29 Sep 2010 16:37

Polymetal boosts H1 GAAP earnings five-fold to $95 mln, below forecast

MOSCOW. Sept 29 (Interfax) - Polymetal boosted net profit top US GAAP five-fold year in H1 2010 to $94.53 million, the No. 1 Russian silver miner said in a statement.

This was below the $106 million that analysts predicted in a consensus forecast for Interfax.

Earnings before taxes, depreciation and amortization (EBITDA) by 112% to $186.9 million, outpacing revenue growth of 92% to $421.7 million, both largely driven by combination of rising commodity prices and sales volumes.

Cash margins expanded as 22% increase in total cash cost per ounce of gold equivalent from US$442 to US$541/oz (or US$99/oz) trailed 25% (or US$234/oz) jump in average realized gold price.

"The company maintained its strong ability to generate stable operating cash flows to fund its aggressive growth program." Cash flow from operations grew by 38% to $121.0 million and to a large extent covered capital expenditures of $161.3 million.

"Our financial performance in the first six months of 2010 was excellent," said Vitaly Nesis, CEO of Polymetal, commenting on the results. "We are reaping the rewards for disciplined expansion and relentless cost control".

In H1 2010, gold revenues grew by 106% from $117.6 million to $241.8 million with 64% volume growth and on the back of 25% increase in average realized gold price from $918/oz to $1152/oz.

Silver revenues grew by 66% from $100.9 million to $167.2 million on the back of a 35% increase in average realized silver price from $13.0/oz to $17.5/oz. gold accounted for 57% of revenue with silver comprising 40% and copper 3%.

Costs of sales increased by 93% from $112.4 million to $217.3 million as two successful expansions and acquisition of Varvarinskoe led to a dramatic rise in physical volumes of production. Ruble appreciation vs US dollar (10%) and domestic inflation (10%) contributed to unit cost pressures.

Costs of consumables and spare parts grew 69% from $36.8 million to $62.1 million, mostly on the back of more than doubling the amounts of both ore mined and ore processed. Of other factors, a significant increase in domestic diesel fuel prices in 1H 2010 vs 1H 2009 was a major factor for remote mines generating power from diesel gensets.

Personnel costs increased by 30% from $27.6 million to $35.9 million as both average wages increased by 20% in dollar terms and number of employees directly involved in production grew by 10%. The management notes that currently wage inflation in Russia and Kazakhstan is generally in line with CPI and no material labor shortages have been encountered in the period.

Cost of services more than doubled from $26.4 million to $58.2 million due to a combination of factors. The most important ones are growing ore haulage and grid power purchases at Dukat and Voro following the expansions, addition of Varvarinskoe, and continuing efforts to outsource non-core activities across company's mines. Mining tax grew by 82% as a result of increases in sales and metal prices.

As a result of the above, total cash costs increased by 72% from $107.1 million to $184.5 million, materially less than 92% increase in revenues.

Depreciation increased by 69% from $18.5 million to $31.2 million as a result of new asset acquisitions, particularly Varvarinskoe, and expansions at existing operations.

Metal inventory continued increasing and grew by $14.5 million as stockpiling continued ahead of commissioning new mines at Omolon and Albazino.

Polymetal said $13.5 million of inventory was written off at Varvarinskoe. This one-off non-cash charge reflects management's assessment that part of existing ore stockpiles (accumulated before Polymetal assumed control of the operation) are not economic to process due to low grade resulting from excessive dilution.

General, administrative, and selling ("GAS") expenses grew 32% from $26.7 million to $35.3 million, mostly as a result of 48% increase in personnel costs. Excluding the impact of labor costs, GAS remained virtually unchanged.

GAS personnel costs increased as, in addition to average dollar-denominated wage increasing 20%, overhead headcount grew significantly following new acquisitions.

Other operating expenses increased by 115% to $25.6 million from $11.9 million.

Exploration costs more than doubled to $3.1 million compared with $1.2 million as the Company increased green-field exploration.

Voluntary social payments were up to $4.8 from $2.2 million as the company expanded social partnership programs to new municipalities, but also due to domestic inflation and ruble appreciation.

Polymetal said $7.2 million was expensed as Omolon start-up costs, including repairs of equipment and auxiliary facilities, and labor costs of the start-up crew and contractors.

Interest expense declined by 33% to $7.9 million from $14.4 million despite increase in average net debt balance, mostly reflecting decrease in average interest rates which almost halved. Exchange losses of $8.7 million were recorded as ruble depreciated in 1H 2010 by 3%.

Income before income tax grew strongly from $33.0 million to $123.5 million reflecting strong revenue growth and effective cost containment.

Income tax expense doubled to $29.0 million from $14.1 million with effective tax rate of 23.5% materially exceeding the statutory rate of 20%. Some costs in the period were not tax deductible, most importantly costs at mines in development stage and depletion.

As a result of the above, the Company reported net income of $94.5 million compared with net income of $18.9 million for 1H 2009.

Capital expenditures increased from $86.0 million to $161.3 million.

During the period Polymetal continued further extending the duration and lowering the interest rates on Company's debt. As of June 30, 2010, the average maturity of debt was 2.5 years and interest rate was c. 5.0%. The management believes that the current leverage ratio of less than 2 times Debt/EBITDA is reasonable and comfortable for the company.

Net debt grew 8% during H1 2010 to $616.5 million, of which $154.7 million was short-term debt.