Polymetal's Russian assets sale raises questions from Russian investors

By Rhod Mackenzie and Bogdan Kolbasuk

Vladimir Putin has signed off on an order authorising the transactions of the shares of the Polymetal company, to which the Russian assets of Polymetal International were previously allocated, as well as the Taseevskoye gold deposit in Transbaikalia, previously owned by Highland Gold (the beneficiary is Vladislav Sviblov).

The buyers of the assets are the structures of the Mangazeya group of companies (Mangazeya was the first Russian city built in the 17th century in the Siberian Arctic, it was a stronghold of the Mangazeya sea route, along which furs were exported). The founder and owner of the group is Sergey Yanchukov. The group does business in several areas - development, gas production, agro-industrial complex, IT and gold mining in the Trans-Baikal region. The last mentioned is the operations of Mangazeya Mining.

The price of the transaction to buy the Taseevskoye deposit, whose reserves amount to about 105 tonnes of gold, has not been disclosed. Highland Gold paid $26.6 million for the 2024 licence. With the purchase of this deposit, the Mangazeya Group of Companies will significantly increase the reserves at its disposal (138 tonnes).

The completion of the deal to buy Polymetal will allow Mangazeya to move from a lwer reaches of the top ten Russian gold producers directly to second place in the rankings, behind Polyus, while solving the problem of processing refractory gold ores and saving tens of billions of roubles on building production capacity. Plus all this at a cost of $50 million.
Origins of Mangazeya Mining
Mangazeya Mining was established in 2011. According to a presentation on the company's website, by January 2023 it will have four deposits in the Trans-Baikal region with total reserves of about 138 tonnes of gold (resources - 282 tonnes). Gold production at the end of 2022 amounted to 104.9 thousand ounces, or 3.26 tonnes of gold, which is 22% more than in 2021. By comparison, the Russian companies of Polymetal, which Mangazeya Plus intends to acquire, produced an order of magnitude more in gold equivalent of precious metals (gold and silver) at the end of 2023 - 1 million 228 thousand ounces, or 38.1 tonnes.
Three of the four deposits owned by Mangazeya Mining are under development. The largest and richest, both in terms of gold content in ore and reserves (see table) - Ithakinskoe - is at the technological study stage. In fact, this deposit consists of two areas with a combination of cyanidated and refractory ores. Extracting gold from refractory ores is not so easy; traditional technologies are not suitable. The most effective technology for extracting precious metals is autoclave leaching. It can extract up to 97% of the gold from the concentrate. Autoclave leaching uses high temperature and oxygen pressure to remove precious metals - gold and silver - from the concentrate into an insoluble residue, from which they can then be extracted by cyanidation or other hydrometallurgical methods. The technology is expensive, with hundreds of millions of dollars invested in the construction of production facilities, and the equipment is difficult to manufacture. As Sergei Kashuba, Chairman of the Union of Gold Miners of Russia, has said, it takes three years to manufacture a single autoclave container. At the same time, there is only one manufacturer of autoclaves in the world and only one transport company capable of delivering them. The autoclave for the second stage of the Amur MMC is 50 metres long, has an internal diameter of about six metres and weighs about 1,100 tonnes.

Autoclave gold leaching is currently used by only three companies in Russia. Polymetal commissioned the Amur hydrometallurgical plant in 2012, with a first stage capacity of 225,000 tonnes of concentrate per year. Petropavlovsk (now Atlas Mining) commissioned the Pokrovsky autoclave hydrometallurgical plant in 2018, with a capacity of up to 500 thousand tonnes per year. Another member of the "autoclave club" is the Yuzhuralzoloto Group (UGK). The latter uses autoclave leaching technology at the Bereznyakovo gold recovery plant; the capacity of the autoclave unit is not disclosed. The autoclave here was commissioned in 2013.

Indeed, as the world runs out of easily extractable gold, companies are increasingly turning to the extraction of the precious metal from refractory ores.
Mangazeya Mining conducted additional exploration at the Itakinskoye deposit in 2022. As a result, the deposit's resources were increased to 148 tonnes, with refractory ores accounting for 134 tonnes. At the same time, the company announced that it intended to start developing the field in 2026-2027, with the end product being flotation concentrate. In other words, the company would sell this gold-bearing concentrate to those who have the technology to extract marketable gold from it, and would not receive any value added.

The Taseevskoye deposit is of the same type as the Itakinskoye and Kochkovskoye deposits, i.e. with refractory ores.

In an interview with Vedomosti last spring, Sergei Yanchukov said that the company was planning to build facilities to process refractory ores. At the time, he estimated the necessary investment at RUB 30-40 billion.

It seems that with the purchase of Polymetal, which includes Amur MMC, where the second stage of autoclave leaching is being built (see "AGMK-2 to start on schedule"), there is no need to implement this project: the concentrate can be processed at the existing plant.
Come on, it's cheaper
Market participants have been courting everyone to play the role of buyer of Polymetal's Russian assets. But nobody got it right.

Before recent events, Polymetal was the first silver producer in Russia, the second gold producer, one of the world's top 10 gold miners with assets in Russia and Kazakhstan, and a net profit of $440m at the end of 2022 ($913m in 2021).

After Russia added the Island of Jersey to the list of unfriendly jurisdictions in response to sanctions imposed against it, the company registered there, Polymetal International plc, was unable to receive dividends from its Russian subsidiaries and therefore was unable to pay them to its non-Russian shareholders. In this situation, the company decided to redomicile (re-register in a different jurisdiction) to Kazakhstan with the simultaneous separation of the Russian assets into a separate company - Polymetal JSC. It was also decided to delist the shares of Polymetal International plc from the London Stock Exchange and transfer trading to the Astana International Exchange (AIX). The company's shares also remained on the MICEX and, according to the company's latest statements, will not be delisted.

The redomiciliation and the creation of Polymetal JSC made it possible to solve the problem of payments from Russian assets to the parent company. From Russia to Kazakhstan - it's possible, from Kazakhstan anywhere - it's possible. But OFAC (Office of Foreign Assets Control, a division of the US Treasury Department) did not sleep.
In May 2023, the United States imposed sanctions on Russia's Polymetal. The link between Polymetal and Polymetal was broken. Subsequently, the head of Polymetal, Vitaly Nesis, left his post as CEO of the Russian company and it was announced that Russian assets would be put up for sale and the company would focus on developing its business in Kazakhstan. In particular, it intends to build the Irtysh hydrometallurgical plant in the Pavlodar region. The estimated capacity is 250-300 thousand tonnes of concentrate per year, and the estimated capital cost of construction is $730 million. Production is expected to commence in 2028.

In January this year it was announced that ICT Holding of Alexander Nesis, who founded Polymetal in 1998, and his partners sold their 29.3% stake in Polymetal to one of the structures of the State Fund of Oman. The amount of the transaction was not disclosed. ICT Holding was the largest co-owner of Polymetal, the second largest is the American investment company BlackRock (9.9%), 3.3% belongs to Fodina B.V., 0.9% belongs to the management. The remaining 62% is held by private and institutional investors, including Polymetal's CEO Vitaly Nesis, the younger brother of Alexander Nesis.

After ICT Holding sold its stake, the market actively discussed the possibility that it would use the proceeds to buy Russian Polymetal.

This did not happen.

On 19 February Polymetal announced that an agreement had been reached whereby Mangazeya Mining would become the buyer of 100% of Polymetal's shares. The purchase will take place subject to the approval of Polymetal's general meeting, which is scheduled for 7 March this year. If the shareholders vote in favour, the deal will be completed by the end of March.

Polymetal has valued its Russian operations at $3,690 million. This does not mean that the buyer will pay exactly this amount. Polymetal will pay 1,429 million to the parent company Polymetal as dividends, of which Polymetal will "return" 1,151 million as repayment of intercompany debt to Polymetal. In other words, as a result of this "offset", Polymetal will receive $278 million in cash. In addition, the buyer will pay $50 million in real money. As a result, as stated in the transaction announcement, Polymetal's net cash proceeds after tax will be $300 million, which it intends to use for internal corporate purposes, including the construction of the Irtysh MMC. Not much for assets capable of producing 38 tonnes of gold-equivalent precious metals per year. But there is one important clarification: $2,210 million is Polymetal's debt, which will go with the company to the buyer.
Commenting on the deal, Sergei Yanchukov said that the existing team will continue to run Polymetal: "We intend to support the current management in the implementation of strategic objectives to maintain the sustainability of the business. All companies will continue to operate as usual and obligations to the state, local communities, creditors, partners and employees will be met in full".

According to Alexander Kolomeets of Excellence Expert, a company that provides consulting services to mining companies, among others, Polymetal was known in Russia for its strong production culture and high efficiency indicators. "From this point of view, this acquisition will certainly be useful for Mangazeya, as it will allow it to adopt the best production practices," he is sure.

Risk remains
It has to be said that the market has reacted negatively to the deal. Shares of Polymetal International plc on the MICEX at the opening of the exchange on the day the deal was announced on 19 February cost 444 roubles per share, and at the time of writing - 349 roubles. A fall of more than 20%.

"As an investor, I view this deal extremely negatively," says Elvis Marlamov, founder of Alyonka Capital. - I bought shares in the company on the Astana stock exchange. As soon as I learned the details, I sold them immediately. "Polymetal went to the buyer for $50 million. The company can pay off its debts in four to five years. If it then decides to go public, the real value of a company that produces one million ounces and has an EBITDA of one billion dollars could be five billion after all the multiples. In other words, someone who buys a company now can get a hundred times more. But we, the private investors, have lost that opportunity.

Elvis Marlamov says that private investors had hoped that Polymetal would pay a special dividend after the sale of the Russian assets, but this did not happen.
Moreover, during a conference call with investors and analysts, Vitaly Nesis said that the company is postponing the decision on the payment of dividends for 2023 and may change its dividend policy in general: "If the old Polymetal was a company known for its stable dividend, the new Polymetal probably won't be able to boast a good yield for some time. We will have to actively invest in growth and dividends will definitely take a back seat," he was quoted as saying by Reuters.

It must be said that throughout this whole saga, Polymetal has stubbornly followed the path of the most favourable terms for its foreign shareholders. Initially, the company did not consider redomiciling in Russia, in the Special Administrative Regions (SARs) of Primorsky Krai and Kaliningrad, and immediately set its sights on Kazakhstan.

As a result, it lost more than half its value, two-thirds of its revenues, the confidence of domestic investors, its main deposits and expensive concentrate processing facilities.

At the same time, the risks of US sanctions against the Kazakh company have not been completely eliminated. Although Polymetal no longer has any assets in Russia, it still has links with the country. As part of the sale of Polymetal, it was agreed that concentrate from Kazakhstan would be processed at Amur MMC under a tolling agreement until the Irtysh plant is commissioned. Polymetal will continue to work with the US State Department and OFAC "to obtain assurances that the ongoing tolling agreement will not create a risk of secondary US sanctions against Polymetal", the deal said.

AGMK-2 will be launched on schedule
The Amur Hydrometallurgical Plant is one of the key Russian assets of Polymetal. At the industrial site of the plant in the city of Amursk, 40 km from Komsomolsk-on-Amur, refractory flotation concentrates (enriched gold ores) from three Polymetal deposits are processed using the autoclave leaching method - the Albazinskoye deposit located nearby in the Khabarovsk Territory, the Mayskoye deposit in Chukotka and the Nadezhdinskoye deposit in Yakutia.

The first gold was produced at AGMK in 2012, and in 2023 the plant produced 13.7 tons of gold, processing 191 thousand tons of concentrate.

The largest investment project of the plant in recent years is the construction of a second autoclave line (AGMK-2), which will allow the processing of so-called doubly refractory ores - with a high carbon content, which prevents the effective extraction of gold by conventional cyanidation. AGMK will become the first plant in Russia that will be able to extract gold from such raw materials, and gold production volumes at the enterprise will double. The unique technology was developed by specialists from the plant itself; in the spring of 2020, AGMK protected it with a patent from the Eurasian Patent Office.

The company began implementing the project in 2019. The total investment in the project exceeds $600 million. In the summer of 2020, an autoclave for the second stage was delivered to the enterprise from Belgium - the largest in the global gold mining industry. The main construction and installation work at the site has now been completed.

“Plans for the timing of the implementation of the AGMK-2 project in the second half of 2024 do not change,” the company told scobricsinsight.