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Edited Transcript of POLY.L earnings conference call or presentation 27-Aug-19 11:00am GMT

Half Year 2019 Polymetal International PLC Earnings Call

LONDON Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Polymetal International PLC earnings conference call or presentation Tuesday, August 27, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Maxim Nazimok

Polymetal International plc - CFO

* Vitaly N. Nesis

Polymetal International plc - Group CEO & Executive Director

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Conference Call Participants

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* Boris Sinitsyn

VTB Capital, Research Division - Equities Analyst

* Daniel Edward Major

UBS Investment Bank, Research Division - Director and Analyst

* James Andrew Keith Bell

RBC Capital Markets, LLC, Research Division - Analyst

* Justin Chan

Numis Securities Limited, Research Division - Analyst

* Kieron John Hodgson

Panmure Gordon (UK) Limited, Research Division - Executive Director of Commodities and Mining Research

* Nikolay Sosnovskiy

Prosperity Capital Management (Russia) Limited - Director of Metals, Mining & Chemicals

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Polymetal First Half 2019 Production Results Conference Call. I'll now hand over to your host, Mr. Vitaly Nesis, Group CEO. Sir, please go ahead.

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [2]

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Thank you very much. Ladies and gentlemen, welcome to the conference call on first half financial results for Polymetal International. Traditionally, we'll first briefly walk you through the highlights of the results. Today on the call is also Maxim Nazimok, the Chief Financial Officer of the company. And then, we'll be happy to answer any questions.

Now we would also like to draw your attention to the disclaimer contained in the webcast about the forward-looking statements. That's on Page 2.

Looking at Page 3, overall first half results are very strong. We managed both to increase production and to bring total cash cost down. As a result, adjusted EBITDA increased by 34% year-on-year and underlying EPS grew by 14%.

We maintained a very healthy last 12-month dividend yield of almost 5%, and the Board approved the payment of the interim dividend of $0.20 per share on the back of first half results. So overall, a very strong performance.

In terms of -- turning to Page 4, in terms of progress on nonfinancial metrics. Now we are very satisfied with our ESG results. Very recently MSCI has upgraded our ESG rating to A. This is the highest rating among Russian miners. Now we also have an improved rating from ISS. And over the last half, we certified or actually confirmed the certification of 2 of our facilities, Amursk and Voro on the International Cyanide Management Code.

We also are one of the first international mining companies to comply with the request for full disclosure of our tailings storage facility management practices and the relevant information can be found in free access on our website.

In terms of projects, Nezhda is progressing very well. We have recently received environmental clearance for the project, and we expect to complete permitting by the end of the year. We also are progressing with the construction of the concentrator building and plan to complete the external roofing and walling by early November, so we can start doing stuff inside during the wintertime. At POX-2, which is also on track for planned launch, detailed engineering is in full swing. We have signed contracts with the supply of all long-lead equipment items and plan to start earthworks for foundations for the autoclave in the next quarter.

Turning to Page 5. One of the negatives during the period was our safety performance. We have suffered 2 fatalities: one at Mayskoye and one at Omolon. And in general, lost time injury frequency rate has gone up by almost 50%.

We have responded accordingly by first identifying that the root causes of safety issues now relate less to technologies employed and more to behavioral issues with the personnel. So the focus going forward will be on specific behavior-related training and also on making sure that the motivation systems put in place do not reward unsafe work and excessive risk-taking.

And turning to Page 6. As I lead into the overall financial results, you can see the waterfall chart related to the dynamics in underlying production. Clearly, the key driver was Kyzyl, which exceeded our expectations for the first half and more than compensated for the discontinued operations. Overall, almost all assets demonstrated production increases year-on-year and as such, paved the way for both significantly higher top line and improved cost performance.

And now, I'll turn to Maxim for the financial details.

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Maxim Nazimok, Polymetal International plc - CFO [3]

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Thank you. So looking over to Page 7, which is the snapshot of the key financial numbers for the period. We have seen very strong growth across all profitability metrics, which was, as Vitaly just mentioned, underpinned by higher productions of revenue growth of 20% was almost exclusively driven by volume and not led by...

(technical difficulty)

I apologize. Sorry. So moving over to adjusted EBITDA, we've seen growth of 34%. That was driven both by increased top line, but also by lower cost, 3% year-on-year. This is slightly above the full year production guidance range of $600 million to $650 million, but we expect to be on track to be within the range by the year-end, as there were inevitable seasonal factors affecting the cost dynamics.

In terms of all-in sustaining cash costs, we remained roughly flat. Again, we expect a meaningful decline in the second half of the year as we've seen a number of one-offs at our existing operating mines in terms of the CapEx.

This has helped to drive the underlying net earnings up by 21% and the corresponding increase in the interim dividend for both going up from $0.17 per share to $0.20 per share.

In terms of cash flow, I will be reminding here that, for Polymetal, we have quite a bit of seasonality pattern in terms of cash flows, mainly because of the seasonal purchases in the first half of year and also almost no revenue from one of our operating mines from Mayskoye in the first half of year as revenue will start to improve once we have started shipping the concentrate from the seaport of Pevek to the Chinese offtakers and to the POX-1.

We're also seeing some increase in capital expenditure driven by active construction activities, mostly at Nezhda. So as a result, we ended the period with roughly flat free cash flow of minus $63 million. In terms of the debt levels, the absolute debt level went slightly up, again, a seasonal factor. But in terms of the relative leverage, we have lowered it by roughly 1% to 1.92x adjusted EBITDA.

Looking closer on revenues. As I have already mentioned, if you look at Page 8, it's volume growth that has driven the underlying increase in revenues. We have seen this mostly coming from Kyzyl, while silver revenues have declined. As a result, we are now a significantly -- we have now a significantly larger portion of total revenues in gold rather than silver, 84% versus 16% in silver. That has been 74% to 24% in the same period of 2018.

In terms of the key drivers behind the EBITDA growth, volume is obviously number one; EBITDA growth was also underpinned by per ounce decrease in total cash cost as well as some decrease in other expenses.

In terms of price movements, they have been actually negative on the silver side, so there was a bit of downside from silver in the first half of the year. So in a nutshell, the results are not yet reflected the significant upward trend in the commodity prices, which we have witnessed effectively only since June and which had a little influence on the half year results.

In terms of -- by mine performance, Kyzyl is taking the lead. It's now the largest operation in terms of production volume, but it's also already the largest in terms of adjusted EBITDA generation.

In terms of other operating mines, there has been roughly steady performance. The declines at Albazino were mostly related to grade profile, especially in the first quarter of the year. And at Dukat, we've seen a rather significant gap between production and sales in the first half of the year, which was expected to be close in the second half.

Moving over to total cash costs. Total cash costs for the group went down 3%. In terms of external factors, there was a bit of a depreciation of the local currencies, both ruble and tenge against the U.S. dollar. Tenge more significant, ruble less significant. This was somewhat offset halfway by domestic inflation, and also to a certain extent by the negative change in gold-silver ratio. So there was less amount of silver-equivalent ounces in total sales as a result. And there was also, as I mentioned, some negative performance in terms of average grade processed at the existing material operations.

On the upside, the high-cost asset disposal and this is where we are moving to internal factors have had a pretty positive impact on the total cash cost level, almost minus 4%. And change in sales structure, most predominantly the impact of Kyzyl has also been very positive.

As we are looking into the second half of the year, we expect further positive performance, predominantly through larger share of production from Svetloye and Kyzyl in total results. Svetloye is a seasonal operation, where production effectively starts -- meaningful production starts mid-second quarter. Third quarter is traditionally the largest in terms of production, so we're already seeing some of those declines already in July-August numbers.

In terms of cash cost structure, it remains roughly stable. 50% of the total cash cost is denominated in the Russian rubles, 15% now with the arrival of Kyzyl and Tenge, 15% in oil and the remaining 20% in foreign currencies. So looking at each of those components, ruble and tenge continue to display weaknesses. The current spot rate is RUB 66 versus roughly RUB 63 per dollar in the first half of the year. So this will be supported for the overall cash cost level -- levels from the external factors.

Also, we are seeing some weakness in oil and a freaky material weakness in tenge, which has also depreciated against the Russian ruble during the period. So that's also quite supportive in terms of the macro influences on the cash cost level.

In terms of the sensitivities, if you apply RUB 1 per dollar movement to the total cash cost, this will result in $5 to $6 effect on the total cash cost level for the group and $8 million to $10 million impact on adjusted EBITDA and roughly $10 million impact on the free cash flow. So we will most likely see those impacts already in the second half.

And obviously, the eyes of many analysts and investors are turning over to sensitivity to the top line as gold prices and silver prices have grown quite significantly in the past couple of months. So $100 per ounce movement in gold price, assuming a parallel movement in the silver prices, will have roughly $140 million impact on adjusted EBITDA and $110 million impact on net income and free cash flow. So this is what you should be expecting to be reflected in the second half result.

In terms of the mine-by-mine performance, on top of cash cost and all-in sustaining cash costs, I'd probably note excellent performance at Kyzyl, with total cash cost of $407 per ounce, the third lowest in the portfolio, noting that this is now the largest-producing asset within the portfolio. So very good performance, well ahead of the feasibility study expectations. We've also seen improvements at Varvara and Voro, and Albazino and Omolon have been processing some of the lower-grade material in the first half, so that has driven the relative underperformance in terms of cash costs. Same applies to a certain extent to Dukat, which was somewhat impacted by the tie-up in the working capital, which we expect to be reversed in the second half.

In terms of all-in sustaining cash costs, there was broadly similar dynamic. There were 2 mines within the portfolio, which were impacted by certain one-off outlays in terms of sustaining CapEx. These are Dukat and Varvara. At Dukat, we've been progressing with the scheduled upgrade of the tailing storage facility. So these costs were skewed to the first half of the year. And at Varvara, we are continuing to strengthen the railway transportation operations. So we've purchased the locomotive and the freight carriage fleet as well as additional mining fleet at Komar in order to further ramp up and make those operations more efficient. So that was a one-off offline chance of sustaining CapEx. So this resulted in roughly flat capital -- sorry, all-in sustaining cash cost performance for the group, and we reconfirm the guidance for the full year as those one-offs will not be seen in the second half year performance.

In terms of all-in sustaining cash cost performance versus peers, Polymetal continues to be within second quartile of global large- and medium-size gold producers, also containing, if not so emanating fully aiding growth in total cash costs during the period unlike many of the other competitors. And to reiterate, we expect even better performance in the second half.

In terms of free cash flow performance, on Page 17. We have seen compared to last period, a significant increase in adjusted EBITDA. However, we've also seen pretty meaningful changes in working capital. These are mainly related to Mayskoye and to a certain extent Svetloye and Dukat, which are expected to be reversed fully in the second half of the year. And also there has been an increase in overall level of capital expenditure with the start of active construction at Nezhda, despite the decrease of CapEx at mature operations and POX. So that has overall resulted in flat negative free cash flow for the period of minus $63 million, incorporating the proceeds from disposal of Kapan which we received in the first quarter of the year. That was minus $23 million. And we obviously reconfirmed that we expect pretty strong and positive free cash flow in the second half of the year as we'll see start of revenue inflows from Mayskoye, and also, the reversal of those one-off working capital increases at other maturing operations.

In terms of net debt performance, apart from free cash flow, we've paid a pretty significant final dividend in the first half of $146 million, and that has driven net debt up by roughly $170 million in total in the first half of the year. As we move along the second half, we expect deleveraging both in relative and in absolute terms.

So looking over to the balance sheet, net debt is expected to go down by the year-end, as I said, in both terms. We've also been quite successful in our refinancing efforts, which were focused mainly on continuing to increase the average maturity of our portfolio, while not compromising on costs. So the current average cost of it is 4.5, and it's going down with the recent refinancing efforts. We've refinanced $200 million in the second quarter rolling them over to 2024, mainly. This represents the refinancing of Sberbank loan -- the partial refinancing of $400 million Sberbank loan. More refinancing is expected this quarter. We are working on 2 deals: one will be a traditional refinancing deal and the other is expected to be another example of so-called green financing. These efforts I think will result in further refinancing up to $200 million to be announced already this quarter.

And we continue to maintain a robust liquidity buffer in terms of undrawn credit lines of approximately $1 billion available to us. With this and with very supportive macroeconomic environment, I think our medium-term target of 1.5 net debt to adjusted EBITDA looks more than achievable, and I think if the current commodity prices persist as they are, we'll be seeing these levels already by the end of first half 2020.

With this, I'm switching over back to Vitaly for Page 19.

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [4]

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Yes. Well, Page 19 demonstrates the relative performance of Polymetal versus our industry peers and FTSE 100 and 250 indices. As you can see, we spec up pretty well on both average dividend yield and on total shareholder return and that pretty much is how we measure our success within the company. We need to deliver positive returns to shareholders, and we must pay dividend. Clearly, this performance over 5 years captures the pretty lone bear market in gold and this number should look much juicier as we have now moved into the bull market for precious metals.

Page 20 just stresses the seasonality of our business and the discrepancy between the first half and second half of the year. With the arrival of Kyzyl, seasonality is likely to be less important, but it still will be an important factor given the fact that all our Far Eastern operations display strong seasonality in cash flow.

Page 21 is more or less reiteration of the guidance as we have provided it in the beginning of the year. We are on track to meet all of the relevant metrics. And in particular, in terms of cost performance, we will be helped by lower ruble. On the other hand increased gold price will push up the royalty component of our costs. However, we expect that these 2 influences are likely to cancel each other out in the second half. And just to complete the presentation, Page 22. As of recently, Polymetal is now both the largest primarily listed precious metals stock on the London Stock Exchange in terms of market capitalization and Polymetal is now also the most liquid precious metals stock on the LSE. We have exceeded Fresnillo on both those metrics, and we hope that this new prominence will attract new pools of investor money to the company.

And with this, we'd be happy to answer any questions.

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Questions and Answers

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Operator [1]

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Our first question comes from James Bell from RBC Capital Markets.

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James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Kyzyl costs both on a cash cost and all-in sustaining cost basis have been a little bit better than your expectations and certainly better than my forecast in the first half. Ahead of the resource and reserve update, I know it's coming, are you able to give some color on what you expect in terms of sort of steady state for the rest of the year and into 2020 in terms of sort of cost -- on a unit cost basis?

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [3]

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Well, actually, the -- thanks for the question. The transit that we currently see actually favorable. So we expect costs to be actually lower because on the one hand the share of gold that we derive from in-house POX processing in the second half will be higher and that portion of production has lower costs. Also in the second half, we expect to shrink the gap between production and sales by reducing the working capital, we concentrate in transit. The only headwind would be the increase in royalty from higher gold prices, but if anything, over the next 18 months or so, the cost structure at Kyzyl is likely to be better than in the first half of the year.

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James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [4]

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Okay. That's interesting. And then just in terms of looking at returns, at spot prices, you should be deleveraging pretty rapidly. I mean I know it's a Board decision, but I wondered if you could maybe give me some thoughts on if there's a gearing level where perhaps special dividends start to reenter the conversation or do you feel like you're in a cycle where it's about investment delivering Nezhda and POX before those become a conversation again?

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [5]

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Well, a lot will depend on the market feeling and the market conditions at the time the Board meets to discuss the special dividend decision. Clearly, leverage is important, but that's a backward-looking metric and I think what will drive the Board decision is the outlook for commodity prices to significant extent. So I think in terms of purely leverage level, I think 1.5 definitely stays on the table as the target. However, it's not only the leverage level, it's also market outlook which will be important in making that decision.

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James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Okay. That's great. And then just one more quick one. Can you remind us what your base case planning assumptions are in terms of prices for gold and silver? And do you think there is scope for those to change at year-end when you looked up at your resource and reserves?

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [7]

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Well, currently, we use $1,200 per ounce gold and $15 per ounce of silver for both reserve and resource estimates. I'm not sure whether we will change those assumptions, but chances are we may bump them up a little bit if the prices stay at the present level.

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Operator [8]

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Our next question is from Justin Chan from Numis Securities.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [9]

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My first question is on the Chinese market for offtake. It's been a fairly bumpy market in China for other commodities. I'm wondering what you're seeing there understanding that Kyzyl is a relatively clean kind and high-grade, but just if you could give us an update on what the dynamics you're seeing in that market are?

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [10]

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Well, thanks for the question. It's a complex market as you have directly stated, and there are several counteracting influences currently at play. On the one hand, we have negatives, which is increasing environmental standards and relative shortage of dollar liquidity for industrials in China. On the other hand, there are positives. And the key positive so far is the depreciation of Chinese currency and also the trade war with the United States, which pushes China increasingly to look at gold as an alternative component of their foreign exchange reserves.

On balance, I would say that the current state of the markets is better than what we expected in the beginning of the year in terms of the appetite for material and the spot treatment charge levels that we see. The negotiations for next year's contracts for concentrate will start around the LME Week which will be in I think early November this year. By that time, it will be I think -- it will be better understood how this counteracting forces play out net-net, but so far so good.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [11]

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Okay. And then just one question on the effective tax rate this period was a little bit higher than the statutory 20% rate, I'm just reading through the notes, it's said that that's the best estimate for what the full year will be, I'm just wondering if that 26% rate flows through to cash or is cash tax expected to be at that 20% statutory rate?

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Maxim Nazimok, Polymetal International plc - CFO [12]

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Well, that's largely an accounting thing, rather than a cash thing. We have -- you might have noticed we have had a bit of a funny foreign exchange loss in the period, which is in between subsidiaries loans reevaluate at different functional currencies. So the spike in the effective tax rate, I hope to be rather a one-off and generally not the best estimate of what you will see going forward. Historically, we've been tracking between 21%, 22% effective tax rate for the group as a whole and I think this is what you should be expecting for the full year.

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

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Okay. So 21% to 22% for the full year, which means that the second half will be a little bit below that to even it out, is that...

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Maxim Nazimok, Polymetal International plc - CFO [14]

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Yes. Yes. This is also impacted by the seasonality to a certain extent because Svetloye is currently paying a 0% corporate profit tax and Svetloye will have the bulk of their profits in the second half.

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Operator [15]

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Our next question is from Daniel Major from UBS.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [16]

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First question is on the maintenance CapEx that is reflected in the all-in sustaining costs, was a little bit higher certainly year-on-year and higher than, I think, some in the market expected this period, is there any change to the full year of expectation around -- or around maintenance CapEx and what is reflected in the sort of all-in sustaining cost calculation? Should we expect a similar run rate, I think, the $70 million -- $71 million in the first half -- in the second half of the year? That's the first question.

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Maxim Nazimok, Polymetal International plc - CFO [17]

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Well, as I mentioned, Daniel... Yes. Please, go ahead.

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [18]

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Go ahead.

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Maxim Nazimok, Polymetal International plc - CFO [19]

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Yes, as I mentioned, we've actually seen a couple of one-offs in the first half at Varvara and Dukat. Other than that, everything else is pretty much the run rate. So there is no reason to believe that we will exceed our full year capital expenditure guidance for the sustaining CapEx.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [20]

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Okay. So that would imply about $200 million, is correct because $194 million was your...

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Maxim Nazimok, Polymetal International plc - CFO [21]

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$200 million including exploration.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [22]

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Yes. Yes. Okay. Cool. The next question on Kyzyl specifically, perhaps to follow-on from James' question. I think at the quarterly update you said there was scope to put in a relatively small investment about $3 million to get the run rate to the plant to sustainably achieve about 2 million tonnes per annum, is that sort of project progressed and should we be expecting that sort of throughput with the plant in 2020?

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [23]

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Yes. Well, this project is nearing its completion. So yes, 2 million tonnes per year would be from our current point of view kind of the bottom of the potential throughput ranges that if the hardness of the ore returns to the original feasibility study assumptions. We may do even slightly more, but 2 million tonnes is, again, if -- the bottom of the expectations.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [24]

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Okay. Very clear. And that would obviously -- just to follow up on that, that would obviously imply higher total gold production than those in the feasibility study, not offset by any grade or anything?

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [25]

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That's right.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [26]

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Okay. Yes. Then final question, there was some press commentary around Polymetal taking a minority stake in reros deposit in Russia. Can you provide any updates or any information there? And the strategic rationale around minority investments in a different commodity?

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [27]

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Well, I think we're still at a pretty early stage in our deliberations about that potential investment. The fundamental logic revolves around our core competency in hydrometallurgy. In terms of reros the key obstacle for the vast majority of deposits of reros is metallurgy, which is very complex and which is hydrometallurgy. So we were thinking about deploying our substantial intellectual capacity in this new subsector of the mining industry, particularly given the fact that recently it has attracted quite a lot of attention in the market because of the pretty drastic expectations of growth in new technologies.

Clearly, gold remains our core sector, but as a matter of strategic flexibility and not getting ourselves too boxed in, we look at other opportunities from time to time, and we find that there is definitely benefit through specialization, but there are benefits through diversification as well, particularly, against the backdrop of gold multiple premiums disappearing at least in London. So when we sit down to make the final decision whether or not we need it, we definitely will take into account all of the factors, and we'll inform the market accordingly, but right now it's too early to tell.

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Operator [28]

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Our next question is from Kieron Hodgson from Panmure Gordon.

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Kieron John Hodgson, Panmure Gordon (UK) Limited, Research Division - Executive Director of Commodities and Mining Research [29]

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Can I just ask a quick question with regards to '19 budget and '20 as well? On the '19 budget, if you -- are you using the Kyzyl cost part of feasibility state -- feasibility study? And also, just sort of touched on what Maxim mentioned about the 1.5x net debt adjusted EBITDA target in H1 '20, is that still assuming gold at $1,200, silver $1,500? Or are you making some assumptions -- higher commodity price assumption, et cetera, for that sort of forecast, if that's okay, please?

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Maxim Nazimok, Polymetal International plc - CFO [30]

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Okay. Kieron, on the 2019 cost budget, the Kyzyl cash cost estimate was specific year's estimate. It was already no longer reliant on the feasibility study but reflected the actual results achieved by the end of 2018. So I think for Kyzyl, chances are that the current cash cost is more or less a run rate if not further improving as Vitaly has mentioned. So I think this is kind of permanent. Secondly, on your question for 2020, when I was referring to 1.5x adjusted EBITDA, leverage level achievable in the first half of 2020, I was assuming pretty much flat forward gold prices from the current spot. So that -- this is not the budget estimate. This is kind of a very straightforward extrapolation on the current spot prices.

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Operator [31]

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Our next question is from Boris Sinitsyn from VTB Capital.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [32]

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Congratulations with positive results at Kyzyl. We have 3 questions. The first one is on Nezhda cost, which you like had during the first half of this year $4 million, just the -- and the question is what are expectations from further costs to be incurred before the mine start up?

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Maxim Nazimok, Polymetal International plc - CFO [33]

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You mean the SG&A costs, which are not capitalized or what?

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [34]

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Correct.

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [35]

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I think you can probably expect a similar rate.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [36]

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So like $8 million per annum?

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Maxim Nazimok, Polymetal International plc - CFO [37]

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Yes.

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [38]

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Yes.

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Maxim Nazimok, Polymetal International plc - CFO [39]

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Noting only that it is not just Nezhda, it's Nezhda plus Prognoz.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [40]

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Okay. That's helpful. Another question is on the split of your Omolon costs if you could provide a very rough estimate, what's the difference between heap leach share cash costs and other cash costs, that would be helpful?

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [41]

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Well, heap leach represents a very, very small share of the overall production at Omolon, we are talking less than -- around 10%. And if we -- and if allocate all of the overheads in proportion to production, then clearly heap leach costs would be significantly higher than the average costs without production.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [42]

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Okay. That's fine. And the last question on your prepays. We noticed that in 2018 and as well as this -- during this period, you've attracted some prepays from gold sales. The question is what is the strategy here for the company? For example, what share of your total revenues go into sell via prepays? And what is the cost of this prepays for the company?

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Maxim Nazimok, Polymetal International plc - CFO [43]

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The cost is actually very low, hence the reason to enter into this. So for us, it's more a working capital financing rather than anything else. The prepays are not at fixed price, so we actually settle physically and receive the actual price. So I think as we are entering a seasonal working capital release and being in a very good period in terms of commodity prices, the relative importance of prepays will diminish quite quickly.

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Boris Sinitsyn, VTB Capital, Research Division - Equities Analyst [44]

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On -- just a follow up on this. So would you expect the -- like the value of prepays on your balance sheet in 2020 to be higher or lower than you have right now?

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Maxim Nazimok, Polymetal International plc - CFO [45]

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Lower. I think we'll settle the current prepay already by end of this month. The one we had as of 30th of June, and I don't expect at the current prices and at the current state of things in general the need for a new prepaid by the year-end.

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Operator [46]

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Our next question is from Nikolay from Prosperity.

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Nikolay Sosnovskiy, Prosperity Capital Management (Russia) Limited - Director of Metals, Mining & Chemicals [47]

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I've got also a couple of questions. First one is on basically higher gold price and much better economic environment. First part of it is your potential divestments, have you reassessed any of your expectations from these assets that are yet to be sold? Is there any progress in these negotiations or anything else to report?

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [48]

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Nothing really to report. We retain the kind of the general direction of our intentions and the gold price has gone up quite significantly recently, and we have not really factored that into any of the ongoing negotiations. And also frankly speaking, the last month or even more than a month have been quite slow because people are on vacation. We -- I'm going to the Eastern Economic Forum in Vladivostok next week and plan to hold several negotiating sessions on some of the assets. I think that will be an important juncture for deciding how fast we will advance the sale of those assets.

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Nikolay Sosnovskiy, Prosperity Capital Management (Russia) Limited - Director of Metals, Mining & Chemicals [49]

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And the second part of this question basically relates to your operational assets, once again conditions have improved greatly, have you reassessed any operational or investment plans? And if not, how much more this condition should change before you factor in some new potential or some alternatives to the current plan?

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [50]

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Well, the nature of our assets -- most of our assets is such that they're not particularly sensitive, where mine plants and not particularly sensitive to changes in gold prices. One thing that we are looking at is, for example, to make another pushback at Birkachan and thus extend the life of mine for the heap leach component of the operation. And another thing is, to extend the life of mine at Komar by adding a new pushback to the open pit. But those changes are not likely to have material impact on either production or costs in the medium term. They are more related to the long-term prospects for the operation. And for that, you need to make an assumption that the new price levels are here to stay, and I think that's a bit premature given the fact that the current bull run is less than 3 months old.

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Nikolay Sosnovskiy, Prosperity Capital Management (Russia) Limited - Director of Metals, Mining & Chemicals [51]

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Yes, that's fair enough. And then my last question is rather technical. In the press release, in all-in cash costs you basically disclosed capitalized stripping which went up 80% year-over-year from $13 million to $23 million and then capital expenditure, capitalized stripping goes down 20% from $30 million to $24 million, so just can you help me to reconcile what is the difference? Why don't you capitalize everything on the costs and don't allocate the entire expenditure?

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Maxim Nazimok, Polymetal International plc - CFO [52]

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Sure. Sure. That's easy actually. First half 2018 we're still capitalizing cost of Kyzyl and not yet including this into all-in sustaining cash cost calculation before it started production in June last year. And this year all of the capitalized stripping at Kyzyl goes into all-in sustaining cash costs.

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Nikolay Sosnovskiy, Prosperity Capital Management (Russia) Limited - Director of Metals, Mining & Chemicals [53]

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So this preproduction for commercial production has been...

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Maxim Nazimok, Polymetal International plc - CFO [54]

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So any preproduction cap strip is not included in all-in sustaining cash costs.

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Operator [55]

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(Operator Instructions) We have a follow-up question from Daniel Major from UBS.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [56]

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So 2 very quick follow-ups. Firstly just a follow-up from Nikolay's question on capitalized stripping. If we look at on a group level, excluding the all-in sustaining costs, inclusion or not, what sort of run rates should we be looking for on an ongoing basis versus the $54 million last year and the $24 million in the first half?

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Maxim Nazimok, Polymetal International plc - CFO [57]

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Sorry, are you referring to what's included in all-in sustaining cash costs or overall level, which is...

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [58]

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Just overall -- overall level?

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Maxim Nazimok, Polymetal International plc - CFO [59]

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Overall, I think the number will actually be drifting down because what will be happening is the average strip ratio at Kyzyl will be gradually coming down and that's actually the largest component of the capitalized stripping at the moment. So the way to look is actually to look at the strip ratio at Kyzyl approaching the life of mine average. It's going to be gradual, but this is where the ball should be rolling.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [60]

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Got it. And then next question, Mayskoye from -- I guess a production and safety prospective has been a fairly challenging asset, and we don't get an indication really of how things are tracking from a cost perspective in the first half considering you don't sell any volumes. Can you give us an indication around your expectations for full year all-in sustaining cost at that asset as you push the sales through in the second half of the year?

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [61]

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I think all-in sustaining costs this year should be relatively in line with the last year's results. So it's something around maybe $850 to $900 per ounce.

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Operator [62]

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Dear speakers we have no further questions. Back to you for the conclusion.

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Vitaly N. Nesis, Polymetal International plc - Group CEO & Executive Director [63]

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Well, thank you very much all for very active participation. Please feel free to follow up with either the management or the Investor Relations team, and we wish you all a very good day. Thanks a lot. Bye-bye.

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Operator [64]

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