Polyus PJSC

LSE:PLZL

Earnings Call Transcript 2021-Q1

[Operator]

Good day and welcome to the Polyus Q1 2021 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the call over to Victor Grosskopf. Please go ahead.

[Victor Drozdov, Director of Investor Relations]

Thanks a lot. Hi, everyone. Thank you all for joining our conference call. So today, we've published our financial results for the first quarter. That was the 12 consecutive quarter for us to post positive levered free cash flow. But probably enough fun facts. So we have our CEO and CFO, here with us today, who will walk you through all the details on our financials for the first quarter.

With that in mind, I'll pass the mic to our CEO, Mr. Pavel Grachev. Please go ahead, sir.

[Pavel Grachev, Chief Executive Officer]

Yes. Hi, everybody, and thank you for joining our call. Well, in the first quarter, we delivered very solid results. We continue to advance our development projects. In particular at Verninskoye, we have already completed the throughput capacity expansion project to 3.5 million tons, well ahead of the initial schedule. The mill has now achieved its target hourly throughput rate of 450 tons per hour and is currently running at an annualized capacity of 3.5 million tons. Capital expenditure for the project amounted to $60 million, that's in line with the initial budget.

In Blagodatnoye, we are now completing ground works and site preparation for Mil 5 project and finalizing tender procedures to select our major contracted and long lead equipment suppliers.

As for our financials, lower total gold output in the first quarter, which reflects the accumulation of the unrefined gold as well as a seasonal slowdown in production at eludes and corona, that resulted in a decline at the top line and EBITDA level to $1.28 million and $739 million, respectively.

I will now hand over to Mikael, who will provide a detailed overview of our financial performance.

[Mikhail Stiskin, SVP Finance, Strategy and Director]

Hi everyone. So in terms of our top line performance in the first quarter, the revenue fell by 30% quarter-on-quarter, to approximately USD 1 billion. We find gold sales declined to 569,000 ounces in physical volumes. That's a 30% decrease from the previous quarter. And our sales trailed production, which stood at 60,000 ounces of DORe produced.

As mentioned previously, there were no sales of flotation concentrate during the period as we sell the majority of our flotation concentrate in the fourth quarter of the preceding year. And in the first quarter, we're focused on securing future delivery contracts during the remainder of the year.

Now moving on to the cost performance during the quarter, our TCC rose by 9% quarter-on-quarter to $3.86 per ounce and that was broadly flat year-on-year.

Group TCC remained below the lower bound of our guidance range, which is standing at $4.25 to $4.58 per ounce, and the guidance range remains unchanged at this point.

Now the quarter-on-quarter increase in TCC, that was fairly meaningful it was driven by, a, lower grades at Olimpiada and Blagodatnoye alongside lower recoveries. And second, the absence of sales of flotation concentrate during the quarter, which is a lower cost product compared to our dore gold.

And we recorded now by product credit during the period compared to $14 per ounce in the fourth quarter.

So as we pointed out on a number of occasions to you at the calls. We will be processing greater volumes of lower-grade stockpiles at Olimpiada in 2021 as we continue to catch up with the backlog in stripping. So in terms of production, reduced head grades will be partially offset by increase in throughput capacities as we are progressing with the expansion project at the Olimpiada mills.

And we expect the process more than 14.5 million tonnes of ore at all the 3 mills at Olimpiada in 2021. At Natalka, you see increased by 10% quarter-on-quarter and stood at $377 per ounce, among all the factors that reflects a drop in recovery rate to 71% compared to 73% in the previous quarter.

We continue to fine-tune the processing parameters of the mill and calibrate the flowship, and we are seeing a gradual improvement in recoveries. So in March and April, they went up to approximately 72.5%

Now at our group level, the quarterly EBITDA declined to a USD 739 million compared to the USD 738 million in the previous quarter, driven by lower gold sales volumes over the period. In terms of CapEx, we spent $127 million in the first quarter.

Now we are, again, very much in the same fashion as we saw CapEx spread of the course of 2020 we're going to be seeing the CapEx program back-end loaded this year. And the guidance range of 2021 remains unchanged at $1 billion to $1.1 billion.

Now in terms of balance sheet highlights, the cash on balance improved to approximately $1.8 billion. Net debt declined to around $2.1 billion compared to $2.5 billion as of the end of the previous quarter. We generated around $420 million of levered free cash flow, and that drove our net debt-to-EBITDA position even lower to approximately 0.5 times. That's down from 0.7 times as of the end of 2020. And that is a new record level for us since the relisting of the company on the LSE in 2017.

In terms of liquidity position, it will be negatively impacted by virtue of an upcoming dividend payment for the second half of 2020. That is approximately $690 million. Now in terms of our COVID-19 expenses in the first quarter, we spend approximately $35 million that was expanded. And -- I'm sorry, $35 million overall expenditure out of this amount, $24 million was expense, $11 million was capitalized.

And right now, over the course of 2021 we anticipate to allocate approximately $100 million those financing COVID-related activities.

That's it from me. Back to Pavel.

[Pavel Grachev, Chief Executive Officer]

Yes. Thank you, Mikhail. Just a few points on ESG front. In late April, we acquired Green Certificates, which will offset the emissions from the remaining share of Polyus energy consumption, not yet directly mapped by the renewable sources.

Combined with the large-scale hydropower supply contracts signed previously, this means that Polyus has now become the first major gold mining company globally to cover all of our Eletrica needs with renewable energy sources. In terms of health and safety measures, we are proceeding with the resignation of our employees against COVID-19, the vaccination campaign has -- was launched early this year.

And currently, about 60% of our workforce are the breaking assets are immune to the virus. COVID protocols and preventive measures remain in place at all of our assets, and this includes majority monetary use of personal protective equipment, with all of our operating operations and

offices as well as quarantine and patented for access to the production sites.

Thank you for the time. Now we are ready to take your questions.

[Operator]

[Operator Instructions] First question comes from Daniel Major, UBS.

[Daniel Major, UBS]

A couple of questions. On the cost side, even during what was, I suppose, a seasonally weaker quarter from a production and sales standpoint, you're well below the full year guidance. Obviously, I believe the full year guidance based on RUB 65. So currency would have some impact, but you still seem to be undershooting at this point versus the guidance. Can you give us any more color on how you expect the inflation pressures progress through the rest of the year? And how you’re feeling in terms of the risk around that cost guidance as such?

[Mikhail Stiskin, SVP Finance, Strategy and Director]

Great. So I mean, we did see a very solid cost performance in the first quarter. Now we do expect that to deteriorate for the remaining 9 months. So first of all, it will be a result of lower head grades at Olimpiada and Natalka. In the period from the second quarter until the fourth quarter compared to the first quarter on average.

Secondly, the result of building inflationary pressures both in consumables and in equipment, plus yearly salary indexation, which we'll be conducting from April as usual. That's the second point.

And the third point, we are going to have sort of a step-up increase in maintenance expenditure. So bear in mind that we did not have any a significant maintenance stoppages in the first quarter as opposed to the fourth quarter, for example. And the effect of maintenance stoppages will have, obviously, will weigh negatively on the cost line. And also, the again, if you look at the overall maintenance program for 2021, it is generally back-end loaded, so it will be particularly high in the third and the fourth quarter.

As don't forget the impact of the addition of high-cost ounces from a level from the third quarter onwards. Well, until the fourth quarter,

So yes. So we will stick to the initially outlined guidance range in terms of TCC.

[Daniel Major, UBS]

And then a question on CapEx. You reiterated the original guidance range and indicated the second half weighted nature of spend. Can you give us some guidance on, I guess, the line items between division and CapEx that you provide guidance on and reported CapEx, particularly

stripping profile, where are you seeing that number progress through the year? And what should we be expecting in that differential between the $1 billion to $1.5 billion of divisional CapEx and total CapEx through the cash less shipping?

[Mikhail Stiskin, SVP Finance, Strategy and Director]

So just bear in mind that the guidance range for CapEx of $1 billion to $1.1 billion, it does not include capitalized shipping. Now in terms of the overall volume of capitalized shipping for the year, it will be comparable to 2019 numbers. And substantially higher than in 2020. And in terms of quarter dynamics, it will be sort of building up towards the year-end.

And the main driver would be the anticipated pickup in excavation volumes at Olimpiada. That's the biggest moving factor. And the second fact in terms of importance would be our increased capitalized stripping at Blagodatnoye as we are ramping up -- as we're expanding the pit and we're expanding the petal in preparation for the commissioning of Mill 5 in 2025. So that's on capitalized stripping in terms of CapEx, it will be also back-end loaded, like what we saw in 2020.

And again, the third and the fourth quarter would be most heavy. And one of the factors, which is sort of affecting the dynamics would be construction works that we can conduct during the warm season. So you're going to have a meaningful expenditure for the construction of Mill 5 commencing from April, May this year.

And that's the biggest item in the overall CapEx program for the year.

[Daniel Major, UBS]

So if I look at the breakdown of your CapEx items capitalized at $41 million in this quarter. Is it fair to assume, obviously, that rate will increase and will $200 million be reasonable estimate for the full year?

[Mikhail Stiskin, SVP Finance, Strategy and Director]

A lot of $200 million will be a reasonable estimate. And indeed, the quarterly expenditure will be growing.

[Daniel Major, UBS]

And then a final question, on working capital. It was a slight positive working capital quarter despite sales being below production. I think you had over $100 million release from accounts receivable, just remember, but can you -- yes, give us some guidance from what are you expect that to had with rest of the year?

[Pavel Grachev, Chief Executive Officer]

Well, you remember correctly, so it was a settlement of accounts receivable for the concentrate from the Asian after ACS. Now we expect for the entire year, a flat working capital profile or a slight reduction in working capital year-on-year. So we saw a release of approximate late mill in the first quarter. That will partially underwind during the remainder of the year.

[Operator]

Our next question comes from Boris Sinitsyn, VTB Capital.

[Boris Sinitsyn, VTB Capital]

Yes, gentlemen. Two questions from my side, please. Firstly, as you mentioned, hopefully, you see the quite good rate of vaccination. Do you still expect $100 million of COVID related expenses in 2021? That's the first one.

[Pavel Grachev, Chief Executive Officer]

Well, admittedly, there is some downside to this number given the sort of the vaccination rates plus the overall rate of immunization. So we believe that the downside versus this estimate could be around $20 million, i.e., the final tally arriving at about $80 million. And out of this number, approximately $55 million will be expand through the P&L and the rest capitalized. That is the most sort of recent estimate.

And again, it will be front-end loaded, i.e., so we anticipate that quarterly expenditure will be falling towards the year-end.

[Boris Sinitsyn, VTB Capital]

The second question is on the dividend distribution. So your leverage in terms of net debt to EBITDA continues to decline, mostly to gold price. What's the management view here either in your conditions under which the decision on special dividend is likely? And the second -- the first part of the question. The second part of the question is buyback considered as the alternate to special dividend?

[Mikhail Stiskin, SVP Finance, Strategy and Director]

We do not anticipate any changes in the existing dividend policy. We deliver fairly balanced and provide very good visibility to the market as to our semiannual and annual payments. Now it is natural that we're going to see leverage falling in the environment of higher gold prices, and vice versa, leverage would be increasing in the environment of lower gold prices contract to sort your judgment on sort of -- on long run sort of mid-cycle gold prices. So it is perfectly natural with what we are seeing right now. Plus, this is -- this dovetails with the overall production and investment profile of the business when we are gearing up for 2 mega projects, i.e., Mill-5 and Sukhoi Log. So we believe it's also perfectly natural to see currently a reduction in leverage. So we welcome it. And we believe it is natural given the profile of the business.

[Operator]

Our next question comes from Nina Dergunova, Goldman Sachs.

[Nina Dergunova, Goldman Sachs]

Two questions from my side. First one, antimony outlook for the rest of the year, if you could provide guidance on how shall we be thinking about byproduct contribution to costs. Discussion of volumes and pricing dynamics you're expecting on antimony would be helpful. And I'll ask the second one after this.

[Mikhail Stiskin, SVP Finance, Strategy and Director]

Nina, so in terms of sales volumes for the antimony-containing concentrate, we anticipate approximately 25,000 tonnes in 2021, and that will be containing approximately 4,500 tonnes of antimony. So at a conservative assumption of $7,000 per tonne, and our [indiscernible] is about 25%. That gives you about $8 million in byproduct credit for the entire year. So not a particularly meaningful amount.

[Nina Dergunova, Goldman Sachs]

And the second one is a follow-up on the previous question on dividends. Do you have any discussion internally to review dividend frequency? What are the major reasons [indiscernible] annually and not quarterly?

[Mikhail Stiskin, SVP Finance, Strategy and Director]

Well, I mean, I don't think it's sort of -- I don't think it matters, frankly. Now we -- when we devised the dividend policy initially, we believed that sort of semiannual payments reflect the sort of the global practice. Plus, that's going to be smoothing out the volatiles in our financials from quarter-to-quarter. So frankly, we don't see any compelling reason to alter it now.

[Operator]

[Operator Instructions] We have no questions in the queue at this time.

[Victor Drozdov, Director of Investor Relations]

Yes. Thanks a lot a lot -- thanks for joining our call. Any follow-up questions or any new questions, you can just easily drop us a line. Thanks, and have a good day. Cheers. Bye.

[Operator]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.