Polymetal production results for 2q2017

Andrey KozhokaruJuly 26, 2017

Polymetal confirmed 2017 production plan at 1.4mln ounces in golden equivalent

In 2q2017, Group produced 278thous ounces in golden equivalent, which represents 6% YoY growth. Main sources of growth were strong production at Kapan, Varvarinskoe, and increase in heap leaching at Svetloe facility. Production results were negatively affected by planned shutdown for maintenance of Amursk facility and lower content of metals in ore at Ducat field. Total volume of production in 1H2017 amounted 558thous ounces in golden equivalent and was 7% YoY higher. In 2H2017 Group expects an increase in production due to realization of concentrate at Mayskoe, increase in production at Amursk facility, increase in heap leaching at Svetloe, and influence of seasonal factor.

Realization of gold and silver significantly increased in 2q2017, reaching 203thous ounces (+29% YoY) and 7.8mln ounces (+19% YoY) respectively. Consequently, revenue for the quarter reached $385mln (+26% YoY). On June 30 2017 Company’s Net debt was $1 583mln, 5.1% QoQ higher. Polymetal confirmed total amount of cash expenses at $775-825 per ounce of golden equivalent. According to company’s management forecasts, free cash flow in 2017 will be around $200-250mln. Payment of special dividends in 2017 is unlikely, because main cash flows will be directed on the development of current, perspective projects.

Company continues planned construction work at Kyzyl, launch of which is scheduled for 3q 2018. According to company’s CEO, the main aim in the near future is to establish effective supply chain for proper functioning of the enterprise. Following the launch, Kyzyl should reach full capacity within 3-4 months.

At 17 July 2017, Polymetal made announcement regarding increase in its stake in Nezhdaninskoe field by 7% to 24.7%. Company acquired the option to purchase remaining 75.3%. Option realization period is from 1 February to 1 June 2018. Company will publish results of initial valuation of field’s reserves in the end of 2017. According to company’s data on 1 July 2017, potential resources of Nezhdaninskoe field amount to 71mln tons of mineralized material, which includes 11mln ounces of golden equivalent. Nezhdaninskoe is the fourth largest gold field in Russia. Its ore characterized by high strength, which contributes to complexity of processing. In addition, development of this field requires significant expenditures on infrastructure, because of its size. Polymetal considers this asset as a good fit to overall portfolio, because of its correspondence to core company’s competencies.

Our opinion:

Latest production results match our expectations of gradual decrease in production on the old fields of the company and increase in output on the new assets. We forecast that company will attain its production target of 1.4mln ounces of golden equivalent in 2017. Main sources of risk for the business are prolong decline in metal prices and appreciation of the ruble in which main part of operating expenses are nominated. Given stable exchange rates and gold prices holding near current level ($1 240 per troy ounce), we expect attainment of our financial forecasts for 2017. Timely launch of Kyzyl project will improve company’s operating results. We consider Nezhdaninskoe field as perspective asset in terms of potential production volume and overall increase in Polymetal resource base. Nevertheless, we need to see economic characteristics of the project to evaluate its financial benefits. We keep our Buy recommendation.