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Polyus targets 1 million-ounce production boost by 2020

will soon sellup to 5% of its shares on the Moscow Exchange, and may also re-list stock on aninternational exchange — just months after it its old listing in London, CEOPavel Grachev said in an interview published by Vedomosti July 18.

Grachevalso confirmed plans to boost Polyus' annual gold output by 1 million ounces by2020 to 2.7 million ounces, boosting the company into the ranks of the top fiveglobal gold miners by production and resources, according to data from SNLMetals & Mining.

Grachev,who admitted that the company's previous target of reaching 4 million ounces ofgold production by 2015 was a "goal-setting error," believes the new,more modest goal is within reach.

TheRussian group, which is majority controlled by companies linked to businessmanSuleiman Kerimov, plans to pour first gold at its Natalka 450,000 ounce-per-annum project bynext year. It is also pursuing projects to expand capacity and clearbottlenecks at existing mines, including Verninskoye and Kuranakh.

Otherexpansion plans include a reconfiguration of processing units at — Polyus'biggest mine — and a boost in heap leaching at Blagodatnoye, another open-pit mine in theKrasnoyarsk region.

Low costs, high margins

Polyus,which benefited significantly from the decline in the Russian ruble in 2014, isone of the few mining companies whose profitability increased in recent years —its EBITDA margin increased from 45% in 2014 to 58% the following year.

Accordingto a June corporate presentation, total cash costs fell to US$424 per ouncelast year, 28% lower than in 2014. All-in sustaining costs fell by 26%, toUS$610 per ounce.

Withits cost-cutting measures, efficient mines and a weak currency, Polyus iseasily the lowest-cost gold miner in the world.

As aresult, production has been increasing.

Thecompany reported a 7% increase in first-half gold production to 839,000 ounces.Russia's largest gold company said it maintained the high level of productiondespite a nine-day work suspension at Olimpiada, caused by the collapse of apit wall May 23.

Totalproduction of the yellow metal in the second quarter at Polyus was 455,000ounces, a 6% increase on the second quarter of 2015, due to increased output atOlimpiada, as well as Blagodatnoye and Verninskoye.

Sukhoi Log — Polyus' backyard

Askedabout Polyus' interest in the upcoming auction of — one of the world'slargest undeveloped gold resources — Grachev said both the magnitude of theproperty's reserves and its location were attractive.

Eventhough the Russian government has been promising to sell off the rights to thedeposit for at least a decade, Grachev believes that the auction may take placethis autumn.

SukhoiLog has total reserves and resources of 685.71 million tonnes, at an averagegrade of 2.8 g/t for 61.73 million ounces of contained gold reserves, accordingto SNL Metals & Mining data.

Polyusis uniquely suited to developing the deposit because of the Russian company'sexperience in the country exploiting large, open-cut gold mines. Polyus'established infrastructure and its "significant" investments in theIrkutsk region meant it would be able to better operate Sukhoi Log, he added.

"Elevenkilometers from Sukhoi Log is the pit of Verninskoye mine. And up until 2011,Polyus mined Zapadnoe, right on the flank of Sukhoi Log," he said.

Hepointed out that it would take at least six years to fully explore the depositand work out a feasible mine plan. Further discussions over necessaryinfrastructure will need to take place as well, he said.

Grachevalso heavily suggested the state will demand some level of involvement in thedeposit's development.

"Theestablishment of a joint venture — that is the only possibility of meeting thedemand for state participation in the project," he said. Asked if he hadreached a preliminary agreement with Rostec— a state-owned investment conglomerate — Grachev said he had reached an "understanding."

CapEx in 2016-17 to surge onbrownfield projects, Natalka

Grachevconfirmed Polyus will spend between US$600 million and US$650 million per annumthis year and next year on Natalka and the brownfield projects. That comparedto total expenditures of US$268 million in 2015.

Planneddevelopments include a US$110 million power cable in the Krasnoyarsk territory,near the Olimpiada and Blagodatnoye mines. The power infrastructure will enablePolyus to boost gold output around its Krasnoyarsk hub, as well as cut itsexisting power bill by US$12 million per annum and boost grid reliability,according to the company.

Otherprojects slated for development in the next few years are the start-up of heapleaching of low-grade ore at Kuranakh, and the expansion of the processingplant at the Verninskoye.

Brexit a boon for goldminers

Likeother gold companies, the Russian producer's shares have risen in response tothe increases in the gold price.

Grachevsaid Polyus had benefited from Britain's referendum vote to leave the EU, butnamed it as only one of a number of the "global uncertainties" thathave been pushing up the price of gold recently.

Hesaid the Brexit vote, and gold's subsequent rise, did not trigger the company'sdecision to sell 5% of Polyus' stock on the Moscow Exchange as the move wasagreed a few months before the vote.

He also suggested the company could list its stock onanother international bourse, despite its comparatively recent exit from theLondon Stock Exchange.

"Of course, we will consider all options in the future.The Toronto exchange is very popular in the mining sector, but large Russian playershave little experience on it. The Hong Kong [Stock Exchange's] main focus is onAsian investors. There are other exotic variants as well that we aren'tconsidering," Grachev said.

He said last year's decision to de-list from the Londonbourse last year was more about changing the company's home listing.

Grachev was unfazed about selling shares back to the sameinvestors involved in the de-listing.

"Buying and selling is voluntary, there can be somenegative emotions. The delisting came after the offer at market prices, and wepaid cash, not some doubtful alternative instruments," he said.

At the end of the day, investors for the most part look tothe future, and future revenue streams and better standards of management, hesaid.