Polymetal International plc

Ladies and gentlemen, welcome to the conference call on production results for the Third Quarter of 2019 for Polymetal International. I will first walk you through the highlights for the quarter, and then we'll have a Q&A session.

Overall, the quarter was quite successful for the company, very strong performance at Kyzyl drove the significant increase in production. If we look at continuing operations, gold equivalent production increased by 21%.

All of the assets performed more or less in line with production plan with the exception of Kyzyl, where we continue to benefit from a positive grade reconciliation and very strong throughput performance. Kyzyl concentrator actually achieved steady-state throughput of two million tons per year, which is 11% above the original design and several initiatives are underway to push throughput to 2.1 million tons per year.

In terms of production outlook for the full year, we now see very high probability of exceeding our original production guidance, and we believe we can bid it by up to 50,000 ounces, which would put us at 1.6 million ounces of gold equivalent for 2019. We also would like to reconfirm production guidance for 2020 at 1.6 million ounces and for 2021, which is 1.65 million ounces of gold equivalent.

In terms of cost performance, currently, we see higher commodity prices driving up our costs through the influence on royalties. However, we maintain our current cost guidance for 2019 at $600 to $650 per ounce of TCC and AISC of $800 to $850 per gold equivalent ounces.

However, we believe that the result is likely to come close to the upper limit of the guidance. We managed to significantly unwind the working capital build up.

In the third quarter, we generated significant free cash flow and paid the regular semi-annual dividend. We expect fourth quarter cash flow dynamics to be significantly positive.

Turning to construction and development activities. Both Nezhda and POX-2 are progressing on schedule.

And we expect the concentrated building at Nezhda to be fully winterized within the next two weeks. And that we also expect to complete the statutory permitting process at Nezhda by the end of the year.

At the POX-2 project, construction activities are picking up pace with the focus clearly on site preparation and the construction of the foundation for the Autoclave. Importantly, in third quarter, Polymetal received upgraded ESG reading from MSCI and ISS.

We also have been reaffirmed as a member of the Dow Jones Sustainability Index and FTSE4Good index. We will continue to press ahead with a variety of sustainability initiatives, which we currently are executing.

And I guess, this completes the highlight session, and I would be happy to answer any questions.

Hi Vitaly, congratulations on the strong quarter and on the upgraded year outlook. And my first question is just on your outlook for next year and the year after, have you fed through or changed your assumptions for Kyzyl grade going forward?

And could you just remind us of what your expectations are there? And what you've put into that calculation?

Well, I think – thanks for the questions. I think we expect to see Kyzyl grades normalized starting from the current quarter from Q4 2019.

So next year, we expect grade to be very close to the average open pit reserve grade, it's roughly 6.5 grams per tonne. And in general, this year's a very strong positive grade reconciliation is not expected to recur as it was mostly driven by the presence of near surface geological anomalies.

The grade at lower levels of the mine will be steady.

Okay, thanks. That’s very clear.

And just the second one for me is just on the Chinese market for offtake, could you just give us an update on what you're seeing there. If there have been any material changes in terms of TCRCs and willingness to take on arsenic?

Yes. Well, just to give you a bit more color.

We are seeing increased ounces for arsenic and for some other elements. And actually in response to changing market conditions, we have changed our process and approach at Kyzyl.

Originally, we planned that concentrate production will be split approximately 50/50 between POX and China, in terms of gold contained. However, we – given the changes in Chinese market, we decided to shift Kyzyl gold and concentrate production towards POX more.

And currently, approximately 65% to 70% of golden concentrated from Kyzyl goes to POX. As a result of this actually, now we moved all of the Mayskoye concentrate to the Chinese market, just because it makes more sense to process as much Kyzyl concentrate in house, given its higher gold grade and higher arsenic grade.

As a result, we expect positive impact on Kyzyl profitability in terms of both gold produced and cost. Well, Mayskoye actually, as a result, was on the receiving end of the market shifts and the cost increases will hit that particular operation's results more heavily.

And going forward, we did have full visibility in terms of the next year, in terms of just the ability to place material. However, the arsenic unfriendly trends are in place.

And I think they kind of vindicate our decision to commence POX-2 development because it will get – I think it may get it even more challenging from here as the Chinese off-takers are trying to kind of include price participation clauses in the offtake contracts, so giving them part of the upsides related to the gold price.

I see. That's very helpful and interesting.

And I guess going forward for POX-2, have you baked in any assumption on your ability purchase to third-party concentrate and process it given the changes in the market? Or is that incremental upside from the current scenario?

Well, we will have extra capacity, and we do have a couple of long-term contracts. But currently, the base case does not incorporate in any sense, the addition of third-party material.

So we are trying to be conservative from that front, particularly given the fact that we now have a competitor in the domestic market for third-party concentrates, Petropavlovsk is actively participating in the market.

Okay. Thanks very much, Vitaly.

That’s a very interesting update and congratulations again on the strong operational performance.

Thanks a lot.

Vitaly, a couple of questions. First on Q4.

Firstly, the note flags, the lower expected grades at Kyzyl what do you expect that to knock-on impact for the two recoveries for the mine there in Q4? And then more broadly for the group level for Q4.

You’ve had a fantastic nine months, the implied Q4 production figure looks pretty conservative. Aside from, let’s say, some lower Kyzyl contribution sequentially.

Are there any other mines you’re expecting lower Q4 production?

Alan, thanks a lot for the question. I don’t think recoveries will change at Kyzyl, they will be steady and actually we hope to improve them as we complete a couple of incremental debottlenecking initiatives at Kyzyl.

In terms of Q4 production, production per se, will be seasonally weaker. We expect to see a significant decline at Mayskoye because we managed to shift more of the concentrate in Q3.

We expect to see declines at Svetloye and Voro, because of a lower production from seasonal heap leach shift. Operations in Kyzyl will be lower because the grid will normalize.

So as a result, Q4 production will demonstrate a very meaningful quarter-on-quarter decline. And I think, that is the reflection of – mostly of the seasonality within the portfolio.

Okay. And then one last one, part of our – the replacement of the mill lining for the leaching circuit.

Was that fully completed in the third quarter, or did that work continue in the fourth quarter?

It was fully completed in the third quarter.

Okay. That’s it for me.

Thank you very much.

Thanks for the call. Just two very quick ones.

Firstly, just on the higher silver prices, potentially impacting the production profile at Dukat. When do you think we’ll have clarity on that in terms of potentially the postponement of the mine closure at Goltsovoye?

Thanks for the question, James. That decision has been made.

We will continue mining at Goltsovoye. I don’t think it will be a big impact in terms of the overall portfolio.

For us, it’s more important to keep people working, because underground miners, very short supply. And we were very reluctant to let the people go to make them redundant.

And the extension of Goltsovoye would be nice because we will then transfer the operating team to Primorskoye, which is a new satellite mine within Dukat hub. Primorskoye will start development late next year, and it will be kind of a natural succession in terms of closing Goltsovoye, and opening up a new operation.

Okay. Makes sense.

And then I guess in light of the slightly higher price environment. Can you remind us what you’re assuming for reserve prices?

And then if there’s a different price you use for short-term planning in terms of the mines?

The Board has recently decided that we will use the same price deck for reserves and resources assessment so $1,200 per ounce gold price and $15 per ounce silver. For short-term planning, we will be using $1,400 gold and $17 silver.

Yes, that’s perfect. Thanks very much.

Vitaly, a few questions. Firstly, can you remind us how many ounces within the portfolio you expect to sell to off-takers in 2019 and in 2020?

That’s the first question, following the changes.

That’s a good one. I think overall about 250,000 ounces this year and a similar amount next year.

Okay. Thanks.

And then sort of following on from that. You mentioned in the release around the $150 to $200 announced negative impact on Mayskoye’s cost for 2019?

How should we look at that in terms of the year-on-year progression? And should we effectively take last year and assume that you get around $150 to $200 increase or would there be some incremental cost improvements coming through as volumes have lifted a little bit this year?

Daniel, this is kind of an expected full year-on-year performance. So $150 to $200 increase compared to full year 2018.

That’s not only the impact from the offtake, it’s accumulated impact of several factors including the shifting all of the concentrated to offtake, first thing, and increased penalties for us, the second thing. And then generally a lower shareholder of oxidized material in this year's production, which had a better grade and as result a better cost profile.

So it’s actually double whammy. First, the treatment charges increased for Mayskoye but also we assumed the different mix.

The original plan was for approximately half of the materials to go to POX and to enjoy relatively low cost. And that material is not going to POX.

It has been pushed out by Kyzyl. So again Mayskoye ended up on the receiving end of the market share.

Okay, thanks. So effectively, we should be looking at cost rising year-on-year by that sort of amount.

That's very clear. Okay, and then final question just on the working capital and I guess the balance sheet and the dividend.

Do you still expect to fully release all of the working capital you built in the first half in the usual sort of seasonal pattern? Or do you see a net build this year because of higher prices?

No. We expect a full release even if you look at nine months production, you will see that production and sales pretty much match.

We'll complete destock piling at Mayskoye in Q4 and that will be it.

Okay. So net-net, you should release all of the working cap you built in the first half as usual?

Yes.

Okay. And then finally, I appreciate Board decision at the end of the year, but if the current prices persist and you end up below one time, sorry 1.5 times net debt to EBITDA at the end of the year, is the special dividend still on the cards?

Well, as you have pointed out correctly, this is the decision for both to take in late January. So if you assume the current market situation in gold and silver, I think, the special dividend decision is probable.

Excellent. Thanks so much.

Look forward to seeing you at the Investor Day in the few weeks.

Thank you.

Thanks, Vitaly and team. First one, you talked to the life of mine extension potentially at Birkachan heap leach.

And can you just give a little bit more color on that? And what you're hoping to extend it to?

Thanks for the question, Richard. We currently see maybe three extra years for the heap leach at Birkachan.

Given positive price dynamics, it makes sense to [Technical Difficulty].

Sorry I think my line has got some technical faults. So, I'll follow up with an e-mail.

Sorry about that.

I just wanted to follow up a small question on this guidance revision this year. Should we somehow expect next year performance to be a little bit better than 1.6 million ounces based on what you encountered this year so far?

Nikolay, thanks for asking question. We prefer to be on the conservative side.

So we will not upgrade next year's guidance presently.

And once again, a very small follow up on what Daniel was asking regarding special dividends. Should we somehow include the sale of Kapan in this money you get from this deal into this equation on special dividends?

How do you think?

Nikolay, this is a more comprehensive decision. So it's not a formula-based thing.

So the Board will look at the free cash flow generated, less the amount of expected final dividend for the year. But it's not a formulaic decision.

So they will look at all factors including the proceeds from the deals, but also, if you recall, proceeds from the deals who were generally earmarked for debt reduction.

Okay, thanks.

Just to round off on Birkachan, you talked of three years of extra life before I got cut off. Can you just remind me what the current life is of that heap leach?

And where that would take it to?

We actually plan to discontinue stack next year, originally and continue only with residual leaching. So the net – the updated life of mine plants calls for three more years of stacking and then two more years of residual leaching.

So, we just continue stacking next year.

Okay, cool. So an extra five years effectively from this year.

And then just on Varvara, you talked to a new loco being commissioned and driving down Komar or transport costs. Have you got any kind of sale on what could that do to all-in sustaining costs for Varvara?

Well, the savings will be about $1 million per year. So given the operations output of 150,000, it's not particularly, so we are talking may be less than $10 per ounce.

But it is not only cost reduction, it’s not the improvement in predictability and stability of the railing route, which is critical because the bulk of production at Varvara is now generated from the core mine and rail from Komar.

Okay. Thanks, Vitaly.

And my last one is just on Veduga, is there any update on that in terms of the disposal process?

We’ve pretty close to making some decisions, and we'll probably announce them at the Investor Day.

Okay, cool. Vitaly, that was it and thanks for your time.

Thank you.

All right. Well, thank you very much for the call.

Please feel free to follow up with the management team or the Investor Relations team. And have a very nice day.

Thanks a lot. Bye-bye.