When Polymetal took over the Kyzyl project in Kazakhstan, it was considered, while world-class, to be technically challenging to operate. The previous owners envisaged a large capital outlay of over US$1 billion to start extracting and process the refractory ore, which is high in sulphur and organic carbon.
So far, however, the miner has delivered a steady programme of development, broadly on budget and on schedule to start operations in the third quarter of 2018.
“We were getting familiar with Kyzyl since 2005, and progressively identified it as fitting well with our expertise and existing setup. Once the drilling results were confirmed, we knew it was a matter of execution,” Maxim Nazimok, Polymetal’s CFO recollects.
With the Amursk pressure oxidisation (POX) facility successfully processing refractory ore since 2012, achieving 96% recovery on concentrates it currently processes, the low-carbon portion of Kyzyl will also be suitable for processing there. The remainder is to be sold on to Polymetal’s established pool of off-takers, along its existing business practice.
In addition to reducing much of the metallurgical risk, using the existing downstream processing plant and having no leaching on site significantly shortened Kyzyl’s permitting process and reduced the environmental footprint.
High gold content allowed the company to design a combined mining operation, initially a large-scale openpit extracting 3.1 million ounces at 6.9g/t for the first 10 years, then moving underground for another 12 years to recover the remaining 4.1Moz at 8.5g/t. The design effectively solved the challenging geotechnical situation and more than halved the capex requirement compared to previous owners’ estimates.
“Our main focus now is to get the processing plant up and running. The openpit is already at full capacity in pre-stripping mode and is shifting to ore mining from the end of 2017 to accumulate sufficient stockpile by the time we start up the concentrator,” Nazimok comments.
Kyzyl is a pioneering large-scale openpit mining operation, and the company speaks positively about its permitting process experience and the government’s approach. Nazimok particularly mentions the authorities’ responsiveness during all stages of development. Kazakhstan is planning to upgrade some of its mining law, a process the company is optimistic about.
Polymetal is working with the EBRD in Kazakhstan, with the bank providing $140 million of financing for Kyzyl. Nazimok highlights the additive aspect of EBRD involvement: “The bank is not just instrumental in terms of funding, but is also helping us achieve the best practices in sustainability, going beyond local environmental regulations and upping our game in terms of community engagement.”
"The openpit is already at full capacity in pre-stripping mode and is shifting to ore mining from the end of 2017""
Looking to the future, Polymetal is investing into advanced research to take POX processing further, exploring the potential to upgrade the capacity in Amursk to process the entirety of its refractory materials. The company has been working closely with leading international technology consultants for some time to develop a higher temperature autoclave.
Nazimok sees the metallurgical research as a positive in terms of more flexibility: “We are aiming to be able to treat concentrates at temperatures up to 230-240-degrees celsius, making Amursk one of the most advanced POX facilities globally.”
While Kyzyl has, quite rightly, taken most of the recent interest in the company, Polymetal’s potential consolidation of the Nezhdaninskoye gold field (Nezhda) into 100% ownership has gone under the radar.
Nevertheless, this is a solid find, with 10Moz of JORC-compliant gold resources at 4g/t and further exploration potential. Under the terms of the acquisition agreement, Polymetal retains the option to walk away while binding its purchase price to a range of $105-180 million. There is no deferred consideration element in the transaction.
Like Kyzyl, Nezhda is a high-grade refractory deposit and the company is planning to use the same business model of starting the project as an openpit in order to reduce capital intensity and operational risk. Similarly, the idea is to produce concentrate on site and transport it to the Amursk facility for further processing or sale to interested off-takers directly.
Nezhda’s challenging geography is not seen as a major obstacle to the company. Indeed, Nazimok sees the project location as one of the reasons why Polymetal was able to extract value out of the transaction: “Over time, logistics has become one of Polymetal’s key competencies. We successfully transport large amounts of ore as well as concentrate resulting in significant reduction in capital intensity though our hub concept,” he comments when discussing the process.
The management is expecting to finalise the Nezhda prefeasibility study by early 2018, with a development decision scheduled for late 2018. Production could potentially start in 2021.
Another JV where Polymetal has a 50% option is the large-scale Prognoz silver deposit containing 292Moz of JORC-compliant resource averaging 586g/t Ag. As in its previous partnerships, Polymetal is the operator in the JV and plans to leverage its expertise to add maximum value through the design of an optimal mix of surface and underground mining.
Once in production, Prognoz would supply roughly 20Moz of silver annually for 20-25 years, with additional exploration potential. Nazimok sees the project development aligning with the company’s overarching strategy: “As Dukat is approaching its maturity stage, we are happy to retain significant silver exposure. Following Dukat’s successful model, we are looking to produce high-grade concentrate on site to sell to smelters for final processing.”
The management is also very excited about Viksha; the company’s first platinum group metal asset. Located close (by Russia standards) to the company’s St Petersburg headquarters, Viksha’s shallow dipping orebody, low strip ratio and excellent infrastructure offset the lower grade of 1g/t for the 6.6Moz combined PGM resource.
Currently in the process of metallurgical testing, the management expect a PFS by 2019, potentially targeting a production start in 2022.
"We are aiming to be able to treat concentrates at temperatures up to 230-240oC, making Amursk one of the most advanced POX facilities globally""
Several of these new projects make use of the company’s hub-based operation model.
Given the often remote locations with typically scarce infrastructure, processing at a centralised facility allows the company to reduce capex and mitigate risks. Smaller auxiliary deposits can be tapped as a source of ore, and management can continue to incrementally add more brownfield properties to its reserves, often extending mine lives beyond what was originally planned.
Polymetal continues to maintain a strong balance sheet, keeping to a debt to adjusted-EBITDA ratio below two on a long-term basis. The management has extended the Sberbank loan from 2018 to 2024, and now funds below a 4% interest rate on average.
Nazimok says: “We are in a unique situation where there are high levels of liquidity on offer by both domestic and international providers, allowing us to consistently extend maturities and lower the cost of debt across the board.”
Polymetal’s operations are largely unaffected by the recent diplomatic spat between Russia and the US. Indeed, Russian mining regulations have not experienced major change over the past decade.
Nazimok sees very little resource nationalism in the Russian mining industry: “We see taxation, licensing, as well as the permitting environment in Russia and Kazakhstan as significantly more stable than more popular traditional mining destinations such as Africa and Latin America. Indeed, even Canada and Australia are not immune to sudden fiscal or environmental changes facing the industry”.
With Kyzyl progressing as planned, Nazimok’s message to investors remains one of management’s “focus on being able to deliver stated goals, however challenging those may initially seem from the outside”.
Polymetal - at a glance
HEAD OFFICE: Zinas Kanther and Origenous Corner street, Zinas Kanther Business Center, 3035, Limassol, Cyprus
Telephone: +44 (0)207 016 9503
DIRECTORS: Bobby Godsell, Jonathan Best, Vitaly Nesis, Leonard Homeniuk, Konstantin Yanakov, Russell Skirrow, Marina Gronberg, Christine Coignard, Jean-Pascal Duvieusart
QUOTED SHARES ON ISSUE: 430.11 million
MARKET CAP (at September 12, 2017) : £3.75 billion
MAJOR SHAREHOLDERS: ICT Group (27%), PPF (13%)