Polymetal continues to expand in Armenia: for $50 million in cash and their shares the company acquiress Kapan gold mine (working with GOK) on the basis of which it plans to create a hub for processing. The asset is still unprofitable and Polymetal will have to improve the performance of Kapan and to reduce costs. Other Russian gold miners do not pay much attention to Armenia, as there are almost no large proven fields but in the country except for Kapan.
Kapan fields with resources of 2.6 million ounces gold equivalent (1.4 million ounces of gold, 24 million ounces of silver, 80 tonnes of copper and 270 tonnes of zinc; the average gold content is 5 g per ton) has processing plant and infrastructure. Polymetal will redeem 100% of the Armenian CJSC “Dundee Precious Metals Kapan”, paying $15 million of its new shares (approximately 0.04% of the volume in circulation) and $10 million in cash. Also Polymetal will pay Dundee every year 2% royalty for Kapan, total payments capped at $25 million. Company needs the approval of creditors of Dundee (European and canadian banks) for closing the transaction, which sits on loans of $32.5 million of the pledged share in the assets, including Kapan (package size not disclosed), as well as regulators. The transaction should close no later than June 30.
Dundee, who bought Kapan in 2006, will use the proceeds from the transaction for other projects (there are assets in Bulgaria, Namibia, Serbia), as per Dundee Precious Metals head Rick House. And the head of Polymetal Vitaly Nesis told that he expects “significant synergies” of an asset with Polymetals’ Lichkvaz Deposit (inferred resources of 0.5 million ounces of gold) 70 km away from GOK Kapan. “We see the potential of turning Kapan to the hub, which will be processing the ore from other deposits in the region; we been conducting preparatory work for about six months,” says Mr. Nesis. The current production is 1.5 ton gold equivalent (53 thousand ounces), but the factory load is only 50%. “We see three levers of increase in volumes: productivity growth at Kapan mine, involvement in the production of ore with Lichkvaz, and other fields”,— comments one of the top managers expecting increase in production.
Duting five years Dundee has invested $75 million in the asset and any other significant investmenta iare not necessary, said Mr Nesis. Kapan’s revenue in 2015 reached $35 million with EBITDA of $5 million, and net loss of $48 million; for 2014-2015 about $100 million written off. Vitaly Nesis said that the write-offs were done due to the fact that Dundee “was not able to make the asset profitabile corresponding to investment.” Polymetal intends to reduce the cost that was up to $723 per ounce in 2015 by reducing the number of “expensive expatriates” (the company employs about 20 Canadians) and by increasing productivity growth, because fixed costs make up more than 50%.
Oleg Petropavlovsky from BKS specifies that the maximum transaction amount of $50 million seems high (it’s 10 EBITDA of Kapan in 2015), but given the installment payment of royalties and payment of $15 million of shares, the price is quite reasonable. Construction of mining plant from scratch would cost significantly more, says the analyst, adding that based on Kapan mine Polymetal may establish a foothold for business development in Armenia, while the Republic does not fall into the focus of other major players from Russia, says Mr. Petropavlovsky. There are no fields with reserves of 0.7-1 million ounces in the country and there is little to choose from, thus priority is given to investment in Russia, he explains.