Polymetal announces full year 2009 financial results

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Saint-Petersburg, Russia, April 29, 2010 – JSC “Polymetal” (LSE, MICEX, RTS: PMTL) (“Polymetal” or the “Company”) announced its US GAAP audited consolidated financial statements for the year ended December 31, 2009, which are available on the Company’s website at www.polymetal.ru

• Polymetal recorded US$96 million in net income compared to losses in both 2007 and 2008
• Financial results were significantly impacted by four acquisitions the Company completed in 2009. Most importantly, this impact is displayed by growing asset base, increased overheads, rising cash outflows for capital expenditures and expansion of working capital, and appearance of several non-recurring items on income statement
• Cash flow from operations more than doubled to US$174.3 million and Adjusted EBITDA grew by 49% to US$242.0 million as modest revenue growth was accompanied by meaningful declines in costs
• Cash costs at all mines calculated on co-product basis remain in the bottom half of the global cost curve with company-wide total cash cost per ounce of gold equivalent amounting to US$479/ounce
• Net debt increased significantly to US$569.1 million or 2.4x Adjusted EBITDA, mostly as a result of Varvarinskoyeye acquisition. Liquidity position remains comfortable with less than 20% of gross debt being short-term

“2009 financial results drive home the message of Polymetal’s excellent fundamental profitability,” said Vitaly Nesis, CEO of Polymetal.

“Cost containment and steady production expansion underpin our Company’s unique combination of strong operating cash flows and ambitious growth perspectives”.

REVENUES

Silver accounted for US$241.9 million or 43% of revenues while gold accounted for US$306.6 or 55% of revenues. Average gold-to-silver price ratio in 2009 was 67 compared with 59 in 2008. Two months of copper-in-concentrate sales from newly acquired Varvarinskoye mine amounted to US$7.6 million while other revenues stood at US$4.6 million or approximately 1% each of total sales.

COST OF SALES

Total cash operating costs grew from US$247.9 million to US$257.9 million or by 4% despite significant increases in waste moved (39%), underground development meters (), and ore processed (by 40%). 

Costs of consumables and spare parts decreased by 6% as a result of price reductions for materials bought in Russia with the largest benefit coming from reduction in diesel fuel price. Labor costs (including social security tax) decreased by 2%. Headcount increased by roughly 15% and ruble-denominated wages rose modestly, but these trends were more than compensated by 28% depreciation of ruble versus dollar. Costs of services (together with other costs) increased by 13% mostly driven by rapid growth in grid power tariffs as well as by significant increases in tonnages of ore hauled by contractors.

Mining tax increased by 12% on the back of gold production growth and rise in gold price.  Depreciation decreased by 6% as the impact of ruble depreciation was partially balanced by significant expansion in the Company’s fixed assets base.

Work-in-process inventory grew by US$24.7 million as ore continued to be stockpiled ahead of future processing at Omolon and Dukat while Yurievskoye ore awaited winter road for trucking to the processing plant. In 2008 the Company wrote down US$10.6 million of carrying value of low-grade ore at Khakanja. In 2009 US$2.6 million was written off due to market value of some inventory items declining below book value.

As a result of all of the above, cost of sales decreased by 5% from US$300.7 million to US$284.4 million.

GENERAL, ADMINISTRATIVE AND SELLING EXPENSES

General, administrative, and selling (GA&S) expenses almost halved from US$90.1 million to US$52.0 million, mostly as a result of the non-recurring non-cash employee stock option compensation expense of US$31.9 million recorded in 2008.

Without taking into account the stock option plan, GA&S expenses declined by 11%. Employee overhead headcount and utility usage increased by roughly 20% as a result of added expenditures at newly acquired assets and progress at key development projects. However, ruble depreciation and strict rationing of non-essential outsourcing led to personnel costs staying roughly flat and services’ costs declining by 45%. Other GA&S increased by 21%, mostly because of addition of GA&S at new developments projects (Mayskoye and Omolon).

OTHER OPERATING EXPENSES

Other operating expenses increased by 15% from US$36.2 million to US$41.7 million. Other taxes (mostly property tax) increased 41% as Company’s asset base expanded and more assets were transferred from construction-in-progress to assets-in-use category. Exploration costs declined by 32% with investment reduced in the aftermath of the financial crisis to preserve cash. Voluntary social payments declined 19% mostly as a result of ruble depreciation.

The Company realized non-cash loss on disposal of certain fixed assets of US$3.4 million compared to US$4.6 million in 2008. Bad debt allowance almost tripled as some supplier prepayments were deemed unrecoverable due to financial distress of some counterparties. Other expenses increased by 130% and included, inter alia, fines to suppliers and customs to Mayskoye (after certain contracts were severed due to the change of project scope), directors’ remunerations, write-off of unrecoverable VAT, etc.

OTHER INCOME STATEMENT ITEMS

Interest expense increased by 57% from US$20.7 million to US$32.5 million despite slow, but steady declines in interest rates in Q3 and particularly Q4 as net debt increased significantly. Loss from investment in JV with AngloGold Ashanti dropped to US$0.3 from US$8.4 million as the JV was largely non-operational in 2009.

The Company recorded loss on extinguishment of debt of US$5.9 million which stems from Mayskoye acquisition. At the time of the transaction Mayskoye had a US$25 million loan from an unrelated party maturing in 2015. At the time of purchase price allocation it was valued at less-than-par as interest rate was less than the market rate. The Company settled this debt in full during 2009. The difference between below-par valuation at the time of purchase and full face value paid appears as an expense on income statement and is a non-cash item.

The Company recorded US$41.9 million in expenses to account for the change in fair value of derivative. The derivative stems from the option the Company granted to сo-investors in Mayskoye to select either cash or a fixed number of Polymetal’s shares as a payment for 91% stake in the legal entity holding the license for the Mayskoye deposit. The option became exercisable after certain conditions precedent (most importantly, government approvals) were satisfied. Option holders elected to exercise their call option on Polymetal shares. For the purpose of these financial statements, Mayskoye option granted by Polymetal was valued as of the grant date (April 28, 2009) and was included into the purchase price of the acquisition. As Polymetal’s share price increased over the period, the value of the option increased correspondingly.

The Company recorded US$11.4 million in expenses to account for the change in fair value of contingent consideration liability. The contingent liability stems from perpetual deferred payments the Company is liable for equal to 2% of revenue from deposits acquired as part of Omolon acquisition in 2008. In 2009 certain assumptions concerning the amount and timing of such revenues have been modified based on changes in gold prices and expected production schedule. These modifications impacted the estimated value of contingent liability. The resulting change in fair value of contingent liability appears as an expense on income statement and is a non-cash item.

An exchange gain of US$7.9 million was in sharp contrast to exchange loss of US$44.5 million in 2008 mostly due to Mayskoye dollar denominated loans which were consolidated to the Company’s balance sheet in April 2009 and rouble appreciation against US dollar in the second half of 2009.

Income tax expense roughly doubled to US$38.4 million from US$18.6 million as pre-tax income went from US$2.0 million to US$98.3 million. The effective income tax rate was substantially above the statutory rate of 20% as a significant portion of costs in the period was not tax deductible, most importantly changes in fair values of financial instruments.

As a result of the above, the Company reported income before extraordinary items of US$60.0 million compared with net loss of US$16.6 million for 2008. Extraordinary gain of US$36.0 million was recorded in the period as a result of Sopka Kvartsevaya acquisition. The extraordinary gain is due to the fair value of the assets acquired exceeding the purchase price. This compares with the extraordinary gain of US$0.8 million in 2008. Net income for 2008 was US$96.0 million, largely driven by improvements in operating income.

Basic EPS for 2009 stood at US$0.30 per share while fully diluted EPS was US$0.29 per share. This compares favorably with small losses per share in 2008.

ADJUSTED EBITDA

Adjusted EBITDA increased from US$162.9 million to US$242.0 million with increases in average realized gold price and sales volume strengthened by declines in cost of sales and GA&S. Adjusted EBITDA reconciliation is detailed in the following table. Please note that reconciliation for 2008 was restated. Current calculation includes only adjustments related to non-recurring non-cash items.

CASH COSTS

Ruble-dollar exchange rate and domestic inflation were the key external factors driving cash cost trends at the Company’s mines in 2009.

Dukat cash cost per tonne milled declined 11% with impact of ruble depreciation partially offset by increase in higher-cost underground mining at Lunnoye and higher stripping ratios at Arylakh.  Despite this decrease, cash cost per ounce of silver produced at Dukat remained essentially flat at USS$8.1/oz due to recovery drop at Dukat.

Voro cash costs per tonne milled declined by 3% as larger share of throughput came from higher-cost (on per tonne basis) CIP plant compared with lower-cost heap leach operation. Cash cost per ounce declined 8% to US$381/oz with average recovery improving due to more tonnage from the CIP plant.

Khakanja recorded the best cost performance with cash costs per ounce declining 13% to US$463/oz on the back of 16% drop in costs per tonne milled. This decrease is mostly attributable to a significant fall in diesel fuel prices.

Overall, second half of 2009 was marked by rising costs as ruble depreciation trend was reversed and domestic diesel fuel price started climbing. Outlook for 2010 is dominated by these two variables as operating fundamentals (grades, recoveries, stripping ratios) are expected to remain largely stable.

Breakdown of cash costs calculated on a co-product method is given in the following table:

CASH FLOWS

Operating cash flows grew from US$80.8 million to US$174.3 million, a 116% increase outpacing growth in all other profitability measures.

Capital expenditures roughly doubled from US$112.5 million to US$222.2 million. US$122.6 million was spent on Albazino-Amursk project, mostly on concentrator and POX facility equipment as well as on related infrastructure. US$31.6 million was spent on Dukat to complete the expansion of Dukat processing plant and increase underground fleet at Dukat, Lunnoye, and Goltsovoye. US$16.6 million was invested in Omolon project to build a trial heap leach facility at Birkachan, purchase mining fleet for Birkachan and Sopka, and to start refurbishment of the Kubaka mill. Spending at Voro, Khakanja, and Varvarinskoye was mostly for maintenance capital. Corporate and other segment includes investments at Mayskoye and capitalized exploration spending.

In 2009 the Company spent US$10.7 million on acquisition of Goltsovoye. Some loans were also extended to related parties (Sopka and Goltsovoye) before the respective acquisitions closed. As a result of the above cash used by investing activities increased from US$164.0 million to US$267.6 million.

The excess of cash used by investing activities over cash provided by operating activities amounted to US$93.3 million compared with US$83.2 million in 2008. This gap was funded by cash inflows from financing activities of US$117.7 million compared with US$83.1 million in 2008. Cash at the end of 2009 was US$28.3 million compared with US$4.1 million at the end of 2008.

NET DEBT

Net debt during the period increased by 82%. In Q4, the Company refinanced the bulk of its short-term debt extending maturities and bringing down interest rates. Net debt also includes derivatives stemming from the retirement of pre-existing gold hedge obligations at Varvarinskoye. These derivatives do not have any influence on the Company’s exposure to commodity price upside (see Note 29 to the Financial Statements for detailed discussion).

Net debt calculation is detailed in the following table:

CONFERENCE CALL

Polymetal will hold a conference call on Thursday, April 29, 2009 at 6:00pm Moscow time (3:00pm London time; 10:00am New York time).

To participate in the call, please dial:

+7 495 580 9543 (toll-free from Russia), or

+44 800 358 0886 (toll-free from the UK),

+44 207 153 2027 (outside the UK and Russia), or follow the link:

http://www.cyber-presentation.de/cgi-bin/visitors.ssp?fn=visitor&id=1204

Please be prepared to introduce yourself to the moderator.

Recording of the call will be available on Polymetal’s website (www.polymetal.ru) and at the above link immediately after the call. It will also be available at +44 207 959 6720 (toll-free from the UK), access code 142895#, from 7:30pm Moscow time Thursday, April 29, till 11:59pm Moscow time Thursday, May 6.

ABOUT POLYMETAL

Polymetal is a Russian gold and silver miner with operations and development projects in Russia and Kazakhstan. The Company produced 0.6 million of gold equivalent ounces in 2009 and is targeting to double its total production by 2012 mostly as a result of commissioning of the new projects, all of which are now under construction. A key element of Polymetal’s strategy is creation of processing hubs with the goal to ensure the most efficient and responsible utilization of financial and human capital by treating ores and concentrates from various sources at centralized locations.

THIS RELEASE MAY INCLUDE STATEMENTS THAT ARE, OR MAY BE DEEMED TO BE, “FORWARD-LOOKING STATEMENTS”.  THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS AT THE DATE OF THIS RELEASE.  THESE FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, INCLUDING THE WORDS “TARGETS”, “BELIEVES”, “EXPECTS”, “AIMS”, “INTENDS”, “WILL”, “MAY”, “ANTICIPATES”, “WOULD”, “COULD” OR “SHOULD” OR SIMILAR EXPRESSIONS OR, IN EACH CASE THEIR NEGATIVE OR OTHER VARIATIONS OR BY DISCUSSION OF STRATEGIES, PLANS, OBJECTIVES, GOALS, FUTURE EVENTS OR INTENTIONS.  THESE FORWARD-LOOKING STATEMENTS ALL INCLUDE MATTERS THAT ARE NOT HISTORICAL FACTS.  BY THEIR NATURE, SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS BEYOND THE COMPANY’S CONTROL THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.  SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON NUMEROUS ASSUMPTIONS REGARDING THE COMPANY’S PRESENT AND FUTURE BUSINESS STRATEGIES AND THE ENVIRONMENT IN WHICH THE COMPANY WILL OPERATE IN THE FUTURE. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE.  THERE ARE MANY FACTORS THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY’S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENTS ARE BASED.

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