LAWRIE WILLIAMS: Polymetal CEO bullish silver and copper but calls gold unpredictable
A meeting with the CEO of Russia’s second largest gold producer, Polymetal, Vitaly Nesis, is always a worthwhile experience. As well as being one of the longest standing CEOs of a gold major – 15 years so far – he is also one of the most open about his company and the sector in general. Given that Polymetal, which is quoted in London and Moscow, has proved to show exemplary performance in its continued expansion programme, and is one of the highest dividend payers in the sector in relation to ounces of gold produced, Nesis has shown himself to be a particularly astute corporate leader, so his views on the company, and the markets in which it operates, are always well worth listening to.
Polymetal, as well as being a gold mining major with mines in Russia and Kazakhstan and, until recently, Armenia, is also one of the world’s largest silver producers – No. 1 in Russia and perhaps No. 5 in the world, despite nowadays classifying itself as primarily a gold miner. Thus Nesis’ views on the silver market are always worth noting. Talking to him in April last year (See: Polymetal CEO very bullish on silver) he expressed the opinion that the Gold:Silver ratio (GSR) was far too high and that the silver price was thus way too low in relation to gold. But since then the ratio worsened for silver and the price, if anything, has further underperformed its yellow sibling. Nevertheless, Nesis remains bullish on silver suggesting that the GSR will come down sharply in the medium to long term. We doubt that it will come down in the near future to around 60 as he suggested to us last year, but we have ourselves gone on record as predicting a fall to around 70 in the reasonable future, and if this is the case the metal will indeed sharply outperform gold.
Nesis is also bullish on copper – Polymetal produces copper as a significant byproduct at some of its operations -citing the permitting and environmental strictures which could prevent, or at least delay, big new primary copper projects being developed leading to a supply shortage down the road. He also intimated that the recent horrendous Brazilian tailings disaster would likely exacerbate the permitting problems.
On gold, however, he remains sanguine suggesting that future pricing is largely unpredictable given that the price is very dependent on geopolitical events and that these too can sometimes have only very short term impacts on price. He specifically noted the Brexit referendum outcome and the election of President Trump in this respect. Both generated very rapid spikes in the gold price only to see it fall back again quite rapidly.
Nesis’ visit to London was in part to explain details of the company’s latest capital project to shareholders and institutional investors. This is the construction of a second POX (pressure oxidation) line at its Amursk facility in Russia’s Far East. The new facility, along with the existing Amursk POX line is being built to process refractory concentrates from its Mayskoye, Voro, new Kyzyl and the under development Nezhda operations. Nesis says that around half of Polymetal's gold ore reserves are refractory which will require treatment by the POX, or BIOX processes, and it has chosen POX as providing the best long term solution.
The new POX line is estimated to cost $US431 million to build (to be financed out of operating cash flow) and will take 4.5 years to bring on stream with first production anticipated in Q3 2023 and full ramp-up by the end of that year. The distances from Amursk to most of Polymetal’s mines is vey considerable, but given that most transportation is by rail (except from Mayskoye). Nesis says that the overall shipping costs to Amursk using the extensive Russian rail system are relatively insignificant – indeed there are savings in most cases against shipping concentrates directly to China, the principal market for Polymetal’s gold given Amursk’s relative proximity to a sea port and to China itself.
(Interestingly, in view of our continuing assessments of China’s gold imports, this gold shipped from Russia does not appear in readily available statistics and is thus another example of ‘unknown’ Chinese gold imports over and above the ‘known’ gold export figures from Switzerland, Hong Kong, Australia, the U.K. and the U.S.A. which all publish country-by country breakdowns of their gold shipments. Note one of our previous comments on Chinese gold imports thus: Chinese gold consumption figures are always tough to correlate, and always seem to fall short of apparent known gold imports from countries/regions which announce detailed gold export statistics like Switzerland, Hong Kong, the UK, the USA and Australia plus the nation’s own production, plus an allowance for scrap and unknown imports from countries which do not provide breakdowns of their gold trade figures, We thus tend to utilise Shanghai Gold Exchange (SGE) gold withdrawal figures as a proxy for the country’s overall demand and these came to a little over 2,000 tonnes in 2018, marginally higher than in 2017 (See: Chinese gold demand falters but still up y-o-y - just).
Overall Polymetal has been one of the most successful global gold mining companies over the past few years, exceeding its production guidance every year for the past seven years, even though it has been on the ever increasing gold output path. It is also one of the world’s lowest cost gold producers and its reserve grade is ever-improving with the new Kyzyl mine and the under-development Nezhda, both of which are considered high grade operations by today’s standards.
The company works hard not to overstretch itself with a policy of not entering into more than two expansion projects at once – hence the new POX expansion was only given the go-ahead once the de-bottlenecking project at POX1 was complete, and the Nezhda development once Kyzyl was satisfactorily up and running. Next in line is probably Prognoz, said to be one of the world’s largest undeveloped silver mines, but on past policy a possible go ahead on this project is unlikely to be received before 2021 when Nezhda should be coming on stream.
Polymetal also has a generous dividend policy. It rekons to distribute 50% of its underlying net income as dividends and it stock is currently yielding about 4.9%.
As an aside Nesis has probably has had cause to be wary of corporate geologists, although we’re not sure which project he may be referring to in this respect! “Geologists can be very convincing” he said. “Geologists will never fail a polygraph test as they truly believe in their own bs”. Perhaps this should be taken as a caveat emptor for potential investors in geologist- initiated junior exploration companies. It is probably unfair to many geologists, but as a mining engineer by background I have to say I found the comment at least amusing.