Polyus Finance Plc — Moody’s upgrades PJSC Polyus’ ratings to Baa3; stable outlook

Rating Action: Moody’s upgrades PJSC Polyus’ ratings to Baa3; stable outlookGlobal Credit Research – 21 Apr 2021London, 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 At the same time, Moody’s has assigned a Baa3 issuer rating to PJSC Polyus (« Polyus » or company) and withdrawn the company’s Ba1 corporate family rating (CFR) and Ba1-PD probability of default rating (PDR).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 remains stable. »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.RATINGS RATIONALEThe 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 in Russia.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) CONSIDERATIONSPolyus 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 decarbonization efforts.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 OUTLOOKThe 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 RATINGSRatings 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.PRINCIPAL METHODOLOGYThe 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.REGULATORY DISCLOSURESFor 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.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. 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