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.

Thank you. As a reminder, if you would like to ask a question over the phone, please press star 1 and 1 on your telephone and wait for your name to be announced. Until we draw your question, you can press star 1 and 1 again. And if you wish to ask a question via the webcast, please type it into the box and click submit. Please stand by while we compile the Q&A roster. Once again, to ask a question over the phones, it's star 1 and 1 on your keypad, or you may type your questions into the webcast box. There are no questions on the phone line at the moment, so I'll hand over to you to manage questions from the web.

There are a number of questions from the webcast that relate to the future of the shares post-REDOM. And first of all, I would like to direct those who ask these questions to our web page with the list of frequently asked questions which provide information in some cases quite a detailed overview of what may happen. And secondly, I think when we are ready to finally put up the recommendation of the board for the shareholder decision, we will definitely explain in the shareholder circular in great detail what options are available for various categories of shareholders dependent on the structure and the product in which they hold their fallen metal shares. This is quite a technical discussion, so I think this call is probably not an appropriate place to answer these relatively technical questions. Again, generally, I would like to stress that our top priority is preserving stakeholder interest, including shareholder interest, and we'll make every effort to ensure that stakeholders the shareholders don't lose the value of our shares. In terms of more kind of business-oriented questions, I will start with probably the most topical one. Can you comment on the rumors that Highland Gold owner weighs buying fall metal assets? I would like to stress that we are not in negotiations to sell any of the operating mines that Palmetto owns, and definitely we plan to continue on with the same portfolio of operating methods that we currently have. And then more detailed questions. What is your AISC plan for NASDAQ? We expect that this year there will be a big drop, probably to the level of somewhere around $1,200 per ounce. What is your net debt split between Russia and non-Russia? So I'll just cross that. of roughly 3 billion and 2.2 belongs to the Russian operations and then 800 belongs to the Kazakhstan operations. What percent of approval from shareholders do you need to proceed with re-down to Kazakhstan? The resolution needs to carry 75% of votes from those voting. Will Russian shareholders in NRV also vote? Unfortunately, given the sanctions imposed on NRV, the NFD shareholders will not be able to vote. What do you plan to do if shareholders do not approve freedom of installation in Kazakhstan? I think it is definitely number one priority for the management to put up to the shareholder vote a proposition that will be suitable for the supermajority of shareholders. Now, definitely we have a Plan B, but I think we are so concentrated and relatively confident in the success of Plan A that I'd rather not discuss it. You mentioned that you would be hopeful of reinstating dividends in 2023. Just to clarify, do you mean in this calendar year or 2023-24 trading year, please? I think our original intention was... to seriously consider paying a dividend after the redone is completed on the back of first half 2023 results. Again, the redone itself is still not a done thing, but I think first half financials will be the point when the board will be seriously considering the possibility of paying a dividend the current trading and the current cash flow dynamics so far in the year are quite positive. In case there are some issues with debt refinancing, can CapEx be decreased? If so, to what extent? Of the $700 to $750 million planned CAPEX for the year, the split is approximately 65-35 between what we would call non-discretionary and discretionary CAPEX. Whatever projects that we have already started, we will definitely do whatever it takes to push across the finish line. And that means, first and foremost, POCS II. but also the backfill plant at , the flotation plant at , and the new prognost silver mine. On the discretionary CapEx side, Verduga and the power line to Albazino are the projects where we have a high degree of confidence in their financial sense, but we may elect to postpone the execution if the financial situation becomes too stressful. Can you provide a brief comment on the current terms for processing concentrate in China at this time? Has there been any material change in recent months? No. There have been no changes. We don't really see any difficulties in selling the regular material. I do the concentrate. We have hard time selling, and thus need to resort to blending in many cases, but overall, The situation in China, and particularly the logistical situation, has improved to such an extent that the content trade sales channels into China are currently not viewed as a significant operating risk for the companies. Do you have any hedge contract derivatives on gold and silver? No, we have none. Yeah, do you see a big jump in interest rate when refinancing? If so, is this better to pay off the debt before paying a dividend? Well, we don't see a dramatic jump, although it's definitely – but I have to remind that we are now borrowing an alternative currency. So when borrowing in rubles, you are paying a high interest rate, but you're also, you know, taking on the possibility of further ruble devaluation, which seems quite possible. So this kind of compensates each other. If so, is this better to pay off the debt before paying a dividend? I would say, inevitably, we need to bring the leverage levels down below the internal comfort levels before considering a dividend. So some deleveraging definitely needs to happen before we are considering the resumption of the dividend. Well, this actually leads nicely to the next question about the inventory reduction. and the current net debt levels. I think we will provide net debt update together with our first quarter production results, which will be closer to the end of April. And in terms of inventory reduction, it is proceeding quite well. And normally, you know, for the last seven, eight years, first quarter was the weakest cash flow quarter of the year. But this year, given the significant Z-stock pilings, we are seeing some very positive trends. And as Maxim has mentioned, the leverage definitely needs to go below 2 and hopefully closer to 1.5 net debt over EBITDA in order for the board to prove the dividend without you know, looking as if we are compromising the robustness of our financial position. So the current cash flow dynamics and cost dynamics are quite, you know, quite positive. Still, you know, I have to admit that a significant chunk of this positivity is linked to the devaluation of the ruble and the largest threat to dividend presumption. from the point of view of business performance definitely comes from the exchange rate dynamics. If ruble strengthens, that will depress the likelihood that we will be receiving dividend this year. How advanced are you in terms of substituting providers from Western countries by non-Western ones? Now, I think in addition Inventory unwind. This is probably number one operating priority for the management. We have created the whole new department of import substitution and staffed it with the best people combining skills from the procurement, production, and engineering. And so far I think the progress made was very good. I think in terms of consumables, we currently don't see any threats. We managed to substitute the consumables mostly for the Chinese ones. In terms of equipment, I think the largest area of concern is underground equipment. We have contracted late last year and this year more than 40 units of equipment. underground mine equipment from China, Turkey, and Latin America. And we are also implementing the program of concentrating the existing Western European fleet of various brands at specific sites. So overall, I think in a couple of years, the underground mining equipment will be more or less, you know, majority replaced by the equipment from countries which currently have not imposed sanctions against Russia. To make the long story short, we don't expect the shortages of equipment and spares to impact production from the existing mines. And in terms of new projects, we will just design them to start with, with the equipment from Russia, China, and other countries that have not imposed sanctions. Could you provide an update on the plans for POCS 3? We are in the process of are securing the land tenure for the site of the potential plant. This should be a relatively large land plot, actually two land plots, one for the facility itself and second for the tailings. It's obviously a pretty complicated process to ensure that there are no conflicts with other regional municipal stakeholders and also to ensure that it's fully compliant with the relevant environmental regulation. We expect that the process of actually getting the actual long-term lease rights for the plot will be completed in third quarter of this year. In parallel, we have contracted our traditional engineering partner, Hatch, to push on with basic engineering. Now, we are currently evaluating options to modify the flow sheet implemented at box two in order to take into account different water balance in the area and different feedstock makeup. Again, this probably will be finalized by the end of the third quarter, so we should enter 2024 with basic engineering completed. with the land plot fully secured. So 2024, we can do full bankable feasibility study targeting the investment decision Q4 2024. Should we expect sales to match production in 2023?

Yes.

Given that AIC are going to be very similar to 2022 and CapEx also similar to 2022, how is it possible that the company is likely to reroute profitability unless there is a significant change in goal prices? surely there will be very limited free cash flow, and given the very significant debt repayment due in 2024, paying a dividend is not only unlikely, but also unwise. I think the second part of the question we've already covered, in terms of profitability, I will probably mention two factors. Whereas costs are expected to be roughly the same, and production is expected to be roughly the same, the costs are currently estimated at 65 rubles per dollar, so we already see some devaluation But more importantly, we expect 2023 to be different from 2022 on free cash flow generation maintenance, because there will be no inventory build-up in terms of unsold gold, hopefully, and also there will be no inventory build-up in terms of security stocks of consumables and spares, which actually took quite a significant working capital chunk in 2020. So there will be unwinds of the working capital against the backup of the same profitability. This will mean a reversal to positive free cash. Just to give you a sense, if you look at our cash flow statement, The outflows from working capital in 2020 were close, I think, to $350 or $400 million. And we expect that this will not only not repeat, but this should reverse, probably not fully, because some of the inventory buildup is long-term, I mean more in the consumables and spare parts. But the buildup in the saleable goods, sellable finished products inventory will definitely go down. So we may end up with the same underlying net earnings and the same capex, but the direction of working capital flows will reverse sharply, which, if we have a bit of luck from change rates, may enable us to pay dividends. Again, we have a number of questions about the technical details of the potential redone. We honestly don't have, full visibility currently, and this visibility will be needed before we launch the final circular to secure shareholder approval. And that's why we are not launching the circular right now, because the decision has not been taken and some of the important aspects of the potential future transaction are not known currently. I also, again, ask you to look at the FAQ section on our website where we have tried to provide detailed questions to some of the technical issues related to the potential redone. One question that I think I should refer to, although I don't have an answer, all the shares on MOEPS trade a significant premium to LSE. Could you please explain this premium? And the answer is I don't have an explanation, but I thought it would be unfair not to mention that there is this question, which is perplexing to us as well, because given the sanctions on NRV, the shares of MOACs are more or less blocked from dividends and from voting as long as the company remains resident in Jersey. We are more or less out of the questions on the web, so maybe... If there are any questions from the call.

Not at the moment. As a reminder, if you would like to ask a question, please press star 1 and 1 on your keypad, and we can take your question over the phone. That's star 1 and 1.

All right, there is one more question from the web. What's the biggest risk to successful on-time ramp-up of POX-2? That remains to be the procurement of construction materials, specifically stainless steel piping to complete the construction. All of the equipment is already on site, but a lot of the piping needs to be acquired. Definitely Western European companies suppliers are no longer available, so we're working with alternatives in Russia, China, and India to try to buy that stuff. We are optimistic about the ultimate success of our efforts, but in terms of timing, I think the risk is there that procuring those items will be slower than currently envisioned in the schedule, and it may push the startup somewhere into the future. But again, I'm fully confident that, you know, this potential slip-up in timing will not be very significant, and we will launch and ramp up POCS 2 in 2024. And with this, I would like to thank all of the participants for questions. Please refer your further inquiries to our investor relations team in London, or you can write directly to the top management. Thank you very much, and have a very good day.

Thank you. This does conclude today's conference. Thank you for participating, and you may now disconnect.