19 Dec 2022

Polymetal CFO Maxim Nazimok: Investor needs are now fairly basic: downwards, towards the base of Maslow's hierarchy

Russian gold miners have had to had to revise all established models of their work in 2022, selecting new suppliers, tapping new sales markets, adjusting to a new financing and pricing environment and seeking alternative ways to structure their business. Maxim Nazimok, CFO of Polymetal, tells Interfax in an interview about how this company has been adapting to the new conditions.

A local foreigner

Q.: There are only a few "foreigners" left in the Russian gold mining market, and Polymetal is the only large one. What are the risks of such a status?

A.: From a practical point of view, for example, in terms of obtaining licenses and liaison with regulatory authorities on operational issues, then of course, we have never felt like a "foreigner". We are a local company, both in Russia and Kazakhstan.

The only discomfort is in the field of corporate regulation, sanctions and counter-sanctions. And for these purposes we are a "foreigner" and, moreover, incorporated in an "unfriendly" jurisdiction. This was in fact one of the reasons why the plan to sell the Russian part of the business, announced in the summer, did not come off: some of the new presidential decrees and other regulatory acts severely limit opportunities for residents of such jurisdictions. But this concerns, I repeat, first of all, corporate matters - M&A transactions, to some extent, intra-group financing. Russia and Kazakhstan quietly exchange cash flows, but the parent company has proved to be somewhat isolated, and it is now financed mainly by Kazakhstan.

Q.: At what stage is the discussion of asset split? Which option is currently the main one on the agenda? When can we expect some news?

A.: This whole situation taught has us not to try to think too many steps ahead. We have a good idea of the next step or two, and of the overall concept. So, the next one is the exchange of shares of non-residents that got "stuck" in the NSD. This is taking a little longer than originally thought, but it must be completed one way or another before we can move on. Once this is sorted out, the next step is to move to a "friendly" jurisdiction, just in time to untie the company's hands in terms of corporate actions. Because in the current configuration, where we are registered in Jersey, neither a sale nor an asset split can be done normally.

Moreover, when choosing a new jurisdiction, a wide range of factors should be taken into account: not only the friendly country tag, but also the political aspect, the regulatory and tax aspects. You need an understanding of the jurisdiction because this is a full-blown corporate relocation. In fact, the list of options is short: these are the Astana International Financial Center (AIFC) in Kazakhstan, and Hong Kong and the United Arab Emirates. The AIFC now looks objectively to be the priority, because we have been in Kazakhstan for a long time, we have a listing on the AIFC, we have people on the ground. We have a good understanding of the jurisdiction, regulatory and tax aspects. We are looking in that direction for now, but a final decision has not been made.

Q.: And at what stage might the company start paying dividends again?

A.: The share swap has to be completed and, most likely, the relocation. I'm not venturing to name a date right now.

New-style sales

Q.: Does the withdrawal of Good Delivery from domestic precious metal refineries interfere with you in any way?

A.: No, it doesn't. The London Bullion Market Association Good Delivery status was important when we used to sell gold to the West. The Middle East and Asian markets, where we sell gold now, do not attach much importance to it. Firstly, they have their own equivalents - Dubai Good Delivery and Shanghai Good Delivery. Krastsvetmet, by the way, hold both of these certificates. Secondly, our refineries have earned a very good reputation in terms of the quality of production processes and metal, and are de facto Good Delivery compliant. Buyers are already looking rather simply at the brand, at which refinery the ingot was produced.

Q.: How successful has Polymetal been in restructuring sales?

A.: The restructuring process was completed entirely over the third quarter. It worked out well with the Middle East and India. There is a notion that China is buying up enormous volumes, but so far East Asia is opening up more slowly - there are supplies there, but a smaller share.

At the moment, we have full-fledged regular shipments to new customers with minimal discounts, that is, we have not suffered in terms of pricing. Yes, we perhaps took a little more time than some of our colleagues in the industry, and because of this we built up quite large stocks of unsold metal. But on the other hand, we got a good, efficient structure: we sell metal on market terms with as few intermediaries as possible and are not dependent on one big buyer or any specific arrangement. There is a lot of flexibility.

Although the direct export of refined metal is fairly complex in terms of formalities. In Russia, there is still an archaic system of paperwork, state control, plus the Assay Office and now the State Integrated Information System for Precious Metals and Stones. None of this meets today's needs for flexibility when choosing a buyer, pricing, efficiency - the ability to export metal quickly. The system is objectively not tailored for this now.

Q.: As a miner, do you see any benefit from the fact that retail buyers have become more active in the Russian market?

A.: When it became clear in the spring that it was necessary to look for new sales outlets, Russian retail was the first place we looked. But in the end it did not materialize into real work and volumes. Why? First, there should still be a commercial bank between the manufacturer and retailers, and we in Russia hardly sell to banks now. Second, retail customers do not buy standard, large bars that we are used to selling. They buy 10g, 100g, 1 kg at most. The production of such ingots is expensive, since each refinery takes an additional payment. At the same time, the terms for buying that we saw were even worse than those on which we now sell abroad in bulk. In other words, a lot of hassle, expensive in terms of production and a very shallow market.

Q.: Do you believe in the prospects of a new price benchmark?

A.: No. And I don't see the point in it. A benchmark that is the same for everyone makes it possible to talk to each other on the same terms. If the number of benchmarks increases then market efficiency diminishes.

Alternative finance

Q.: To what extent has the market for finance changed for you?

A.: Considerably. The market has gone through several stages. There was no financing at all at the beginning of March, but as if anticipating the situation we drew down as many credit facilities as we could in January, That is, we had a big liquidity cushion, and this helped a lot. More financing was available in rubles and at high cost, because the key rate was about 20%. As this came down, the cost of ruble borrowing also fell, and by the middle of summer it normalized to current levels. There was a brief period when funding was available in the usual currencies, dollars and euros. Again, we took full advantage of it. But then, somewhere in late August-September, when there were fears that Russia would be cut off from "unfriendly" currencies altogether, courtesy of the Central Bank it started to be effectively squeezed from the banking system. It went quite well, and now none of the Russian commercial banks wants to work with either dollars or euros. Those that are not sanctioned accept payments, but there is simply no dollar funding, especially long-term funding.

And so that there are no illusions: there is currently no financing at all in non-Russian banks for companies with a significant share of Russian business, except for Kazakh banks. That is, the financing markets available to us now are Russia and Kazakhstan.

At the moment, we see the following trend - funding in alternative currencies. Relevant for us are the yuan and the UAE dirham. We are already working quite a lot with both in terms settlements, we have already raised our first loans in yuan. The dirham is a slightly more exotic currency, but a market is beginning to emerge for it.

Q.: What are your current debt management goals? Are there any major repayments coming up next year?

A.: For almost all next year's repayments, we already understand where and how we will refinance, and there are things that we have already refinanced, but mostly in rubles so far. But we'll try and roll over those relatively high-cost borrowings, primarily in rubles, which were taken out to finance working capital in the spring and summer, at the beginning of next year, most likely, just in alternative currencies. And I do not rule out through a mechanism that includes public debt.

Q.: Yes, now even gold miners who have not issued bonds before are tapping the public debt market. In particular, yuan bonds are gaining popularity.

A.: To be fair, the bar for issuer requirements has dropped significantly, primarily in terms of rating aspects. Since it is mainly professional financial market participants who buy such issues, they themselves carry out credit analysis and rely less on ratings. And this is a local market, there are no foreign investors in such issues.

As for the currency, we'll most likely choose the yuan. The interest spread between bonds in yuan and loans in them is not very wide, and the potential advantages are their volume and maturity, because the mechanism that we have historically got used to when it was possible to negotiate bilaterally with a specific bank and raise a large amount of funds for a long term does not now work, alas.

There are no issue parameters that we can announce yet. But, I repeat the barrier for entering public debt market has been lowered greatly. The transaction costs and administrative efforts to organize an offering cannot be compared to those needed for a classic Eurobond in the old days.

Non-routine operations

Q.: How has Polymetal been affected by the exit of foreign equipment suppliers, consulting companies, software vendors and so on from the market?

A.: In various ways. The situation differs greatly for specific groups of goods and services. Some suppliers have left completely, for example, European manufacturers of mining equipment and spare parts. For some positions alternative supply channels are possible, the parallel imports, for others they have been fully replaced by equivalents from different parts of Asia or domestic ones.

Our key facility, the autoclave, is doing quite well. Most of the long-term suppliers and contractors are meeting us halfway if there are no direct sanctions.

In terms of mining equipment, everything is very similar to the aviation industry: a donor scheme and the purchase of machines, now, loosely speaking, Chinese ones.

Again, it took quite a lot of effort to re-establish the supply chains. The result is two-fold: firstly, everything has become more expensive, sometimes significantly so, due to logistics and the need to implement parallel import schemes, and secondly, the level of buffer stocks at enterprises has increased, and this is an elevated level of working capital.

Q.: Are any projects being moved back in connection with this, and by how much?

A.: There were a couple of situations at the construction site of the second stage of the Amursk POX plant when reengineering was required, but as it turned out, there was nothing insurmountable. Yes, this takes longer and costs more, hence the rescheduling, but nothing is impossible.

Amursk POX 2 has been moved back to the first half of 2024. We were going to launch Veduga in 2025, but now we plan to in 2027.

A major project that we have decided not to implement in its current form is the Pacific POX plant. But a site in Kazakhstan is now being assessed and selected. The feasibility study, which was going to be done for Sovgavan, will be used for this new site, because it is absolutely clear that autoclave production in Russia cannot be created from scratch in the current conditions.

Q.: One of the Sovgavan project's advantages was access to the sea, that is, the ability to bring concentrate in from anywhere in the world.

A.: There will be some redistribution. Now, concentrate from Kazakhstan's Kyzyl is almost the Amursk POX hub's main feed. When an autoclave appears in Kazakhstan, we will process everything that comes from there within the country. And, by the way, from the point of view of the future potential Russian and Kazakh asset split, this is better, because there is less operational interdependence between segments. Amursk POX capacity is freed up, can be used to process third-party feedstock, for which the Pacific POX plant was originally designed.

It cannot be said that Amursk is losing heavily to Sovgavan in terms of logistics. There is a river and a railway, and we are already investing in infrastructure during the construction of Amursk POX-2. So there will be no particular difficulties with bringing the concentrate to Amursk from Sovgavan.

Q.: In general, given that logistics has become more challenging, is there still a working initiative to transport concentrate from one country to another?

A.: Absolutely. We are not relying on American concentrate. And the logistical problems that arose this year during deliveries to China were mainly due to Covid, and rarely environmental.

Q.: Reporting by a number of gold miners in Russia for the third quarter show a rather dramatic decline in margins.

A.: These are macroeconomic constraints. In the third quarter, two factors converged: the drop in gold prices to $1,600 and a very strong ruble. And we have not yet touched on the inflationary and logistics aspects, which, of course, also play a role. Also, if we're talking about margins, this can be seen even in our half-year reporting, when you do not sell everything that you produce, fixed costs are distributed unevenly and, naturally, margins sag.

Our results for the year will be more or less even, given that sales are now entirely regular and working capital is in order, the ruble has weakened slightly compared to August-September, and gold prices have risen. Of course, we won't see last year's indicators, but margins will be quite normal.

Q.: Is there an understanding of cost? Are you staying within guidance?

A.: We remain within the updated guidance, for TCC, for AISC, and for capex, by the way [current guidance is $900-1000 per ounce, $1300-1400 per ounce and $725-775 million, respectively]. Next year, we cannot expect costs to fall, especially with such a ruble.

Q.: Inflation has been quite unpredictable this year. Does your "own" inflation coincide roughly with official inflation?

A.: Here, too, it is very uneven in terms of components. For example, labor costs are rising more or less in line with official inflation. It is different in supplies, especially where there has been import substitution or simply substitution of imports for imports: for certain positions, the growth has been considerable, and for some there has been no growth at all. For example, iron prices have fallen, so for some components - for example, supports, grinding balls for mills - there is growth above inflation. But the fuel has risen much more than official inflation.

Q.: Is production guidance of 1.7 million oz still valid?

A.: Yes. We do not see any risks. It's an advantage that we have a relatively large number of assets. Problems at some of them are compensated by additional production at others. China is still complicated from the point of view of being able to ship things there on time, but other enterprises have worked well. For example, Kutyn was launched ahead of schedule, despite the current situation.

Q.: What are the plans for investment in exploration? Polymetal was going to cut costs, primarily by forming joint ventures with junior partners.

A.: The current situation gives us cause to look critically at both exploration projects, and at some not very large development projects. We applied new macro assumptions, new assumptions in terms of prices for everything, and some projects were downscaled. But the general approach, that we invest in exploration, including greenfields, remains unchanged. Key, promising joint ventures with juniors are ongoing, and we are selecting new projects. It's just, perhaps, a little more resolutely that we are saying goodbye to what either does not yield results, or somehow does not look economical.

Q.: A couple of years ago, Polymetal was even ready to participate in regional geological surveys.

A.: We are now trying nevertheless to focus on specific projects, not on abstract regional surveys. Again, this is a sort of rationalization of capital expenditures. That is, we only take on what can show a relatively fast result, as far as this is possible for exploration.

Work for IR

Q.: Has anything changed from the point of view of ESG in the new realities?

A.: Not in terms of the general approach to the topic. But again, there has been some rationalization from the point of view of capital-intensive projects. We analyzed what can be done, and what cannot be done in the current conditions from a practical point of view, whether it is possible to build or deliver something, and what works or does not work from an economic point of view. But the general areas and priorities are the same: industrial safety, climate, cutting greenhouse gas emissions, water recycling, that is, the transition to dry tailings storage. All these projects are being implemented.

Q.: But on the part of investors, ESG needs, as I understand it, have faded into the background.

A.: The needs of investors right now are generally pretty basic. Both the few remaining institutional investors and the sizable base of now retail investors from around the world are all interested in simple things: the company's corporate existence, dividend prospects, production, leverage. That is, downwards, towards the bottom of Maslow's hierarchy.       

Although from time to time we do get enquiries from that old world: "Why has the proportion of women on your board of directors decreased? How do you plan to change this situation?" We are talking about Western institutional investors who have some kind of ESG-guidelines or minimal criteria, and they poll companies as part of their regular reviews.

Q.: Are there investors who have stopped working with the company altogether?

A.: Of course. Compared to January, the register of institutional shareholders has changed a lot. There are a few large classic funds left, the most striking example being BlackRock , which now has more than 7%. There have been some buyers during this time, but not many. But, of course, there are practically no index funds, and there are practically no UK generalist funds, given that we have dropped out of the FTSE. Their place has been taken mainly by retail investors, and Western ones at that.

We now have two isolated baskets of investors: Russian investors trade only on the Moscow Exchange, and foreign ones only abroad. And it is quite difficult for foreign retail buyers to purchase our shares, although a lot want to. Our IR work has also changed a lot: now we spend most of the time working with the retail investor, who has different needs with a different frequency.