Polyus PJSC

LSE:PLZL

Earnings Call Transcript 2019-Q3

[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. [Operator Instructions]

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

[Victor Drozdov, Director of Investor Relations]

(Foreign language] Hi, guys. Thank you for joining us for our third quarter financial results conference call. Look, we are setting new records quarter-after-quarter, definitely, probably should be passing the floor to the top management team to speak more on this one.

So for that reason, I'll hand over to our CEO right now. Pavel Grachev, the floor is yours.

[Pavel Grachev, Chief Executive Officer]

Thank you, Victor. Hi, everyone. Thank you for joining our call. In the third quarter of 2019, we once again delivered very solid results, achieving a double-digit growth in production, revenue and EBITDA.

In terms of revenue, the recent gold price probably combined with the higher sales volumes has given our top line performance in the reported period. We reported revenues of $1.70 billion, 19 increase -- 19% increase compared to the previous quarter, a record figure for the company in absolute terms.

Our EBITDA has also reached another quarterly record, higher than $705 million, up 17% from the second quarter of 2019. As for total cash costs, our TCC for the third quarter and for the first 9 months of 2019 stood at $412 per ounce and $376 per ounce, respectively. Mikhail will give you some more color on the factors that affected our TCC in the third quarter of 2019.

Given our cost performance since the beginning of the year, we are revising our cost guidance for the full year 2019 and now expect total cash cost to stay within the range of $375 to $425 per ounce. We have also come up with a new range for the full year 2019 CapEx estimate. CapEx spending for the first 9 months in 2019 amounted to $410 million, and Polyus now expect to invest approximately $650 million to $700 million in total across the business in 2019, whereas we were previously guiding for $725 million. This downward adjustment reflects our CapEx rollover from 2019 to 2020, which is related to a number of infrastructure development projects.

I will now hand over to Mikhail, who will provide additional detail on our financial performance in the third quarter. Thank you.

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

Yes. Hello, guys. So in terms of our performance, our sales volumes in the quarter amounted to 729,000 ounces, which is a 6% increase on the second quarter. And as for sales of refined gold, those stood at 650,000, which is 4% higher than the figure -- the comparable figure in the second quarter.

Now how sales -- higher sales volumes are driven by, obviously, seasonal increase in production, like alluvial plus refined gold output at Kuranakh, Natalka and Verninskoye. As for flotation concentrate, we sold 31,000 tonnes of concentrate that contained 79,000 ounces of gold compared to 25,000 ounces of concentrate containing 57,000 ounces of gold in the second quarter.

As we disclosed, at the trading update call, a few weeks ago, the inventories of concentrate rose to approximately 56,000 tonnes as of the end of the third quarter compared to 49,000 tonnes as of the end of the second quarter. That reflects higher production volumes and delayed shipment schedule. And according to our current understanding, we will accelerate significantly our sales of concentrate in the fourth quarter. So the level of those inventories will come down meaningfully by the end of the year with our concomitant release of working capital.

Now in terms of our cost performance in the third quarter. If you see, it went up to $412 per ounce that's 17% higher than in the second quarter, and that's driven by higher share of high cost [dollar result] in overall output. That's a fact that you can see every year, then sequence of scheduled maintenance shutdowns at major mills. So we conducted extended maintenance at all of the main assets. And finally, higher royalty expenses, which are exclusively driven by higher realized price in the quarter.

In terms of offsetting factors, our TCC performance was positively impacted by a normalization of grade in our process at Blagodatnoye and an increase in hourly throughput at Natalka. And as you know, Verninskoye stands at a record high, exceeding 1,500 tonnes per hour. Now Natalka's cost performance. This is increased by 13% quarter-on-quarter to $420, and that's mainly due to scheduled maintenance work that we mentioned previously.

With regard to recoveries at Natalka, they increased to 71.6%. That's slightly -- that's a slight increase quarter-on-quarter. And as we guided, the company is continuing to implement a set of operational initiatives, targeting recovery improvement, so we anticipate a gradual increase in recovery rate at Natalka over the next 12 months. However, I would like to warn you that this will be very much back-end loaded, so most of the increase will be observed in the second half of 2020.

Now in terms of the fourth quarter performance, we expect a decrease in TCC as alluvial operations are winding down seasonally, and I believe we are incurring lower maintenance spend.

Regard to the full year TCC guidance, as Pavel has already mentioned, we anticipate TCC remaining in the range of $375 to $425. And if you look at our TCC figure for first 9 months, it is $376. So the performance year-to-date has been very satisfactory for us.

In terms of CapEx guidance, the updated range is $650 million to $700 million. That reflects a CapEx spillover from 2020 into -- from 2019 into 2020. So we will incur that anyways next year. But when it comes to precise figure for the upcoming year, we will provide that in early 2020 in terms of guidance.

Now I would like to remind you that it will be reflecting higher spending that the group is incurring on IT automation and drilling across main assets plus new projects that we are -- we could be adding to the pipeline.

Now in terms of our free cash flow in this third quarter, we generated $370 million of unlevered free cash flow or approximately $300 million of levered free cash flow. And year-to-date, we generated well above $700 million in levered free cash flow, which is fairly encouraging.

Now in terms of the cash on the balance that rose to $1.55 billion, up from $1.25 billion as of the end of the second quarter. I'm talking in billions. So our estimated net debt position declined to about $3.3 billion, down from $3.6 billion at the end of the preceding quarter, and our net debt to EBITDA also came down from 1.7x to now 1.5x.

So just to sum up, we have set two records in terms of EBITDA and sales. We have 3 assets, namely Blagodatnoye, Verninskoye and Olimpiada that are generating EBITDA margin of approximately 70%, which is, we believe, to be remarkable. We are content with the performance at Natalka as throughput gains are starting a slack in the recoveries we are observing right now.

And then in terms of fourth quarter performance, bear in mind that our byproduct credit for antimony will increase compared to the third quarter significantly, reflecting more aggressive shipment schedule. So this will be helping the cost.

That's it. Now back to Pavel.

[Pavel Grachev, Chief Executive Officer]

Yes. Thanks, Mikhail. Just a small closing remark, I would like to remind you that we paid out approximately $340 million in dividends this October, which represent 30% of our EBITDA for the first half of 2019 and provide dividend yield of approximate 2.3%. This will be reflected in our fourth quarter financials, impacting our cash on balance, respectively.

Now we are ready to take your questions. Thank you.

[Operator]

[Operator Instructions] The first question is from Dan Shaw, Morgan Stanley. Your line is now open, please go ahead.

[Daniel Shaw, Morgan Stanley]

Hi thanks for taking my question. Yes, just first one on costs -- on TCC, clearly, you've had a strong performance year-to-date, around $376 and the new range is for $375 to $425. If I understand correctly, you expect TCC lower in the fourth quarter. So I'm just curious why you didn't bring that range a bit lower than you did today?

And then secondly, on Natalka, how should we expect costs to develop from here because it's been a little bit of volatility, given the initiatives that you have in place with volumes and recovery is expected to increase over the next 12 months or so. Where do you expect costs to move to? Thank you.

[Pavel Grachev, Chief Executive Officer]

Yes, hi. Well, I mean, setting a guidance range is a bit of an art, obviously. I think, obviously, the performance remains subject to prevailing currency rate as well as the pace of shipment of flotation concentrate that has a meaningful impact to sales that it couldn't at this juncture to provide a fairly broad range. At the same time, as you can see, judging by our year-to-date performance likelihood, the actual figure will be closer to the lower bound of this range, that's it.

Second, in terms of Natalka. So what you're going to see next year is that the recoveries will gradually creep up. And as I said, there will be back-end loaded. So the real impact will be in the second half. The processing volumes are expected to increase, driven by the gains in productivity, we have already posted in the third quarter, and to a lesser extent, in the second quarter.

In terms of grade -- process grades, they will remain broadly flat compared to this year's level, so based on that, you can derive sort of cost dynamics in your models.

[Daniel Shaw, Morgan Stanley]

Thank you.

[Pavel Grachev, Chief Executive Officer]

Thank you.

[Operator]

The next question is from Anton Fedotov of Bank of America Merrill Lynch. Your line is now open, please go ahead.

[Anton Fedotov, Bank of America Merrill Lynch]

Thank you very much for the presentation. You spent about $410 million on CapEx in the 9 months of this year, which is about 63% of the lower end of your full year guidance. Do you think that you will be able to spend more than $200 million in the fourth quarter? Or we may possibly expect further rollover of the CapEx into the next year? Thank you.

[Pavel Grachev, Chief Executive Officer]

Yes. Thank you for the question. So indeed, we spent about $150 million in the third quarter, and that's roughly the same rate at which we were investing in the first and in the second quarter. We are comfortable that CapEx will be above $200 million in the fourth quarter. We'll be taking our delivery of a lot of mining equipment in the fourth quarter. That's already taking place because right now it's already early November, plus the construction works at Natalka and at Verninskoye have accelerated meaningfully with associated capital spending. So yes, we're comfortable we'll be exceeding $200 million. So we are comfortable with the new range at this point.

[Anton Fedotov, Bank of America Merrill Lynch]

Thank you.

[Pavel Grachev, Chief Executive Officer]

Sure.

[Operator]

There are currently no further questions. [Operator Instructions] And the next question is from Andy Jones, Wood & Company. Your line is now open, please go ahead.

[Andrew Jones, Wood & Company Financial Services]

Hi, could you -- can you tell us how much antimony, where was in the -- in terms of sales volumes in the third quarter and range of your expectations for the fourth quarter in terms of sales?

And also, I don't know how much you can guide us on your mine plans for 2020 yet. But given that those are large amounts of mining activity relative to what you processed this year, could you give us some guidance on mining volumes as well as the processing volumes at some of the main assets in 2020 and what impact that might have on working capital? Thank you.

[Pavel Grachev, Chief Executive Officer]

Yes, Hi Andrew. So in terms of sales of flotation concentrate, obviously, we have to separate antimony-containing concentrate and nonantimony-containing concentrate. So for antimony-containing concentrate, we sold about 18,000 ounces and that contained approximately -- that contained just below 4,000 ounces antimony. But now just to remind you, antimony has a fairly low payables ratio, but gold in the antimony-containing concentrate has the high payables ratio, so that sort of balances off each other.

Secondly, in terms of dynamics of ore processed versus ore mines as main assets, I can give you -- at this point that you should expect in the same dynamics we have seen in the -- we experienced in 2019, i.e. at some of the assets like Blagodatnoye and Natalka, ore processed will be -- in Verninskoye also, ore processed will be exceeding the mine's volumes, and we will be, obviously, incurring the impact by working capital and that's the way the mining plan will set up to optimize the head grades, to optimize the process grades. So should be expecting a continuation of this trend. Thank you.

[Andrew Jones, Wood & Company Financial Services]

Thank you. And just to clarify on that. When -- I mean, do you expect that to be ongoing over a number of years? Or what changes, do you expect, result in essentially processing volumes being in line with mining volumes at some point? You mentioned Blagodatnoye, the plant may be expanded there, which may start to close that gap. Is there anything happening at Olimpiada or at Natalka, which may change this dynamic in the coming years?

[Pavel Grachev, Chief Executive Officer]

Sure. So at Olimpiada, in general, our ore processed will be equaled to ore mined. And there is, in that particular year, ore mined is great. That's just, at times, a phenomenon, if you will, given how sort of the mining schedule was designed and so on. The Blagodatnoye, indeed, this will be addressed if and when we take investment decision on the expanded mill. At Natalka and Verninskoye, that we have started to continue as a structural phenomenon.

[Andrew Jones, Wood & Company Financial Services]

Understood, thank you.

[Pavel Grachev, Chief Executive Officer]

Thank you.

[Operator]

The next question is from Anna Antonova, JPMorgan. Your line is now open, please go ahead.

[Anna Antonova, JPMorgan]

Thank you for the presentation. Just a follow-up question from our side. So you're mentioning cutting the CapEx guidance for this year because of the -- part of the expense carryover to the next year, based on the previous guidance for next year, CapEx of around $550 million. Does this -- the decrease in this year's CapEx, does it imply that your CapEx outlook for next year should be around -- now around $600 million?

[Pavel Grachev, Chief Executive Officer]

Well, I will not give you a precise number, but what I can tell you is that taking into account the spillover of CapEx from 2019 to 2020 that you mentioned, plus taking into account the approval of new projects, brownfield expansions, including Verninskoye 3.5 million tonnes expansion. We can tell you at this point that there will be significant increase in capital spending of the group versus the previous guidance in 2020. I will not give an exact number right now, but I can tell you to look, there will be a significant increase.

[Anna Antonova, JPMorgan]

Thank you.

[Pavel Grachev, Chief Executive Officer]

Very positive.

[Operator]

There are currently no further questions. [Operator Instructions] We haven't received any further questions, so I hand back to the speakers.

[Victor Drozdov, Director of Investor Relations]

Okay. Thanks a lot, guys. Thanks for your questions, and thanks for your time. Will there be any sort of follow-ups, just give us a buzz. Thanks a lot. Cheers, bye. Have a good day.

[Operator]

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