Slightly expanded version of article first published on the Sharps Pixley website:
Meeting with Vitaly Nesis, CEO of Russia’s second largest precious metals mining company, Polymetal (LSE: POLY), is like a breath of fresh air in relation to talking, if one can get a word in, with the CEOs of many equivalent-sized Western gold miners. Straight answers to questions seems to be the Nesis mantra!
Polymetal is, according to GFMS, the world’s fifth largest silver miner but it should be ranked primarily as a gold miner, producing last year some 1.433 million gold equivalent ounces (44.6 tonnes) and its gold production by value dwarfs the value of its silver production by around 4:1 at the current gold:silver ratio of around 80:1. It also produces copper and zinc which also come into the gold equivalent ounce figure at a ratio of 1.5 tonnes of copper equivalent to a gold ounce and 1.2 tonnes of zinc. Metals Focus ranks it as 18th in its listing of the world’s largest gold mining companies but in terms of gold equivalent ounces it perhaps should be even higher up the listing according to its own latest figures.
The company is in the forefront of Russia’s drive to increase domestic gold output and has what will become its biggest gold mine, Kyzyl in Kazakhstan, due to come on stream in August this year which will add substantially to that country’s gold output too. This new mine is due to reach full production capacity of around 320,000 gold ounces annually during 2019.
Kyzyl is a world-class asset (high grade by today’s standards with the a reserve grade of over 7 g/tonne gold) and one of the best development-stage gold projects in the world and was acquired by Polymetal in 2014 for a total of $618.5 million. With its large high-grade reserves and low capital intensity, the asset is set to become the main source of medium-term growth and significant shareholder returns for the company.
Once completed, the project will comprise the Bakyrchik refractory gold deposit and the Bolshevik deposit and a state-of-the-art processing plant that is anticipated to deliver first concentrate production in Q3 this year. Mining has already started in the open pit with the ore being stockpiled ahead of the initiation of the process plant. The deposits will initially be developed by open pit mining (10 years) and later be substituted by underground mining (a further 12 years). Mined ore will be processed via conventional flotation followed by third party off-take and/or pressure oxidation at Polymetal’s POX facility in Amursk.
The Project is located in north-eastern Kazakhstan in a traditional mining region with good infrastructure and easy access to grid power and the railway. Based in the Auezov Village, the site is approximately 750 km east of the capital city of Astana and 75 km west of the mining and metallurgical industry centre of Ust-Kamenogorsk (or Oskemenpopulation of approximately 300,000). Kyzyl is also in close proximity to the Russian (120 km) and Chinese (330 km) borders. The nearest railway station is 6 km away in the village of Chalobai, connecting Ust-Kamenogorsk to Shar, as well as Russia, China and Europe.
Overall group gold production is scheduled to increase to 1.8 million ounces by 2020 and further to over 1.9 million ounces by 2023 assuming the projects in its proposed forward pipeline go ahead as planned – but some of these do not yet have Board approval.
When questioned on what he felt were the prospects for precious metals going forward Nesis was fairly non-committal on the prospects for an increasing gold price, but admitted to being a strong bull on silver. He pointed out, as we have also done in these columns, to the high level of the gold:silver ratio (GSR) which is currently at close to 80 (and has been as high as 81.5 recently) and is firmly of the opinion that a GSR of around 60 would be far more appropriate. Even at what some regard as a particularly low current gold price level of around $1,320, a GSR of 60 would put silver at $22 an ounce – some 33% higher than it is today. In our view, though, it would probably take a decently rising gold price to stimulate a re-rating of the GSR, in which case the gain in silver would be even higher.
Polymetal currently operates eight producing mines – six in Russia and one each in Kazakhstan and Armenia and has other development projects in the pipeline as well as Kyzyl. However it has a policy of only managing two new projects at any given time and the current concentration is on Kyzyl and on de-bottlenecking its state-of-the-art pressure oxidation (POX) facility at Amursk in Russia’s Far East. It won’t take a decision on building what is potentially its next new mine – Nezhda – until Kyzyl is up and running successfully. Likewise it has a second POX line in prospect at Amursk, but won’t take the decision on that until the current POX debottlenecking programme is also seen to be successfully implemented – due to be in early 2019.
Further down the road will be the Prognoz new mine development in Russia but a go-ahead decision on this would not be made until Nezhda is up and running in 2021, assuming there’s a positive Board decision to go ahead with this. Prognoz is the largest undeveloped silver project in Russia and one of the largest in the world. The property comprises a very large high-grade resource of 292 million ounces oof silver at 586 g/t with excellent exploration upside estimated at 119 — 273 million ounces of silver contained at 469 g/t. Polymetal envisions a relatively low-capital and fast development approach for the asset that is based on open-pit mining and conventional processing. Production from the property is estimated at 20 million ounces of silver per annum should the project proceed, but go-ahead is only likely to be given in late 2021 with possible first production in 2024.
There is also a possible pgm project at Viksha as a potential long term prospect, but Nesis obviously thinks this is perhaps non-core and may be sold off, as may be the barely profitable Maminskoye mine. The currently unprofitable Kapan mine in Armenia is also under review.
Polymetal’s current priority is, like its Western counterparts, balance sheet improvement and cost control. The new operations coming on stream will cut capital outlays and should reduce overall group costs. Current AISC comes in at $893 an ounce putting Polymetal firmly in the mid tier among major gold producers globally.
The current dividend policy might be seen as generous in comparison with most western gold miners and is to pay out 50% of underlying net income. Current dividend yield is around 3.8% at the current share price of a little over £7 (its primary listing is on the London Stock Exchange). It likes to compare its dividend policy positively against other key London-listed precious metals miners Randgold and Fresnillo!
Nesis confirmed that the company’s gold production is nearly all sold to Russian banks, which in turn sell it on the the central bank. Last year the Russian central bank expanded its gold reserves by well over 200 tonnes and national domestic production was around 270 tonnes according to Metals Focus in its Gold Focus 2018 report, although the country’s Finance Ministry put the level a little higher at just over 300 tonnes.
Maybe because it is a Russian miner with its principal operations in Russia and Kazakhstan, Polymetal has to try that much harder to generate Western investment, but interestingly it has now exceeded its production guidance for six successive years and its current dividend policy, noted above, puts all the major western gold miners to shame. Nesis is of the opinion that investment in mining in Russia is probably less risky than investing in mining in Africa, pointing out that government is stable, there have been no property nationalisations or drastic changes in royalty and taxation policies – and in any case Polymetal is a Russian company working in an environment it understands in its home and allied countries. It has no desire or intention of spreading its wings outside the areas it knows.