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Edited Transcript of POLYP.L earnings conference call or presentation 22-Sep-22 11:00am GMT

Half Year 2022 Polymetal International PLC Earnings Call LONDON Sep 30, 2022 (Thomson StreetEvents) -- Edited Transcript of Polymetal International PLC earnings conference call or presentation Thursday, September 22, 2022 at 11:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Maxim Nazimok Polymetal International plc - CFO * Vitaly N. Nesis Polymetal International plc - Group CEO & Executive Director ================================================================================ Conference Call Participants ================================================================================ * Mitchell Martin ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Polymetal H1 2022 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vitaly Nesis, CEO. Please go ahead. -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [2] -------------------------------------------------------------------------------- Ladies and gentlemen, welcome to our traditional financial report for 6 months ended on the 30th June of 2022. This call will be more expansive than traditionally because we will cover not only the financial results but also give a strategic update on the company's direction and also explain the proposed exchange offer. Well, in terms of the financial highlights, clearly, the first 6 months of this year have been extremely challenging, mostly due to the huge external pressures generated by geopolitical events. Now, we first faced significant disruption in traditional supply chains and sales channels. And then the overall market for precious metals has deteriorated. Still, we managed to maintain operational stability and despite all of the challenges, continue to stick to the original production guidance of 1.7 million ounces of gold equivalent although we do note that, that guidance is at risk. But we still believe it is within reach. In terms of the financial results, clearly, profitability have suffered massively on the back of the significant backlog of sales, which we believe will fully unwind before the end of the year. Adjusted EBITDA declined by 35%. Total cash costs increased by 20%. And all-in sustaining cash costs increased very significantly by 34%. We would like to note that this huge increase is only partially driven by inflation and various supply chain-related challenges. At least part of this is due to the accumulation of unsold metal inventory, and we expect the cash cost to decline in the second half as we unwind that inventory. As a result of the financial results and increasing pressure on the balance sheet, the Board of Directors has made a decision to finally irrevocably cancel the dividends, both the full year 2021 dividend and the interim 2022 dividends. This decision was taken against the backdrop of a significant increase in net debt to $2.8 billion and a significant increase in leverage from 1.1 to 2.3 net debt over adjusted EBITDA. The company definitely remains liquid and solvent and have plentiful access to various forms of financing. But the Board unanimously decided it would be unwise to further strain the balance sheet by paying a dividend. We definitely hope that the dividend payment can be resumed in the near future as the company fully settles into the new sales channels and successfully resolves the issues related to the supply chain issues. In terms of the strategy of the company, we have previously announced that Polymetal has been considering the potential modification of its asset holding structure which will ensure distinct ownership in the various jurisdictions in which the company operates. And we also announced that we were evaluating the potential disposal of the company's assets located in the Russian Federation. However, following the recent developments, specifically Russian presidential decree of the 5th of August, now we believe that the previously considered transaction structure is now very challenging, if not outright impossible. Definitely, the decree has added significant restrictions on our ability to execute this pre-disposal transaction. Now therefore, we continue to evaluate all available options to modify its asset holding structure, and the ultimate goal of this exercise is to partially at least restore and maximize shareholder value. The current focus of analysis is potential re-domiciliation of the parent company, Polymetal International, to a friendly jurisdiction -- friendly under the meaning of the relevant Russian law. Now this is definitely a necessary step which could unblock the ability to execute further corporate actions. No decision has been made in relation to the various options available to the company. And we would like to stress that any corporate actions will be fully compliant with all applicable international sanctions, counter sanctions and regulatory requirements in all jurisdictions that the company operates. And I finally come to the proposed exchange offer. As most of you probably know, a significant chunk of the company's issued share capital, approximately 22%, is currently held by shareholders through the Russian National Settlement Depository or NSD. And these shares are completely denied currently all of the rights of shareholders due to the international sanctions imposed on the NSD. And we believe that any further corporate action, including, first of all, a dividend, and secondly, potential change in corporate structure such as re-domiciliation, all of these steps are not possible, both from the corporate governance perspective and from the practical holding perspective until the issue of shares stuck in NSD is resolved. Therefore, we are announcing today our intention to conduct an exchange offer, which invites our shareholders whose rights have been affected by NSD sanctions, subject to fulfilling eligibility criteria to tender such shares for exchange -- in exchange for the issuance of a certificated share on a one-for-one basis. Fundamentally, we are exchanging NSD-locked shares for shares not subject to NSD restrictions on one-for-one basis. There will be no change to the shareholder structure and there will be definitely no value leakage in such transaction. Further details of the exchange offer can be found in a separate announcement, which is both on our site and on RNS. I would like to conclude now with a statement that we believe the company still is doing fine in terms of stability and long-term viability of our operations. The best proof of that is the recent launch of our newest mine, Kutyn heap leach, which is a part of the Albazino hub, and we believe significant cash outflows over the first half will be significantly reversed in the second half despite decline -- recent decline in gold prices. Now we also note recent news flow out of the Russian Federation. We continue to evaluate how this may impact our operations and our development projects. We plan to issue a third quarter operational update probably in the end of October, and we'll definitely provide more details about the ongoing dynamics of the company's business during that call. And with this, I thank you for attention, and we would be happy to answer any questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We'll take our first question from [Jonathan Paul]. -------------------------------------------------------------------------------- Unidentified Participant, [2] -------------------------------------------------------------------------------- Congratulations on the launch of the new mine. I just wanted to ask about the sale of gold. In your last update you gave, you said that you were hoping for progress in Q3. I mean this half year results, you still said the same thing. So I was just asking, has there been any increase in the sale of gold to Asian countries, especially as China has now come out of lockdown? -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [3] -------------------------------------------------------------------------------- Thanks for the question. Yes, we have successfully established several channels of sales into Asia. And particularly recently, in September, the sales have really picked up, and we are seeing significant operational cash inflows. I would probably abstain from detailed comments on the geographic destination of the sales, but we do realize that diversification of these channels is essential to maintain operational and financial stability. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- (Operator Instructions) As there are no further questions on the phone, I will hand the call back over to Mr. Nesis for any closing remarks. -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [5] -------------------------------------------------------------------------------- Let's wait for the text questions that we are receiving through the webcast, and then we'll answer those questions in the order received. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- (Operator Instructions) -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [7] -------------------------------------------------------------------------------- Yes, let's wait a little bit for the text questions and then we'll decide whether we conclude the call. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- For your information, Mr. Nesis, there is one question after coming through on the phone. -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [9] -------------------------------------------------------------------------------- Sorry? -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- There is one question after coming through on the phone, Mr. Nesis. -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [11] -------------------------------------------------------------------------------- Yes, let's do this. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- We'll take the question from [Jamie Wheatley] who is a private investor. -------------------------------------------------------------------------------- Unidentified Participant, [13] -------------------------------------------------------------------------------- Do you see the net debt into 2023 increasing? Or do you see a reduction going into 2023? -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [14] -------------------------------------------------------------------------------- Thanks for the question. We see a meaningful reduction in the second half of this year, so by the end of the year. And in 2023, unless we see additional deterioration in operating conditions, we definitely expect a positive free cash flow. So we more or less expect that the net debt of $2.8 billion as of the end of the first half is the peak net debt, again, unless we face some additional significant negative developments. Do you think the new sales routes may be in danger? Can you put some color about what latest sanctions in July are about? Well, obviously, the geopolitical situation is very fluid, and it's difficult to forecast with certainty how the additional restrictions may be put in place. My personal view is that some of the countries where we sell are extremely unlikely to introduce any restrictive measures at all. Other countries may introduce some measures which may have an impact. That's why sales channel diversification is such an important part of our strategy right now. Overall, I'm reasonably optimistic because all of the Western world, the United States, the European Union, the U.K., have already introduced the sanctions, mostly in July, that have effectively blocked the import of Russian gold and silver for that matter into those countries. So the impact of the July sanctions has already been fully established and incorporated in the current market dynamics. And these countries, U.S., U.K. and EU, have already done everything they could do to block the sales of our product. And the actions of additional countries, I think, are significantly less likely. So I'm cautiously optimistic. How will Kyzyl do in relation with new regulation by the Chinese government about high arsenic concentrates in the case of Kyzyl having no relation at all with Polymetal Russian assets? Will it be affected by 13% penalty VAT? Well, I think in the auction where Russian business and Kazakh business are separated, realistically, there will be some transitional period which will see our Russian POX facility continue to toll treat Kyzyl concentrates. Now if this relationship becomes, for some reason, fully impossible, I think Kyzyl will face a very material deterioration in profitability because it's not only 13% penalty VAT, it's also a direct smelter penalty on arsenic content. So the costs will go up very significantly. The operation will remain profitable, but its profitability will deteriorate very significantly. Are you close to any major decisions about shutting down certain parts of the operations and increases in the current grade? Well, we are actually in the middle of the asset rationalization program as we speak. And we have already made some decisions to curtail operations. We are in the process of evaluating the decisions, and we will present all of the steps that we decided to take at the time of our third quarter operational update. Up to what point you think that net debt level could be a problem for Polymetal in the close future? What about debt refinancing for Polymetal? Do you have any recent feedback from financial entities in relation with today's published net debt to EBITDA ratio? Our CFO, Maxim Nazimok, will take that question. -------------------------------------------------------------------------------- Maxim Nazimok, Polymetal International plc - CFO [15] -------------------------------------------------------------------------------- Yes. Sure. We are obviously engaging with quite a number of financial institutions, and we did so over the course of the third quarter where the net debt number was already in public domain. We don't see any major concerns on the side of the banks, and we have actually been continuing refinancing the business over the course of Q3, extending maturities, sometimes swapping dollar-denominated debt into rubles, where rates have become more pleasant and more competitive as the central bank continued its downward slope on the rate. So we don't see -- with this level of net debt, we don't see any meaningful pressure from the lenders, especially as we have the plan to unwind working capital increase. -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [16] -------------------------------------------------------------------------------- Please discuss the friendly jurisdictions and what they might be. Well, all jurisdictions that are not on the list of unfriendly jurisdictions are friendly. The options which have been floated during the recent discussion -- internal discussions include Hong Kong, Mainland China, Kazakhstan and the Emirates. Now there's a lot of work that will need to go into the definition of the criteria for the potential transaction and the doability of the deal. Given how difficult it will be to do the separation, is it truly worth giving up being in the Jersey jurisdiction to go somewhere, arguably with worse governance, just to do this transaction? Well, this is the issue. This transaction, as far as I understand, refers to the potential split up of the company. And this transaction under the Jersey holding structure is next to impossible because it requires a very heavy level and very high level of government's approvals in Russia. And it also has a lot of risks in terms of what may happen if such approval is not granted. So if we're talking about the separation, my personal belief is if there is no [redone], there is no separation. -------------------------------------------------------------------------------- Maxim Nazimok, Polymetal International plc - CFO [17] -------------------------------------------------------------------------------- I'll probably add into this, that [redone] doesn't automatically mean a decline in corporate governance standard because it doesn't mean a delisting from the London market, for example. -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [18] -------------------------------------------------------------------------------- What will be the effect of the mineral tax increase in Kazakhstan in 2023 for Polymetal? Well, the mineral tax has increased by 50% in Kazakhstan. So this will translate in approximately 5% -- 5% to 6% increase in all-in sustaining cash costs for our Kazakhstan operations. When do you plan to move your Pacific [POX] facility project from Russia to Kazakhstan? Definitely, this is -- well, first of all, it's not about moving the facility, it's more re-siting the project because there is no Pacific facility. And we are very close to making a final decision about the specific location. We'll present that decision and conceptual action plan at the time of our third quarter results -- production results release. What will be the consequences of partial mobilization in Russia on the human resources of Polymetal? Does it bring any risk for relocation of the company to the friendly jurisdiction? Well, the partial mobilization has been announced only yesterday and it started in earnest today. So definitely, it's very difficult to assess the consequences, particularly the scale and the scope of mobilization effort. So this is something that we obviously are living with and need to understand. My expectation is that in about a month when we report production results, there will be more clarity. I don't think there is any impact on relocation from the partial mobilization. There will be an impact on operations, but not on the corporate actions. Yes. As far as I understand, there are questions from the call, so let's take them. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- We will take the next question from [Leonard Lawson] who is a private investor. -------------------------------------------------------------------------------- Unidentified Participant, [20] -------------------------------------------------------------------------------- Yes, hello. Can you hear me? -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [21] -------------------------------------------------------------------------------- Yes, please. -------------------------------------------------------------------------------- Unidentified Participant, [22] -------------------------------------------------------------------------------- Yes. So my question is regarding the re-domiciliation and potential relisting to understand that the proposed exchange offer is due to the sanctions between the London Stock Exchange and the Russian clearing house. So potentially, this could be resolved by moving the listing to another market that is not subject to such sanctions. Has this been considered as part of re-domiciliation efforts? And if you could comment on that, I think it would be helpful. -------------------------------------------------------------------------------- Maxim Nazimok, Polymetal International plc - CFO [23] -------------------------------------------------------------------------------- Look, in our thinking, the question of additional listing in a friendly jurisdiction is really a secondary one. We first need to deal with the legal part of the issue, which is the company domicile in a non-friendly jurisdiction. Once the re-domiciliation has been affected, we can consider further enhancements such as additional listing in, say, Hong Kong or some other place. But this is an enhancement really. The company needs to deal with the legal part first. -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [24] -------------------------------------------------------------------------------- Do you consider share buybacks? The answer is no. Any further questions from the call? -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Yes, we do have a follow-up question from [Jonathan Paul] who is a private investor. -------------------------------------------------------------------------------- Unidentified Participant, [26] -------------------------------------------------------------------------------- Yes. I just wanted to ask you, what would you say are the top 3 things keeping you up at night now from your last update? -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [27] -------------------------------------------------------------------------------- Well, number one, definitely and with a huge gap is the mobilization -- the partial mobilization recently announced. We are watching in real time how many employees are being called up, what employees are those, how we can deal with the reduction in human resources available. So this is definitely #1 on the agenda. Number two is diversification of sales channels. The more we have, the better we are positioned to deal with the potential expansion and strengthening of the international sanctions against Russia. And I would say three is carefully weighing the pros and cons of a couple of large-scale projects that we have in our pipeline, specifically Veduga, which will be ready for full-scale launch in about half a year, and the grid line to Albazino, which is also pretty close to being shallow-ready. So it's a difficult call. Both projects definitely make economic sense, but we also need to weigh liquidity and leverage considerations as well as the potential fallout from the partial mobilization. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- There are no -- we now have a follow-up question from [Leonard Lawson] who's a private investor. -------------------------------------------------------------------------------- Unidentified Participant, [29] -------------------------------------------------------------------------------- So regarding the re-domiciliation, I understand -- I agree with you, it is the first priority in this regard. However, do you see any risk that further sanctions could prevent such re-domiciliation? And if so, do you intend to accelerate the time line? Or what time lines do you have in mind? -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [30] -------------------------------------------------------------------------------- Well, this is a natural question. And unfortunately, the geopolitical developments this year have demonstrated that it's next to impossible to forecast or predict the dynamics of international sanctions against Russia. So unfortunately, everything is possible. We hope that there will be no impact. And we understand that the faster we move, the better our chances of completing the transaction. However, we will not compromise the integrity of the company in terms of fair treatment of shareholders and compliance with all relevant international Russian and Kazakhstan regulations. So we will try to move fast, but we will not cut corners. -------------------------------------------------------------------------------- Unidentified Participant, [31] -------------------------------------------------------------------------------- Do you have an estimate of what time line that would imply? -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [32] -------------------------------------------------------------------------------- We probably will have an idea in a couple of months. I think a lot will depend on the outcome of the tender offer that we have announced today. And also, we will be engaging with our institutional shareholders. We still have a sizable portion of our shares held by institutionals. So we need to listen to their views and concerns. And I think we will have an action plan, hopefully, in a couple of months. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- We will take the next question from Mitchell Martin from Mitchell Advisory. -------------------------------------------------------------------------------- Mitchell Martin, [34] -------------------------------------------------------------------------------- Obviously, from the first half financial report, I'm most concerned about, of course, the tremendous negative free cash flow of USD 630 million and of course adding a tremendous amount to your net debt. And you did say that you see that as $2.8 billion as the maximum. But can you forecast for us how you intend to get that debt paid down? What you anticipate in coming quarters? I mean are we ever going to have a first half like we've had? And if you could just address what you're doing to reduce your net debt and how you can save, of course, facing -- continuing to face operational challenges given the sanctions and the war, what you're planning to do to get your balance sheet in better shape. -------------------------------------------------------------------------------- Maxim Nazimok, Polymetal International plc - CFO [35] -------------------------------------------------------------------------------- Yes. Thanks for the question. In terms of the plan, it's relatively straightforward. As Vitaly mentioned on the call, we have, over the last few months, accumulated quite significant amount of unsold metal inventory. So this is doré gold, which is readily convertible into cash. It was an issue of resetting the sales channels, the logistics of those sales channels and so on, that prevented us from monetizing that inventory. But we already see that process of sales gradually resuming. And so this is kind of the major part. The other thing that we did, especially in the first half of the year, we rapidly increased the funding of buying critically important spare parts, equipment, consumables and so on. So everything that was at risk of becoming unavailable due to other sanctions or self-imposed restrictions by the suppliers. And that was basically another half of the increase in the working capital. As now, the logistics and supply chain stabilized and we find alternative routes. We'll also be gradually winding down this excess working capital level. So I think we have a pretty firm plan of how we get to lower net debt. And hopefully, by the time we announce the third quarter results in terms of production, we will be reporting already lower net debt number as of 30th of September. -------------------------------------------------------------------------------- Mitchell Martin, [36] -------------------------------------------------------------------------------- Okay. What do you see as the optimal amount of -- operationally -- the ratio of net debt that you're looking for? I mean you're over 2 -- EBITDA, what is -- you are at 2 something. Where would you like to be? Any kind of forecast in the next year of where you would like to be? -------------------------------------------------------------------------------- Maxim Nazimok, Polymetal International plc - CFO [37] -------------------------------------------------------------------------------- Well, thanks for the question. In previous reality, we did have like a soft target of 1.5x net debt adjusted EBITDA as a target. So everything below 1.5 was good. I think presently, we are probably prepared to be more leveraged because the situation has changed in many, many ways, including the macroeconomics because commodity prices have somewhat come down and exchange rate in Russia is actually strong. So we see lower fundamental profitability of the operations just solely because of the macro parameters. But just as a reminder, in our dividend policy, everything below 2.5 was marked as the level of comfort. So I think below 2.5, we do feel ourselves pretty comfortable. -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [38] -------------------------------------------------------------------------------- Well, I would add that -- I would unpack your question into 2 parts. The first part is what is the level above which we start to feel kind of acute discomfort. And I think 2.5 is that level, which Maxim has stressed. And then the second question is, what would be the leverage level if other structural issues are resolved, at which we would consider resuming dividend? I think it's definitely below 2 and hopefully closer to 1.5. 1.5 definitely is comfortable and probably above 2 is not comfortable. So within that continuum, there will be some discretion applied to whether we can afford resuming dividend payments. -------------------------------------------------------------------------------- Mitchell Martin, [39] -------------------------------------------------------------------------------- Thank you for your very clear answer. Just one of the -- so we should really see -- as investors, we should really see these improvements -- these operational improvements of which you've mentioned in the update that you said we should be hearing from the end of October. Is that correct? -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [40] -------------------------------------------------------------------------------- Yes. I wouldn't call that operational improvements, I would call that liquidity improvements. So yes. -------------------------------------------------------------------------------- Operator [41] -------------------------------------------------------------------------------- We will now take the next question from [Jatin Shah]. It seems he stepped away. There is no further questions on the phone at this time. -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [42] -------------------------------------------------------------------------------- There is a question from the webcast. Is there any problem with servicing EBRD debt provided previously for Kyzyl project? -------------------------------------------------------------------------------- Maxim Nazimok, Polymetal International plc - CFO [43] -------------------------------------------------------------------------------- No, there is no problem there. We are in active dialogue with EBRD, and we are servicing those debts pretty much as usual. -------------------------------------------------------------------------------- Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [44] -------------------------------------------------------------------------------- It appears we are having some technical issues with webcast, so please send your questions to the and we will pick up your questions through e-mail. Well, seeing no further questions, I would like to thank all of the participants for being active and perceptive at this call. Please don't hesitate to contact the company by e-mail, either our Investor Relations department or the top management. Have a very nice day. Bye-bye. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.