Polymetal announced 4Q2017 operating results

Andrey KozhokaruJanuary 25, 2018

Polymetal produced 1 433k ounces of gold equivalent in 2017, exceeding its own forecast of 1 400 ounces.

In 4Q2017, the Company produced 405k ounces of gold equivalent (+8% y/y). Annual production of the gold equivalent amounted to 1 433k ounces (+13% y/y), which slightly exceeded the Company's forecast for 2017 of 1 400k ounces. In 4Q2017 Polymetal produced 317k ounces of gold (+11% y/y), 6.6mn ounces of silver (-6% y/y). Production of gold and silver during 2017 equaled to 1 075k ounces (+26% y/y) and 26.8 mn ounces (-8% y/y), respectively.

Strong performance in 4Q2017 attributed to the growth of production at Albazino-Amursk, Komar, Omolon, as well as from Svetloye heap leach. The decrease in the silver production was facilitated by a lower grade at Dukat.

The Company slightly exceeded our annual forecast for silver production (26.8mn ounces-fact versus 26mn ounces-forecast) and reached our forecasted level of gold production.

Polymetal confirmed production forecasts for 2018-2019 at the levels of 1.55mn and 1.7mn ounces of gold equivalent. The main drivers of the production growth will be the launch of the Kyzyl project, the processing of oxide ore at Mayskoye, as well as improvements at Varava and Kapan.  

Due to the appreciation of the ruble, increase in fuel prices, additional costs of exploration and acceleration of work at the Kyzyl project, the Company estimates all-in sustaining cash costs for 2017 at the level of 850-900 USD per ounce of gold equivalent (775-825 USD earlier). All-in sustaining cash costs for 2018 are expected at the level of 875-925 USD. According to the Company, capital expenditures for 2017 will amount to 415mn USD (370 mn USD previously). Capital expenditures in 2018 are forecasted at the level of 400mn USD, while maintaining high exploration costs, investing in the Kyzyl project and increasing the productivity of the Amur POX.

As of December 31, 2017, Polymetal's net debt was 1 421mn USD against 1 599mn USD as of September 30, 2017.

The Kyzyl project continues in accordance with the schedule. In 4Q2017, the Company completed the tailings storage facility. The first concentrate is scheduled for mid-August 2018. The first ore was extracted in January 2018.

According to the updated dividend policy, the Company will direct 50% of the net profit (30% earlier) to dividend payments, while maintaining the Net debt/adjusted EBITDA below 2.5. Polymetal declined a special dividend for 2017, taking into account that all free cash flow will be directed to regular dividend’s payments. Total dividends for 2017 will be determined by the Board of Directors in March 2018.

Our opinion:

The projected all-in sustaining cash costs for 2017-2018 exceed our initial forecast by an average of 7%. Given the continued strengthening of the ruble and significant increase in oil prices observed through January 2018, we do not exclude that in the short term Polymetal can reach the upper bounds of all-in sustaining cash costs range announced for 2018, taking into account the fact that most of the production falls on the second half of the year. Meanwhile, we see an increase in metals’ prices. According to Bloomberg, the average price of gold for 1H2017 amounted to 1 239USD per ounce, for 2H2017 -  1 278USD per ounce, for 25 days of January 2018 - 1 331USD  per ounce.

Currently, we believe that oil is close to the upper limit of its traded range (Brent - 71 USD per barrel). The Company will be able to maintain margins at an acceptable level in case gold and silver prices hold at current levels (1 331 USD for gold and 17.2 USD per ounce for silver).

Given the significant change in forecasts for commodity markets and all-in sustaining cash costs since our last assessment and considering the need to adjust capital expenditures that we have pledged for 2017-2018, we put our recommendation under review.