Polyus PJSC

LSE:PLZL

Earnings Call Transcript 2020-Q1

[Operator]

Dear, ladies and gentlemen, welcome to the conference call of Polyus. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions.

May I now hand you over to Victor Drozdov, Head of IR, who will lead you through this conference. Please go ahead.

[Victor Drozdov, Director of Investor Relations]

Hi, everyone. Welcome to our first quarter 2020 financial results conference call. Today we have our CEO Mr. Pavel Grachev; and our CFO, Mr. Mikhail Stiskin present. They will provide you with an update on the first quarter financial results. And at the same time, we’re going to provide you with some additional updates on the COVID-19 spread in Russia.

So with that in mind, I will pass the floor to Mr. Pavel Grachev. Pavel, the floor is yours.

[Pavel Grachev, Chief Executive Officer]

Yes. Thank you, Victor. Hi, everybody. Thank you for joining our call. The first quarter of 2020 we posted a 32% decline in top line and 33% decline on EBITDA compared to the previous quarter due to 39% drop in sales volume of refined gold and flotation concentrate during the period.

Such decrease in the sales volume is mainly attributable to the timing of the refined rather than production process. The volumes of doré gold produced were only down 8% as it normally happens due to seasonal stoppage of the alluvial operations. The discrepancy between the gold that are produced over the quarter and sales volume of refined gold is a common development, meaning that a significant demand of gold was left unrefined at the end of the quarter and will be processed later this year.

As we’ve previously highlighted, we'd like to follow volumes of doré gold production when assessing our operational performance as opposed to refined gold. The company now continues to progress with the development projects across its portfolio. In addition, we’re finalizing feasibility studies on a number of new grounds of project and we will provide a detailed overview of those late in 2020. Our main greenfield project, Sukhoi Log, we are processing with the in-fill drilling program and the pre-feasibility study in nearing completion.

Now I would like to comment on the most demanding topic at this moment, spread of COVID-19 and its potential impact on the company's operations. Back in early April, Polyus introduced strict protocols across all of our operations to minimize risk of possible spreading of the virus among its employees. This included special access control arrangements requiring all rotational employees to be tested for COVID-19 prior to their transfer to Polyus sites. [Indiscernible] and vehicles had to get disinfected before entering sites with drivers required not to leave the cabin until they leave the site territory. We started to disinfect all communal areas and operating facilities on a daily basis wherein PPEs monitored all of our sites.

As of the moment, the Company has completed the broad-based testing program. Throughout the duration of the testing program, which began in mid-April, there was a substantial growth of Polyus employees with COVID-positive test results at the Olimpiada mine. The vast majority of those employees with the virus have not been shown any symptoms and have been placed in isolation at the mine site.

Polyus is working closely with the authorities on both federal and regional levels in order to minimize the spread of the virus at the production site. Temporary isolation centers have been set up at the site as well as mobile hospitals, which helped the company provide necessary medical care for employees.

All of those employees who have received positive test results, and any categorized as being higher-risk, are receiving repeat testing. A substantial number of Polyus employees, who had previously tested positive for COVID-19, have fully recovered from the virus and have been now discharged from the quarantine and medical facilities. And we expect this positive dynamic to continue and bring our entire operation back on track in the coming days.

I will now hand over to Mikhail, who will provide a detailed overview of both our financial performance of the first quarter and additional color on development related to the virus. Thanks.

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

Yes. Thank you, Pavel. Hello, guys. So in terms of our top line performance in the first quarter, gold sales amounted to $872 million. We sold 544,000 ounces of gold in physical volume compared to 894,000 ounces in the previous quarter. As mentioned during the operational results conference call, this reduction is a reflection of lower sales volumes of both refined gold and flotation concentrate during the period.

Over the course of the first quarter, we sold approximately 35,000 [ph] tonnes of flotation concentrate containing a 11,000 ounces of gold compared to approximately 62,000 tonnes of concentrate which contain about 170,000 ounces of gold in the fourth quarter.

Similarly to the first quarter of 2019, Polyus conducted a marketing campaign to secure future deliveries to foreign off-takers and we’ve seen a mild improvement in the payability terms compared to what we achieved last year. Separately, I would like to underscore that our first quarter sales were wholly comprised of merchant gold containing flotation concentrate, and there are no sales of antimony-rich flotation concentrate in this period.

As a result of lower sales during the quarter, our inventories of concentrate at Olimpiada shot up. So they went up from 29,000 tonnes to approximately 51,000 tonnes and approximately 45,000 tonnes out of it is antimony containing product. So the shipments are expected to be accelerated. We currently anticipate that we’re going to sell approximately 30,000 tonnes of concentrates in the second quarter. But most of the shipment, as usual, will take place in the third quarter and the fourth quarter of this year.

Now looking at our cost performance during the period, our TCC increased by 16%, quarter-on-quarter to $394 per ounce and that is below the lower bound of our guidance at $400 to $415. Now the “increase” is driven mainly by three factors: lower head grades at Olimpiada, a smaller share of flotation concentrate, and finally, no byproduct credit from antimony.

Now separately at Natalka, our TCC increased tangibly by approximately 10% to $414, and that reflects scheduled maintenance at the mill, which was brought forward from the end of last year to February this year. And also a temporary several percentage point decline in recoveries as a result of the installation of the new rubber-steel lining at the mill.

So we are working to improve our recoveries and they are below target. We expect it to bring it back to target in the second half of the year as we calibrate the lining performance first. And secondly, we complete the installation of the flash flotation circuit and first machine -- the first flash flotation machine is currently being installed and fine tuned.

Now at the group level, our quarterly EBITDA went down to $589 million compared to approximately $880 million in the fourth quarter. And that's mainly the result of lower volumes of gold plus higher TCC. Still our EBITDA margins stood at 68%. That's 1 percentage point decline from the fourth quarter level.

In terms of CapEx, we spent $124 million in the fourth quarter now -- I'm sorry, in the first quarter. We expect to catch up during the remaining 9 months. So the guidance will remain unchanged at $700 million to $750 million a year. Also, the macro assumptions underlying our TCC and CapEx guidance remain unaltered. So that’s ForEx of 16 and the gold price of 1,200.

Now look at the dynamics of net debt position. So our cash and balance was approximately $1.9 billion. Net debt including derivatives stood at approximately $3 billion compared to $3.25 billion at the end of the fourth quarter. As you can infer free cash flow generation was fairly solid. Free cash flow came in at $260 million as a result of lower net debt position in absolute terms and adjusted EBITDA expansion over the previous 12 months.

Our net debt to EBITDA ratio came down to 1.9x, which is the lowest level in the -- in our public history since the relisting on the London Stock Exchange and Moscow Stock Exchange several years ago.

Now as for factors, which impacted our liquidity position after the end of the reporting period. So we repaid the Eurobonds in full. I mean, the 750 million Eurobond, out of which $677 million was outstanding, post the buyback plus there was an accrued interest of $17 million, which was also settled.

Now we also completed the redemption of the convertible bonds with a nominal amount of $250 million, and we delivered approximately $4.5 million to bondholders as a result of this settlement.

Now, as I mentioned during the operational results call in April, we are seeing a negative impact on our financials coming from the COVID-19 pandemic outbreak at KBU, and the preventive measures were taking at all other assets. So over the course of 2020, we currently expect to allocate approximately $70 million to finance COVID related activities. This will cover: first, the extension of the workers shift, plus the voluntary decision of the company to temporarily increase the pay of the staff who are either continuing to work or are quarantined -- or on quarantine or who are fallen sick due to the virus. And, b, the cost of protective gear, temporary accommodation, various medical equipment and support to the medical scientists in the regions of our presence.

So out of the $70 million, $60 million is expected to be operating expenses and $10 million is expected to be capital expenditure. Very limited expenses have incurred in the first quarter. So the bulk of it will be taking place in the second quarter and some remaining volumes in the third quarter.

Now we also expect that working capital build up in the second quarter as we accelerated shipments of consumables to ensure the safety of operations. So the first quarter was outlined with respect we had the tangible release of working capital in the amount of wood mill, which improved our EBITDA to operating cash flow conversion to a record level of $92 million. That will not be sustained. This is due to the supplement payment from our Chinese off-takers for the previously shipped concentrate. So this will reverse in the second quarter and you're going to see a material build up.

Now in terms of our project schedules, as we said, previously we expect some extensions in terms of deadline -- in terms of completion deadlines, but it's not expected to be significant. Now we are continuing to apply efforts to ensure continuity of our operations and on scheduled project execution, while assessing any potential risk on a daily basis.

As we start, we are seeing modest downside risks of production guidance for 2020. We will provide the markets with a full update during the time of the release of the trading update for the second quarter. At the same time, we are comfortable that TCC guidance is unchanged at $400 million to $450 million. And also our CapEx guidance is unchanged at $700 million to $750 million.

So thank you for your time and we are now ready to take your questions.

[Operator]

Thank you. Ladies and gentlemen, we will now start our Q&A session. [Operator Instructions] And our first question comes from Daniel Major, UBS. Please go ahead.

[Daniel Major, UBS Investment Bank]

Hi there. Thanks for the call. Can you hear me okay?

[Operator]

We can hear you well.

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

Go ahead.

[Daniel Major, UBS Investment Bank]

Okay. Thanks. A couple of questions. Firstly, just on the reference to the additional costs associated with COVID related measures, will they flow through the P&L through total cash cost, principally? And where should we be seeing them through the financial statements? That’s the first question.

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

All right. Hello. So in terms of the $70 million as I elaborated in my speech, $60 million will be operating expenses and it will be both in COGS and SG&A. Most of it will be in COGS. And also, we are intending to exclude those costs as one-off non-recurring. So when we are confirming to the market our TCC guidance, this is ex non-recurring COVID-19 related expenses. And the same will apply to EBITDA. So the additional costs that we have incurred will be excluded, but obviously will be fully reported and we will do sort of a detailed disclosure on that.

[Daniel Major, UBS Investment Bank]

Okay, got it. So the $400 million to $450 million guidance is excluding those one-off costs?

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

Correct.

[Daniel Major, UBS Investment Bank]

Okay, thanks. And then second question just on working capital. Can you give us any range of -- you said there'll be a material build in the second/third quarter. Can you give us any more tangible guidance on the magnitude of that?

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

Well, I don't think I should at this point. It will be tangible, but nothing groundbreaking. So there will be an increase in the inventories of concentrate. There will be an increase in the amount of consumables by storing. And that's with an aim to ensure the continuity and safety of our operations. And finally there will be an increase in the amount of ore that has been previously mined and that is due for processing. So it will be tangible. But again, nothing groundbreaking as I said. Thank you.

[Daniel Major, UBS Investment Bank]

Okay, great. Thanks. And just a final one.

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

And yes, Dan, just one point. And bear in mind that some of it will be unwound in the second half of the year.

[Daniel Major, UBS Investment Bank]

Okay, cool. And very last quick one. Can you just give us any update on the expected timing of the Sukhoi Log or Blagodatnoye expansion updates or your latest thoughts on it?

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

Yes, as I said at the trading update call, so the feasibility study for Blagodatnoye 5 and pre-feasibility for Sukhoi Log have been delayed. So we previously anticipated to complete that work and announced to the market in summer 2020. We now anticipate this will take place in the second half of the year for both projects.

[Daniel Major, UBS Investment Bank]

Got it. Great. Thanks a lot.

[Operator]

Our next question comes from Dan Shaw, Morgan Stanley. Please go ahead.

[Daniel Shaw, Morgan Stanley]

Hi. Yes, Dan from Morgan Stanley. Just first one on the production guidance where you’re flagging some risks. Is this purely in relation to the coronavirus or are there some other factors at play? And then, just following on from that. Well, actually, just to elaborate on that first question. Is it basically at Olimpiada, where you see that the risk coming from the production side or are there some other operations as well where you think they might be performing slightly less than what you expected them to be originally? And then, this is the second one on CapEx. Do you see much impact here from, again, what's happening with coronavirus, for example, not being able to get personnel on site for certain projects. So can we expect any CapEx delays from that or is that not a factor? Thank you.

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

Yes, hi. So in terms of sort of downside risks that we currently see when it comes to our production guidance, this is due to COVID-19 outbreak and consequent production changes. We are experiencing a material labor shortage when it comes to mining, particularly at Olimpiada, not so much at Blagodatnoye. So we had slowed down the amount of rock moved significantly. And this has an immediate bearing on our production schedules. This has actually a bearing on this year's production schedule and potentially on next year's production schedule. So we have cut down on the amount of stripping and reallocated the remaining staff towards ore and mining. So ore and mining hasn't been affected, but stripping has been affected.

And secondly when it comes to the virus outbreak, the area that has been affected most is actually the repairs and maintenance that unfortunately now has to be deferred. Also, exploration has been slowed down. That pertains to infill drilling and exploration drilling. And finally, the construction activities also have slowed down materially.

Answering your second question on the capital expenditure, that -- first of all, again, CapEx in the second quarter will be below our initial expectations due to the factors mentioned above, plus at other operations we are experiencing slower delivery of some critical equipment. So maintenance and repairs will be sort of slightly below target as well. But most of the changes, they are really at KBU, and not at other operations. But in terms of capital expenditure for the entire year, as I said, it is our anticipation at this point that we'll be able to catch up in terms of project delivery in the second half of the year, which is why the guidance is unchanged. Thank you.

[Daniel Shaw, Morgan Stanley]

Thank you very much.

[Operator]

Thank you. Our next question comes from Nina Dergunova, Goldman Sachs. Please go ahead.

[Nina Dergunova, Goldman Sachs & Co.]

Good day, gentlemen. Thank you very much for presentation. I have two questions. First relates to your CapEx and TCC guidance. As you mentioned, it rests on macro of assets of 60 and gold 1,200. But yesterday's FX is 70 rubles for dollars and gold is a 1,600, which is 16% and 30% ahead of your base assumptions. So the question is at spot macro, where would your CapEx be this year and where could TCC be?

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

Right. Hello, Nina. So we're disclosing the share of ruble and dollar denominated costs when it comes to OpEx and CapEx. So for CapEx, 60% is rubles and 40% is USD. And for OpEx, including royalty, about 65% would be rubles and 35% would be dollars. So you can sort of infer the result and figure in dollars plugging in different ForEx rate assumptions. But for the purpose of guidance, for the purpose of consistency of our disclosure, we are not changing our base assumptions. Thank you.

[Nina Dergunova, Goldman Sachs & Co.]

That is understood. Thank you. You mentioned that you are comfortable with current CapEx and TTC guidance. So as you mentioned, now we have macro tailwinds on one side and what are the headwinds of at least CapEx expectations back to the previously announced range?

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

Can you repeat the last part of your question, I’m sorry I didn’t quite get it.

[Nina Dergunova, Goldman Sachs & Co.]

So the question is, we have tailwinds from macro side that decrease -- effectively decrease your CapEx and TCC. But you nevertheless maintain the range provided earlier this year, which implies that there are some headwinds that offset macro tailwinds that lead CapEx and TCC expectations back to your initial assumptions. Will you speak a bit about these factors?

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

That conclusion is inaccurate. So we said that our TCC guidance remains unchanged at the base ForEx rate of $400 million to $450 million. So which means that -- so -- at the unchanged exchange rate of 60, our TCC is expected to be $400 million to $450 million, i.e. if the ForEx rate is above 60, TCC goes down. So we are not changing our assumptions.

[Nina Dergunova, Goldman Sachs & Co.]

That is very clear. Thank you. And the second question is about your antimony output and sales this year. Can you provide an estimate of antimony output and sales in 2020?

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

Sure. So in terms of our sales of antimony-rich concentrate, we expect to sell approximately 17,000 tonnes. And that is expected to contain approximately 15,000 tonnes of antimony. Thank you.

[Nina Dergunova, Goldman Sachs & Co.]

And a short follow-up on this. Do you see any complexities in selling antimony to China now? And what is the average price of antimony in the market as compared to last year?

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

No, we're not seeing any additional complexities or difficulties when it comes to shipment of the outbound concentrate. So we already sold about 15,000 tonnes in the second quarter and the spot price for antimony is approximately 55 -- well, $5,000 to $5,500 per tonne. And that's about, I guess, 10% below the average last year. Thanks.

[Nina Dergunova, Goldman Sachs & Co.]

Thank you very much for explanations. That is all for me.

[Operator]

Thank you. Our next question comes from Anna Antonova, JP Morgan. Please go ahead.

[Anna Antonova, JP Morgan Chase]

Yes, hi. Thanks for the presentation. Just a quick follow-up question from our side. I remember you -- the management recommended dividends for the full-year 2019, which, however, have not been yet approved by, I guess, the Board and the shareholder meeting, which has not been in place yet. And there has been no update on that well, since the beginning of the year. Could you please comment on your stance towards final dividends for 2019 when those are going to be approved or -- and whether you would consider counting or handing the dividend amount earlier [indiscernible] by the management and the company? Thank you.

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

All right. So on the dividends, the Board as we announced, sort of confirmed its intention to recommend the usual payout of 30% of EBITDA for the second half of 2019. Now, however, the AGM has been deferred due to the state of emergency in the country and extraordinary conditions around KBU. So we currently expect pay out consistent with the dividend policy. However, AGM is taking place later and we expect that to occur sometime in summer this year. Thank you.

[Anna Antonova, JP Morgan Chase]

Thanks.

[Operator]

Our next question comes from Anton Fedotov, Bank of America. Please go ahead.

[Anton Fedotov, Bank of America Merrill Lynch]

Good afternoon and thank you very much for the presentation. One question on Olimpiada. In the press release you highlighted lower grades in Olimpiada. What's the outlook for the grades? What will be the dynamic for the next couple of quarters, or maybe couple of years? Thank you.

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

Right. Hi. So, I mean, we've said previously that there will be step down in average process grades at Olimpiada in 2020, and that's exactly what's happening. However, they have been unusually low in the first quarter as we didn't have access to reach ore at the deeper horizons of the third stage of the Vostochnyi pit. So the post out grades stood at 3.2 grams per tonne and they’re expected to recover in the remaining 9 months. However, the average for 2020 will be still meaningfully below the average for 2019. So we already saw an improvement in process grades and mine grades in April and May compared to the average in the first quarter. And that's facilitating a cost improvement at Olimpiada as well. I mean, I'm not willing at this point to give an exact number of the process grades in April and May again. But I can tell you that there was a recovery compared to first quarter levels as we expected. Thank you.

[Operator]

Anton, was your question answered?

[Anton Fedotov, Bank of America Merrill Lynch]

Yes, thank you very much.

[Operator]

Thank you. Our next question comes from Timothy Riminton, Barclays. Please go ahead.

[Timothy Riminton, Barclays Investment Bank]

Hi, there. Thanks for your time this morning. So I had a question about your sales of gold. So firstly, we saw that the CVR announced that it suspended purchases of gold. And we understand that there are bottlenecks with getting physical bullion to mint [ph] and to where there's demand for it. So can you give us any more insight into anything you're seeing on that side? Have you faced any issues directly from your new normal sales channels? And then the second part of the question is, we had reports that the government were looking at extending export licenses to minors themselves. So you'd be able to export gold directly. Do you have any update on that, or has this already -- are you able to do this already, or do you expect sales to do it soon? Thank you.

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

All right. So in terms of our traditional sales channels, they are sort of unchanged. So indeed, the Central Bank of Russia stopped purchasing gold from the domestic banks. And it took a while for the local banks to sort of establish accurate channels given sort of reduced air transportation. So once charter planes were arranged, the exports of gold to the largest hubs mainly in Switzerland have been fully resumed. So we are continuing to sell to local banks all of our volumes. And these volumes are then exported by the commercial banks. So there has been no interruption. The payment terms broadly unchanged versus what we had prior to the sort of global virus outbreak. That's first.

Second, in terms of the possibility to export gold doré ourselves or refined gold ourselves. Now, under the existing legislation, companies can export, but you have to receive a license specific to a particular shipment, which is a fairly cumbersome process. Now the recent legislative changes enables miners to get a so-called general license, which will allow us to export material without receipt of a license specific to any particular shipment. Now we have applied for such a general license. We expect to receive a general license sometime in summer. But again, at this point, the traditional and conventional sales channels via commercial banks, in our view, are optimal, both from the payment and logistics perspective. Thank you.

[Timothy Riminton, Barclays Investment Bank]

Thanks very much.

[Operator]

[Operator Instructions] We have a question from Andrew Jones, Wood & Co. Please go ahead.

[Andrew Jones, Wood & Company Financial Services]

Hi. Just a quick one on Olimpiada grades. You were talking about obviously having delayed stripping works as a result of this current crisis. Can you give us an idea as to how that potentially could impact on 2021 production? I mean, is it -- I mean, which areas of the pits are being most impacted by this? I mean, is it typically higher grade zones or I mean basically can you give us an idea about approximately how much this could potentially negatively impact your volumes or grades for 2021? Thanks a lot.

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

I will not give you details and how it's going to impact production in 2021 or 2022, since we are reassessing and assessing that ourselves at this point. However, delayed stripping may result in lower capacity to reach high grade ore zones when it comes to mining. So that can potentially impact production levels. Now in order to mitigate that, we'll be recalibrating our mining scheduling. So we need some time to reassess that and run various sequencing scenarios to maximize output. So once that is done, we will announce to the market our position on the matter. Thank you.

[Andrew Jones, Wood & Company Financial Services]

Just as a quick follow-up. I mean in terms of the overall stockpiles, you've obviously accumulated a lot of lower grade ore, but do you have any sort of reasonable sized stockpile of decent grade material that could consensually plug the gap if there is a shortfall in mine volumes, or is it all very low-grade stuff?

[Mikhail Stiskin, Senior Vice President, Finance and Strategy]

We have significant medium and low grade stockpiles on site, which make part of the blend. And this is also an integral part of our mining scheduling always. Thank you.

[Andrew Jones, Wood & Company Financial Services]

Okay, thank you.

[Operator]

As we have no further questions, dear speakers, back to you for the conclusion.

[Victor Drozdov, Director of Investor Relations]

Yes, thanks. Thank you guys for joining our call. If you have any follow-up questions, just send us an email. Thanks a lot. Have a good day and stay safe. Cheers. Bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.