Polyus PJSC

LSE:PLZL

Earnings Call Transcript 2021-Q2

[Operator]

Good day and welcome to the Polyus Q2 2021 Financial Results Conference Call. Today's conference is being recorded.

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

[Victor Drozdov, Director, IR]

Thanks a lot. Hi everyone. Thanks a lot for joining our call today especially given the heavy [indiscernible] season. Today we have our CEO, Mr. Pavel Grachev and our CFO, Mr. Mikhail Stiskin with us. We plan to provide you with some detailed comments on our financial results -- our decent financial results for the second quarter 2021.

And not to keep you waiting, I'll hand over the microphone to Mr. Grachev. Pavel, the floor is yours.

[Pavel Grachev, CEO]

Thanks Victor. Hello everybody. Thank you for joining our call. I'll just briefly take you through the key highlights. I will then pass the floor to Mikhail Stiskin for the details of our financial performance for this period.

As we highlighted during our trading update conference call, solid operation performance resulted in higher gold sales volumes in the reported period, which drove our topline up 21% compared to the previous quarter, to approximately $1.2 billion.

We achieved EBITDA of almost $900 million, which is a 22% increase quarter-on-quarter. We also continue to advance our growth projects in the second quarter and at Blagodatnoye, we are progressing with the minimum of five project. We have already selected the primary contractor and finalized the tender process for long lead equipment supplies.

We have advanced the engineering studies and began construction of the crushed ore stockyard. We have also completed groundworks and site preparation and the construction workers are now arriving on site.

We're also expanding throughput capacity at Natalka and we expect to process more than 12 million tonnes of ore this year as compared to 11.4 million tonnes in 2020. In addition, we are running a number of operational initiatives to improve the recovery rate at Natalka.

At Verninskoye, in May, we completed the program to expand capacity to 3.5 million tonnes per annum. Further, our expansion projects at Olimpiada and Kuranakh, which have been recently announced at our Capital Market Day, are underway as well. At Olimpiada, we expect to reach throughput capacity of 15 million tonnes in 2022, whereas at Kuranakh expansion project to 7.5 million tonnes will be completed in 2024.

I would also like to highlight the progress we're making with the development of the BFS for the Sukhoi Log project. The company is currently proceeding with the mine planning and tradeoffs, as well as designing the general layout, the processing plant, and tailings storage facility. We also began the comprehensive engineering study required for the bankable feasibility study and the project design documentation.

Our project timeline remains unchanged. We do expect to publish the key outcomes of the BFS in the second half of 2022, which will be followed by an FID.

Now, I'd like to hand over to Mikhail who will provide details on our financial performance.

[Mikhail Stiskin, SVP, Finance and Strategy]

So, hello everyone. So, in terms of our sales during the second quarter, we sold approximately 679,000 ounces of refined gold, which is 19% increase on the preceding quarter. We also sold 9,000 ounces of gold contained in our flotation concentrate.

Now, in terms of our cost performance during the quarter, TCC remained broadly in line with the first quarter, just slightly increasing to $3.90 per ounce. The seasonal increase in output at the structurally higher cost Alluvial [ph] operations was the key factor negatively affecting the past performance. This was a fact by A, completion of the expansion of the Verninskoye mill to 3.5 million tonnes. B, resumption of sales of antimony-containing concentrate in the second quarter, which was providing a byproduct credit of $10 per ounce at the group level and C, high head grade at Blagodatnoye.

So, in terms of the cost performance of assets on a standalone basis TCC at Olimpiada declined by 6% quarter-on-quarter to $373 per ounce. Besides the sales of antimony-rich flotation concentrate, this reduction also reflect a high recovery rate in the second quarter, driven by improved performance at the Mill-3 flotation circuit. The recovery rate rose to south of 84% compared to 82.5% in the preceding period.

The recovery rate at Natalka rose to 71.8%, up 0.7 percentage points compared to the first quarter. This had a positive impact on TCC, which came down by 2% quarter-on-quarter.

Now, looking at our cost performance for the first half of the year, TCC rose by 7% to $388 per ounce and I would like to highlight a few key factors underpinning such an increased.

Firstly, it's a temporary decline we're seeing head grades and recoveries at Olimpiada and Blagodatnoye. Secondly, ongoing inflation in our consumables, and finally, changes in the applied Mineral Extraction Tax under the original investment our project regime at Natalka and Verninskoye from the beginning of the year. At both assets, MAT was increased by 1.2% in line to the schedule. Our expansion projects and cost containment initiatives partially offset these factors, and was also benefited from ruble depreciation.

The third expect RTC to substantial increase in the second half of the year on the back of ongoing inflationary pressures. In particular, we anticipate a substantial increase in pricing for key consumables such as diesel, grinding bolts, and ammonium nitrate. In addition, we'll have an aggressive maintenance schedule in the second half of the year. So, we're confirming our cost guidance. So, we expect to see to state in the previously outlined range of $4.25 to $4.50 for the entire year.

And the assumptions for the ForEx rate is 65 and for gold price is $1,300. In terms of CapEx, we spend $179 million in the reporting period, which was up 41% over the previous quarter. The CapEx guidance for the entire year will also remain unchanged at between $1 billion and $1.1 billion.

Moving on to balance sheet, items -- the cash on balance was down to $1.5 billion and net debt increased to approximately $2.4 billion compared to $2.1 billion as of the end of the previous quarter.

Net debt to EBITDA ratio stood at 0.6 times and as you're well aware, we paid out approximately 700 million in dividends in the reporting period. So, in terms of free cash flow, Polyus generated around $450 mil of leveraged cash flow during the second quarter, which is broadly comparable for the first quarter figure.

Now, in terms of COVID-19 expenses, we allocated $25 million to prevention measures during this period, and $20 million ran through the P&L and the remaining $5 million was capitalized. In the first half of 2021, we spend $60 million just on COVID-related activities. And the annual guidance is approximately $100 million for the entire year.

Now, in terms of the impact of COVID-related interruptions and restrictions on the operations, we are observing obviously shipping container shortage in China, which is resulting in extended waiting times for some consumables and an increase in freight rates.

However, this will not be significantly impacting our coastline. It will not be impacting the continued alterations.

So that's it in terms of my comments. And now back to Pavel.

[Pavel Grachev, CEO]

Just short closing remark. The Company's Board of Directors have just recommended that dividends for the first half of 2021. The dividend amount is equivalent to approximately $3.61 per ordinary share, or $1.81 per depositary share.

The total recommended dividend payout amounts to approximately $490 million, which is in line with the company's dividend policy. The dividend remains subject to approval by the company's EGM on 29, September of 2021 and the record date is expected to be 11th of October this year.

Thank you for your time. And we are now ready to take your questions.

[Victor Drozdov, Director, IR]

We are ready for your questions now.

[Operator]

Thank you. [Operator Instructions]

And we'll now take our first question. It comes from Dan Shaw of Morgan Stanley. Please go ahead.

[Dan Shaw, Morgan Stanley]

Hi, thanks for the comments. Just two quick ones from me. The first one on production, you say that they've been aggressive maintenance schedule in the second half. If I'm not mistaken, I think you've produced around 47% of your total production guidance at the halfway point. So, just wanted to confirm that you remain confident in that --in light of that maintenance that's going ahead and what factors might offset some of that maintenance impact? That's the first question.

[Mikhail Stiskin, SVP, Finance and Strategy]

All right, hi Dan. So, yes, we are confident we'll be hitting our guidance for this year. Secondly, we do have an aggressive for meeting the schedule. So, in the third quarter, there will be a maintenance stoppage at Verninskoye and Mill-4. And then the fourth quarter, there will be maintenance stoppage Mill-1 and Mill-2 of Olimpiada plus Natalka. That said, given the sort of -- the recovery dynamics and growing dynamics we expect in the second half will be comfortably reaching the guidance.

In terms of grades, what has to be highlighted is that grade at Olimpiada will be coming down in the second half compared to the first half and grades at Natalka also will be on a downward trend that it will be partially offset by grades at Blagodatnoye, which will slightly increase. But net-net, again, we're -- we should be reaching guidance.

[Dan Shaw, Morgan Stanley]

Okay. Thank you. And then just on working capital, you talked about the impact of inflation on your costs going forward with GTC [ph] much of that impacting your working capital through the second half of the year, what are your expectations there? Thank you.

[Mikhail Stiskin, SVP, Finance and Strategy]

Cost inflation per se will affect working capital figures, right? Just -- the cost inflation effectively capitalized in working capital and then released into P&L. Now, in terms of when that working capital is on the ground. Now, in terms of, sort of, the market situation and sort of increasing lead-times for equipment delivery and spare parts delivery, that is having a negative impact on working capital, indeed.

In terms of consumables, we're not seeing any major impact.

[Dan Shaw, Morgan Stanley]

Okay. Thanks. Appreciate that.

[Mikhail Stiskin, SVP, Finance and Strategy]

And secondly -- turnover in days, which, obviously -- which stands translated into working capital.

[Dan Shaw, Morgan Stanley]

Fine, so we should expect to continue build up through the second half of the year?

[Mikhail Stiskin, SVP, Finance and Strategy]

We had a smaller release in the first quarter. We had a negative working capital figure in the second quarter. Net-net for the entire year will be broadly flat. Thank you.

[Dan Shaw, Morgan Stanley]

Okay, very clear. Thank you.

[Operator]

[Operator Instructions]

And we'll now take our next question. It comes from Nina Dergunova of Goldman Sachs.

[Nina Dergunova, Goldman Sachs]

Good day. Thank you very much for taking my questions. I have two questions today. The first will lead to your cost inflation expectations. You expect TCC up above 20%, when their standard FX big moving part here, but can you split your TCC inflation expectations into two broad categories like exogenous macro factors that you don't control, general inflation, higher mill [indiscernible] from higher prices, all these sorts of things?

And secondly, on temporary operational factors, like Olimpiada grades, too many byproducts. So, how would you split the cost inflation this year into these two FX? Thank you.

[Mikhail Stiskin, SVP, Finance and Strategy]

Hi Nina. Well, we are not sort of providing explicit figures in terms of the influence of exogenous and endogenous items, but you can infer that yourself doing fairly simplistic calculations and assessing cost inflation on a per tonne or per sales basis and then on per ounce produced basis. And the figures on the per tonne of ore processed will naturally exclude the variation in head grades and variation in recovery.

That said, it will absorb the -- any potential changes in the mining schedule and the stripping ratios.

[Nina Dergunova, Goldman Sachs]

Understood. Thank you. Just a brief follow-up on this. So, are we correct to assume that the operational factors that are a headwind for TCC this year are non-recurring, typically grades in Olimpiada that should normalized next year as well as byproduct credits my -- next year. So, these will not be sustained and next year, TCC might face improvement on the back of this. Is it a correct assumption?

[Mikhail Stiskin, SVP, Finance and Strategy]

Well, obviously, we have a wealth of factors separation literature affecting our cost performance. Now, talking about these two specific issues we have outlined, indeed, the drop in grades in head grades at Olimpiada this year is temporary, and we did confirm that the market on a number of occasions and grades will go up in 2022.

And the same applies to antimony byproducts. So, we are producing minimal volumes this year and the volumes will increase from next year as we have access to high grade antimony-containing ore.

[Nina Dergunova, Goldman Sachs]

Understood. Good. Thank you. And the second question is a bit of a follow-up from the previous one on the antimony. You demand shows that you're planning to increase volumes next year. As we know, the market is very concentrated on folio, so has a high market share in producing consumer new globally. So, this year, you only sell a very, very small volume, how this affected market prices for the antimony?

And if you see any difficulty when you win contracts with -- as your antimony buyers next year? Thank you.

[Mikhail Stiskin, SVP, Finance and Strategy]

Sure. So, I mean, obviously, the amount of product we are supplying to the market shrank aggressively in 2021 and that had a positive impact on the market balance. So, spot pricing went up from about $6,000 per ton for European prices last year to a spot level of $11,000 per ton. So, pricing almost doubled.

It's not just a result of lack of our material, it's also a result of an upswing in the cycle, which is impacting all cyclical industrial commodities and you see that across the board.

But obviously, talking about our impact that we exert on the market balance as our volumes pick up from next year, obviously, it will naturally increase the supply of products and should help the market to rebalance.

[Nina Dergunova, Goldman Sachs]

Thank you very much. That's it from my side. Passing over to next analyst.

[Operator]

We will now take our next question comes from Anna Antonova from JPMorgan.

[Anna Antonova, JPMorgan]

Yes, hello. Thank you for the presentation. A quick question from our side on the CapEx. In the first half of this year, you spent roughly $300 million on CapEx versus your annual target of $1 billion to $1.1 billion.

Our question is, how should we think about the -- your cap expense in the second half and perhaps the split between the third and the fourth quarter in lines of your planned maintenance works at service plants? Thank you.

[Mikhail Stiskin, SVP, Finance and Strategy]

Hi, Anna. So, first of all, we confirm we'll be neatly within the guidance range. The capital spending is back end loaded this year and that's sort of similar to previous years. The spending will be particularly heavy in the fourth quarter compared to the third quarter. And that will be a result of both maintenance stoppages and mining and mobile equipment delivery, plus accelerated spending at Mill-5 construction, plus super log exploration and engineering studies.

So, we'll be within the guidance. The only change will be that it is likely our spending on Blagodatnoye, Mill-5 will be higher than what we guided that we initially guided about $150 million, it's likely to be higher than that. And that will be at the expense of some non-essential brownfields, but the overall CapEx [indiscernible] within guidance.

[Anna Antonova, JPMorgan]

Thank you. And may I ask what has been driving the higher CapEx at Blagodatnoye bringing forward from next year's or cost inflation or something else?

[Mikhail Stiskin, SVP, Finance and Strategy]

It's the former. We're bringing forward some of the construction work which was planned for 2022. However, obviously, the project is experiencing negative pressure from the cost inflation and we're sort of reassessing -- we are assessing the impact right now, since the impact itself not just through pricing for western equipment, but also through our construction costs and the cost of local labor, which spiked meaningfully this year compared to 2020.

[Anna Antonova, JPMorgan]

Understood. Thank you.

[Operator]

It appears we've no further questions at this time. I would like to turn the call back to Victor Drozdov for any additional comments or closing remarks.

[Victor Drozdov, Director, IR]

Yes, thanks a lot guys. Thanks for attending our call. Thanks for your questions. If you have any questions unanswered, just drop us a line. Thanks a lot. Cheers. Bye.

[Operator]

This concludes today's conference. Thank you for your participation. You may now disconnect.