Polymetal Said The Gold Mining Industry Is Waiting For More Consolidation
If the price of gold will continue to decline, mergers and acquisitions will be more, says chief Executive officer of Polymetal Vitaly Nesis.
Current value of gold does not stimulate the company to implement new projects. Players hide the inability to grow with mergers and acquisitions. If the price of precious metals will continue to move down, the industry will intensify the process of consolidation, says CEO of one of the largest Russian mining company Polymetal Vitaly Nesis. About the problems in the industry and the prospects of the company, he said in an interview with the correspondent of “Izvestia” Victor Jirovu.
Since the beginning of the year, gold prices have steadily increased, only in September there has been a slight decline. What are the prices for the precious metal you would expect by the end of 2016? What factors will have the greatest impact?
— Short-term factors only two is the results of the US presidential elections and the decision of the Federal reserve system of the United States at the rate in early December. In early November, before the elections, the rate is unlikely to be changed. In December the same probability of increase in rates is estimated by the market more than 50%. I don’t think that will be global changes, and in the short term, I guess we can expect a $1.25–1.3 thousand per ounce.
— The price of gold affects mergers in the industry?
— In a global context, Yes, it does. The price is clearly small to justify investments in new production capacity. The price of precious metals does not stimulate the company to implement new projects. Players hide the inability to grow with mergers and acquisitions.
In Russia the beginning of the year was outstanding in terms of a situation — a weak ruble, good price for precious metals. Now oil has grown, the ruble strengthened after OPEC meeting. I think that if the price of gold will continue to move down, we’ll see major consolidation in the gold mining industry.
In Russia the main factor of activity in the market of mergers and acquisitions remains a crisis as a potential seller. If he can not sell the asset, you will never do it, because his expectations at a price far beyond all reasonable limits.
In 2007 Polymetal held two dozen deals in the market of mergers and acquisitions, mainly in Russia. Our total investment in the acquisition of assets of $1.3 billion And the majority of these transactions took place in a situation when the seller does not remain alternatives, as it was under significant pressure from external circumstances.
— At what price of gold, investors can become more active?
— If you focus on the reviewers ‘ reports, the incentive prices are at level of $1,4–1,45 thousand per ounce. It’s a level that will ensure sufficient reproduction of current production volumes, so they do not fall.
II quarter of this year — the first in five years, when the world production of gold decreased. In the third quarter is expected to decline. The trend is already beginning to emerge, and it will continue for several years. This will support prices.
Despite the bad situation in the past years, world production has grown at the expense of input of new capacities that were built back in the good times, as well as through projects with a high gold content in the ore. Now such projects are almost there.
Around the world this year, we see only three major new project in gold mining: Amethyst — in Russia, one in Mexico and one in Burkina Faso.
— How much money your company is ready to send to the purchase of assets?
— If the field is good, we are willing to pay, but to find such an asset is extremely difficult. For Kyzyl in Kazakhstan, we paid $620 million is a lot of money compared to the size of our company. But if we have found an asset of this level of quality again in a heartbeat would have paid that kind of money again. However, deposits of this quality is unique, and is a more realistic expectation is much smaller deals with smaller objects. Nevertheless, we will definitely continue to look for new projects. Will it be the fields at an earlier stage of development, not yet ready to build, requiring investment in further exploration.
Russia and especially the far East very considerably nedorazvedany. Therefore, the potential discovery of new deposits of world quality level here is very significant.
— You are considering a new field from the point of view of compensation of the resource base or talking about the growth of the business as a whole?
— Yet, with rare exceptions, all projects of exploration is focused on the restoration of the mineral raw materials base of existing enterprises. The main objective is to ensure the continuation of their work in 5-10 years. And the new assets we consider, in terms of growth for the company — more extensive development rather than intensive, as in the case of current exploration.
— What new interesting projects? What are you looking at?
— Our focus remains on those countries where we are present, — Russia, Kazakhstan and Armenia. Clearly, we are interested in gold and silver, although we do not mind non-ferrous metals. Of course, I always have high hopes for exploration. I hope by the end of this year will be at least a couple of striking results in the far East.
We focus on the content of useful component in the ore, and everything here is highly dependent on the region and its infrastructure. For example, somewhere in the Urals, the field content of 2 g / tonne of gold may be very interesting, and in remote areas of the Magadan region — not less than 10 g / tonne.
— How much money invest in exploration?
— This year will allocate about $60 million, Approximately the same level, maybe a little less next year. For exploration there are fluctuations depending on the season results. By the end of the year we will have full clarity.
Last year we replaced about 80% of our production through exploration, or put on the balance of 32 tons of gold equivalent in the extraction of 40 tons this year, yet less than half of data on hand, but I hope the result in the same range — about 80% of the production. In the whole year-end we its resource base through acquisitions will expand.
— Will there be adjustments to the forecast following the results of work for nine months?
— Adjustments will not, we are in the plan. All indicators for which we have previously provided forecasts, the volume of production, cost, capital expenditure unchanged. So, in 2016 we plan to produce 1.26 million oz (39,2 t) precious metals gold equivalent in 2017 — 1.4 million ounces (43.5 tonnes) and 2020 to reach a volume of 1.8 million ounces (56 tonnes) per year.
The company’s investment to 2020 will be about $1.4 billion, with an exit in five years at the average level of capex of about $230 million a year, including about $50 million in exploration.
— What financial instruments are you using now?
— Current market conditions speaks in favor of traditional Bank financing, including bilateral and syndicated loans. Bonds are much more expensive.
— What is the amount of debt you need to refinance next year?
— We do not plan to increase the total amount of debt, not planning to change it, we are comfortable.
By the end of this year, we have no need to refinance. Next year we have a total of about $150 million, the Market situation is such that we no problems with the refinancing do not see, obtain new loans. We will work to improve the debt profile. Now the average rate on loans of the company is situated at a level slightly less than 4%.
— Are there any changes in dividend policy? The transition to quarterly payments?
— Quarterly payments mean the quarterly financial statements that don’t want to move. Itself dividend policy we are completely satisfied. We will look at the market, we have a regular practice of assessing current policy by the Board of Directors. But I think some significant changes here should not wait.
— When will be considered on payment of Spartivento and what this decision will depend?
In the beginning of December. It will depend on the prices of precious metals. Now the prices have fallen. At the beginning of the year, we said that Spartivento will not. As prices increased, we became more optimistic about the likelihood of such payments. At the end of September I would say that their probability was 50: 50. After a significant price drop in early October, I think the likelihood of payment is already less than 50%.
In addition, a large value for the prices for precious metals is the result of the presidential election in the United States. The probability of winning Hillary Clinton further pressure on the gold price.
— How do you feel about the interest of Chinese investors for gold projects in Russia?
I don’t see that interest, yet the mass of examples of Chinese investment in the Russian mining industry. There is only one is Kyzyl-Tashtygskoe mine in Tuva. No more deals, no, in the short term too.
As for credit resources of China, we have attracted funding in the Russian “daughter” of the large Chinese banks. It is very important that the Chinese money of the commercial banks really had in Russia. Potentially they can offer very favorable terms.
Do you plan to further diversify the business risk management in the metals of the platinum group or other metals?
— While we have only one project in the platinum group metals is Viksha in Karelia. The project is in fairly early stages. Will take about three years to prepare a full Bank feasibility study to confirm the reserves and to estimate the amount of investment. On the planning horizon of five years to produce platinum group metals we do not plan. It’s more long-term option for the company.
From the point of view of diversification in the medium term, in five years it is clear that will produce gold and silver with small amounts of associated base metals. Platinum group metals for us strategic direction, but to speak about concrete volumes of production will only be able in a few years. I can assume that it will be several tons, not tens.
— Possible partnership with other major companies in this direction? Or partial sale of assets?
Our strategy does not provide for a waiver of partnerships, as long as they make sense. Everything is for sale if the price is good. But if we sell an asset, at an attractive price. I believe that only the faint of heart and short-sighted sell during low prices. Assets need to be sold in a period of high prices, and during low, on the contrary, to buy, than we did at the end of last / beginning of this year. Acquired Komarovsky field in Kazakhstan and the Kapan mine in Armenia. Then prices rose, and we left the market. If prices will begin to fall again, think about whether it makes sense to go back.
— Tell us about the development of assets in Kazakhstan. Are you planning any acquisition in this country?
— Acquisition of new assets depends on market conditions. In Kazakhstan, the existing Varvarinskoye Deposit plus two projects under development. In 2020, the share of Kazakhstan in the total volume of production will amount to about 25%.
Now in Kazakhstan is in full swing preparing a new Mining code, while the procedure for obtaining new exploration licenses had not yet been developed. We expect the new code to fully start a set of licences. While limited local projects in the framework of existing licenses.
— How is the development of assets in Armenia?
— We have a couple of years, there is a exploration project — Lichkvaz. This year we bought the existing company — Kapan mine. We see very good prospects of increasing production volumes and improving economic indicators, including by combining the two assets. This year they are investing about $10 million, and next year the same. There is now produced a little more than 1 ton of gold equivalent, the program-minimum — to go at 3 t, in the best case — 4 ton in 2019.
— What are the main problems faced by the company is now the gold mining industry?
— After the rapid growth of the previous five years, when it was built a lot of processing capacity, the main problem of the gold mining industry is the replenishment of mineral resource base.
The necessary intensification of exploration works. Started talking about the Junior stock exchange only distract government agencies, mining companies, all industry participants from solving pressing problems. I have no doubt that foreign investors on the stock market will not come.
In Russia there are no potential investors in novice exploration projects. In the West it is usually the individuals with lots of money, retired people who know something about Geology and decide 10% of their assets to send to those projects that actually play the lottery. In Canada and Australia a very large number of people are interested in the mining industry, we have this interest yet.
Chinese investors, on which much is now said, is only interested in control for large projects.
But in General, the system of state regulation in Russia is not yet ready for such projects, if foreign investors suddenly want to participate.
— Do you consider the possibility of placement of shares on foreign exchanges?
The prospects for the posting on canadian sites is equal to zero. From there, investors will not buy Russian paper. China is now makes no sense too.
Up to the end of the year can be bid for the Sukhoy Log Deposit. Are you going to participate?
— This issue should return after the publication of the terms of the auction. The starting price, the timing of testing, the minimum requirements in terms of processing and production — all significant factors in deciding how entertaining and interesting, if at all.
Polymetal International Plc ranks among the leading gold producer in Russia and is one of the largest silver producers in the world. Leads to the extraction of precious metals in Russia, Kazakhstan and Armenia. In November 2011, the company obtained a premium listing on the London stock exchange (Ticker: POLY), a member of the FTSE 100.
Group IST Alexander Nesis (his brother Vitali) is the final beneficiary about 27% of the share capital of Polymetal, 13% of the company is owned by Czech PPF Group NV Peter Kellner, about 10% Polymetal is controlled by the family of Alexander Mamut. In addition, about 1% of the share capital and controls the management of the company, the remaining more than 50% of shares are in free float.
Vitaly Nesis chief Executive officer Polymetal International Plc from December 2014. Prior to that, from September 2011 acting Director-General. Since 2003, General Director of JSC Polymetal a subsidiary of Polymetal Int.
In 2002-2003 — General Director of JSC “Vostsibugol company”. In 2001-2002 he held the position of Director of investment planning, JSC “SUAL-holding”, in 2000 — Director for strategic development, OJSC “Ulyanovsk automobile plant”. In 1999-2000 he worked in the Moscow office of McKinsey&Company 1997-1999 analyst in an investment Bank Мerrill Lynch (NY, USA).
He graduated from Yale University with a degree in “Economics” in 1997.
By Ekaterina Buravich, fannews DUOTON