Vitaly Nesis: Armenia is very promising from the geological point of view

ArmInfo. We met  Vitaliy Nesis, Chief Executive Officer of Polymetal, one of the leading precious metals mining companies in the post-Soviet space, for an interview in the resort town of Jermuk, where the 2nd stage of the Junior Grand Prix tournament of the European Chess Championship union was held during the period of  October 3 - October 16, under the sponsorship of the company.  The company of Polymetal was founded in 1998 and during  19 years has taken a sustainable   position in the geological exploration, design, construction and commissioning of mining enterprises, carrying out the full range of work on the development of ore deposits - from exploration to operation. In 2015, Polymetal acquired its first asset in Armenia - Lichkvaz CJSC,  with the right of subsoil use in respect  to the gold deposit of Lichkvaz-Tey. In April 2016, the company also acquired   Kapan Mining and Processing Plant from  Canadians,  which is operated for  processing  the Shahumyan  deposit ore. Only this year, the volume of investments of  Polymetal made in the modernization and expansion of production will form  $ 15 million. 

Mrs. Nesis, when will the Lichkvaz deposit be ready and when will it join the company's aggregate production flow?

 The underground mining works are already in progress on Lichkvaz. We have a lot to do, because the tunnel has not been exploited for 30 years, in fact in many places we go through it anew. Preparing the Lichkvaz for production cycle will take another 9 months, and I hope that next year the first ore will be got, and what to full capacity,  the mine will operate so in 2019. We plan to receive about 150 thousand tons of ore per year at initial stage. 

How will this affect the total amount of ore mined?

 This year in Kapan we plan to produce about 530 thousand tons, and next year- about 650 thousand tons. We are facing the goal to reach the mark of 900,000 tons per year. This is both Kapan and Lichkvaz, and, perhaps, other sources of raw materials.

Looking the reports of the company, I noticed a significant reduction in the level of processing costs per year. Hence, capital investments in modernization are already yielding certain results. What is the optimal cost per ounce, according to your estimates? 

This year, we are investing in the renewing of Kapan assets forming $ 15 million. Basically, this is the modernization of underground mining equipment in order to quit manual labor as much as possible. Due to this, in respect to Kapan, we are quite capable to bring costs to the average level for the company which is up to $ 600 - $ 650 per ounce. The deposit, though being a difficult one, has favorable mining and geological conditions, excellent infrastructure and professional team. Therefore, I am optimistic about the dynamics of cost reduction.

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For 9 months of 2017, the extraction and processing of ore in Kapan formed  389 thousand tons, 21.1 thousand ounces of gold were produced , as well as  0.4 million ounces of silver, 900 tons of copper and 3,600 tons of zinc. Capital expenditures of the company at Kapan Mining Plant  in 2016 formed  $ 8 million, while  in the first half of 2017 formed  $ 13 million. The total cash costs per ounce of gold equivalent in the first half of 2017 at the company amounted to $ 1,197 per ounce versus $ 1930 for an ounce in the first half of 2016, decreasing by 38%. According to the company's report, the adjusted EBITDA for the Kapan enterprise was $ 7 million by the end of the first half of  2017.

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Will he average content of gold in the ore change with time? 

Shahumyan deposit is a polymetallic one, we get gold, silver, zinc and copper. Gold takes only 50% in the profit plan now, so it would be more exact to talk about "the content of the gold equivalent." This indicator ranges from 4 to 4.5 grams per ton. This is a fairly stable level, and it provides both full extraction of ore from the bowels, and profitable work of the plant. And we are standing approximately at this level.

Does the company think about the organization of deeper ore processing in Armenia exactly?  

We produce gold in copper concentrate, and it can be processed more deeply only at the copper plant. As far as I know, one of investors is currently working on a project for the construction of a new copper smelter. Just one such enterprise will be quite enough for Armenia. We monitor the development of the project, and if our industry colleagues   launch its operation, then, of course, it will be interesting, we will save on transport costs, it will be good for the country as a whole, too . The project is ambitious, but I am sure that the investor, the state, and the public will do their best to make its implementation environmentally safe.

The official website of the company reads  that the entry of Polymetal into the Armenian market was due not only to interesting assets in Kapan and Lichkvaz, but also good  to prospects for further expansion of the business. Are you already watching out  new assets?

Armenia is very promising from the geological point of view, it is enough to look at the map of its minerals. Our priority, in addition to investing in Kapan Mining Plant, is investing in geological exploration, as we intend to increase the raw material base, and we are actively working with government agencies to obtain licenses. We hope to get one license for studying the flanks of the Shahumyan field, being now at the stage of consultations with the communities. But not only Syunik is interesting, northern Armenia, regions neighboring with Georgia are also attractive. At that, one could speak about geological exploration from none in this case. 

And, perhaps, somewhere supplementary exploration of Soviet facilities as well? 

Basically, those are already in the hands of existing subsoil users. We conduct a dialogue, but we are very cautious about the valuation of assets, because for many deposits that were being surveyed in the 1960s-1970s, there was no primary documentation left, only reports, some questionable quality. We managed to check 4 new objects, but we did not like them. I have visited one site in August, and it could be of interest potentially, while in October I visited another one. Objects are underdeveloped, and it is necessary to invest significant funds in this. 

Since we casually touched on the problem of control and environment, I would like to ask about your attitude to the British EITI initiative (Extractive Industries Transparency Initiative – Editor’s note       ), being joined by Armenia? And, apparently, in this context, in the parliament of  the country cooresponding amendments to the Subsoil Code are under review to be considered, in respect to oblige field operating companies  to monitor and publish environmental impact reports.

The EITI initiative includes states, but we, as a company, meet much more strict requirements, namely, the London Stock Exchange (LSE) premium listing standards, at which our shares are quoted. In the annual reports we disclose information on payments to state bodies, environmental statistics, statistics on industrial safety and labor protection, and on the level of management payment.

 Today, Armenia already has a fairly high level of environmental control over the industry, which is absolutely justified, because the country's territory is small, but it is very rich in farmland, natural and cultural monuments, and therefore, it is undoubtedly necessary to be very cautious when operating the fields. But "the devil is hidden  in details". I would prefer that some norms and procedures be more formalized: let them become stricter, but clearer and   more precise. 

Would you share the company's investment plans for 2018? 

For the next year we planned approximately the same amount of investments as in the current year - about $ 15 million, although the final budget has not been approved yet. We will continue to invest in exploration at the Shahumyan field and on its flanks. The Kapan mine does not need investments anymore, the work is completed here, and it is fully armed in respect to technologies. Until the end of the year, the main ventilation system and 2 district water drains should be put into operation. Thus, the program of its technical modernization will be completed. Next year, we will focus on the technological improvement of the flotation plant. We will replace the elements of obsolete equipment, we will carry out its overhaul, as the previous owner had been idle for a long time due to being loaded not completely. In respect to Lichkvaz, next year we have to finish building the mine with its complete infrastructure. We also hope to start investing in licenses, which are now under preparation. 

Is  the company intended  to expand the geography of its presence? You have assets in Armenia, Kazakhstan, many assets in Russia. And what is to the assesment of  other countries? 

Expansion of geography for the company is not a self-goal in itself, there would be qualitative geological assets. I can say unequivocally that we have no intention to go beyond the countries of the former USSR. Within these boundaries, from time to time we look at other countries. In the near future there will be the first geological exploration project in Georgia, while there is aerial geophysics on a polymetallic deposit with a high copper content. We are looking at Uzbekistan, which is slowly opening up for external investments. If there is something that makes the heart beat faster, why not. 

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The final beneficiary of about 27% of the share capital of Polymetal is the "ICT Group", 13% of the company assets belongs to the Czech PPF Group NV, more than 50% of the shares are in a  free float. Shares of Polymetal, the first of Russian companies, in 2011 received a premium listing on the London Stock Exchange (LSE). According to the results of the first half of 2017, the company's revenue formed $ 683 million,while  net profit amounted $ 120 million.

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Not so long ago, we studied Iran, but eventually decided not to invest. The barriers in mutual understanding, almost no common language, high geopolitical risks are too high. There was a time we also looked at Finland. It is necessary to understand that any new country means  investments  not only in assets, but also in understanding the country, understanding the work of official  and informal structures and sources of power, understanding how things are done and how they are not being done. It is necessary to know this and this must be learned by the whole organization, including myself. 

Does this means   conclusion that in Armenia everything is smooth in this sense? 

We did not have any significant problems in dealing with government agencies. Now we strongly hope for deepening the relationship in connection with obtaining new exploration licenses. Still, one thing is the exploitation of the operating enterprise, in this case the authorities usually show flexibility, go to meet the investor, because behind the project there are people and taxes. Another thing is the geological exploration, because there is a difficult and long path from a bore hole to taxes. But we will try to establish relationships as constructively as before. 

The country often changes its regulations. Is it an obstacle for your  planning? 

Regulations changes are normal. Personally, I do not like legislative initiatives that are connected with the bureaucratization of processes - long reconciliations, delays in obtaining permits, which do not add anything to the state's performance of its functions. And speaking of geological exploration, unfortunately, this is the standard situation in the entire former USSR, where a large number of barriers are unreasonable, incomprehensible. But I have a feeling that Armenia in the sphere of subsoil use is less bureaucratized than many countries of the former USSR. 

As a rule, all large companies carry out projects on so-called corporate social responsibility. Do you have such projects? 

All  our enterprises, without any  exception, have social partnership programs. We try to invest directly in the regions of our presence. We constantly support educational institutions in Kapan, cleaned the Voghji River from domestic garbage, and in Lichkvaz we help municipal services. We support the development of children's chess in Armenia. Me personally, and the whole company take it very seriously. As they use to say in the West, our goal is to maintain a "public license for activities". Because people around the enterprise, not only workers, but residents of towns and villages, should feel immediate benefit from our presence, besides wages.