London, 21 April 2021 -- Moody's Investors Service ("Moody's") has today
upgraded the rating of the backed senior unsecured debts issued by Polyus
Finance Plc to Baa3 from Ba1. At the same time, Moody's
has assigned a Baa3 issuer rating to PJSC Polyus ("Polyus" or company)
and withdrawn the company's Ba1 corporate family rating (CFR) and Ba1-PD
probability of default rating (PDR). The outlook of both entities
"The upgrade reflects Polyus' unique positioning as one of the lowest
cost gold producers in the world, substantial reserve base,
strong cash flow generation, track record of deleveraging and our
expectation that the company will continue successfully executing its
growth projects maintaining conservative financial policy and modest leverage
under various gold price scenarios" says Denis Perevezentsev, a
Vice President-Senior Credit Officer at Moody's.
The upgrade of Polyus's ratings to Baa3 from Ba1 reflects the company's
track record of deleveraging and its status as the fourth largest gold
producer in the world with one of the lowest cash costs in the sector
and stellar reserve base. Moody's expects the company to continue
delivering strong operating performance, which will allow it to
maintain modest levels of leverage under various gold price scenarios
despite its dividend policy, which anticipates fairly high dividend
distributions of 30% of the company's EBITDA, provided
that the company's reported net debt/EBITDA is below 2.5x.
The nature of the company's open pit mines with high quality ore grades
supported by weak rouble exchange rate and the company's focus on
operational efficiencies resulted in total cash costs of $300-$350
per ounce (oz) for its key deposits and a blended total cash cost of $362/oz
in 2020, the lowest among Moody's rated gold producers.
Although Moody's estimates that a more sustainable level for the
company's total cash costs is about $400-$450/ounce
taking into account the company's mining plan as well as due to
inflationary pressures building up amid economic recovery post-pandemic
and commodity prices growth, it is still substantially lower compared
with its peers. The low cost profile will support the company's
performance through the cycle. Polyus' leverage, as
measured by Moody's adjusted debt/EBITDA declined to 1.15x
as of year-end 2020 from 3.0x as of year-end 2017.
The deleveraging was achieved by a combination of Moody's adjusted
EBITDA expansion to $3.4 billion in 2020 (2017: $1.6
billion) supported by production and gold prices growth and debt reduction
with Moody's adjusted debt declining to $3.9 billion
as of year-end 2020 from $4.9 billion as of year-end
2017. The company expects to produce about 2.7 million ounces
of gold in 2021 (2020: 2.8 million ounces).
Moody's estimates capital spending in 2021-23, on average,
of up to $1.3 billion-$1.5 billion
per year (2020: $815 million, as adjusted by Moody's),
including capitalized stripping costs, with the increase in spending
mainly related to the construction of Mill-5 at Blagodatnoye and
Sukhoi Log as well as a pick-up in stripping costs. Construction
of Mill-5 at Blagodatnoye will allow the company to increase ore
processing volume by 8 million tonnes by 2025 (to 17 million tonnes on
a combined basis, accounting for the existing Mill-4),
resulting in 390,000 ounces of additional gold production at this
mine. Despite this pick-up in capital spending Moody's
estimates the company to maintain gross leverage, as measured by
Moody's adjusted debt/EBITDA of below 2.0x in 2021-23
under gold price scenario of $1,400/oz during this period
and up to 2.3x-2.5x under gold price scenario of
$1,250/oz during the same period. Lower gold prices
will result in lower EBITDA and lower dividend distributions, which
will be supportive for retained cash flows available to fund capital spending.
Development of the Sukhoi Log open pit project, located in the Irkutsk
region of Eastern Siberia, which will be subject to the final investment
decision in the second half of 2022, will contribute to material
strengthening of the company's business profile by the time the
project is launched in 2027 as the project will be processing 33 million
tonnes of ore (the company processed 45 million tonnes of ore in 2020)
with the average annual production of 2.3 million ounces at a very
competitive cash cost. This is one of the world's largest
greenfield assets with over 40 million ounces of gold reserves,
which combines high grade ore with gold content of 2.3 grams per
tonne with long-term life of mine of about 20 years. Although
this $3.3 billion project bears execution risks, some
of which are out of the company's control (e.g. expansion
of electricity grid), these risks are offset by the experience and
track record the company has in executing greenfield projects (e.g.
construction of Natalka mine), including construction of electricity
grids. Polyus has long-term strategic relationships with
Russia's federal grid operator FGC UES, PJSC (Baa3 stable)
while the project's proximity to the existing grid and Verninskoye
mine allows utilization of the current infrastructure for the new mine
construction and processing. Capital spending will be spread over
several years, but will nevertheless compress the company's
free cash flows during the active stages of mine construction.
Polyus' Baa3 rating factors in (1) large scale of operations with
gold production of 2.8 million ounces in 2020; (2) the company's
global cost leadership (total cash cost of $362/oz in 2020) owing
to high grade ore, rouble depreciation, production efficiencies
and open pit nature of ore extraction; (3) high-grade reserve
base of over 100 million oz, including Sukhoi Log -- the largest
among Moody's rated gold producers; (4) its history of organic
growth, cost cutting and operational enhancements; (5) its
very high Moody's-adjusted EBITDA margin of more than 60%,
backed by completed operational enhancements; (6) Moody's expectation
that Polyus will maintain its leverage below 2.5x over the next
12-18 months under Moody's conservative gold price assumption
of $1,250/oz; (7) the company's strong liquidity
and balanced debt maturity profile; and (8) its balanced financial
policy and prudent corporate governance.
At the same time, the rating takes into account (1) Polyus'
operational and geographical concentration, with all five active
mines and deposits located in Eastern Siberia and the Far East in Russia;
(2) product concentration, as the company predominantly produces
gold, while the share of by-products is insignificant;
(3) dividend policy, which anticipates fairly high dividend payouts;
(4) concentrated ownership-related risks, including potential
rapid changes in strategy and financial and dividend policies, although
mitigated to some extent by Polyus' listing on the Moscow and London
stock exchanges, with 21.85% free float; (5)
sensitivity to the volatile gold price and rouble exchange rate;
(6) fairly elevated capital spending related to the development of Sukhoi
Log, which will be spread over the next seven years; and (7)
exposure to Russia's macroeconomic, regulatory and operating
environment because all of Polyus' operating assets are located
Polyus has strong liquidity and benefits from its balanced debt maturity
profile. As of 31 December 2020, Polyus' liquidity
comprised nearly $1.5 billion in cash and equivalents,
and around $1.8 billion in operating cash flow, which
Moody's expects the company to generate in 2021 under the conservative
gold price assumption of $1,400/oz ($2.2 billion
under gold price assumption of $1,600/oz). This liquidity
will comfortably cover Polyus' capital spending of up to $1.4
billion, including capitalized stripping costs, during the
same period, shareholder distributions, which Moody's
estimates at up to $0.8 billion-$1.1
billion, and short-term debt maturities of around $220
million. Beyond 2021, the company's debt maturities
in 2022 are represented by the outstanding $483 million eurobond
due in March 2022. Moody's views the related refinancing
risks as low because of the company's sustainable operating cash
flow, and access to both domestic and international debt financing.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
Polyus is exposed to environmental, social and governance issues
that are typical for a company in the mining sector. The environmental
risks include, but are not limited to, soil and water pollution
as a result of processes and chemicals, in particular cyanide and
other hazardous substances, used in gold extraction and production
methods. Such risks are generally viewed by Moody's as very
high for mining companies, which include water shortages and man-made
hazards. Such hazards may include flooding, and collapsing
of walls or shelves at the company's open-pit mines. Leakage
from, or failure of the company's tailings dams may present another
potential risk, but Polyus regularly inspects its tailings storage
facilities. Thawing permafrost may lead to significant operational
disruptions. About 35% of the company's total gold
output is produced in permafrost areas. Polyus has a permafrost
monitoring system in place, including on pit walls and mine adjacent
areas. In 2021, the company signed a number of agreements
with RusHydro, PJSC (Baa3 stable) to supply the company's
plants with hydropower, which will increase the share of renewable
sources in the production assets electricity generation to 90%
in 2021 from 36% in 2020, and underscores the company's
Governance risks are an important consideration for all debt issuers,
and are relevant to bondholders and bank lenders because governance weaknesses
can lead to a deterioration in a company's credit quality, while
governance strengths can benefit a company's credit profile. Polyus
has a concentrated ownership structure, with 76.34%
of the company's share capital owned by Said Kerimov. The risk
of concentrated ownership is mitigated by the track record of a balanced
financial policy as well as through independent directors' oversight,
with four out of nine board members being independent directors.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that, over
the next 12-18 months, Polyus will sustain its modest leverage
level; maintain strong liquidity; and pursue a balanced financial
policy, with no elevated shareholder distributions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings upgrade is unlikely over the medium-term given that the
company is in the midst of the elevated capital spending cycle.
Moody's could upgrade Polyus' ratings if the company were
to (1) continue demonstrating a track record of increasing its gold production,
inter alia, as a result of a successful launch of Sukhoi Log;
(2) generate positive FCF on a sustained basis; (3) pursue a balanced
financial policy and prudent corporate governance, showing restraint
with respect to dividends and maintaining its (CFO - dividends)/debt
above 35%; and (4) maintain strong liquidity.
Moody's could downgrade the ratings if (1) the company's Moody's-adjusted
total debt/EBITDA were to rise above 2.75x on a sustained basis;
(2) shareholder distributions or capital spending were to significantly
exceed Moody's current expectations; or (3) operating performance
and liquidity were to deteriorate substantially. A downgrade of
Russia's (Baa3 stable) sovereign rating could also lead to a downgrade
of Polyus's ratings.
The principal methodology used in these ratings was Mining published in
September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
PJSC Polyus (Polyus) is one of the lowest-cost gold producers globally,
with five active mines in Russia. In 2020, the company produced
2.8 million ounces of gold, ranking as the fourth-largest
producer globally, and generated revenue of $5.0 billion
and Moody's-adjusted EBITDA of $3.4 billion.
Polyus is beneficially controlled by Said Kerimov (76.34%),
while 21.85% is in free float on the Moscow and London stock
exchanges; the remaining 1.81% consists of treasury
shares and shares that belong to the company's management.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Denis Perevezentsev, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
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Associate Managing Director
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