18 Jan 2024

Polymetal International CEO Vitaly Nesis: Kazakhstan business to get wealth of development opportunities as standalone entity

The Polymetal holding is gravitating increasingly towards Kazakhstan: it has moved its parent company’s business address to Astana from Jersey, the primary listing from London, and one of its key development projects - a new pressure oxidation or POX hub - to the Pavlodar region from the Russian Far East. The company is now looking for a buyer for its Russian business that is subject to U.S. sanctions. The head of Polymetal International, Vitaly Nesis, talked about progress with the negotiations and the holding's plans in an interview with Interfax.

Q.: When will there be an investment decision on the POX hub in Kazakhstan?

A.: The board of directors approved $70 million in 2021 for the "Pacific POX" hub’s pre-construction phase - design, ordering long-lead equipment and preparation of the construction site. We actually managed to spend $10-15 million of this at Sovetskaya Gavan. We also ordered the autoclave. Now the rest of the money has changed location, and we continue to work within the framework of the pre-investment budget approved in 2021. The board will be ready to approve the investment phase budget at the end of next year. Then, in the baseline scenario, the autoclave will arrive at the site in the summer of 2025 and start operating in mid-2028.

Q.: The same autoclave supplier as for Amursk POX-2?

A.: Yes, the same Belgian company. We plan to ship the autoclave along the Northern Sea Route, then up the Ob and Irtysh. The construction site is approximately 10 km from the Irtysh. The terrain is straightforward, so the logistics will be generally comparable to Amursk POX-2.

Q.: The capex estimate was $730-780 million. Is this still the case?

A.: We will update the estimate taking into account the relocation of the site to Kazakhstan, where prices for building materials are different, and some technological aspects will also change. Again, inflation must be taken into account. But I believe $700 million-$800 million is a fairly accurate estimate.

Q.: All other things being equal, does construction in Kazakhstan and Khabarovsk differ in price?

A.: It’s cheaper in Kazakhstan. We believe that savings on construction and installation work will be around 20%, all other things being equal.

Q.: Why was the Khabarovsk Territory considered originally?

A.: Sovgavan was chosen with a view to importing concentrate from Australia and Latin America. There were trial contracts. Now this logic doesn't work.

Q.: In that case, what is the capacity requirement in Kazakhstan if imported concentrate is no longer needed?

A.: Given that we want to duplicate, if possible, all design solutions of the second stage of the Amursk POX hub, the capacity will be set at 250,000-300,000 tonnes of concentrate per year, depending on the sulfur content. Kyzyl will provide 60% of the feed, the remaining 40% will be sourced in the markets of Central Asia and Western China. We are still five years from launch, so the task is quite feasible. Moreover, Kazakhstan has declared a major increase in investment for the mineral development, and the gold mining industry in Kyrgyzstan is developing actively. I think the new plant will easily be fully utilized.

Q.: Is the company going to expand its own resource base in Kazakhstan?

A.: We have a large-scale geological exploration program, which is focused on copper and refractory gold ores, so we have certain hopes for our own growth.

Q.: Will the company be expanding its own resource base in Kazakhstan?

A.: We have an extensive geological exploration program, which focuses on copper and refractory gold ores, so we have some hope for growth of our own.

Q.: How have junior JVs performed in Kazakhstan?

A.: We bought our junior partner out of the Baksy project in June. We are very happy with the results, and we are now expediting the field’s preparation for development. We also have a partnership with a junior in the Northern Balkhash region, where we are prospecting copper and polymetallic ore deposits. In general, so far one of our two junior joint ventures has delivered, while the second is at the active exploration stage.

We are open to new offers. There is a lot of competition for licenses in Kazakhstan right now. Large Western, Chinese and local companies are active there. And there is no the same abundance of options in Kazakhstan as there is in Russia now. But we continue to work on this.

Q.: Are you thinking of expanding your mineral resource base by purchasing pre-explored blocks or companies at the pre-mining stage?

A.: We are looking at all options. We have been in Kazakhstan almost 15 years, so we know most of the promising well-known sites. Also, the country is currently experiencing a wave of inactive license withdrawals and termination of dormant contracts. As a rule, these are for anything but top sites, but we are also monitoring the process: maybe the state will put something interesting up for tender again.

We also conducted a preliminary analysis of other countries, formed working groups on some with representatives of government bodies. At this point it's premature to talk about anything specific, but we're seriously looking. Kazakhstan, of course, is a promising country, large in area, with substantial potential for geological exploration. But it wouldn't be bad to have some second, third jurisdiction. One country is good, but two are better.

Q.: What are your impressions of the Astana International Financial Centre’s (AIFC) Astana International Exchange (AIX)?

A.: It’s a very professional, competent and constructive team. The move from London to Astana was a unique project. A lot of difficulties arose - legal, technological - but all of them were resolved successfully. The AIX, AIFC, and AFSA [Astana Financial Services Authority] teams were very pro-active and we are grateful to them for their support and prompt delivery of this complex project.

But we can’t rest on our laurels yet - our interim goal is to increase liquidity. So far the volumes can’t compare with those we had in London. But Polymetal International is already one of the most traded securities on the AIX, with turnover of about 100,000 securities per day. Our interim goal is 1 million securities, and this will be about $5 million. It’s a matter of time before we reach this figure. It can be achieved, and it will mean that Polymetal International is not just formally a public company, but also a liquid investment tool.

I want to stress that for us AIFC is a permanent home, not a transit stop. Polymetal International has moved to Astana for good. So we have set strategic goals and we are ready to create a long-term tool box, including, for example, attracting international brokers, analytical coverage by investment banks and working with Chinese investors.

Q.: Last week the deadline for exchanging shares for non-residents whose securities are registered by the National Settlement Depositary has just lapsed. Were you not going to prolong it?

A.: There is no point in prolonging it as such. We have a registry that used to be on Computershare, but is now kept by the company itself. But at the same time, there is a very active migration of shareholders, both individuals and institutions, to the AIX central depository system. I opened an account there myself last week to receive my annual bonus partly in company shares. Overall more than half of the shares, perhaps nearly 60%, have migrated to the depository in Astana, and I think this will continue.

As for exchanging shares for a physical certificate, this is still more of a psychological exercise - documentary confirmation of an entry in a computer register so that a specific shareholder, especially a private individual, can feel comfortable.

Q.: What proportion of shareholders is currently unable to receive dividends? What can be done about it?

A.: About 12%. And this is now the main barrier to paying dividends. We will be discussing what to do, including with regulators and AIX. There is no ready-made solution yet, active consultations are ongoing. Hopefully we'll figure it out by the end of the year. But resuming dividend payments is our goal.

Q.: What can the company do for its part to increase liquidity?

A.: We need to work with investors, but our team has always been very active in this regard. For now, the lion's share of time goes on the ongoing migration from London, and I think this will take at least until the New Year. Now the main thing is to help all shareholders, wherever their shares are located, to make a successful move to the central depository in Astana. Then there will be classic marketing: meetings with investors, explaining the company’s prospects on the new stock exchange with a new strategy, with new investment plans.

As for longer-term prospects, it is of course necessary to bring back institutional investors. I think there is a chance of that by the end of next year, after sale of the Russia-based assets goes through.

There’s a lot of work to do and some things will have to be re-done. On the other hand, this, unlike the actual move, is easy to understand, with a fairly standard toolset and sequence.

Q.: As you mentioned selling Russian assets... It seems that there are not many potential interested parties.

A.: I’ll not comment on specific interested parties. There are quite a lot of them. The problem is that the deal will be non-standard; it will involve scrutiny by American and Russian regulators. It won't be easy, but I remain optimistic because these are prime assets and we are totally transparent. The principles on which the transaction will be carried out are also clear: total emphasis on compliance, as well as maintaining the full viability of existing Russian businesses, so that operating plans, investment plans and social commitments are not disrupted. This is crucial to Polymetal International from a corporate governance perspective, as well as to ensure that the transaction itself goes as smoothly as possible, because abrupt twists and turns will inevitably generate unnecessary risks. The task is complex, but clear. The principles are demanding, but can be fulfilled. So let's get on with it.

Q.: It the company prepared to sell assets piecemeal?

A.: Of course not. In fact, of those preliminary expressions of interest that we have received over the last month or so, only two serious offers were for a partial acquisition. All the others, and there are more than ten of them, have been for the company as a whole. We're not even considering a piecemeal sale.

Q.: My reasoning is that some potential interested parties are out of the running because they themselves are sanctioned, and others because not every company will be able to secure funding for such a big deal. Chinese investors will need additional approval to buy federal subsoil areas. Then we’re talking about more than six to nine months.

A.: Foreign investors will want some kind of extension to the process, and perhaps we will not then meet the nine-month deadline. But if we have a signed deal, and it's only a matter of state approval, then I think other stakeholders will understand.

But I am optimistic as regards financing. The gold mining industry is now “hot”, the external environment is very positive against the backdrop of high gold prices and a weak ruble. The assets are quality assets.

I think a deal will definitely be found and done. Yes, there are risks attached to timing, but I don’t think they are that great because we have taken on certain obligations and must honor them.

And we have time - not very much, but enough so that the deal does not turn out to be a fire sale, so that the shareholders of Polymetal International can get a reasonable, decent amount for Russian assets. Obviously it we take a sober look at the situation we can't hope for the same valuation as there was in 2021. There will be some kind of discount, but it needs to be measured in percentages, not multiples.

Q.: Can I ask a personal question: do you regret this?

A.: There is no place for passive emotions in business. Splitting a company up isn’t easy, but you have to move on. Like children, sooner or later the time will come when they leave home and continue as adults, on their own, and have what I’m sure will be a good life with their new family. Of course I’d like the new Russian business “family” to be no worse than the existing one. This is a little worrying, but it’s one thing that the board of directors is able to influence. So that the new “hands” are reliable, worthy, so that the Russian Polymetal can continued its constructive trajectory.

Q.: How can we guarantee the normal functioning of the Kyzyl-autoclave combination?

A.: There'll be a tolling agreement. It has already been concluded, and its long-term conditions are being cleared with the regulators. That is why the choice of counterparty in a transaction for the sale of Russian assets is important - we need to minimize the risk of processing the concentrate for Kyzyl. This aspect of the transaction, in preliminary communication with potential buyers takes a lot of the time we have available perhaps even more than, for example, conducting the cost assessment. And it’s not whether one side wants this contract and the other doesn’t. It is necessary to phrase things in such a way that the industrial relations are supported by a legal form that is stable, defensible and transparent.

Q.: Following the sale of assets, will it be possible to distribute funds between shareholders, for example in the form of special dividends? This could encourage shareholders to vote for the deal at the meeting.

A.: There’s a good saying: don’t count your chickens before they are hatched. Better to ask this question once the sale has gone through. Right now I think it’s too soon.

A simple majority of votes is needed to get the deal over the line. If we look at the situation pragmatically, the main factors for shareholders will be its structure and cost. Where the money goes is less important. Polymetal International management has always allocated capital in a balanced and proper manner. At the time of voting there will be more clarity on plans for the construction of the new POX hub, there will be specific ideas on the acquisition of new assets in Kazakhstan, and less likely, but still possibly, in other countries. The main thing is to finish separating the businesses in Kazakhstan and Russia. I think the logic of doing this is so obvious that the vast majority of shareholders will not have any objections. The main thing is for the terms to be reasonable.

Q.: How are management functions now distributed between the Russian and Kazakh offices?

A.: The Russian business is already being managed on a standalone basis. I still spend a lot of time in Russia, but this is mainly in connection to the upcoming transaction, communicating with potential buyers. In terms of production and investment decisions, the new management of Polymetal JSC – it’s not that new in fact, these are people who have been working in the company for about 20 years – is entirely independent.

In general, the business split is already 80% complete. We’ve hired additional employees in Astana, switched to some service contracts with independent providers, in particular in information technology, and we continue to maintain some service relationships without payment, but in the near future we will stop them completely. Ultimately there will be no relations between the Russian and Kazakh parts of Polymetal, with the exception of the tolling agreement.

Q.: What else would you like to convey to investors?

A.: We have discussed both the process and goals very carefully, so I would like to convey the general optimism of the board of directors and management. It is clear that both the sale of the Russian assets and the split of the company into two parts are events that undermine shareholder value. But on the other hand, the Kazakh company, on a standalone basis and left to its devices, will have many opportunities for development and a management team that will be focused on Kazakhstan and other countries in Central Asia. The options will only increase.