Polymetal International Plc (POLY), the gold and silver producer part-owned by Russian billionaire Alexander Nesis, agreed to buy the Kyzyl project in northeast Kazakhstan for $618.5 million to add 50 percent to its reserves.
Polymetal will pay $318.5 million in cash and issue $300 million in new shares for the Bakyrchik and Bolshevik gold deposits, the London-traded company said in a statement today. It is buying the assets from Sumeru Gold B.V. and Sumeru LLP. Polymetal will pay Sumeru a further amount of as much as $500 million if certain conditions are met over seven years, it said.
“This asset is one of the last available among the large and high-grade ones discovered during Soviet times, that’s why we are very keen on acquiring it,” Polymetal Deputy Chief Executive Officer Pavel Danilin said in a phone interview.
Polymetal is adding reserves after it swung to a loss last year as the average price it achieved for the precious metal dropped and costs increased. Bullion slumped 28 percent last year, the most in three decades, on expectations U.S. stimulus would slow. The gold producer planned to buy the Bakyrchik mine from companies owned by Timur Kulibayev, a son-in-law of Kazakh President Nursultan Nazarbayev, Kommersant reported in October.
Polymetal dropped 0.7 percent to 539 pence in London trading at 9:45 a.m. Its Moscow-traded stock slumped 3.3 percent to 319.11 rubles.
Polymetal intends to complete a new feasibility study of the project by the end of next year and will then decide on its capital spending required for development, Danilin said.
“According to the most recent feasibility study, capex was estimated at approximately $1 billion, but we expect it to be meaningfully lower due to our unique development approach.”
The transaction isn’t expected to affect dividend policy, Danilin said. “We expect to maintain regular dividend payments should current commodities prices be sustained.”
Polymetal’s dividends policy calls for payments of 30 percent of net income. If the ratio of net debt to adjusted earnings before income, taxes, depreciation and amortization is higher than 1.75, the board can change the payout level.
“This is the largest acquisition in Polymetal’s history,” Oleg Petropavlovskiy, an analyst at BCS Financial Group in Moscow, said by phone. “The deal will allow the company to boost gold reserves and possibly to achieve lower production cash costs than it has at its existing mines in Russia and Kazakhstan.”
Kyzyl holds 6.7 million ounces of gold at 7.5 grams a metric ton, as measured under the Joint Ore Reserves Committee code, with a mine-life of 20 years based on reserves at Bakyrchik, Polymetal said. The project offers “further substantial potential of additions to existing reserves,” it said.
Bakyrchik and Bolshevik are in a traditional mining region with good infrastructure, including easy access to power and rail, and part of Kyzyl could be converted to open-pit mining from an underground operation to optimize extraction, Polymetal said.
The additional cash payment is contingent on certain conditions being met and dependent on the movement in the gold price and the price of Polymetal’s shares in the next seven years, the company said.
The extra payment “is intended to compensate Sumeru for any negative difference between the market performance of the consideration shares and the gold price in the seven-year period following completion of the acquisition,” it said.
Polymetal expects to fund the cash element of the initial payment from available undrawn facilities of $1.3 billion, and to finance projected capital spending at the mines with project-finance debt and cash flows, it said in the statement. It intends to complete the acquisition by the end of the fourth quarter.
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