Earnings Transcript for POLY.L - Q4 Fiscal Year 2023

Operator: Welcome to Polymetal Full Year 2023 Financial Results with Mr. Vitaly Nesis, Group Chief Executive Officer; and Mr. Maxim Nazimok, Chief Financial Officer. Mr. Nesis, the floor is yours.

Vitaly Nesis: Thank you very much. Ladies and gentlemen, welcome to the conference call on 2023 financial results. We will first walk you through the brief presentation of the results, and then we'll have a traditional Q&A session. These results announcement will be somewhat unusual in that the results refer to the group as it was constituted at the end of 2023. Following the year-end, the group has completed the divestment of the Russian business. So we will mostly refer now to the results of the combined company as it was last year, but rather to the results of the retained business, which is comprised of the assets of the company in Kazakhstan. I will start with the traditional disclaimer about the forward-looking statements contained in the presentation. Please take note that they should be treated with a degree of caution. I will start with the recap of the transaction, which has recently been completed, following a very strong shareholder approval and satisfaction of all other conditions. Now Polymetal International completed the sale of its Russian business. And as a result of this transaction, the group has deconsolidated $2.2 billion of external net debt, fully settled more than $1 billion of intra-group liabilities, and received after-tax cash proceeds of $300 million. Following the completion, the group is now net cash positive to the tune of $130 million and is actually expected to continue to increase its net cash position through the year. Obviously, the long-awaited completion of the sale paves the way for the formulation, Board approval and implementation of new corporate strategy and capital allocation policy. Right now, the management is busy doing the strategic analysis and we expect to present our new Board approved strategy and capital allocation policy in May during our Investor Day. In terms of the key figures for the combined group, in general, the year was quite successful. On the back of flat production, we saw a 40% growth in EBITDA and EPS, and we managed to bring down total cash cost and all-in sustaining cost, mostly thanks to the significant depreciation of the Russian ruble. Leverage has also improved considerably on the back of strong growth in adjusted EBITDA. Turning to more relevant figures in Kazakhstan. Here, the dynamics are less positive, mostly 2 factors contributed to the dynamics of the results. First, the planned decrease in gold equivalent production by 10% on the back of material grade decline at both operations, Kyzyl and Varvara. And on the other hand, costs have increased not only due to the decrease in grade, but also because of very significant domestic inflation in Kazakhstan, with tenge-dollar exchange rate roughly stable year-on-year, domestic inflation of roughly 18% drove costs up considerably. The only positive metric is our leverage again, which is at year-end was at 0.4x net debt over adjusted EBITDA. And as I have mentioned before, right now, we are net cash positive. Safety performance in 2023, now was solid. We reported a second year in a row of 0 fatalities among both employees and contractors. Lost-time injury frequency rate declined and Kazakhstan actually recorded 0 lost-time injuries. Last year, again, a very solid result, which we will be looking to replicate in 2024. Turning to sustainability metrics as they relate to Kazakhstan. The changes that are in the way electricity supply in Kazakhstan is regulated meant that the group was forced to switch from bilateral agreements with specific power providers to the purchases from the general electricity pool. And as a result, the composition of power we have bought changed in favor of coal-powered electricity. This is unfortunately something that we have not been able to counteract quickly. However, the group is committed to GHG reductions. And now we will need to claw back the losses from green power we have experienced in 2023 by building and commissioning substantial renewable and gas power in-house, a project that has commenced this year. Importantly, fresh water use intensity continue to decline. We have more than halved water usage over the last 5 years. And this is something that we are very satisfied with. The share of dry stack tailings group-wide has also increased since 2019. As it relates to Kazakhstan, we are also very proud this year to launch the first corporate reforestation project in the country. And I hope the results will be quite material in terms of the impact on our GHG emissions in about 4 to 5 years. Turning to production. As I mentioned, Kazakhstan registered a decline, Russia registered growth. And in terms of mineral reserves, importantly, Kazakhstan registered an increase despite significant depletion. And in general, looking into 2024, we expect continued growth in both reserves and resources in Kazakhstan on the back of near mine exploration, mostly at Kyzyl. And I turn the floor to Maxim, who will walk you through the financial statements.

Maxim Nazimok: Yes. Thanks. We'll skip the first 2 slides, they are more or less repeating the highlights that Vitaly has gone through. The only thing I would like to draw your attention to is that Kazakhstan actually faced sort of headwinds in terms of the local currency exchange rate because despite the double-digit inflation in Kazakhstan last year, the tenge rate remained very strong and stable, actually slightly even appreciated against the dollar in 2023 versus 2022. So this, to a large extent, explains the drop in EBITDA, which resulted not only from slight revenue decline, but most importantly, from a pretty significant increase in total cash costs and all-in sustaining cash flows. In terms of cash flow generation, we are pleased to report that after a very problematic 2022, the group has improved its cash flow generation quite significantly by realizing some of the unsold inventory, although growth on the Russian side of the business. And on the Kazakh side of the business, we ended the year with quite a bit of unsold metal inventory still. But operating cash flow went up almost 3x and free cash flow from a negative $440 million turned into negative $120 million, taking into account pretty heavy capital expenditure that was incurred mostly in Russia, but also at Kazakhstan $145 million were spent both on the startup expenditure for Ertis POX and for the projects -- sustaining projects at Kyzyl and Varvara. In terms of revenue, as I mentioned, production in Kazakhstan went down and, therefore, revenue went down as well on the Kazakh part of the business, although not very significantly, but were helped by a pretty positive macroeconomic factors, the commodity price dynamics. Although the volume, as I mentioned, decreased 15 -- sorry, 14% because of the continued issues on concentrate transportation. We are working pretty hard to resolve this issue during the first half of 2024. The focus is all on Kyzyl. Varvara doesn't experience any problems with sales. And Kyzyl does experience those because of the need to transport concentrate through the Russian railways to the eastern ports before they reach China. Adjusted EBITDA for the whole business went up quite significantly. We were helped both by the gold and silver price movements and by the depreciation of the ruble. In terms of the breakdown, 30% of EBITDA was generated in Kazakhstan and 70% in Russia, because Russia saw quite a significant uptick in selling the unsold metal inventories in 2023 versus 2022. In terms of total cash costs, Russia has seen very positive dynamics because of the rapid depreciation of the Russian ruble. And as I mentioned, tenge was stable, so there was no help from the local currency against pretty strong inflationary pressures in Kazakhstan. So if you look at individual mine dynamics in Kazakhstan, Kyzyl cash costs increased by 17%. Still at a very low level of $700 per ounce. Kyzyl is continuing to be one of the highest grade mines vis-a-vis its volume of production, with average grade processed in 2023 or 5 grams per tonne. And at Varvara, cash costs went up by 29%. Again, this is mostly grade-driven combined with inflationary headwinds. And Russia, as I mentioned, the cash costs went down. In terms of the cash cost structure for the Retained Polymetal Group, so the Kazakhstani operations, you can see that 63% of our costs are denominated in tenge, the local currency and approximately 24% are denominated in U.S. dollars, including the mining tax, which is at 7.5% in Kazakhstan for both revenue based. And fuel or other oil-related costs are amounting to 13% of the total cash costs. The next slide just shows very quickly the sensitivities of the key metrics, EBITDA, free cash flow and total cash costs to the reasonable changes in gold price and local currency dynamics. As you can see, the business remains pretty sensitive here. And the current situation is already somewhat better compared to 2023. We still have flat tenge, but we have very strong uptick in the gold price compared already even to second half of 2020. All-in sustaining cash cost dynamics in Kazakhstan pretty much followed the total cash cost dynamics, with the only difference being the spend on sustaining CapEx, which is pretty heavy at Varvara at the moment where we are building the second stage of the tailings storage facility. And Kyzyl is entering the same project this year. However, as we expect unwind of the metal inventories over the course of 2024, even over the course of the first half, we think those trends will be somewhat reversed, resulting in stable total cash cost for Kazakhstan in 2024. Net debt dynamics. Actually, both sides of the business showed deleveraging both in relative and absolute terms. Net debt to EBITDA at Kazakhstani side went down from 0.54x to 0.39x adjusted EBITDA. And here, you can see the quick reconciliation of the net debt of the Kazakhstani operations post the successful sale of the Russian business. So from the starting point of net debt of the group at $2.4-roughly billion as of the end of the year, we deconsolidated $2.2 billion of the Russian debt. The remaining Kazakhstani debt was $174 million. And then as we received fully the $300 million or the net proceeds from the transaction, we are now running, first time for a very long time in the company's history, a net cash position of $130 million. In terms of the balance sheet, our refinancing needs for 2024 are now more than covered by the existing cash balances. And then we have repayments -- large repayments in 2025 and 2026. The interest rates on the Kazakh side of the business remained very low. Actually, the average interest rate is still below 4% for the Kazakhstani operations. And we are looking positively into the future in terms of the ability of Kazakhstan to refinance and to fund the investment projects as we are gradually regaining access to the Western or, more broadly, international financial markets after the divestment. A quick reminder that Kazakhstan had roughly 78,000 ounces of gold equivalent in unsold inventory. As I mentioned, this was pretty much mostly represented by Kyzyl. The [door] balance is insignificant and is traditional. It is traditional to have it at the year-end as the refinery stocks for the annual stocktake. We are working very hard to monetize those concentrate balances in the coming months.

Vitaly Nesis: And just to conclude the formal presentation with 2024 guidance for the retained group, we guide for more or less stable production and slightly higher costs. The higher costs take into account the continued inflationary pressures in Kazakhstan. A significant increase in capital expenditures is mostly driven by the start of active construction fees at the Ertis POX facility. We are moving forward quite aggressively in order to meet our obligations to the government of Kazakhstan in order to fully sever the links between the group and our former Russian subsidiary. Now it would be worthwhile to note that we are using what we believe are quite conservative assumptions now for gold price, so the upside for our financial performance in 2024 remains substantial, although the potential inflationary headwinds also may be significant. And with this, we pass to the questions.

A - Vitaly Nesis: I would like, first, to start with a lot of questions that relate to our dividends policy and strategy. Again, right now, the management is in the process of etching out the strategy and talking to various shareholders. So we definitely will take into account both the medium-term view for the company and the preferences of the shareholders. And a few factors are, on the one hand, strong desire on the part of some shareholders to see the dividend. And this particularly, obviously, refers to a lot of retail shareholders who migrated to AIX after the redone. On the other hand, we need to recognize a pretty heavy CapEx requirement in the next 4 years as we build the Ertis POX. Also, I think a decisive consideration will be the Board assessment of potential M&A plans by the management. So again, I think the shareholders should just need to wait a couple more months before the management presents a Board-approved plan. Do you have an updated CapEx for POX-3 given the inflationary pressures? Now we are in the middle of the basic engineering done by Hatch. And by the end of the year, we will have fully updated CapEx estimate, which will take into account not only the inflationary pressures, but also the specific prices and specific engineering decisions as they pertain to Kazakhstan. Will the company focus on acquiring copper projects that have high gold mineralization rather than stand-alone gold projects? Our -- the management's original thoughts are that as we are now constrained by significantly tighter geography, the company is likely to be less specific about the commodity mix, not only gold and gold copper, but also generally base metals projects

Maxim Nazimok: However, I would just note, with reference to LBMA, so the company is no longer suffering any type of discount when selling its gold.

Vitaly Nesis: The Ertis POX, which professionals will be included in the project team? Will it be very different from the ones included in POX-2 and 1? Well, actually, we already have managed to recruit and bring to Kazakhstan a number of people who have been involved in POX-1 and 2. We also expect that as POX-2 is completed and the POX-2 team won't have anything to do, we'll be able to recruit quite a lot of people to the Ertis POX. Overall, we expect that at least 2/3 of the Ertis POX team, including the design part and the actually on the ground team, will be transferred. And that, I think, is a very positive factor in terms of my personal confidence in that project being successful. Will you be using Kazakhstan regional airborne geophysics? We've been using this technology in Kazakhstan for several years, so obviously. Having delivered an extremely disappointing result on the sale of the Russian business, management's claim strategy is a $1 billion-plus M&A spree on a pool of unidentified targets, which are going to be expensive and pose significant integration challenges. How is this a realistic strategy? I would agree that the result of the sale of the Russian business is disappointing, although, in my opinion, not extremely. And I blame this disappointing result on the geopolitical situation and the general challenges we have faced in Russia. I also would disagree with the fact that M&A spree would be $1 billion plus. We simply don't have and won't have such money. We will spend quite a lot on the Ertis POX, but that's not M&A. We have historically, as the team, focused on reasonably priced and actionable targets. So I believe we won't do anything expensive, and we will be successful in integration. So to sum up, I think the strategy is not uncontroversial. I understand that a lot of shareholders would prefer dividends, but I think it's realistic. Do you plan a name change of the newly now Kazakhstan-based company? This is one of the topics that has been discussed and will continue to be discussed at the Board level.

Maxim Nazimok: Maxim mentioned that international money markets are now starting to become more available since the divestment. What is the strategy for machinery equipment, spares and repairs? Will you now be seeking to reinstate those supply chains from the West? I have to say, for Kazakhstani operations, those supply chains have never really interrupted. So there were some temporary challenges. But generally, all of the Western equipment, machinery, spares and technologies is available and has been available for the Kazakhstani part of the business. Obviously, we'll have better terms with those contractors and suppliers. They will no longer see sanctions-related risks in interacting with the Kazakhstani part of Polymetal's business. So -- but yes, there will be a bit of an improvement. But I guess specifically on the funding side, we will see a more radical improvement in terms.

Vitaly Nesis: There are a couple of questions related to the tolling agreement that we have in place with the Amursk POX. We believe that the current tolling agreement, which was agreed as the disposal of the Russian assets is very comfortable for our company. It provides significant cushion for the potential delay of comfort from OPEC and other relevant authorities. And we also have a significant flexibility in terms of commercial terms. Again, this was one of the concessions that we have managed to extract from the quarter in exchange for a relatively low price. So I'm quite comfortable that the tolling situation, the tolling agreement and associated risks are well understood, well managed and don't pose a significant material threat to the success of our business. Up to what point are the former Soviet Union countries without Russia are underexplored in relation with other mining territories? I think we've done analysis on Kazakhstan. Kazakhstan is better explored than Russia, but still underexplored compared to, let's say, Western Africa or Mexico. So I think the exploration potential is very significant, particularly given the fact that the share of Kazakhstan's territory available for exploration is very significant. Agricultural production is relatively limited and population density is extremely low by global standards. Population is quite concentrated in urban centers. So it's not only the large land mass of Kazakhstan, but also its favorable demographics, its favorable belief, which are quite positive for [indiscernible]. Have you considered the listing the company on other stock exchanges? Well, yes, we have. Unfortunately, the scale of the company probably currently doesn't warrant such a listing because we wouldn't be appealing to large international investors. But the longer-term strategy clearly is grow in size, grow profitability, grow cash flows and then consider relisting with London [indiscernible]. To include base metals -- will you put a new strategy to include base metals to shareholders? It very rarely works to have precious metals and base metals in the same company in terms of valuation. I think I would agree that historical precious metals enjoy the premium multiple. I don't think it's the case now. And also in our specific situation, size is more important than a single commodity specialization. So I think doing both precious and base makes sense. Historically, we have never put strategy for shareholder vote. If we will have large transactions, certainly, they will be put up for a shareholder vote. But otherwise, strategy will be decided at the Board of Directors level. I will not respond to the question on equipment charges at the POX facility because I think the commercial sensitivity of this information is very significant. I ask for your understanding of this. Did Polymetal bring forward CapEx in Kazakhstan in 2023? Well, to the extent that we -- the speed of full ahead with the Ertis POX, yes. In terms of the construction of the renewable power facility, yes. In terms of other elements of stay-in business capital, no, we will continue to proceed as planned. And seeing no further questions, I thank you very much for active participation in this call. Please feel free to follow up with our IR team, either in London or in Astana or with the top management. Thank you very much, and have a very nice weekend.