in terms of volume of gold sold. So as a result, we finished the year with significantly lower stockpiles of unsold metal inventory, yet there was still a gap between the gold and silver produced and gold and silver sold. In terms of adjusted EBITDA, as I have mentioned, the cost increases combined with gold and silver price movements were the two most important factors. Out of the $1 billion and $17 million, $660 million was generated in Russia, and the rest was generated by the Kazakhstan operations. In terms of cash flow dynamics, you can see here that double-digit inflation, which, as a reminder, was 12% in Russia and 20% In Kazakhstan, probably the largest factor. In addition, there were some specific inflationary pressures related to sanctions and related logistic difficulties and the need to replace certain pieces of supplies. In terms of purely internal factor, I would probably think about the scheduled grade declines at Albazina and Kizil. And obviously in terms of Forex, that wasn't helpful because really the US dollar rate was actually weaker, so the ruble was stronger compared to the full year of 2021. In terms of cost structure, this is an index of 2023. But this will be very similar to 2022 with one exception, the royalties in Afghanistan, which are going up this year 50% compared to last year. But everything else is roughly the same. You can see that foreign currency denominated costs are not very significant. However, the domestic inflation over the last year was quite meaningful. So that was a major factor behind the cost dynamics. Page 13 just shows you the sensitivities to the two key most important variables. One is the gold price, and the other is the global dollar exchange rate. As you can see. maintain quite significant exposure to both. Right now, the situation looks better than it was in 2022 for both variables. Gold is higher by approximately $100 per ounce compared to last year. And Google so far has been already meaningfully weaker than in the second half of 2022. Turning over to individual cost dynamics at our operations, Gazelle remains the lowest cost operation in the portfolio. These are AISCs, so this includes sustaining capital expenditure. However, most of the dynamics at Gazelle was actually driven by operating costs on a per-hour basis, simply because of the great decline. And pretty much the same applies to the next mine. which still holds the same cash costs, crossing the $1,000 threshold. Varvara delivered very steady performance last year, so essentially higher grade and higher volume were offsetting all of the related inflationary pressures, but then yet actually was depreciated, not appreciated. At DUCAP, great dynamics. is actually the single most important factor behind the cost dynamics, and staying applies to Omola. We saw a meaningful increase at Wara, which hopefully will be actually reversed this year because this is mainly represented by the capital expenditures incurred to build the flow station, flow sheet at Wara, which is expected to launch this year and bring high-grade ore into production. At Albazina, Also, behind the post-dynamics was mainly the great decline, but also some of the increased capital expenditures, mainly the power line construction that is now ongoing and is expected to deliver material cost savings upon launch in 2020. Likewise, at MySphere, we have launched the conveyor system, and we are progressing the project on shifting to backfill method of mining. Both have increased materially sustaining ethics, and also Maiska was actually the mine which suffered most from the strong ruble because the sale of Maiska, which are occurring in a very short time frame between August and November, coincided with the strongest ruble over the course of the year. Initial auto-sustaining cash slots at Svetlana came at $1,750, which was largely expected because there was still an increased capital stripping bill at Nezda, completion of some of the minor projects. Plus, as Vitaly mentioned, we had experienced difficulties in placing the gold quotation concentrate, Chinese off-takers, so some of this had to be stockpiled and the cost was greater over the smaller amount of assets. Now turning over to the balance sheet, net debt had been reduced over the second half of 2022 to 2.4 billion, yet this is still materially higher than at the start of 2022. This equates to a net debt TBD of 2.35. You can see the maturity chart on the slide. Essentially, all of the 2023 repayments are covered by available cash balances, which is not applicable to 2024 onwards. So we are continuing efforts to gradually refinance the loan portfolio as it falls due and actually starting to increase maturities. Inclusively, we are shifting to alternative currencies from Euro and Dollar, specifically Dollar, which was a major borrowing currency historically, yet still 65% of our loan portfolio is in Dollars, 27% is in Rubles, and we see CNY emerging as a new borrowing currency with 8% of the portfolio. We have been able to maintain still very competitive cost of debt of 5.5% on average. Unfortunately, you know, new debt is coming slightly more expensive, plus the base rates have been growing over the course of 2022. Yet still, 55% of the loan portfolio is at fixed interest rates. and some of this is pretty long-term, so this is providing a solid basis for further refinancing efforts, including some limitation of the cost of it. Turning to 2023 guidance, we're expecting steady production at 1.7 million ounces. We also expect more or less the same level of total cash costs and all entertaining cash costs. The ranges are 950 to 1,000, and $1,300 to $1,400 per ounce respectively. These numbers are based on the budget where the ruble-dollar exchange rate was back at 65 rubles per dollar. So now we are facing the macroeconomic environment that's better than what we budgeted for. At the same time, the Inflation processes in both Russia and particularly Kazakhstan are very significant. You may have seen the report that in February, annual inflation in Kazakhstan ran at 20% plus. So we need to balance the upside in terms of weaker domestic exchange rates against the downside in terms of higher domestic inflation. In terms of capital expenditures, we expect a slight decrease of $700 to $750 million. We are continuing to push on with the POX-2 project, and that obviously presents significant difficulties given the fact that almost all of the, not only equipment, but also construction materials have fallen out of the sanctions. We are working hard to source the materials from mostly China, and we remain confident that this crucial project will get across the finish line in 2024. And the last but not least, a brief update on the potential redemistillation process that the company is continuing to evaluate. It's still a work in progress. We would like to emphasize that the key objective of any potential redemistillation is to preserve and enhance shareholder value, restore ability to pay dividends, and increase the strategic flexibility to conduct our operations. Risk reduction in terms of potential political interference is also a very important consideration. We currently continue to evaluate all available options to modify the group's asset holding structure, and we may be trading less quickly than we originally expected, but that is due to the fact that we have encountered multiple unforeseen difficulties. The preferred option is still the potential redemission of the parent company, Power Metal International, into the Astana International Financial Center in Kazakhstan. Still, I would like to stress that no decision has been made, and there can therefore be no certainty that the company will proceed with or ultimately complete a redone. This is a plan, but not yet the reality. As one of the key war streams within this whole process is the strategy of continued public trading of the redone company. Palmetto has attempted to secure the services of a VI provider in order to continue trading on the LSC on the premium segment. However, the providers that we talked to declined for various reasons, the majority of which are quite obvious, to provide such arrangements. Therefore, the depository interest program, more or less, we have abandoned as an option to remain on the LLC. Still, we continue to actively pursue other options of maintaining liquidity following the redoubt. And definitely, you know, to wrap up, I would like to emphasize once again that the company will continue to take into consideration the interests of its stakeholders prior to making a decision. Therefore, any decision that's recommended by the board will be put up for shareholder vote and the timing of this vote. will definitely be adequate for the shareholders to express their opinion on the matter. Thank you very much for your attention, and we would be thrilled to answer any of your questions.

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