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Edited Transcript of HGM.L earnings conference call or presentation 15-Apr-20 9:00am GMT

·40 mins read

Full Year 2019 Highland Gold Mining Ltd Earnings Call SAINT HELIER Jun 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Highland Gold Mining Ltd earnings conference call or presentation Wednesday, April 15, 2020 at 9:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 * Michael Monaghan Highland Gold Mining Limited - COO ================================================================================ Conference Call Participants ================================================================================ * Justin Chan Numis Securities Limited, Research Division - Analyst * Nikolay Sosnovskiy Prosperity Capital Management Ltd - Director of Metals, Mining & Chemicals ================================================================================ Presentation -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [1] -------------------------------------------------------------------------------- Good morning, everyone, or good afternoon if you're in Moscow. Welcome to the Highland Gold Mining Limited 2019 Full Year Audited Results Conference Call. I'm here today with Denis Alexandrov, our Chief Executive Officer. Also joining us is Alla Baranovskaya, our Chief Financial Officer. And also present in the room besides myself, John Mann, Head of Communications, we have our COO, Mike Monaghan; Anna (sic) [Alla], our Head of International Reporting; and Aleksey Kharitontsev, who is our Deputy CEO. We're all here to answer your questions. But first, we'll pass the word over to Denis Alexandrov, who will take you through the operating results for the past year. Denis? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [2] -------------------------------------------------------------------------------- Thank you, John. Good morning, everybody. Thank you for joining us on our 2019 financial results announcement. I'll go through a presentation, which you can see online. I will point out to the number -- slide numbers which I'm talking through so that you can briefly look through the slides as well. Slide #2, the usual disclaimer for a public company. I'm sure you read a lot of those and familiar with all the things written there. It's all about forward-looking statements. Slide #3, Highland Gold today. Just as a reminder, Highland Gold is focusing on the gold production in Russia. We have 4 operating mines in the 3 regions of Russia, namely, Chukotka, Khabarovsk region and Zabaikalsky. Our annual production was 300 -- just over 300,000 ounces a year during 2019. We are a low-cost and high-margin producer. We also have a pipeline of attractive development projects and clear pathway to growth. And last but not least, we are committed to paying dividends. Over the slide -- Page 4, 2019 results. Production was up by 12%, from 270,000 ounces in 2018 to 301,000 ounces in 2019. The key contributors to increase in production was Valunisty mine, which we acquired at the beginning of 2019, and the MNV increase in production. Revenue, $395 million, generated us an EBITDA of $205 million, which is up 34% from the prior year. TCC, total cash cost per ounce, were $556 an ounce; and all-in sustaining cash cost, $791 an ounce. The net profit this year affected by noncash items was up to $178 million and earnings per share increased from $0.15 per share to $0.49 per share. Slide #5. I start with operations. MNV during 2019 outperformed our expectations, with the production up 10% on the back of improved grades and higher processing volumes. Novo exceeded its production targets for 2019, although output was 5% lower year-on-year as expected due to lower grades and changes in balance of prices for metals. I will remind that we produce there lead and silver -- lead and zinc concentrates were more than 70% of value is in gold, so we report gold equivalent production. And therefore, prices for lead, zinc and the silver and copper slightly affect our production numbers. Belaya Gora, despite a strong last quarter, Q4, production decreased by 9%, was affected by lower grades and also some downtime that we had at a processing plant at the beginning of last year. Valunisty, the new mine acquired at year-end of 2018, added 30,000 ounces, so 11% to our group production. And then Kekura, the construction is on budget and on target, with several infrastructure facilities at or near completion, and we initiated stripping and mining in Q4 2019. We're glad to announce that the Board of Directors approved the third interim dividend in respect of 2019 in the amount of GBP 0.35 (sic) [GBP 0.035] per share, and this obviously expresses confidence in the company cash flows. I'll talk about the dividends later on the slide. In terms of corporate news, we welcome Deborah Gudgeon who joined the Board of Directors in December 2019 as Independent Nonexecutive Director, filling the seat which left vacant by the sudden passing of Terry Robinson last summer. Deborah will chair the Board Audit and Risk Committee. I would like also to welcome Mike Monaghan, who is here in the room with us today, who joined us in March this year as the Chief Operating Officer. Welcome, Mike. -------------------------------------------------------------------------------- Michael Monaghan, Highland Gold Mining Limited - COO [3] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [4] -------------------------------------------------------------------------------- Slide 6, you can see that the company over the past 5 years actually met its production guidance, and we met the production guidance again and even exceeded it this year. The guidance was 290,000 to 300,000 ounces, and we produced 301,000. The guidance for 2020 remains the same, between 290,000 and 300,000 ounces. Slide #7, I call it the John slide. John Mann joined the company about 5 years ago. So I think this is his view on what he could earn if he bought the shares 5 years ago. So the 10-year return for the equity is 91%; dividends, 58%; and annualized return, 11%. 5-year return -- annualized return, 50%. 1-year return annualized, 51%. We outperformed the gold price. Over to Page 8, commitment to dividends. Since 2011, the company has paid, on average, $151 per each ounce we produced. This year, this amounted to $203 from each ounce we produced. Total dividends for 2019 were GBP 0.135 per share, totaling $61 million. I will remind that we have a dividend policy set in 2018, acknowledging that the company goes through the construction of Kekura and investing into development of its producing assets, we realized that our CapEx requirements will be higher, and there were some concerns from the market that the company could cut on the dividends. So we announced the dividend policy, which basically says that our minimum payout will be 20% of net operating cash flows before any capital expenditures. Historically, we paid more than that. And this year, again, we paid more than that. But going forward, I think what we can promise to the market is the minimum payout of 20% of net operating cash flow before any cut. Slide #9, operating sustainability. Back in 2016, we hired a new HSE team which implemented stricter standards for incident reporting, that realized an increase in LTIFR in 2017 to 4.9. Since then, due to implementation of health and safety standards, the LTIFR is gradually going down. And in 2019, it reached 2.6, which for us is not an acceptable level. And we continue to implement our health and safety standard, improve the overall HSE performance, but high fatality rate in first half 2019 triggered our decision to commission an extensive external audit in autumn 2019 to help fine-tune the system. In terms of environment, we continue focusing on protecting the environment and corporate responsibility in our communities. The Worldwide Fund for Nature recognized us in the environmental transparency rating when we ranked #13 and got an award for most improved reporting, and ranked #2 for lowest environmental impact. Last year, we initiated a company-wide contest to collect plastics for recycling on all the sites. Overall, we collected 4.4 tonnes of plastic, and that served as a basis for employee education and for expanding our trash-sorting initiative across the company. And then also last year, the 2019 MINEX Russia awarded us for corporate social responsibility, which recognizes our efforts in responsibility to communities where we operate. Slide #10, I'll talk a little bit about COVID-19, which is a hot topic now obviously. So our primary concern is the health and safety of our employees and well-being of communities in which we operate. In 2019, the company installed state-of-the-art health monitoring systems at all of our mines. And we also contracted a recognized worldwide health care provider, International SOS, who for more than a year now works at all our operating sites with their doctors being on-site and other personnel. So when the COVID-19 came to Russia, we -- I would say that we were better prepared than if -- than last year due to the systems that we already installed. We established a task force at the head office and at each of the mines. Nonessential employee travel restricted. Basically, travel is restricted to 0. There are no business travel from Moscow to the sites or from one site to another. Moscow office almost 100% works from home now. We also extended our shift change to 1st of June. And for that, we compensated people with some extra payments to their salaries to motivate them to stay at the mines and not do the shift change. Those employees who are not invited for the shift change are being paid as well staying at home. And we use this time until 1st of June to establish a basis with -- for the on-site testing and the 14 days quarantine through which we will start shift changes from 1st of May. In portions, we will start shift changes through 14 days quarantine. We also decided to do some mine stockpiling near the mills to create 2 to 3 months of ore stockpiles at all of our mills. In case the COVID-19 hit one of our mines, we could at least continue to upgrade our mills on a skeleton personnel or skeleton crew and continue production. So far, there are no employees of Highland Gold who were detected COVID-19, and we're monitoring the situation daily. Page 11, this is -- for those who are following our company, this is the slide that you've probably seen several times. Our strategy, it's relatively simple. First is to maximize the upside potential of our operating mines, which I will talk about in more details on the next slide. The second block is develop advanced-stage projects into production, and that's what we're doing with Kekura last year and this year. Derisk early-stage projects and convert resources into reserves. And this mainly relates to 2 of our large projects: Taseevskoye; and Unkurtash in [Kyrgyzstan]. Our corporate development will focus in the regions of our presence, and the acquisition of Valunisty was one such example. Concentrate on operating efficiencies and continuous improvement to keep our TCC low. And last but not least, maintain commitment to operating in a sustainable manner. All of that, we call as unlocking the value. And basically, it's all about controlling cost, returning -- providing returns to the shareholders and delivering growth. Page 12, a little bit more details on the first block, maximizing upside potential of our mines. And with each mine, we identified the goals. For MNV, that was to extend the life of mine. Again, I will remind you that, in 2016, the life of mine of MNV was till 2018. Now we extended the life of mine to 2029, and we can see that this goal achieved. We have about 10 years of life of mine -- we added about 10 years of life of mine. We continue to do exploration around MNV, and we continue to add reserves to MNV, extending the life of mine. 2020 CapEx will be $26 million, out of which $5 million will be exploration and 20% (sic) [$20 million] maintenance CapEx. And as we extended the life of MNV, some of the old equipment requires change and more maintenance, and that's the reason for increased maintenance charges at MNV. Novo, we expect the decrease in grades as we go to flex. We changed the cutoff grade, so we know that we will be mining a lower-grade material. To compensate that or to offset that expected decrease, we decided to increase the milling capacity from 800,000 tonnes per annum to 1.3 million tonnes per annum, that's both milling capacity and mining capacity. This year, we will finish the mine capacity construction increase. And also this year, we will finish the installation of 3 X-Ray transmission machines from TOMRA, which are already delivered to St. Petersburg and being shipped to the site within Russia. So there are no delays on that project. Completion of the project by the end of this year, with 2021 being first full year in operations. The effect we expect is to maintain the mine production levels at around 100,000 to 120,000 ounces depending on the year. The cost for this year is $35 million, including $23 million for the mill and mine expansions and $12 million maintenance and exploration. For Belaya Gora, Belaya Gora, as you know, has only -- currently, it is only a gravity circuit. So to improve recoveries and also to enable processing of the ore from nearby Blagodatnoye deposit, we're upgrading the plant with the CIP circuit, which will increase recoveries from currently 75% to around 90%. The site preparation are finalized. 90% of the equipment is already delivered to the site through the winter road. And again, we were on time and on budget, and we were able to transport all the equipment, which came from China. Regardless of the COVID-19 Chinese situation, our Chinese partners were able to ship everything in time, and we were able to ship everything by the winter road also in time before it melted. We expect this project to be completed in Q4 this year, which will increase -- which will result in increase in mine production from Belaya Gora and also decrease TCC. Our total cost is about $14 million, all will be spent this year. And then finally, Valunisty, our fourth operating mine. We want to increase production and lower costs there through 2 things: one is to increase the capacity of the mill from 250,000 to 350,000 tonnes per annum, and also initiate underground mining to reach higher grades and decrease dilution. For this year, it's only engineering surveys and design work, project work and most of the Valunisty expansion work will be in 2021. Over to page, Page 13, development projects and advancing our pipeline. Basically, Kekura is the key development project for us now. It's in active construction stage. Total reserves, 2 million ounces at 7 grams a tonne. I will talk about Kekura a little bit later. And then the second project that we're advancing is the ZIF-1 tailings in Baley, which will be a small heap leach operation. The design is already completed, most of regulatory approvals are received and we will start some groundworks there already this year, with the total budget for this year for ZIF-1 around $4 million. And then early-stage projects: Taseevskoye, Unkurtash and Klen, we're trying to advance those to bring them to prefeasibility or feasibility stages to convert resources into reserves. Then Kekura on Page 14. All of the numbers here on this page are according to the Definitive Feasibility Study done in 2018. NPV of the project is $300 million, that's a 10% discount rate at $1,250 gold price and without any value that we received for the tax breaks. Life of mine expected at least 16 years, 2 million ounces at 7 grams a ton. TCC projected at around $511 an ounce. Estimated production in the first 8 years when we will operate at just open pit, 170,000 ounces per year. CapEx -- overall CapEx was around $300 million, including the investment in working capital. And out of that, CapEx for 2020 is around $107 million. And as we reported earlier, in 2019, we've been granted residency in the Chukotka Advanced Special Economic Zone providing a series of tax incentives that adds more than $100 million to the NPV of the project. On Page 15, you can see some pictures from Kekura and the site map, the general layout. So number one is the open pit. We have started pre-stripping at the end of 2019. Number two is the pilot processing plant with 120,000 tonnes per annum capacity, which we are commissioning now. We did the first gold pour in March this year, we announced that earlier this year. The plant has been commissioned now. We expect that second quarter, we will be able to show the result of commissioning and it will be in full operation from middle or end third quarter. The camp is number three. This is the old camp. We are building the new one, which you can see on the picture on the right, the camp expansion. The modular buildings are all en route to Pevek last year or the first stage of the camp expansion arrived last year. They're now being shipped from Pevek to the site via the winter road. And in May this year, we will start installation of the new camp. Over the page, Page 16, continued Kekura update. You can see number four, these are the 3 tanks build -- 3 new tanks built. Currently, we are finalizing the fourth one. And then power substation was built because Kekura will be on the power grid and we will be receiving electricity from the floating nuclear station which is currently parked in port of Pevek. We expect the power to come in, actually imminently, sometime -- I hope before June. And then the mining support facility was built, which is laboratory, communication tower and things like that. And then let me conclude my part on a little bit looking towards the future. So since 2016, we've been gradually increasing production from our current operations, from 260,000 ounces to 300,000 ounces. This year, we will have the same production target, 290,000 to 300,000 ounces. But we finalized by the end of this year, the Novo capacity expansion and Belaya Gora mill upgrade, which should add about 20,000 ounces into our 2021 production. And then by the end of 2021, beginning 2022, we will finalize construction of ZIF-1 tailings. And also some of the Valunisty expansion will be finalized as well. That will increase our production to around 350,000 ounces for 2022. And then in 2023, Kekura comes in with its 170,000 ounces of production per year, which will take us to more than 0.5 million ounce producer by 2023. We plan to double our EBITDA by that time and keep our total cash cost in the range of $550 to $600 an ounce. With that, let me pass to Alla Baranovskaya who will take you through our financial numbers. Thank you. -------------------------------------------------------------------------------- Alla Baranovskaya, Highland Gold Mining Limited - CFO [5] -------------------------------------------------------------------------------- Good morning, everyone. I would like to present you our financial results for 2019. I would like to draw your attention to the fact that the consolidated figure for 2018 didn't include the data of acquired asset Rudnik Valunisty, with the exception of bad debt. Slide 19 shows the company highlights. For the first time in our history, we recorded a production level of 300,000 tonnes, EBITDA in amount of $205 million and invested about $100 million in the project. Total cash costs and all-in sustaining costs were $556 and $791, respectively, and were below the industry [average]. Revenue for 2019 totaled $395 million. Sales growth was driven by the acquisition of Rudnik Valunisty and the increased gold price. EBITDA margin went up to 52% and net debt-to-EBITDA ratio was 1.2. Net profit benefited from strong operating results and supported by deferred tax credit more than tripled to $178 million. The company had no impairment indicator, it did not recognize impairment loss. Conversely, having received a resident status in the Chukotka Special Economic Zone and been granted tax incentives, the company made reversal of Kekura impairment loss in the amount $18 million. Slide 20 presents the trend of the global market. During 2019, some factors, such as favorable market situation, growing gold price, along with weakened national currency, enabled the company demonstrate the solid performance. You can so -- also find the revenue breakdown by units and the metal pie chart to this slide. The shared growth of the company revenue made 89%. EBITDA analysis is present in Slide 21. EBITDA improved to $205 million against $153 million in 2018 because of growing gold price and the input of the new asset, Rudnik Valunisty. The breakdown by business units were following: $99 million at MNV, 89 -- $87 million at Novo, $23 million at Belaya Gora and $17 million at Valunisty. EBITDA margin made 52%, with the level of the most efficient gold producer. Slide 22 describe the total cash cost and were breakdown by assets. Total cash costs increased by 10% to $556 per ounce due to the Rudnik Valunisty, with their higher production cost profile and the decrease in their share in sales volume over less costly producer, Novo. MNV, our oldest mine, improved total cash cost to $565 per ounce despite the negative effect of rising energy cost by 27%. Our lower-cost producer, Novo, increased total cash cost by 11% to $391 per ounce, resulting from sales volume dip and wage indexation. Belaya Gora total cash cost rose to $794 per ounce, reflecting lower grade ore processing and involving 2 contractors in their mining activities. Rudnik Valunisty total cash cost was $786 per ounce. All-in sustaining costs saw growth by 16% to $791 per ounce, mainly driven by poor ore impairment at BG, at Rudnik Valunisty, in the amount of $12 million, bigger supporting CapEx at MNV and Novo, and grown TCC. Our position in the peer group is shown in the Slide 23. In 2019, the company kept their status of a lower-cost gold producer and showcased the strong headroom of about $550 per ounce, which allows to maintain the strong cash position. Slide 24 shows CapEx breakdown. In 2019, CapEx amount $89 million excluding capitalized [reason]. Breakdown by units is the following: $38 million at Kekura, $21 million at MNV, $13 million at Novo and $5 million at Belaya Gora. Capital expenditure were funded by operation cash flow and bank loans. For 2020, the total CapEx expenditure are planned in the amount of $210 million without royalties. Supporting CapEx makes 21%. 50% of total CapEx will be invested in Kekura. In additional to Kekura project, the company is planning to add CIP at BG and the modernization at Novo. The company also plan to start 2 new projects, increase in Rudnik Valunisty capacity and heap leach project at ZIF-1. Let's go to the next slide. In 2019, the company restructured the debt portfolio, and our key parameters look well. The risk of debt pressure was shift to 2023. Slide 25 give you our outlook for dynamic of gross debt, net debt, cost debt portfolio and net debt/EBITDA ratio for the last 3 years. During the first quarter 2020, the company increased gross debt by $37 million by repayment we have done according by the schedule. And the company rose venue fund $60 million to create reserve break in their current and stable period. The status for the start of April is the following: we increased gross debt to $326 million, but the net debt is significantly lower at amount $254 million; average tenor grew to 56 months. We provide you information about debt breakdown by bank and terms. -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [6] -------------------------------------------------------------------------------- Thank you, Alla. And if I conclude the presentation with some 2020 outlook and targets for the company. The first one is to maintain the production in the range of 290,000 to 300,000 ounces of gold and gold equivalents. Complete improvements into the projects, namely: Novo, 1.3 million tonnes per annum expansion; Belaya Gora processing plant upgrade; additional exploration at MNV; and prepare for Valunisty expansion next year. Continue work -- construction work at Kekura and in terms of construction, this is our first priority. And then support and expand our ongoing efforts to improve workplace safety and employee wellbeing with a focus on health of our workers and especially with managing our risk -- COVID-19 pandemic risk. I think that this year, a lot of efforts will be put in terms of improving the health situation in the mines. And the 14-days quarantine, which we established now for the -- for any newcomers, I think, will not disappear completely. I think it will be transformed into some form of quarantine, hopefully not that long, maybe 2 to 5 days, through which all our employees will be going through during the shift change. And we could use that time, a, to monitor their health; and, b, to do some health and safety education, professional education and teaching the company standards. With that, let me conclude the formal presentation of our 2019 results and pass back to John. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [1] -------------------------------------------------------------------------------- Thank you, Denis, and thank you, Alla. Right now, we'll open it up to questions. But before we do, we have a few questions that were sent in advance from our good friend, Boris Sinitsyn from VTB Capital, one of our -- the analysts who cover us. Boris asks if we can provide some TCC and all-in sustaining cost guidance for 2020 and what our ruble-dollar exchange rate assumption is. -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [2] -------------------------------------------------------------------------------- Okay. The ruble-dollar exchange assumption in the 2020 budget is RUB 65. In terms of TCC forecast, it's very tough to say now where the ruble is and with all the COVID-19 unexpected expenses coming in. But without taking into account those 2 unknowns, I would say, we expect that our TCC for the group will increase, mainly due to Novo production going down. And Novo is our cheapest mine in terms of TCC. And Novo, for this year, production for Novo is expected around 80,000 ounces due to lower grade. And therefore, their cost will go up temporarily before we increase production again starting next year. And therefore, the TCC for the group this year, 2020, will be affected by -- basically by this. MNV, we don't expect increase in TCC. BG, we expect decrease in TCC. Valunisty, a slight increase, again, due to the grade. The key effect for the group will be normal. John? -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [3] -------------------------------------------------------------------------------- Thanks, Denis, again. And next, Boris asks what the share of ruble expenses is in our CapEx. -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [4] -------------------------------------------------------------------------------- It's hard to say because a lot of CapEx is metal. And metal, although it's ruble-driven, but they do have options to increase prices as the ruble/dollar moves, so very hard to say. Formally, probably 50%. But within that 50%, I would say there is a big chunk of [quite known] denominated expenses. -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [5] -------------------------------------------------------------------------------- Okay, thanks. Regarding Boris' third question, which is about the $18 million reversal of impairment, I think Alla spoke to that, having been a function of Kekura being included in the Chukotka Special Economic Zone. And also, a question about COVID-19, I think Denis addressed that. Boris, if you have any follow-ups, you can ask that once we open it up. And the last question that he sent ahead of time, will gold realization scheme change in 2020? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [6] -------------------------------------------------------------------------------- Well, for the gold sales, I think that's an important question. We sell our gold historically, and all the time, we sold it through the commercial banks. We've never done any exporting of gold. Commercial banks buy gold in Russia, delivered from the Russian refineries, and they pay us London fixing, so international price. This year, what we see, due to the COVID-19, the export of gold is somehow restricted due to lower availability of commercial flight and cargo flight. So the banks do have -- do experience problems with exporting the gold they buy from us. The Central Bank of Russia stopped -- announced that they will stop buying gold, which actually they flagged a year ago, so it was kind of an expected decision. So far, commercial banks continue to buy gold from us in Russia and just building their vault. From our conversation with the commercial banks who we sell gold to, there is no indication or no incentive from them to cut gold purchasing. So we do not experience any problems with the sales of our gold. And also, we do not experience any sales with -- any problems with the sales of our concentrates, being lead and zinc concentrates. We sell it both to China and Kazakhstan. And both countries, smelters are working. They continue to accept our concentrates. So there are no issues with selling our gold or gold equivalent so far. And we remain confident. We think the -- so far, situation is positive. We don't see indications that there could be interruptions in the gold sales. Okay. John? -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [7] -------------------------------------------------------------------------------- Okay. Yes. We have some questions from online. I guess we'll go ahead and do those first and then we'll open up to questions from the phone. [Duvall Bridger], DJB Ventures, asks is that our guidance for 2020 didn't include any increase in production from our capital projects in existing mines and possibly 5,000 from Kekura. And I'm sorry, this has gotten cut off. I can't see the rest. -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [8] -------------------------------------------------------------------------------- On the guidance, yes, let me explain you on the guidance. The guidance stays the same, 290,000 to 300,000 ounces. But as I mentioned, Novo will contribute only 80,000 ounces, which is almost 20,000 ounces less than it did last year, which is a significant decrease for Novo production. So that will be compensated by increased production at MNV, slight increase in Belaya Gora and slight increase in Rudnik Valunisty. So our guidance, 290,000 to 300,000, doesn't include any gold that will be coming from Kekura for 2 reasons: one, we're commissioning a small pilot plant, which is not a significant and -- a significant contribution; and, b, because Kekura is in the construction stage, any revenue received by revenue will be deducted from capital expenditures. So basically, revenue will be capitalized. So although we will report it as a production, but it will not have effect on our revenue line or EBITDA line. -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [9] -------------------------------------------------------------------------------- Okay. Thank you, Denis. Next question also from [Duvall]. As gold continues -- gold price continues to rise, is there a level at which we would consider hedging production for the next 5 to 10 years? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [10] -------------------------------------------------------------------------------- Highland Gold never hedged its gold production. So far, the policy is to stay unhedged, and that's the policy as of today. Whether we're going to change it in the future, I don't know. Likely no, but it's hard to say. It depends on the Board. But for 18 years in a row since we've been public, we never hedged our gold. -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [11] -------------------------------------------------------------------------------- Great. And one other question from [Duvall]. With the price of gold so high, would you consider moving mining to the main Valunisty ore body to maximize the benefit from these high gold prices? I guess he was referring to the grades at Valunisty. -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [12] -------------------------------------------------------------------------------- Yes. The grades at Valunisty, were -- this year, were moved to the ore body #12. As we go in the first and second quarter, the grades are lower. But as we keep digging deeper, the grades will be improving. So we expect the second half for Valunisty will be better in terms of production than the first half as we will be reaching higher-grade ore in the ore body #12. But also, the higher-grade material of 5 to 6 to 7 grams is now scheduled to be mined from underground, and that underground mining will commence only in 2022. -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [13] -------------------------------------------------------------------------------- Okay. [Roman Luton] from Sberbank asks, when do we expect to publish our JORC as of January 1, 2020? Yes, I'll take that one. [Roman], we have our annual report coming out in early May. We'll have the full updated JORC audited reserves in it. And we will, of course, that announcement a week ahead of time to let people know that that's going to be posted on our site. So I hope that answers your question. [Klaus Dejit] asks if we could move to the next slide. I guess this was because there was a slight delay on the debt slide. So I'll put that back up for you to have a longer look at. And last question, from Paul Rankine, VSA Capital. The Kekura pilot plant, plant recovery is only 35%. Why is that? And will the middlings, as we call them, be retreated when the full plant is up and running? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [14] -------------------------------------------------------------------------------- Yes. With the pilot plant of Kekura, well, we actually bought it together with the Kekura deposit. And it was idle for several years. So now the commissioning then takes a little bit longer because it's a no-pilot plant. It has only gravity circuit there. So the recoveries of 35% is our conservative estimation of how much we're going to get just using gravity. The middle products will be stored, and they will go through the big mill once it is commissioned in 2023. So we don't -- we are not losing the 65%. We put in this middle product aside, building our working capital basically, and that middle product will go through the bigger mill. -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [15] -------------------------------------------------------------------------------- Okay, great. Paul Rankine also from VSA Capital. Will you do any currency hedging this year against your much increased CapEx spend? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [16] -------------------------------------------------------------------------------- No, we don't have any requirement from the banks for hedging. So nobody is pushing us for hedge. We remain open to the gold volatility and remain unhedged. -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [17] -------------------------------------------------------------------------------- Okay. We have a question from [Chris Furnace]. Could you please explain the increase in borrowings? Why has the increased cash flow not reduced the borrowing? But I think Alla spoke to this earlier, and I'll let her reiterate what she said. -------------------------------------------------------------------------------- Alla Baranovskaya, Highland Gold Mining Limited - CFO [18] -------------------------------------------------------------------------------- In the end of March, we just say this rose the new funds and create the reserves base to where current and stable period. It's not a good deal because we're... -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [19] -------------------------------------------------------------------------------- Oh, I think it's about 2019, the question about 2019. Our net operating cash flow was positive. But with our capital expenditure program at Kekura and the other sites, we basically borrow to invest into our future EBITDA. -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [20] -------------------------------------------------------------------------------- Okay. [David McKay] asks, what's better for us, a high dollar or a high ruble? I think we all know the answer to that. -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [21] -------------------------------------------------------------------------------- Yes. About 2/3 of our costs are ruble-denominated, so the weakness in the ruble benefits our EBITDA. -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [22] -------------------------------------------------------------------------------- And last question from our line is from John Beaumont from Peat & Co. The sales volume of gold in 2019 was about 8,500 ounces less than production. Is that likely to be caught up this year? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [23] -------------------------------------------------------------------------------- Yes. This is quite a usual situation when some of the gold produced is not sold, including the concentrates that we ship to China and Kazakhstan. So obviously, all of that gold that we kept as of 31st of December was sold in the first quarter. Whether the situation will repeat itself at the end of this year, hard to say. We'll see. It all depends on the logistics. But although 31st of December is a major date, but the world doesn't end on the 31st of December. So we sell anything on 1st of January or 5th of January, it doesn't really matter. -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [24] -------------------------------------------------------------------------------- Great. Thank you, Denis. And operator, I guess we'll open it up now to questions from the phones. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Justin Chan from Numis Securities. -------------------------------------------------------------------------------- Justin Chan, Numis Securities Limited, Research Division - Analyst [26] -------------------------------------------------------------------------------- But just, I guess, my first one is on Kekura, $107 million for next year. Could you give us a sense of the longer-term profile for '21 and '22 and '23? And is there any movement on the total expected CapEx for that project? And if so, could you give us a sense of what the overall budget is now? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [27] -------------------------------------------------------------------------------- Yes. Justin, overall, I think I mentioned that overall CapEx, including some working capital movements, will be around $300 million. We spent around $50 million last year. This year, it will be around $100 million. And so over the next 3 years, there will be another $150 million spend. I would say that more would be spent in 2021 from that $150 million just due to navigational issues. And then 2022 will be basically only the commissioning works and the installation of the equipment because we want to commission -- start commissioning by end of 2022, which means that all the equipment, materials, construction, everything should be on site during the navigation season of 2021. So 2022 we will be payment for labor, but not for construction materials or equipment. And there are also some of the mining equipment we are buying already this year so that it will come to the site at the beginning of next year. So that's our answer to the Kekura question. -------------------------------------------------------------------------------- Justin Chan, Numis Securities Limited, Research Division - Analyst [28] -------------------------------------------------------------------------------- Okay. On Novo, is the guidance of 80,000, is that also accounting or including the movement in non-gold metal prices? Is that sort of contributed to that number? And then I've noticed you've outperformed in 2019, and I don't want to get ahead of things. But I guess, how firm is the 80,000 guidance for 2020 at Novo? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [29] -------------------------------------------------------------------------------- Yes. The 80,000 ounces for Novo includes the movement in the prices for Novo gold, which contributed to about minus 4,000 ounces compared to last year. So we also, on the prices -- on the price estimate, we lost about 4,000 ounces for Novo. So 80,000, yes, that's included. And the second part, you said what... -------------------------------------------------------------------------------- Justin Chan, Numis Securities Limited, Research Division - Analyst [30] -------------------------------------------------------------------------------- Just -- I mean there was -- last year was a better year than sort of budgeted going in the year, and I just wanted... -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [31] -------------------------------------------------------------------------------- Yes. So far -- yes. Sorry, Justin. Yes. So far, as of last week, let's say, Novo is slightly ahead of schedule in the kind of the budgeted numbers. But we have a major rework with the stoppage of the underground in August, scheduled for August. So I think we should be on budget. We don't see any signs currently that we will not be on the 80,000. Whether we will be able to do slightly more, we will see. We'll see. -------------------------------------------------------------------------------- Justin Chan, Numis Securities Limited, Research Division - Analyst [32] -------------------------------------------------------------------------------- Okay. Great. And just, I guess, I'll just go one more question each on the operations. At Valunisty, the underground is now -- do you expect any underground production in 20 -- I guess late next year? Or is it all in '22? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [33] -------------------------------------------------------------------------------- Well, for underground at Valunisty, we decided that we will be buying equipment for underground next year, not in 2020 budget. So the underground equipment, we will be buying next year, 2021. The logistic work show that equipment we buy in 2021 will arrive at Valunisty at the end of 2021, September, October. So we expect that we will start developing work at underground end of 2021, but the first gold will be going in 2022. -------------------------------------------------------------------------------- Justin Chan, Numis Securities Limited, Research Division - Analyst [34] -------------------------------------------------------------------------------- Okay. And can you just give a reminder of what to expect for the budget for the underground works there preproduction? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [35] -------------------------------------------------------------------------------- Overall -- yes, overall estimate is about $40 million. But as we now move to the detailed design and detailed feasibility, that could change. But I don't see -- currently, I don't see big changes in the CapEx. So far, as we've said before, about $40 million we will spend on increasing underground capacity and increasing capacity of the mill and going underground. -------------------------------------------------------------------------------- Justin Chan, Numis Securities Limited, Research Division - Analyst [36] -------------------------------------------------------------------------------- Okay. Great. And last one, just on BG, as I understand, the plan was always to save the better grades for when the full circuits put into that higher recoveries make sense when grades are higher. Is that -- do you still kind of forecast a similar step-up in grades into the kind of low to mid-1s? And I guess with the movement in gold prices, does that change your cutoffs and change your plans for that at all? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [37] -------------------------------------------------------------------------------- For Belaya Gora, movement in gold price doesn't change our cutoff because we are currently working on the cutoff of 0.3 grams a tonne. I don't think we can go lower than that. And we are stockpiling some of the low-grade ore, so not all of that ore goes through the mill. So the mill cut-off grade is currently between 0.55 to 0.7. We see this year a slight improvement of grades. If last year the grades were around 1 gram a tonne, today, we see over 1 gram a tonne, around 1.1. So there is slight improvement in grades in BG, which actually build into the production forecast for BG. And -- but also, obviously, recoveries is the key factor for BG improvement in production. -------------------------------------------------------------------------------- Justin Chan, Numis Securities Limited, Research Division - Analyst [38] -------------------------------------------------------------------------------- Okay. Great. That's -- I guess just -- sorry, just one last one for me. Is there any ability to -- and any consideration to hedge the FX exposure right now while the ruble is relatively low? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [39] -------------------------------------------------------------------------------- Well, we kind of debate this a little bit. Our revenue is in dollars. Our borrowings is in dollars. Our functional currency is dollars. So for us to hedge ruble may have a negative financial impact on our financial statements because our reporting currency is dollar and our revenue in dollars and our borrowing is in dollars. So the hedge, although it sounds like a reasonable thing to do, may actually play a bad joke with us. So, so far, we said we are unhedged. -------------------------------------------------------------------------------- Justin Chan, Numis Securities Limited, Research Division - Analyst [40] -------------------------------------------------------------------------------- Okay. That's makes a lot of sense. -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [41] -------------------------------------------------------------------------------- And you never -- and Justin, you never know the new oil deal in June, what's going to be look like, right? -------------------------------------------------------------------------------- Justin Chan, Numis Securities Limited, Research Division - Analyst [42] -------------------------------------------------------------------------------- Yes, that's true. Yes. I mean we could be back to 80 depending on if it doesn't hold. So yes, definitely. All right, that's quite a few for me. So I'll be a good guy and free it up for any other questions on the line. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Your next question comes from the line of Nikolay Sosnovskiy. -------------------------------------------------------------------------------- Nikolay Sosnovskiy, Prosperity Capital Management Ltd - Director of Metals, Mining & Chemicals [44] -------------------------------------------------------------------------------- I've got just one question left, the Slide #17 which shows the production pipeline. Can you please comment on 2023? In terms of individual mine production, what will be the run rate post expansion for Novo, BG, Valunisty and Kekura in 2023? So what's inside this 500,000 once again? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [45] -------------------------------------------------------------------------------- Nikolay, thanks for the question. I think we wouldn't comment in details in terms of 2023 on the run rate of each individual assets. But as you can see from the previous years -- so currently, we're doing around 300,000 ounces between 4 producing mines. Novo and Belaya Gora will add about 20,000. ZIF-1 will add about 20,000 -- well, between 15,000 and 20,000. And then Valunisty will actually add another 15,000 to 20,000. And then 100 -- we expect currently 2023 -- in our 2023 forecast, we put average production from Kekura 170,000 per year. Whether it's going to be 170,000 in the first year or not, it depends on the grade. So far, the model shows that in the first year, we have higher grade, but there could be some commissioning problem. So this is, again, 500,000 plus. I don't think we are ready to commit to a certain number in 2023. We will update it as we go. But I think currently, it's just good enough. -------------------------------------------------------------------------------- Nikolay Sosnovskiy, Prosperity Capital Management Ltd - Director of Metals, Mining & Chemicals [46] -------------------------------------------------------------------------------- And kind of without dwelling into too much details on Kekura, for Novo and Belaya Gora, can you confirm the post-expansion rates? -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [47] -------------------------------------------------------------------------------- Yes. For Novo, I think I mentioned it already. For Novo, it's about 100 to 120, depending on grade and year. So on average, you can say 110. Belaya Gora currently doing around the 40, 45. It will increase to around 50, 55, likely 55. Yes. Novo, I already told you. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- We don't have any further question. -------------------------------------------------------------------------------- John Anthonio Mann, Highland Gold Mining Limited - Executive Director & Head of Communications [49] -------------------------------------------------------------------------------- Great. Well, then, we'd like to thank everyone for taking part in our conference call today and thank Denis Alexandrov and Alla Baranovskaya for their presentation. If you have additional questions, please feel free to get in touch with us. Our contacts are on the Highland Gold website. You can also download this presentation from the website if you want to keep it for your memory. And thanks again for participating today. -------------------------------------------------------------------------------- Denis Alexandrov, Highland Gold Mining Limited - CEO [50] -------------------------------------------------------------------------------- Thank you very much, ladies and gentlemen. Bye-bye. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- This does conclude the conference for today. Thank you for participating. You may all disconnect.