Polymetal board approves POX-2 project

The second POX line, due for completion by the end of 2023, will process double refractory concentrates and have a design throughput capacity of 250,000-300,000 tonnes per annum of concentrate, depending on sulphur content levels. Polymetal said the maximum sulphide sulphur processing capacity was 48,000tpa, which would "complement the 200,000tpa of concentrate and 30,000tpa of sulphur capacity of the existing Amursk POX facility".CEO Vitaly Nesis told Mining Journal there were three main benefits to constructing the second POX line, namely financial benefits, environmental benefits, and the "drastic reshaping" of Polymetal's strategic risk profile."We will lower our costs, will increase our production thanks to better recoveries and we will cut our transportation expenditures. So, these three improvements will drive significant increases in EBITDA, free cash flows and income," he said.POX-2 will allow for an incremental output increase of 30,000-35,000 ounces per annum of gold from the same amount of feedstock and lower total cash costs on average by US$100-150 per ounce for 500,00oz of annual gold production.Nesis said institutional investors globally were placing more importance on environmental, social and governance (ESG) and POX-2 would be a "huge step towards reducing the overall environmental footprint" of Polymetal's value chain."We will stop pretty much sending our stuff to highly polluting and environmentally unfriendly roasting industry in China and as a result, our value chain will reduce toxic solid waste formation, toxic fluids and toxic sulphur oxide emissions so it will go a long way in ensuring sustainability of our business model in the global context," he said.Regarding Polymetal's strategic risk profile, Nesis said the company was currently significantly dependent on Chinese concentrate offtake markets."We depend on a market which is subject to significant regulatory oversight and on a market where we expect negative changes to the regulatory regime because of the general environmental clampdown in China."So we are protecting ourselves, we are protecting a very big change of our net asset value-definitely more than half of our asset value from negative changes in the regulatory regime in China," he said.The POX-2 project is expected to meaningfully increase the value of Polymetal's refractory reserve base, comprising around 55% of total ore reserves, processing concentrates from its Kyzyl, Nezhda, Mayskoye, and Voro mines.The project will also allow Polymetal to create capacity for treatment of third-party refractory concentrates, a market which has grown considerably in Russia and globally in recent years.Nesis said Polymetal would initially will have relatively little spare capacity for third party processing - 20,000-40,000tpa up to 2026, although this would increase to around 90,000tpa of concentrate in 2029."Obviously this plan does not incorporate potential incremental production from internal sources, which is very likely. I think still we will have some of the capacity available for third parties, although the overall share of third-party material will probably be less than 30%," he said.EconomicsThe project's feasibility study laid out a base case internal rate of return of 14% with a net present value of $112 million.This was based on a 10% discount rate, $1,200 per ounce gold price, an exchange rate of 65 RUB/USD, and a total of 4.3 million tonnes of concentrate containing 9.3 million ounces of gold processed from its Kyzyl, Nezhda, Mayskoye, and Voro operations over a period of 23 years.Polymetal expects to fund all pre-production capex from its operating cash flows, with the project already included in its 2019 capex guidance of $380 million.The second line will be immediately adjacent to the current POX facility and the two hubs will share gas and water mains, as well as an access road.The project will include a new hydrometallurgical area, carbon in leach (CIL) and intensive cyanidation areas, an oxygen plant, reverse osmosis water treatment facility, several smaller infrastructural facilities, and will upgrade the existing dry tailings facility.Polymetal has set out a detailed project timeline, with commissioning completion and first production planned for the September 2023 quarter and full ramp-up by the end of 2023.The milestones include the start detailed engineering and construction in the upcoming June quarter, with all permits expected in the March 2020 quarter, autoclave delivery on site in the September 2020 quarter and completion of civil construction works a year later.It aims to complete the installation of main equipment in the March 2022 quarter, complete external infrastructure in the September 2022 quarter and reach mechanical completion and start of commissioning activities by the end of 2022.Nesis told Mining Journal, as POX-2 was a "very complex industrial project", there were a number of challenges along the way to reaching full ramp-up."I would highlight the fact that we will source a lot of equipment, material, service from third-party vendors - we will rely on the suppliers to get us pretty sophisticated, complex equipment, so it is the management of the supply chain, which I think is the number one priority for the project."I think the construction itself, although complex, is not too difficult, but it's just the task of coordinating literally scores of contracts and ensuring that not only physical equipment, but also the detailed [design] drawings … are all in place on time," he said.From an analyst perspective, RBC James Bell and Barbora Baluskova said the economics of the project looked "conservative" and they saw scope for upside in time.The analysts said processing of third-party material, exploration adding further refractory ore at Polymetal's mines and avoidance of potential future charges, particularly in China could increase cash flow from the project. They said these and the "strategic nature of the expanded POX hub in the long-term" added to their positive view and they had upped Polymetal's rating to "outperform".Polymetal's shares have climbed 31.6% in the poast six months and at £8.59 (US$11.04), they are 13% than a year ago.

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