OREANDA-NEWS. October 05, 2009. JSC “Polymetal” (LSE, MICEX, RTS: PMTL) (“Polymetal” or the “Company”), released its US GAAP consolidated financial statements, reviewed by independent auditors, for the six months ended June 30, 2009, which are available on the Company’s website at www.polymetal.ru, reported the press-centre of Polymetal.

In 1H 2009 gold sales grew by 3% while silver sales declined by 8% on the back of small declines in production. Discrepancy between production and sales dynamics is largely attributable to inventory fluctuations which are expected to even out for the full year.

Revenues declined by 15% or US39 million while adjusted EBITDA fell by US30 million, driven mostly by 24% fall in average realized silver prices. Gold accounted for 54% of revenues.
The company maintained its ability to fully fund its growth program internally with cash flow from operations growing strongly by 28% to US88 million and fully covering capital expenditures of US86 million.

“Financial results for the first six months of 2009 bear witness to the remarkable resilience our business has demonstrated in the wake of the global financial crisis,” said Vitaly Nesis, CEO of Polymetal, commenting on the results. “Despite significant weakening of silver price and credit becoming more expensive, Polymetal continues to generate sizable operating cash flows sufficient to continue the implementation of our ambitious growth program”.

REVENUES
In the 1H 2009, gold revenues grew by 3% from US113.7 million to US117.6 million with small volume growth on the background of stable average realized gold price. Silver revenues declined by 30% from US144.1 million to US100.9 million on the back of a 24% drop in average realized silver price from US17.1/oz to US13.0/oz.

COST OF SALES
Costs of sales declined by 6% from US119.8 million to US112.4 million.

Costs of materials, consumables, and services grew 7% from US52.3 million to US56 million as ruble-denominated costs continued to increase although the pace of increase has slowed down to below-inflation rate. Moreover, long inventory cycle at Far Eastern mines, Khakanja in particular, prevented full impact of depreciation to be fully realized within the current period. Personnel costs decreased by 14% from US23.6 million to US20.3 million as ruble depreciation led to a significant fall in dollar-denominated wages. Headcount didn’t change materially. Royalties fell by 12%, mostly as a result of decline in silver prices. Depreciation fell by 31% as ruble depreciated.

GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
General, administrative, and selling (“GA&S”) expenses fell dramatically from US58.8 million to US26.7 million, mostly as a result of the non-cash employee stock option compensation expense of US31.9 million in 2008. Excluding the impact of stock options, GA&S remained virtually unchanged.

Personnel costs increased by 12% as the impact of ruble depreciation was outweighed by increase in headcount both at headquarters and at operations level, mostly related to Albazino-Amursk and Mayskoye projects. Costs of services included in GA&S declined by a third from US9.4 million to US 6.3 million due to ruble depreciation and aggressive cost-cutting.

OTHER OPERATING EXPENSES
Other operating expenses fell by 36% to US11.9 million from US18.6 million. Exploration costs fell by 65% to US1.9 million compared with US5.5 million as the Company curtailed green-field exploration in 2009. Voluntary social payments fell from US4.7 million to US2.6 million as ruble depreciated and the company scaled back social partnership programs in response to financial crisis.

OTHER INCOME STATEMENT ITEMS
The company recorded US13.9 million in expenses to account for the change in fair value of derivative. The derivative stems from the option the Company granted to сo-investors in Mayskoye to select either cash or a fixed number of Polymetal’s shares as a payment for 91% stake in the legal entity holding the license for Mayskoye deposit.

The option becomes exercisable after certain conditions precedent (most importantly, government approvals) are satisfied. For the purpose of these financial statements, Mayskoye option granted by Polymetal was valued as of the grant date (April 28, 2009) and was included into the purchase price of the acquisition. As Polymetal’s share price increased by 47% between April 28th and June 30th, the value of the option increased correspondingly. This change in fair value of derivative appears as an expense on income statement and is a non-cash item.

Interest expense more than doubled to US14.4 million from US6.9 million, mostly reflecting significant increases in average interest rates. Exchange losses of US5.5 million sharply reversed last year’s gains of US11.0 million as ruble depreciated in 1H 2009 by 6%. Approximately half of Company’s debt balances is denominated in rubles.

Income tax expense roughly halved to US14.0 million from US28.6 million as pre-tax income decreased by 52% from US63.3 million to US33.0 million. The effective income tax rate was at 30%, above the statutory rate of 20% as some costs in the period were not tax deductible, most importantly depletion and social payments.

As a result of the above, the Company reported net income before extraordinary items of US\\$18.9 million compared with net income of US43.1 million for 1H 2008. This decline is largely attributable to a drop in silver prices and increase in interest rates, which more than offset decline in options expense included in SG&A.

ADJUSTED EBITDA
Adjusted EBITDA declined by US29.8 million from US121.9 million to US92.1 million with decline in silver prices only partially compensated by cost savings.

CASH COSTS
Ruble depreciation and significant declines in domestic fuel and steel prices drove significant cost declines at all operations when compared with full year of 2008. Declines compared with 1H 2008 were less pronounced due to the effect of long inventory cycle at most operations.  The company expects further improvement in 2H of 2009 as cheaper materials are expensed and included in costs of sales. Full 2009 cash costs dynamics will depend on exchange rate in 2H of the year.

At Dukat and Lunnoe grades were stable with positive effects of depreciation partially offset by increase in higher-cost underground mining at Lunnoe. Long delivery and inventory cycle lead to full impact of declines in fuel prices being realized only starting from 2Q of 2009.

Grades at Voro remained essentially stable and cash cost per ounce decreased in line with cash cost per tonne milled. Further improvements are expected in 2H 2009 as heap leach will benefit from a significant decline in cement price.

Compared with 1H 2008, material decline in gold grades at Khakanja didn’t allow the mine to reduce its cash costs per ounce despite a 5% decrease in cash costs per tonne milled. Khakanja’s long logistics cycle means that in 1H2009 the mine was consuming expensive diesel fuel purchased in the summer of 2008. Comparing 1H2009 with full year 2008, Khakanja demonstrated excellent cost dynamics.

Overall, Polymetal’s cash cost per ounce of gold equivalent increases by 9%, driven by significant increase in gold/silver price ratio from 53 to 70. Silver equivalent cash costs per ounce declined by 17% to US6.3/oz. 

CAPITAL EXPENDITURES
 
Capital expenditures increased from US63.3 million to US million with the bulk of investment dedicated to the construction of the new mine at Albazino and the POX facility in Amursk. Exploration spending declined significantly in an effort to preserve cash.

The Company also provided loans to related parties, namely legal entities subject to acquisition agreements (US13.3 million to CJSC “Artel of prospectors “Ayax”, which holds the license for Goltsovoye deposit and US8.6 million to Rudnik Kvartsevyi LLC, which holds the license for Sopka Kvartsevaya deposit). Ayax and Rudnik Kvartsevyi are expected to become 100%-owned subsidiaries of the Company by the end of 2009. US10.0 million was deposited with Verda Financial Ltd. as a part of a transaction to buy Goltsovoe. This deposit is expected to be returned in full upon the closing of the Goltsovoye acquisition.

LIQUIDITY AND NET DEB
On April 29, 2009 Polymetal announced that it had acquired a 9% equity stake in OOO "Zolotorudnaya Kompaniya Mayskoye" (“ZK Mayskoye”), and entered into a legally binding agreement with four Russian private companies unrelated to Polymetal for the acquisition of the remaining 91% equity stake. Based on the formal contract terms, ZK Mayskoye assets and liabilities were included into Polymetal’s consolidated balance sheet under US GAAP. Since the transaction is not closed so far and Polymetal owns only 9% equity in ZK Mayskoye, the Company does not have exposure to ZK Mayskoye creditors in terms of its liabilities.

Under the abovementioned agreement, Polymetal’s acquisition of a 91% equity stake in ZK Mayskoye is subject to recapitalization by the new shareholders of the ZK Mayskoye by contributing a total of US\\$104,852,220 million to its share capital pro rata to their equity ownership stakes. It was agreed that the recapitalization amount will used by ZK Mayskoye to repay the NOMOS-Bank and Bakersfield Marketing Limited loans.

The Company has successfully extended maturities on the part of its debt portfolio from December 2009 to June 2010. Negotiations are ongoing on further extending the duration and lowering the interest rates on Company’s debt. The decision on the ultimate debt strategy will be taken after the results of the ongoing preemptive-rights subscription for Company’s shares become known in early October. Up to date the Company has already received c. US\\$9.3 million from its shareholders subject to pre-emptive rights.

Presently the Company is fully meeting its capital expenditure requirements from operating cash flows.