Good day, and welcome to the Polymetal Q2 2022 Production Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vitaly Nesis, Group CEO. Please go ahead. Ladies and gentlemen, thank you very much for joining us for the teleconference call on second quarter production results for Polymetal International. This call will be not a routine call because we will also cover the recent announcement on the potential transaction. I will first briefly cover the production results highlights. I will speak briefly about the potential transaction. We'll conclude with Q&A. I would like to apologize in advance. We'll only have about an hour for Q&A. In terms of the operating results, we probably have never had a more challenging quarter, definitely not, in my time as the CEO of the company. Despite that, we actually managed to do quite well in terms of the operations per se. However, in terms of the production, which includes ounces and tonnage, and particularly in terms of sales, we have encountered several significant challenges. I would like to highlight three factors that have influenced the company's performance in the quarter. First of all, we have struggled until recently with bullion sales out of our Russian mines. We decided not to sell at steep discount to the Russian Central Bank, not only because of the discount but because of the sanctions against the Russian Central Bank. As a result, for the bulk of the quarter, we have accumulated gold and silver bullion inventory has grown very significantly in the second quarter. We have only resumed full-fledged bullion sales in the second half of June, and we expect the accumulated bullion inventory to be fully unwind only by the end of August. Right now, all of the bullion is exported to Asian markets, and we expect the current bullion export channels not to be impacted by the recently levied sanctions against Russian gold. The second big challenge is the continuing severe COVID-related restrictions in China. The combination of various lockdowns, transportation constraints, and general inability to travel to and within the country has led to a significant slowdown in shipments of gold concentrates from Nezhda and Kyzyl. As a result, both these mines produce concentrate in line with plan, but there has been significant concentrate accumulation due to mostly transportation-related challenges. Thirdly, we have faced unprecedented supply chain disruptions mostly related to the decision of many mining and processing equipment manufacturers to leave Russia. As a result, we have had issues procuring spare parts and getting the equipment serviced. Now, right now, I can report that the majority of equipment manufacturers have completed their exit from Russia, and we decided to buy out all of the remaining spare parts inventories and to undertake service responsibilities mostly in-house. Now, this has led to significant increase in spare parts and various materials inventories, which obviously has depressed free cash flows and led to the increase in the net debt levels. We believe we will see the start of the unwinding of this accumulated inventory and prepayments in the third quarter. Having said all that, the most prominent number as of the end of the second quarter is clearly the net debt level, which stands at $2.8 billion. This is definitely not a comfortable number, but the management is moderately optimistic in that the full resumption of sales from Russia and the gradual unwinding of concentrate and spare parts inventories will lead to the improvement in net debt over the remainder of the year. Still, the risk of underperformance against the production guidance remains significant given persistent lockdowns and logistical constraints. The management will apply our best efforts to do our best. I think we have to warn about the potential underperformance versus the production guidance. I would also like to highlight that given significant depreciation of ruble against U.S. dollar, we will update our forecast for cash costs and CapEx during the publication of first half financial results, which we expect to happen on the twenty-second of September 2022. I will not repeat the highlights of the press release which went out on Tuesday. I would like to make the following key points regarding the potential disposal transaction. First of all, the special committee formed by the board will consider and discuss all potential options. The decision to pursue any transaction, any type of transaction has not been taken. Definitely, we as the board, I'm speaking right now as a board member, need to take a very close and serious look at what the strategic opportunities are for the company, given the unprecedented level of external challenges and external restrictions which impact the business of the company. Yet, the decision will be properly considered and will be thoroughly weighed on a number of metrics before that proposed decision will be presented for shareholder approval. I would like to reiterate, no decision on a specific transaction has been taken. The special committee is created to consider the options. Second, all options are on the table. I would like to stress that the term disposal covers a range of potential transaction outcomes, which include the sale to a just a trade sale to an external buyer, an option which has been probably the most widespread in Russia this year, which is the management buyout. A less widespread options will also be considered, for example, the various types of spin-off. We clearly understand that various options have their own advantages and disadvantages. I would like to commit personally that the board and the management first and foremost will have in mind the protection of the rights of institutional shareholders and the protection of shareholder value. Long-term shareholder value will definitely be the priority in the decision-making process. Whatever happens, we understand that the decision to be taken by the special committee of the board will be a momentous one. It will decide the direction of the company for a long time to go, and it will not be taken lightly. On behalf of the management, I can guarantee you that many years of hard work serving all of the stakeholders of the company will not be laid to waste by speedy decision-making and by opportunistic decisions. With this, now I would be pleased to answer the questions, both on the operational results and on the potential transaction. Now on the latter, I apologize in advance if a lot of the answers will not be specific because we're just in the beginning of the process. We will have approximately one hour to answer the questions. Thank you very much. Thank you. Ladies and gentlemen, if you would like to ask a question over the telephone, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. Our first question today comes from Boris Sinitsyn of Renaissance Capital. Please go ahead. Hi, gentlemen. Thanks for presentation. A few questions, please. Firstly, on your production guidance for 2022, could you please clarify that the main factor of downside in your opinion is concentrate sales which accounts for roughly 20% of your total production? That's the first one. Yeah, this is. Thanks for the question. Yeah, this is the right assumption. In order to be able to export high arsenic concentrates from Nezhda and Kyzyl, pretty complex logistics are required. Right now, the logistical scheme arrangement is considerably slowed down by various restrictions, most of which are COVID-related, but some of which are actually sanctions-related. As a result, you know, instead of shipping approximately 10,000-12,000 tons of concentrate per month for blending, we can only ship right now about 5,000. We are facing concentrate accumulation at both these mines. We hope that after the situation in China with COVID normalizes, we will be able to return to a kind of full speed of concentrate shipments and will slowly unwind the inventory backlog accumulated. Clear. Thank you. Another questions are on the wrap up on 2020 outlook for sales volumes and the working capital. For sales volumes, would you still expect for the like total of 2022, would you still expect some gap between sales volumes and production? And if yes, what like could you please quantify it? The same relates to working capital build up. Basically, what portion of already happened working capital build up you would expect to reverse in the second half, if you have any ideas? Thanks. Well, yeah, if you break down the working capital build up into three parts, bullion, concentrate, and spare parts and materials, we currently expect that the bullion inventory will be fully sold down before the year end. The concentrate inventory will most likely be flat. Spare parts will probably go down somewhat. We expect that the peak inventory levels will probably be achieved sometime late August, early September. This is all obviously contingent upon the current state of things. The official wording of sanctions against Russian gold imports became available only today. There is a risk that these new sanctions will have some knock-on effects on our current established sales routes. The risk remains. Clear. Thank you. The last question from me is on your potential deal of disposal and split of Russian Kazakh assets. Has management taken any decision in principle to keep Russian assets public or private? No decision has been taken. I think the logic is as follows. The board of directors recognizes that whatever future path the company will take, this needs to be a conscious and balanced decision. Do nothing potential is an option, but this option, if pursued, needs to be pursued consciously and as a result of thorough process. The creation of the special committee and hiring advisors are just two first steps towards arriving at that decision. The decision has not been taken. Okay. That's also clear. That's it for me. Thank you. Ladies and gentlemen, as a reminder, please press star one on your telephone keypad to ask a question. We will now move to a question from Maria Marinova of Sberbank. Please go ahead. Good then. Thank you for the presentation and opportunity to ask questions. I have several questions. The first one related to cash costs, Cash cost performance in the first half of this year was in line with the plan. We will not comment on any financial metrics on this call because the financial results are not yet in. As you can imagine, with the huge buildup in finished goods inventory, the cash cost numbers are probably going to be more or less meaningless in terms of measuring the current economics and the current cash flows of the business. You need to wait until we publish the first half financial results together with meaningful and relatively detailed comments. Thank you. I have several questions on possible demerger. What will be your development plan after the consolidation of Russian assets? Will you focus on Kazakhstan or expansion in other countries is not excluded? Will you develop projects from scratch or prefer M&A transaction with brownfields? Well, this question is definitely premature, as I have emphasized, the decision has not been taken. Until that decision is taken, talking about the future strategy is pointless. Thank you. The last question for me is what is the current distribution of net debt between Russian and Kazakh assets? I think again, this is more a financial question, and we'll provide that information together with the financial statements. Thank you. Sorry. The last question from me. What discount for Russian assets you consider acceptable? I don't know what is this. You discount to what? Discount for the value of Russian assets. I think, you know, given the current situation, I'm not sure this question really has any substance, 'cause even the baseline value is hard to determine. I think making the decision based on the notion of a specific discount clearly does not apply in this case. Thank you very much. Once again, to ask a question over the telephone, please signal by pressing star one on your telephone keypad. We will now take a follow-up question from Boris Sinitsyn. Please go ahead. Hi again. Indeed, one more from me. On your plans to update cash costs and CapEx for Russian business in September, is it correct to assume that the stronger currency is the only factor which would affect your guidance? If it's possible, could you please share your new FX assumptions for this? Thank you. This is the second part of the question is really easy. We don't assume anything for the Forex right now. We just are sitting and waiting what will transpire. Trying to make assumptions is not the right way to approach the situation. In terms of the factors impacting the cost, clearly Forex accounts for the bulk of it, particularly on the OpEx side. But on CapEx side, we also have to contend with massive increases in logistic costs. In terms of OpEx, you know, the discontinuation of traditional supply sources have also led to material increase in logistical costs and sometimes an increase of prices as well. Now, having said that, I would say that probably two-thirds to three-quarters of the impact on costs are related to forex. Okay, clear. Basically some small markup, for other factors still left. Thank you. We will now take a question from Nikolai Vasilenko of Sovcombank. Please go ahead. Yes. Many thanks for an opportunity to ask some questions. What I read from your press release, a couple of days ago, it was quite clear that you were actually selling the Russian assets. Now I hear more like, you are considering various options. That's the first questions. This is the first question. Please confirm that you are indeed want to sell the Russian assets. The second one question, I think, if you are selling the Russian assets, it's quite clear that the state commission will heavily discount the price that you want to obtain. In this case, there is a threat that you might be selling Russian assets at, let's say, 1x EBITDA. This, that's what Kinross, I think, did. That's the main issue that the market is currently afraid of. Sorry, the third question is, in any case, whatever you do, holders of your equity in NSD, National Settlement Depository of Russia, they will probably get nothing. Are you going to do something with it? Yeah, that's all for me. Again, I would like to emphasize again, 'cause similar questions crop up in the webcast. The decision on any transaction has not been taken. The sale, the outright sale, of the Russian business is one of the options. It's probably the most obvious option, but the decision has not been taken. Talking about the valuation and the legal repercussions is definitely premature. Thank you for mentioning NSD. Definitely the fate of shareholders who hold their shares through the NSD will be of paramount importance during the decision-making process. Both because we have a substantial chunk of equity held by shareholders through MOEX and NSD, but also because I myself and the vast majority of employee shareholders are also locked in NSD. So wiping out NSD shareholders definitely you know is something that would worry me personally very much, 'cause a substantial chunk of my personal net worth is in Polymetal shares, even at this depressed price levels. Rest assured, the issue of shares held through NSD is one of the top issues to be carefully analyzed during consideration of various transaction options. Okay. Thank you. As a reminder, please press star one to ask a question. It appears that there are currently no further questions. Yeah, please bear with us. We will start answering the text questions received through webcast. Now, again, I would like to make a general statement which probably would answer a lot of text questions. That we are not ready to comment on discounts, values, process, et cetera. First of all, you know, the decision has not been taken. It's just the start of deliberations. Secondly, it will be definitely up to the special committee to consider all of the options very carefully, 'cause as was explained during the answer, there are a lot of considerations besides pure valuation. For example, making sure that all of the shareholders' rights are protected, including those that hold their shares through NSD. In terms of text questions. Are you going to pay dividend, and if so, when? Realistically, we don't expect any dividend payments this year. The final decision will be made by the board before we announce first half financial results. Given the current situation, it's just more or less impossible to pay dividend. How are you managing morale at this difficult time? Well, this is a pretty broad question, and I agree that making sure the employees feel themselves well and remain productive, is of paramount importance. We are trying to conduct business as usual. We are trying to project the air of confidence in our own resources. We try to be open with our colleagues about the challenges the current situation presents, but also, we're trying to involve them in decision-making process on how these challenges can be overcome. In terms of the timing of the timeline on the decision, I think it will depend a lot on the interaction with the regulators both in U.K. and in Russia. Also a lot will depend on the external developments as we put the advisor team together and the advisors start to work on the potential options. Definitely, this is not something that can be kind of slowly moved forward, but don't expect a fast decision. This is a long and multi-dimensional process, and here it's better to delay the decision than to screw up the transaction. What is the current situation in terms of finding a new auditor for the LLC? Well, the new auditor has actually been appointed. I think there's been a separate announcement of that. This will be MHA, which is part of the Baker Tilly International network. They have already commenced their work in relation to the first half results. We are fully in line with the U.K. corporate governance requirements in that sense. What is the minimum level of the ruble exchange rate that allows the company to remain profitable? I think, you know, even at 50 rubles per dollar, we can make quite a lot of money, but probably, the ounces will be materially lower. We would need to shut down certain parts of the operations and increase the cut-off grade. So our. I think our all of our assets will remain profitable at let's say $1,200 per ounce gold and 50 RUB per dollar, but probably the resulting production totals would go down by about 24%. Is the plan for POX-2 still to establish operations in Kazakhstan? We already have established the team to analyze the potential sites for POX-2 in Kazakhstan, and we expect that work to be completed in the third quarter. When we report third quarter production results, hopefully we'll give you some color on the decisions already taken and probably implemented. POX-3? POX-3. This is POX-3, not POX-2. At what discount to LBMA price do you export gold from Russian assets? Obviously, you know, like discounts to prices are extremely sensitive commercial information. But I think, you know, the level of the discounts is such that it won't be noticeable given the volatility in gold and silver prices. From what we know about the performance of our peers, we currently probably have the lowest discount levels among Russian companies. How is business reducing costs due to the sanctions? Should production slow down employee layoffs, et cetera? We are trying not to rock the boat too much, so employee layoffs are probably the least productive and the last option really to pursue. We definitely moved pretty quickly to reduce discretionary capital expenditures, and the process will continue. For example, next year, we'll probably more or less terminate all greenfield exploration activities, and a lot of smaller projects, including renewable energy projects, have been delayed indefinitely. In terms of the operations, I think the key lever to pull is definitely the increase in cut-off grades with the concomitant decrease in the physical amounts of ore mined and processed. At some operations, this is already in progress, but again, we are trying not to jerk the operating procedures too quickly, 'cause macro variables are changing really by the week, and particularly, the Forex rate remains a huge unknown. We are trying to adjust relatively slowly in order not to demoralize the workforce, but also not to do some long-lasting damage in response to what may turn out to be relatively short-term changes in cost structures. How long do you expect that the accumulated inventory will last in supporting operations of the business? I think that this question relates to the inventory of spare parts and materials. I personally believe that the existing inventory will be more than sufficient for the time it takes us to establish alternative lines of supply. I personally don't expect that the bans on imports of certain equipment and supplies will have a direct impact on operations. In terms of the new projects, it may be quite significant. For example, Veduga was delayed by a full year precisely because of the need to re-engineer away from European equipment towards Chinese equipment. The approximate duration of the delay. In terms of operations, I think the fact that China has a huge market for mining and processing equipment will be a huge boon and will ensure that the current mines continue unaffected. What is your number one pressure coming from? I would highlight two pressures. The first is now kind of slowly receding, which was the establishment of new reliable bullion exports channels. The second is clearly sharp appreciation of the Russian ruble with the resulting huge jump in operating costs. You know, the first number I check when I wake up in the morning is definitely ruble-dollar exchange rate. This is the figure that weighs heavily on our shoulders because if ruble continues to be strong, this will lead to the reworking of mine plans at several operations, and as I have mentioned before, potentially to the meaningful reduction in our production going forward. We are watching this external metric very closely. Internally, in addition to the sales channels, definitely supply chain management receives probably the highest marks for being time-intensive. After the first shock, we managed to find new logistical routes, and now for the majority of the spares and the imported consumables, we found the alternative sources in China, Turkey, India, and Latin America in some cases. That worry again is slowly diminishing in acuteness. I am again skipping all of the questions that relate to the future of the company because that future is uncertain. All questions about the breakup, split up, sale presently cannot be answered because the precise configuration of the future potential transaction is not known. What impact on Polymetal do you expect from recent sanction on Russian gold export to Western countries? I think this is an excellent question. This is an additional source of uncertainty. Right now we haven't had any visibility on the fallout although the sanctions have been announced, the arrival of the sanctions have been announced some time ago. Right now we don't see anything that has already happened, but that is a material uncertainty, and we'll definitely inform the market if this additional sanctions will lead to changes in the way we conduct our business. ADRs? The ADR. How are your negotiations to restart trading in ADR programs? Well, there are no negotiations on the way, and unfortunately, we believe that the likelihood of restarting of this programs is nil. They fall squarely under the American sanctions and we have no way of influencing the restart. Could you give some more detail on the performance of the Kazakh operations? Are they affected in any way by sanctions? Very simple answer is no, not affected. Specific to spare parts, now that the manufacturers have left Russia, are you able to secure additional replacement parts for the mining equipment if required? Well, it actually varies a lot by the equipment manufacturer. Some producers have left Russia and discontinued sales of spare parts. Some manufacturers continue to sell parts and provide services. In terms of the worst affected, are underground equipment produced by European manufacturers such as Sandvik and Epiroc. There we have accelerated the fleet replacement programs, and more or less the general strategy is to cannibalize the existing equipment while the new units coming in will be from other countries, mostly from China. It also helps a lot that we have recently commissioned the underground conveyor at Mayskoye, which freed up more than 25 units of underground mining equipment, which can be reassigned or sometimes just dismantled for spare parts across the portfolio. I think we have about two years' strength in our underground fleet, and within these two years, we will need to substantially beef up the share of the Chinese machines in the fleet. Again, we have detailed plans, literally, on every single unit of major underground equipment, trucks, loaders, drill rigs. We believe the resulting schedule of partial dismantling, partial maintenance, and partial replacement with the Chinese units is realistic and will not have any negative impact on production. Although obviously the capital costs would be somewhat higher, although the resulting increase is not really material against the scale of CapEx for the whole company. What is the projected fall of production in Kyzyl for this year, and what are the major causes? Well, the key driver is definitely the planned decrease in grade mined. Last year was great. Now we mined above the reserve grade, but as we move into the eastern part of the open pit, the grades fall predictably and the production is somewhat depressed. The production will start to recover somewhat after we launch POX-2 and the resulting recovery increase will prop up the production. Is that important to restore the short-term share price? I think this is a very good question, and I mentioned during the first part of the call, and I would like to reiterate that the focus of the management and of the board is not to restore the share price short-term. I realize it is painful to see the share price at the current levels. Believe me, I am also a shareholder, and the bulk of my personal wealth was, and still is, in Polymetal stock. I share the pain, but the focus of the activities is on restoring shareholder value, and it may take a long time. I'm not talking even about the potential transaction. Potential transaction may be just the first step along the way. It's painful, but we, all we shareholders have to be patient and understanding of the situation. The management all of the team at Polymetal is fully aligned with shareholders' objectives. We have more than 500 shareholders within our workforce, and I am getting at least 10 queries per week from employees about the share price and its future. We will do what we can do, and the focus is not on the urgent improvement, but rather on the long-term restoration of value. I don't think it's a good question, but it has a substantial kind of humorous value, so I will answer it. Will you make a takeover bid for Petropavlovsk? Well, of course not. The company is bankrupt, so there is nothing to bid for. Are you able to ship the Russian gold to Kazakhstan and sell it that way if it is being stockpiled? The short answer is no. Kazakhstan is closed as a market for Russian gold following the imposition of LBMA sanctions on Russian refineries. That has happened mid-June. It's a long question, but fundamentally, it is keeping the Russian assets an existential threat for Polymetal given the sanctions risk? I think this is, you know, a billion-dollar question, and I don't have a ready answer for it. In general, it's difficult to assess the risk of sanctions imposition because imposing sanctions has been relatively intransparent process. We definitely will bear this risk in mind when the board will make a decision. It's just one of the many considerations that will be taken into account. Are sanctions affecting only bullion or also concentrates? The sanctions are affecting concentrates as well. We have stopped selling concentrates to Europe. Again, we are waiting for the fallout from the most recent sanctions round to crystallize, that may have a knock-on effect on concentrates. However, concentrate market is a less kind of restricted compared with bullion. We, for example, don't sell bullion to China. It's very complicated. We haven't been able to crack that market yet. While concentrates obviously can be sold to China. In terms of the sanctions risks, concentrate sales probably don't rank very high. If we can't sell them to Europe, we'll sell them to China. Has there been any progress on finding customers for the accumulated silver bullion? Yes. Silver bullion, together with gold bullion, is currently being sold to customers in Asia. We believe the current stockpile will be fully sold down by the end of August. Does the current situation make it impossible to refinance debt? No. Well, actually, over the quarter, since you know, the start of the sanctions, the situation in terms of financing has improved. You know, both the cost of the ruble-denominated funds went down in line with the Russian CBR rate, but also U.S. dollar funding has become surprisingly available at pretty cheap rates. So the Russian part of the business has the full ability to continue to finance the working capital buildup through the available credit lines. All right. I think we have exhausted the list of questions on the webcast. I would like to apologize again for not answering a lot of questions related to the potential transaction, to the specific options relating to the potential transaction, and about the details of sales, acquisitions, valuations, and discounts. I think it's just plain not appropriate presently. Just one more question. What should employees expect regarding their long-term share rewards programs? They were promised to be rewarded, but now they feel that they lost. Well, hard luck. I lost as well. I'm a member of employee stock ownership plan, and the value of that plan just disappeared. This is painful, but this is fair. We all have suffered in line with other shareholders. Definitely this loss is not due to Polymetal employees or management, but that's what's happened. We suffer along with other shareholders. With this unpleasant, but I hope refreshingly honest, comment, I would like to thank you all for the call. Please feel free to direct further questions and inquiries to either the top management or the investor relations team in London or in Saint Petersburg. I wish you all a very good day. Thanks a lot. This concludes today's call. Thank you for your participation. You may now disconnect.