When Petropavlovsk will start to pay dividends?, what price of gold do you expect in 2017, why does the company not intend to abandon hedge contracts, why does it intends to return to the transactions with Amur Zoloto and Zoloto Kamchatki, and where will GMD Gold allow construction of two autoclaves on its territory, also what the main things current;y in his life. Interview with the Prime by the company’s general director Pavel Maslovsky.
Question: Pavel Alekseevich, how much are you satisfied with the results of 2016?
Answer: In a sense, we are satisfied with the results of the year – we did everything that could be done in the circumstances. As circumstances I mean the wonders of weather events that occurred in the Amur region: the flooding, and early frosts, then the thaw, then again frosts - there was a certain slowdown in the execution of mining operations, although we practically didn’t stop them, but therefore, didn’t mine as much product as initially planned. We had to adjust the results.
On the other hand, taking into account the amount of gold that we produced - 416 thousand ounces, 400 thousand ounces of which were sold, - we had the prime cost of $700 per ounce and the "all inclusive" cost (AISC) - $800 per ounce. For such content, for such a rock mass that we processed, it very clearly shows the effectiveness of our work.
The average gold grade we have is 0.9 grams per ton, because we just didn’t have time to take the rich ore by the end of the year as expected. It required a significant drop in the open-pit mine, as well as missing a large stripping – this was planned for the end of November and December. The weather prevented us, but the gold is still there, we will take this year.
Q: Will you move into an active phase of the underground mining in 2017?
A: Yes, last year we started underground operations and are moving forward quickly – we have already passed more than a kilometer of underground mine workings. In the second half of the year we will begin the production of the higher content ore at the Pioneer deposit.
Our massive ore bodies are deep down, so we gave up the high stripping - a lot of work that was done in previous years. Previously we came to the rich content in the ore through open work (an open-pit), - and it is becoming expensive and inefficient. Now, will come out in the continuation of the ore bodies with a higher gold content from underground, it proves to be more efficient and enables us to distribute the work during the year more evenly. Furthermore, it opens the possibility of underground exploration.
We see a great potential in the reserves for underground mining at Pioneer, and in order to get a more accurate, detailed picture of the resources and reserves we are drilling wells from underground tunnels.
Q: How much gold will you mine from underground in 2017?
A: The forecast, which we have given, is 420-460 thousand ounces of gold includes the underground mining too. The difference - 40 million ounces – contains the main component, the significant portion, but not all is the underground mining. We are quite conservative, since this underground mining is the first experience for us, and although we have rather experienced contractor, we give the forecast very carefully – we’ll look at what will be the result of the underground works, as long as we have the biggest uncertainties in this issue.
Q: The company in recent years has steadily decreased it's production (2014 – 624.5 thousand ounces; 2015 - 504.1; 2016 - 416.3). Previously, you were more optimistic - the first forecast for 2015 was 700 thousand ounces. You have the same deposits – were you wrong in the ore quality?
A: No, we adjusted the growth. If you remember, we got rid of our alluvial (placer mining) assets. In connection with the reduction in the price of gold, they became less and less profitable. At the same time, they were distraction, required too much management effort. So we got rid of them, kept only the core assets, and it was an essential contribution to our production.
And now our goal is not the production of number of ounces, but the maximization of profits. You might have noticed that we have the prime cost of $700 per ounce, and the total cash costs, which include support and production capital expenditures, are $800. This is a very good indicator in the industry, very competitive, even though we have low grade ores.
In terms of only the prime cost (TCC), may be, we should mine more ounces, but then the mountain fleet quickly wears out, more funds are spent for repairs, replacement of units, purchase of new equipment. So we moved to a more subtle planning to minimize the costs rather than chase ounces.
And we have never been wrong about the ore quality. This year it happened, I agree, that we reduced the forecast. Just because of the weather conditions we didn’t reach the rich ore body. But the quality of the ore, and its content, are understood by us well enough.
Q: And weren’t you disappointed in the hedge, in 2016, you lost $21 with every ounce; will you continue or renew hedge contracts?
A: Yes, last year the hedge contracts let us down, but if we consider the entire hedging period - from spring 2013 to 2015, then we are in a big plus.
2016 was the first year, when we were in a small minus, and I can’t say that these losses are dramatic for us. So we are opportunistically about the hedge contracts, try to be fairly conservative, and we won’t leave this instrument.
Q: When you refinanced loans, in December 2014, there was a condition determined that dividend payments are possible, when the ratio of the debt to the EBITDA is no more than 2 to 1; when will you reach these conditions? When will shareholders be able to expect the dividends?
A: This condition was determined by the banks, and we couldn’t disagree with it. And we will determine a specific policy regarding the payment of dividends, after we reach this indicator and taking into account the absolute size of the debt.
In addition to our efforts, here the price of gold plays a big role. Now we have the ratio of the debt to the EBITDA of slightly more than three to one. But we hope that we will reach the ratio of two to one by 2018.
Q: Capital expenditures for 2017 are planned to be $100-110 million, including about 60% for the autoclave. How much is it scheduled to spend for exploration, construction?
A: We plan to spend around $15 million for the exploration.
The fact is that a part of the underground mining will also be the exploration, so it is difficult to identify them and formally the figure may vary, but the order is just that. And as for the rest ($25-30 million) - we have to finish the flotation plant at the Malomyr deposit.
Q: What is the price of gold in the budget of 2017?
A: The gold price volatility makes us be flexible. Therefore, we can’t say firmly what figure was laid in the budget. We believe that the average price will be $1200 per ounce. But of course, we tested the budget at the price of $1100, - that is, on the whole, we are ready to adjust our behavior, our work program at the price of $1150.
Q: Why did you break up with GMD Gold, how was the decision to finish the construction of the autoclave at the expense of your own cash flow?
A: When we first agreed, we couldn’t pay for everything. A significant part of the funds was to be sent for the current loan repayment - the schedule was very tough, and therefore we offered a large part in the project to GMD Gold. After the schedules were revised, the calculations showed that, with the support of the banks, we can complete the construction of the autoclave on our own. The banks concluded, and we agree with them, that it’s not necessary to give up 50% of the project.
Actually, the method of the loan amortization schedules revision was calculated by us in cooperation with the banks and consultants so that we could finish the autoclave using our own funds.
But on the other hand, we are ready to discuss another alternative cooperation with our partners. For a while we don’t discuss in detail anything, now they and we should get used to this new reality.
Q: What kind of cooperation can it be?
A: At some stages, we are ready to provide them our capacity for concentrate processing. Another option is to build autoclaves under their concentrates.
Our project provides for a significant expansion since originally we hoped to make six autoclave units and as a result we will have four. Scientific and technological research of our concentrates allowed us to improved the process - we achieved a significant reduction in the residence time in the autoclave, and the refining program of our concentrates that we will get from Malomyr and Pioneer, will be able to be made at four autoclaves. And the original project, and the amount of space were made for six ones, therefore, we can add two more autoclaves to our four. And in fact, that may be one of the options for the cooperation.
Q: How much are they interested in?
A: I don’t know. This is my idea, not their proposal.
Q: And will it be interesting for you?
A: I don’t know too. This should be discussed. It's a question of price, a commercial issue.
Q: At what price of gold will you get $120-140 million that are needed for the completion of the autoclave on your own?
A: $1200-1250 per ounce, in this interval. And for two years.
This year we will continue to work on the construction of the autoclave complex - they are now in full swing, and in 2018 we should run it. We will fully finish the construction and start the processing of concentrates at the end of 2018. In the fourth quarter, the complex should work.
Q: And what if suddenly the price of gold is lower, and the resources are not enough? What are your covenants to the banks - do they make it possible to attract new loans? Or will we delay the launch date?
A: We won’t postpone the launch date of the autoclaved complex. A significant lack of the funds is not expected, and in the first place, we will spend them on the launch, followed by finishing touch. We did so many times at the completion of our enterprises. It works.
Q: What is the current state of the Andreevsky underground mine, how much rich ore does it contain?
A: Everything is all right at the Andreevsky zone, the work almost didn’t stop, they just slowed down because of the cold weather, as I said. A rich ore body goes into depth, very far down there. We plan to begin the underground mining operations after verification of the parameters of its fall and course by the drilling from the surface.
Q: And are there similar, rich ore bodies?
A: Yes, there are. All our bodies come to the depth - as they stretched from surface, so they are going into the depths. And the gold content in them increases.
Now we have two underground programs. The first one is at the Pioneer deposit, and so far only in one place. And it has also other similar ore zones, in other open-pits - in the northeast we have looked the Bachmuth zone. Under the same Andreevskaya zone there is a lot of rich ore shoots that go into the depths. And besides - the underground works have already been started at Malomyr.
All underground projects, which we consider, have the average gold content of about 8-9 grams per ton.
Q: How much have you spent for the underground mines?
A: To date, our investment has amounted to about 300 million rubles.
Q: How do you expand your resource base?
A: We now have an adequate package of exploration licenses. As we reported, we have very good results at the Elga deposit – we discovered almost 2 million ounces of only reserves, now we are getting ready to protect them. And I think that there is not all, there may be even a doubling of resources and reserves. In a geographical sense, Elga is a satellite of our Albyn deposit, although it is much larger than Albyn. It is near, and its ore can be processed at the Albynsk factory.
In the same area we have the ore occurrence of Yasnoye, during the Soviet era, there was small underground development. But we looked at it on the other hand, on the presence of may be lower grade gold, but maybe more powerful ore bodies and we can discover them.
Also, we continue the exploration on the flanks of the Pioneer deposit, there are very good indicatives.
The money that we spend on exploration are fully justified. We now have about 20 million ounces of gold resources, and approximately 8 million ounces of reserves.
Q: Are the transactions that were discussed - for the acquisition of Amur Zoloto and Zoloto Kamchatki, - also a way to expand your geography and resource base capacity?
A: In a sense, yes, we considered the possibility of a merger with Amur Zoloto. I see a great synergy in this deal, I like the asset, and the area is close to the Amur region, it is located in our neighborhood. I think this is an interesting asset, and we will certainly return to this conversation at some point.
With regard to the assets of Kamchatka, there the synergy is less visible, because the distance is large. But our colleagues now prepare their materials – audit of reserves, and so on. They prepare to continue the conversation - the issue is not yet closed.
But so far, we believe, like the majority of the shareholders, this is not the best time for a purely paper transactions (payment in shares). After all, we are now significantly undervalued, although we have very good assets. First, you need to lift the capitalization of the company a little.
Q: Now they are your biggest shareholders (structures of Viktor Vekselberg and Renova group owned 18.377% of the shares, plus convertible bonds - 6.8774%). How much are they involved in the transaction process, and the company's management process – don’t they interfere?
A: Yes, they are a large shareholder. It says only that they see the prospect of our company, otherwise they wouldn’t waste the money to invest. They don’t interfere in the operating process. We work with them, as with all shareholders, we meet, discuss things.
Q: Don’t you plan to get listed on the Moscow stock exchange?
A: The listing is not an end in itself - it is the extra costs, as the London listing, as the Moscow one. The only purpose of the listing for the company is access to capital, and for the shareholders - is the liquidity of the shares. These are two goals, two fundamental meaning of the listing, and if we find that some of these issues are solved, then we will do it of course.
Now the situation is such that there are no opportunities to raise the capital of a company of our level on the Moscow stock exchange. There are no such examples, and liquidity is not much, but we monitor the process for a long time.
Q: Do you plan to fully withdrawal from IRC? How much are you satisfied with the partnership with the Chinese partners?
A: The Chinese partners have done their job - they have built everything, so that cooperation ended. We are not going to leave IRC. The output should be good money.
It’s, so to say, two big differences - to offer a share in the unfinished facility, or in a complete facility that generates cash flow and self-sufficient. IRC is launched, is reaching its designed capacity - now this process takes place in full swing. Therefore, we are not actively engaged in this issue, but it is also one of the options to raise the capital. This idea will be considered later.
Q: What do you expect from 2017 - what price of gold?
A: I would called 2016 a turning point for the gold price and the views of the metal. At the end of 2015 there were very negative forecasts, the falls to $1000 and below were considered. But suddenly, in the middle of the year, everything turned, and the price reached even $1350. Now it is just a little lower, but it's still good. I believe that this is the beginning of a fundamental reversal.
This year, I believe that we will be able to see $1400 per ounce - political instability strongly influences the gold, the uncertainty in the actions of the new US president strongly excites the market. I'm not ready to comment on his actions, they are correct or incorrect, but his energetic approach disturbs the market, and the price of gold reacts in a positive way for us.
Q: Pavel Alekseevich, what do you consider a matter of life for yourself: the metallurgical business of IRC, or the gold of Petropavlovsk?
A: I solved many problems in life: built the house, gave birth to a son, and planted trees - but if we talk about the remaining cases, this is the autoclave construction. Now I see, and very happy that we renewed this our baby, and the mine as well.
I believe that after the restructuring of bonds, after the restructuring of loans, we received a new lease of life. The autoclave, basically, is a new life for the enterprise. More than half of our reserves are resistant ore. They are profitable to be mined and processed by the autoclave method, because it is very low cost of the production - we have massive ore bodies, low stripping ratio. For Russia as a whole, the refractory ores reserves are prevalent.
We had a long road to go - prepared, created a scientific base, pilot production. We built an experienced shop, and a pilot plant - one of the unique facilities in Russia, where the whole autoclave process in a continuous mode was simulated. This is not a trivial task, which is very interesting and difficult to be solved, not only from a commercial point of view, but also from the perspective of an engineer, metallurgist. For me this task, given the fact that I’m already 60 years old, is the most important of the remaining business in my life.