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Edited Transcript of HGM.L earnings conference call or presentation 3-Sep-19 9:00am GMT

Half Year 2019 Highland Gold Mining Ltd Earnings Call

SAINT HELIER Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Highland Gold Mining Ltd earnings conference call or presentation Tuesday, September 3, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alla Baranovskaya

Highland Gold Mining Limited - CFO

* Denis Alexandrov

Highland Gold Mining Limited - CEO

* John Anthonio Mann

Highland Gold Mining Limited - Executive Director & Head of Communications

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Conference Call Participants

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* Boris Sinitsyn

VTB Capital, Research Division - Equities Analyst

* Justin Chan

Numis Securities Limited, Research Division - Analyst

* Nikolay Sosnovskiy

Prosperity Capital Management Ltd - Director of Metals, Mining & Chemicals

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Presentation

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John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [1]

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Good morning or good afternoon, everyone. This is John Mann from Highland Gold Mining. Thanks for joining us for our first half 2019 financial results conference call. With me today are Denis Alexandrov, our Chief Executive Officer; and Alla Baranovskaya, our Chief Financial Officer.

And if you're online, you will be able to see the slides as we go along. If you're dialing in by phone, you can -- but if you happen to be near your computer, you can look at the slides there now up on our website.

Without further ado, I will pass the mic over to Denis Alexandrov, our Chief Executive Officer.

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Denis Alexandrov, Highland Gold Mining Limited - CEO [2]

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Thank you, John. Good morning, ladies and gentlemen. Thank you for joining us at our conference call where we will present to you our first half results for 2019.

I'll start with Page 3. For those of you who joined us for the first time, Highland Gold today, we are 4 operating mines in the 3 regions of Russia, namely, we have Novo polymetallic mine in Baley cluster; we have 2 gold mines at Khabarovsk cluster, MNV and Belaya Gora; and one producing mine in Chukotka, our recent acquisition, Valunisty.

Annual production estimate for this year is in the region of 290,000 to 300,000 ounces. We have a strong pipeline of high-grade development projects, one of which is Kekura, which I will be talking later in the presentation about. We are a low-cost producer with all-in sustaining cash cost for the first half being $778 per ounce. And we have a strong track record of paying dividends, and there will be a separate page on that later on in this presentation.

On Page 4, you can see our financial results for first half. Production was up roughly 10%, from 129,000 ounces to 142,000 ounces for the first half. EBITDA was up 21%, from $71 million to $86.5 million, giving us an EBITDA margin of roughly 50%. Net profit increased to $45 million. Net cash flow from operating activities, up from $65 million to $72.5 million.

Our capital expenditures for the first half were $31 million. Most of the capital expenditures will be happening in the second half of the year, mainly due to the seasonality of navigation at Kekura, so most of the purchases would be done during the summer period. And net debt amounted to $217 million. Net debt/EBITDA, 1.3.

Development on production. At MNV, we had a very strong first half. Production increased by 23%. I should say that last year, in the first quarter, MNV experienced some difficulties, so the numbers are not very much comparable. But still, we see a strong increase on grades at MNV, all in our exploration efforts over the several years -- past several years.

The newly acquired Valunisty accounted for about 10% of production, as expected. Novoshirokinskoye output was 18% lower, again, as expected due to lower grades. And we had done a separate project on Novo to improve production there, which again I will mention later on. Belaya Gora production was down 7.5% year-on-year due to several mill repairs and a localized fire incident that happened in Q2. Construction work at Kekura and the exploration drilling program at Klen continued during the first half as both projects were officially granted residency in Chukotka special economic zone, which will provide us with sizable tax breaks.

Over the page, dividends. As I mentioned, we are committed to dividends. Since 2011, Highland Gold paid, on average, $134 per each ounce we produced. You can see the graph in terms of dividend yield and total payout. For the first half 2019, the interim dividend we announced was 5p per share, which would total $22.3 million and a yield of around 5.9% if you take it on the average share price and the annualized yield.

As you can see, we have a big capital expenditure program ahead of us. So last year, we put out a dividend policy, which basically states that the minimum dividend payout will be 20% of net operating cash flow before any CapEx. Dividends for the first half of $22.3 million are higher than the dividend policy declared. So we were able to pay more dividends than we promised.

Over to Page 6. Our strategy for the group remains the same. Basically, it's all about unlocking the value and unlocking the value through several blocks. The first block is to maximize the upside potential of our operating mine, and each of them has its own focus. The second one is develop assets which are at prefeasibility or definitive feasibility stage, namely, Kekura here. We focus our corporate development on the regions of presence. And last year, acquisition of Valunisty [upholded] this block.

Another area is to derisk and convert additional resources into the reserves. Here, we talk about Unkurtash and [Taseevskoye] and [Verkhne-Krichalskaya] assets -- resource assets in [Zibakalia]. And 2 important blocks for us is to focus on operational efficiency and continuous improvement. We're doing quite a lot on that front. And we are committed to workplace safety and protecting the environment.

Now let me go through some of those blocks in the strategy, and the first one being maximizing upside potential of operating assets. I'm on Page 7 now. MNV, the key focus there was extending the life of mine. The goal we set 3 years ago was to add reserves and extend the life of mine. At that time, the life of mine was until 2018. We've done that through extensive near-mine exploration program. We acquired 3 adjacent greenfield licenses. And we continue to reexamine historic rock waste dumps, taking some of those materials to the mill.

I think at MNV, which is the biggest success in terms of [performance] in our strategy, we extended the life of mine to 2029. We booked nearly 600,000 ounces of additional reserves over the last 2 years. We processed around 820,000 tonnes of 1 gram per tonne waste dumps material. And we continue exploration at the flanks and at the current MNV deposit. So we think this is not the end of the story. 2029 is there -- gives us enough time to continue exploration. And we believe we will be able to add more reserves at MNV and expand the life of mine further.

At Novoshirokinskoye, this is our polymetallic mine which basically, as we go to the flanks and as we recalculate the reserves to lower cut of grade, we anticipate decline in grades. In order to balance the drop in production, we decided to expand the mine to 1.3 million tonnes per annum from currently 800,000 tonnes per annum and increased processing capacity. The first stage of mine capacity is nearly complete.

In terms of second stage, processing plant expansion, we selected the X-ray transmission technology, XRT. We've done the design of the facilities. We are now in process of ordering the equipment. And we expect both first stage and second stage to be completed in the second half next year with a total cost of around $42 million over the next 2 years, this year and next.

Over to Page 8. At Belaya Gora, the key focus there was to increase recovery from currently 75% to around 90%. We're going to do that through adding the CIP circuits to the mill. The mill is 1.6 million tonnes per annum capacity. Adding the CIP circuit will allow us to increase recoveries but also to treat the ore from Blagodatnoye deposit, which together with Belaya Gora contains around 776,000 ounces of reserves and extend the combined life of mine for the mill to 2033 -- 2032.

We are looking also for other exploration targets between Blagodatnoye and Belaya Gora and hope that in the near future, we can have some more exploration reserves around Belaya Gora. The total cost of processing plant upgrade will be $11.4 million. We started the spending this year, and we aim to complete this project by middle of next year.

Valunisty, the focus there, after the acquisition, was basically to increase throughput capacity from 250,000 to 350,000 tonnes per annum and also to go underground for higher grades and lower dilution. The engineering surveys, the design work and the cost estimates are almost complete. We're starting some prepayments for underground recruitment already this year with a view to bring them to Valunisty in the next navigation window in summer 2020. All construction is expected to begin next year and completed in 2021. The rough cost estimate we have in our preliminary in-house estimate was around $40 million. The more detailed number, I think, we will release later in the year when all the engineering and design works will be completed.

Now going to the second block of advancing our development projects, I want to talk here about Kekura, in particular. It's Page 9. Just as a reminder, Kekura has 2.5 million ounces of resource at 8.1 gram a tonne, including reserves in P&P category of 2 million ounces at 7 grams a tonne. This is after dilution and losses. We want to build 800,000 tonnes per annum mill there. And for the first 8 years, it will be an average production of 172,000 ounces per annum. For the first 8 years, it will be open pit and then we're going to go underground.

In terms of the status, the definitive feasibility study was published in 2018. According to that, the estimated TCC will be around $511 an ounce. We divided the project in 2 phases. Phase 1 is auxiliary assets which we need in order to proceed to the Phase 2. And also we want to start open-pit activities and [pre-peaking] in the last quarter this year. Phase 2 will be built in a mill, 800,000 tonnes per annum mill, and we will start that in 2020. Actually, the 2 mills, the SAG mill and ball mill, had been already purchased and now being shipped to Kekura.

This year, we were granted the residency in Chukotka Advanced Special Economic Zone, which will provide us significant tax benefits once the asset will be up and running. The NPV of those tax benefits is roughly $100 million. Estimated cost to the pre-commissioning, $229 million. And there is still a good exploration upside. We're currently doing not a lot of explanation around Kekura, but it's a big area, a big license area. And we think that after we commission the mill, we will be able to intensify the exploration activity there and add to the reserves.

Over the page on Page 10, you can see the general layout of the property. It's kind of coming in steps. On the top of the hill will be open pit. If you look at the picture at the top-right corner, so on the top of the hill will be an open pit. Then number two will be the processing plant site. The number five, that's the camp. And number seven is the fuel tank storage.

What we have done this year so far, we renovated the existing pilot plant. We need the pilot plant there. You can see it on Page 11 with the crushing unit at the bottom-left corner; and then in the middle, the plant itself, the pilot plant itself; and the picture in the top-right corner shows you some insight. There is a diesel power station right next to it. The plant can process around 120,000 tonnes per annum with recoveries of around 35% to 40% just on the grade each year. We're now looking at possibilities to commission that plant maybe earlier next year. And if we will be able to do that, then the recoveries will be around 35% to 40%, and the rest of material will be stockpiled and treated at the bigger mill in Phase 2. So we're not going to lose any gold with that.

Over the page on Page 12, you can see some auxiliary objects that we are currently building there. The communication tower is completed. We need that to start open pit later in the year. The campsite expansion, we prepared the ground for it. The first stage of the new camp is already purchased and is being now shipped to port of Pevek. The power substation, we have completed -- we're waiting for the power grids to come to the sites by the end of the year and hope that end of this year, maybe beginning next year, we will be able to receive electricity from the power grid, which will be very cheap. The assay laboratory, you can see we started to put the walls on and the fuel storage being constructed. This is all for Kekura.

And on Page 13, let me introduce you to our new development project. We've been working on it for slightly more than a year. It's located in Baley region, right next to our Taseevskoye deposit. Just as a reminder, Taseevskoye is a 5 million-ounce resource deposit we have. It used to be a producing mine. It was in operation since 1929 until 1973. During those years, the tailings of old factories had been accumulated, actually right next to our Taseevskoye deposit. We reassessed those tailings. We understand that in ZIF-1, which is the first tailing dam -- old tailing dam, it contains about 10 million tonnes of roughly 1 gram a tonne material. With the heap leach operation, we will be able to expect around 50%, just over 50%. So we will start building the heap leach operation with a processing capacity of around 840,000 tonnes per annum. That should yield us around 15,000 ounces of gold per annum over 11 years.

The total cost for the project is $23 million. It was given a green light last week. And so already this year, we will start preparing the construction site with a view to spend most of the money next year and commission in the summer 2021. This isn't -- although it's a relatively small deposit, around 344,000 ounces, for us, we view it as an important step towards development of Taseevskoye area. And once we have production in this area, I think that unlocking the value for our Taseevskoye deposits will become much easier.

On Page 14, I will not go into the details, but you can see the site layout, the heap leach facilities -- sorry, the ZIF-1 tailings in the top-right corner, the heap leach facility is in the bottom-left corner. And you can see that from those tailings facilities, which is number one, at the right, the blue is our open pit for Taseevskoye which is flooded, as you know. So we're right on the edge of that open pit.

With this, let me pass to our Finance Director, Alla Baranovskaya, who will take you through our financial review analysis. Thank you, ladies and gentlemen. Alla?

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [3]

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Good morning, everyone. I would like to present you our financial results for the first half of 2019.

On Slide 16, you can see our financial highlights. So with stable production and 142,000 ounces and other production given for 2019, totaled about 300 ounces. Revenue rose 19% to $175 million, reflecting the contribution of acquired Valunisty mine and increased sales volume at MNV by 28%. EBITDA was $87 million, an increase of 21% from the first half 2018. Total cash costs were flat at $540 per ounce, which is below the industry average.

As for our key ratios, the net debt/EBITDA ratio was 1.3. EBITDA margin was 50%. The company has analyzed the impairment indicator, it did not regard the impairment loss. The company has benefited from favorable market situation in part due to a stable gold price, but exceeded $1,300 per ounce, and weaker ruble.

You can see the market summary on Slide 17. Valunisty end revenue is still gold, which achieved 89%. Other position amount (inaudible) is presented on Slide 18. Highland Gold remains in position among the company with a low cost.

Next slide show the total cash cost and way of breakdown by item. Highland Gold total cash cost was $540 per ounce, which has amounted in the same level of 2018. TCC were affected by a rise in cost at Novo and in corporation Rudnik Valunisty, which now has the cost exceeded $700 per ounce. Highland Gold all-in sustaining costs were up by 12%, reaching $778 per ounce. The growth was driven by increase of sustaining CapEx and write-down of lower grades or totaling about [$26 million].

EBITDA analysis is presented on Slide 20. EBITDA increased to 70 -- $87 million against $71 million in the first half 2018. The weaker ruble, higher volume of sales and influence of Rudnik Valunisty were offset by a lower price to [link and silk] and increased cost at Novo. EBITDA margin was 50%, which is the range of the most efficient gold mine. EBITDA margin breakdown by business unit was 57% at Novo, 52% at MNV, 40% at Belaya Gora and 42% at Valunisty.

Next slide show CapEx breakdown. In the first half 2019, CapEx amounted to $31 million, capital expenditure funded from operating cash flow. On top of the capital expenditure was spent on Kekura project, including one for the life of mine preparation and the start of a plant and site camp maintenance. Behind about [$19 million] were invested at MNV to upgrade existing equipment fleet and continued exploration work. During for 2019, the company plan to invest about $124 million.

Next, Slide 22 show the dynamic of the debt. The company debt has been [aided] by U.S. dollar. During the reporting period, the gross debt was reduced by 11% to $222 million, free of modification effect of IFRS 9. Comparables were $248 million in the end of December 2018. The average effective interest rate was 4.2% and changed compared over end of 2018. Benefiting from favorable market situation in July and August, the debt portfolio was restructured. Several loans were transferred to a period of 4, 5 years as a result of debt restructuring work. The average term increased from 18 months to 37 months. Effective rate decreased from 4.2% to 4.1%.

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John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [4]

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Thank you, Alla. And I'll pass back over to Denis for a couple of closing words on what we have coming out for the rest of the year. Okay, I just kind of lost the video here. While we go over this and -- okay, carry on.

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Denis Alexandrov, Highland Gold Mining Limited - CEO [5]

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Sorry, I was on mute. Sorry. (inaudible). I already completed the slide, but I have to repeat it now because I was on mute. I apologize.

So key targets for 2019. And thank you, John, and thank you, Alla, for taking us through financial results. We reiterate our production forecast at 290,000 to 300,000 gold and gold equivalent for the year.

Our key target by the end of the year is to complete the 2019 exploration program at MNV and adjacent licenses, stage 1 at Novo and start stage 2 at Novo expansion. This will be a big focus. And the third focus will be Belaya Gora as we are less than 11 months away from deadline for completion of this asset. I think Belaya Gora will be pretty much in our radar screen by the end of the year in first half 2020.

Kekura construction going according to the plan. So we, as promised, we're looking forward to start stripping activity and mining operations in Q4. And we're reviewing the options of commissioning the pilot plant early 2020. Capital expenditure budget is the same, $124 million, out of which around, 50% is basically Kekura. And we continue to roll out our programs for health and safety and operational efficiencies and that August will be our focus going forward.

With that, thank you very much, and I think we'll go to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have questions that came through over the phone lines. Your first question comes from the line of Justin Chan.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [2]

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Congratulations on another good half. My first one is on ZIF-1. I guess, on a -- could you -- so could you confirm that the project is then Board-approved and that everything is approved to go forward? And then just on the details, how much of the $23 million CapEx is preproduction? And then on the ramp-up profile, I guess, from first production, the second half of '21...

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Denis Alexandrov, Highland Gold Mining Limited - CEO [3]

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Yes. Thank you, Justin. ZIF-1 was given the green light by the Board last week. So the Board approved going into the construction stage. And they approved some prepayments, which will be done by the end of the year, around $4 million. The ramp-up, we aim to start first production in sort of August, September 2021. Because it's a heap leach, it's seasonal. So we don't expect a lot of production coming from that in 2021, but the first full year will be 2022. We see -- we are now looking at the ways to expedite the project, but I think in terms of market commitments, it will be safe to assume that the first full production will be 2022.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [4]

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Okay. But that first full year 2022 should be a reasonably 15,000 ounce normal year?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [5]

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Yes, yes, yes. That's the full year. Yes.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [6]

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Okay. And of the $23 million, is the time line given on the slide is to 2023, but I'm just wondering how much of the $23 million is, I guess, in advance of first production?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [7]

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Yes. Most of that is preproduction CapEx. The ongoing CapEx will be minimum as it's quite simple operation. There will be basically simple excavation, no blasting, no drilling, just simple excavation of the heap leaches -- sorry, of old pavings and tracking them to the heap leach going through the agglomerate and then stack them on the heaps. So most of that $23 million is related to the preproduction CapEx.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [8]

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Right. And in terms of, you mentioned some of the logic for that was hoping to make easier the development of Taseev. Is there -- is the reason for that primarily infrastructure, or is it more, maybe on the social side? And could you just comment on it, what if any infrastructure...

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Denis Alexandrov, Highland Gold Mining Limited - CEO [9]

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I think it's both. Taseev is located in a big Baley huge. You've been there, you've seen it. So from social point of view, people are expecting some jobs and they're expecting some development. And I think that will be important. But also, this project will generate cash flow, and it will mean that we will have a team of people there. We will have much more resources to start developing or looking at -- we are now looking at several, I would say, new ways, new approaches to Taseevskoye. It's too early to talk about it, but once we are up and running with ZIF-1, I think it will be much easier for us to commit some of those cash flows towards development of bigger Taseev.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [10]

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Okay. Excellent. On the -- a couple of financial question. On the new debt profile, could you just share with us any covenants that are applicable on that?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [11]

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Alla?

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [12]

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The debt covenants, the net-debt-to-EBITDA ratio of 3.5. The current level, 1.3.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [13]

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Okay. Then there's no interest coverage or other covenants there?

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [14]

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No. No.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [15]

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Okay. Great. And just a couple more. On the deferred tax, there's a fairly positive number for the first half. I presume that doesn't have any impact on your actual cash tax payable this year and the best treatment will be the statutory rate. Could you just confirm that?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [16]

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Just one second, Justin.

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [17]

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No. They have not -- have no influence of our cash flow. It's accounting for -- it's accounting figure, yes? And compared to previous years, yes, where the ruble became weaker by 9%, our tax assets was estimated by more weaker ruble and decreased our future tax expense, it's all. If the account increase and if ruble decrease, the deferred tax increase. If the ruble is strong, the deferred tax decrease.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [18]

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Okay. Perfect. And just one last one on -- just on CapEx for this year. Of the $124 million, how much do you anticipate will go into all-in sustaining costs will be classified as sustaining? And then just -- I just wanted to clarify for Kekura in the second half. Based on your numbers, 50% of $124 million is expected to be spent at Kekura this year was about $52 million, and you spent about $10 million in the first half. So that would -- that was just about $40 million in the second half. Can you just confirm that, what we should anticipate?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [19]

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Yes. Justin, for Kekura concerns, maybe we'll be slightly less. But the other question, Alla, if you can talk about sustaining tax, how much of that will be in there from $124 million?

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [20]

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No. Kekura is with our development target, yes? Where all-in sustaining cost included supporting package in MNV, Novo, Belaya Gora and Rudnik Valunisty. The Kekura is the development package and this is including all-in sustaining costs.

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Denis Alexandrov, Highland Gold Mining Limited - CEO [21]

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I thought it would...

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [22]

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So where...

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Denis Alexandrov, Highland Gold Mining Limited - CEO [23]

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Sustaining.

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [24]

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Sustaining tax from the first half of 2019 was about $20 million. In the second part of this year, decreased because they invested for renovation equipment in the first half, was about $10 million.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [25]

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Okay. Sorry. So the total amount for the second half is roughly $20 million. Did I hear that correctly?

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John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [26]

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No. $20 million was the first half. It will be $10 million in the second half. So, obviously, less influence on all-in sustaining costs.

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Operator [27]

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And we'll now take our next question, and this comes from the line of Boris Sinitsyn.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [28]

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Indeed, congratulations on positive results in the first half. I have a question on cost and CapEx, please. For costs, we'll go on your TCC, they were roughly flat year-on-year versus previous guidance of being 10% to 15% year-on-year for the full year. So the question is would you confirm the guidance or you might see some lower costs for the full year than previously expected?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [29]

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I think, we'll require a lot of...

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [30]

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Okay...

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Denis Alexandrov, Highland Gold Mining Limited - CEO [31]

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Alla, you're taking it? Okay.

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [32]

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Yes. In the first half of 2019 where ruble was weaker and support our total cash cost. And where second half, where slightly increased, where -- because it's the summer period, we increased the repair of equipment, fleet and buildings, and we hope, in the second half, our TCC slightly increased compared to first half, despite the weaker ruble.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [33]

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Yes. That's clear. In terms of CapEx. Sorry, for repeating the question, but the line wasn't clear. So all of this $120 million, roughly for this year, what number would be actual booked in IFRS accounts?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [34]

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Right, I think Boris, around this number, I think every year, we have roughly $6 million to $9 million, kind of, transition. So how to say, the amount of money that we either haven't spent at end of 31st December, but relates to the previous year that we kind of transfer to the next year. Last year, it was around $9 million. This year, it could be the same. So roughly, I think, we should have around $120 million in IFRS as well. If that was your question?

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [35]

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Yes, basically. Basically, the question was just the actual amount of CapEx at this time. But thank you for answering, that's clear. In terms of -- another question please on accompanying the views on capital allocation given the kind of positive gold price conditions. Provided that the gold price remained where they are, would you -- how would you use additional funds or is it from this gold price. Would you reinvest it into business? Maybe just to remind some of the projects or we might expect some upside in terms of dividend payout ratio versus minimal level?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [36]

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Yes. I think as you can see from our ZIF-1 project that's already kind of happening, we are willing to reinvest into the -- into our organic growth pipeline. So ZIF-1 was given the green light. It was not in our CapEx estimates last time. That's about $20 million. We're also looking at spending some money at Unkurtash project to take it to prefeasibility stage, that's probably something for the next year. We are actually looking at Klen, finalizing our design documentation and plan to minimize our CapEx -- pre-commissioning CapEx. So Klen may be another kind of area where we might spend some money. In terms of dividends, whether we're going to spend some of that upside to the dividends. Again, I think, as we said clearly to the market, that is the dividend policy, 20% of net cash flow from operating activities. As the net cash flow increases with the gold prices, the dividend will increase. Whether we're going to pay extra, above the dividend policy, I think that is the Board's decision to take. And they could always take in considering our capital commitments and requirements for the group. So in this stage, I can't promise more than the dividend policy, but with an increased gold prices, the net cash flow from operating increases, and therefore the dividend should increase.

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John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [37]

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We have a couple of questions from online. John -- let me get this. We have a couple of questions from online. Let's go and answer these. One is, (inaudible) policy highlights, I think we've just addressed your first question. So let me know on here, if you need any more color on that.

But on the second question about G&A, you asked, "Why it fell in the first half, even though we added Valunisty? And what do we expect in the second half of the year?" And I'll pass that question to Alla.

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [38]

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Our administrative expense decreased compared of same period of previous year, both were 4%. It's influence of weaker ruble. And it was where -- the main reason where increase -- when we've bought ruble (inaudible) we cannot increase the administrative expense. We managed where -- one additional asset with the same team.

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Denis Alexandrov, Highland Gold Mining Limited - CEO [39]

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So basically, Valunisty acquisition gives us some synergies on the admin front. And by May this year, the administrative portions of Valunisty was basically, I would say, suspended, and we now run Valunisty just using our Highland Gold head office in Moscow without really an increase in staff.

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John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [40]

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Thank you, Denis. We have one more online question, which we'll get out of the way here, from [Anatole Mazour] from (inaudible). Anatole asked, "Is the company is considering any gold-hedging programs to lock in the current favorable prices for a part of the future production?"

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Denis Alexandrov, Highland Gold Mining Limited - CEO [41]

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It's a good question. No, we don't consider any hedging. We're not hedging gold. Any other questions?

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Operator [42]

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Yes, sir. We have one more question over the phone. And this comes from the line of Nikolay Sosnovskiy.

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Nikolay Sosnovskiy, Prosperity Capital Management Ltd - Director of Metals, Mining & Chemicals [43]

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I've got a few follow-ups on the issues discussed. On Baley, this ZIF-1 heap-leach project, could you please specify what was the IRR for this investment because the slide outlines everything else, but not IRR?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [44]

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IRR was just over 20%.

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Nikolay Sosnovskiy, Prosperity Capital Management Ltd - Director of Metals, Mining & Chemicals [45]

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20%. And, again, few follow-ups on other projects, discussing these expansions of Belaya Gora sale and Novoshirokinskoye expansion, the slides just mentioned 2020 as the completion date. Can you please specify a little bit? Is it still first quarter for Belaya Gora and what's for Novo and also for Kekura, 2023, is it late 2023 or early 2023? How do you see there is more precise timings?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [46]

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Yes. Well, Belaya Gora, we said not first quarter, but we said first half. So by summer, we expect to complete the project and commission. For Novo, it's second half, I would say, end of third quarter as it looks now. And for Kekura, it -- how the project looks now, it's rather first -- it's rather beginning of 2023. I think we are moving quite fast. I think by mid-next year, we will have a better view in terms of commissioning. But so far, we remain 2023. But probably moving our estimates towards the beginning of 2023.

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Nikolay Sosnovskiy, Prosperity Capital Management Ltd - Director of Metals, Mining & Chemicals [47]

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And once again, follow up on dividends. You said that for the first half 2019, Highlands has announced dividend, which is higher than 20% of net operating cash flow. I think it's something like 30%. But going forward, for the second half, how do we think of this first half dividend payment. Should we expect at least 20% of the second half net operating cash flow? Or you can equalize and pay effectively lower than 20% to keep this 20% ratio for the full year?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [48]

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It's a good question. I think it's a question to the Board, but I would expect 20% from the second half, net operating cash flows, but it's subject to the Board's decision. Technically, the Board can decide to pay 20% from the net cash flow from operations for the year. But how they can operate, I don't know. I would say, we pay 20% from the second half. So whatever we paid extra this year kind of, we don't take out in the second half.

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Nikolay Sosnovskiy, Prosperity Capital Management Ltd - Director of Metals, Mining & Chemicals [49]

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And basically, given the improved gold prices and your ability to refinance at quite attractive rates, how do you think, does this change anything in your understanding of normal leverage in terms of net debt EBITDA, maybe, now you can go a little bit higher with this cheap borrowing and then continue paying more dividends?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [50]

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I think that most of our debt is required for our assets for Kekura, for Novo, for Belaya Gora and we're paying dividends from our operating cash flows. And you can see that our dividends are less than our net profit, which basically means that dividends are paid out of profits and out of our own cash flows. The borrowing we take for development assets, we don't borrow to pay dividends, which basically means that our comfort level in terms of net-debt-to-EBITDA ratio remains the same. It was around 2, 2.5. We said that temporarily, before commissioning Kekura, we may go up to 3x the net debt to EBITDA, but that would be temporarily. And then once the EBITDA from Kekura kicks in, this ratio will drop. So I wouldn't connect the net-debt-to-EBITDA ratio with our ability to pay dividends.

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Operator [51]

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And we have a follow-up question over the phone coming from Boris Sinitsyn.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [52]

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I have one follow up on Valunisty mine grades in second half. In the first half, you recorded some mixed performance in terms of mining grades around 3-grams per tonne, what is the outlook from the second half, please?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [53]

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Second half Valunisty grade will be higher than the first half. According to our mining plan, the first half anticipated -- we anticipated lower-grade areas where we mine. By the second half, the stripping was done in the first half will allow us to reach the higher grade ore. So in the second half, we expect higher grade at Valunisty.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [54]

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I think previously, you traded at around 4 grams per tonne, even higher. So what's the level should we expect from second half?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [55]

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Alla, (foreign language).

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John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [56]

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Sorry. Can you repeat the question, please?

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [57]

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Just a follow-up in terms of where roughly versus 3 grams per tonne in the first half you might see it in the second half in terms of the magnitude upon increase?

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John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [58]

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Denis, did you get that?

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Denis Alexandrov, Highland Gold Mining Limited - CEO [59]

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(foreign language)

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [60]

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One moment.

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John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [61]

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We're checking on that.

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Alla Baranovskaya, Highland Gold Mining Limited - CFO [62]

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3.9 in the mine.

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Denis Alexandrov, Highland Gold Mining Limited - CEO [63]

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Yes. So average for the year was around 3.9.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [64]

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3.9, yes.

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Operator [65]

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No further questions that came through at this time. Please continue.

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John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [66]

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Okay. Well, if there are no more questions, I will thank you all for joining us for this conference call. If you have any more questions, please feel free to contact us. Our contact details are on the website or you saw the press release for the results, it's on there as well.

I'd like thank to Denis Alexandrov for his participation as well as Alla Baranovskaya and hopefully, we'll see you all out on the road. Highland Gold will be attending the Denver Gold Show later this month as well as a roadshow in London, the JPMorgan Cazenove Small/Mid-Cap Conference in London. And also, coming up for Raiffeisen Gold Day in New York City later this month. So come and see us and please, be in touch if you have any more questions.

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Operator [67]

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Thank you. And that concludes our conference for today. Thank you all for participating, you may now disconnect. Speakers, please standby.