Polymetal International plc

Positive feasibility study results for the Kyzyl gold project

Polymetal International plc (LSE, MOEX: POLY; ADR: AUCOY) ("Polymetal", the "Company") is pleased to announce the successful completion of the Feasibility Study (''FS'' or the ''Study'') for the Kyzyl gold project and the updated Ore Reserve and Mineral Resource estimates audited by Roscoe Postle Associates Inc. (RPA).

HIGHLIGHTS

·      Total Probable Ore Reserves¹ for the Bakyrchik deposit at Kyzyl in accordance with the JORC Code (2012) are estimated at 29.2 Mt at the average grade of 7.7 g/t Au with 7.3 Moz of contained gold. This represents an 8% increase as compared to the previous estimate of 6.7 Moz of gold at 7.5 g/t.

·      Mineral Resources¹ (additional to Ore Reserves) are estimated at 14.2 Mt of ore at the average grade of 6.8 g/t Au containing 3.1 Moz of gold.

·      The Project FS confirmed the economic viability of Polymetal's development approach which incorporates a 1.8 Mtpa open pit to be mined for the first 10 years followed by 12 years of underground mining at 1.2 Mtpa. Ore will be processed by sulphide flotation with concentrate to be sold to third-party processors.

·      A 1.8 Mtpa flotation plant will produce 325 Koz of payable gold in concentrate per year on average from open pit mining followed by 270 Koz of gold in concentrate from underground mining. Metallurgical recovery is estimated at 91% with concentrate mass pull ratio of 6.5%. Concentrate grades averaging 108 g/t Au.

·      The average All-in Sustaining Cash Cost is US$ 630/oz of gold and the average Total Cash Cost is US$ 591/oz of gold.

·      Initial capital expenditures are estimated at US$ 328 million. An additional US$ 69 million will be invested in pre-production stripping in 2016-2017. Sustaining capital is estimated at US$ 228 million over the life of mine. Underground mine start-up costs in 2024-2027 are estimated at US$ 202 million.

·      Project IRR of 27% (after tax) and US$ 538 million NPV at 10% discount rate were estimated at the gold price of US$ 1,200/oz, RUB/USD exchange rate of 55 and Tenge/USD exchange rate of 180. The project economics are robust, with the project IRR for the stress scenario (gold price of US$ 1,000/oz in accordance with the Company policy to stress the project at a 20% discount to spot price) estimated at 19%.

·      Polymetal is on track to start full-scale construction in Q2 2016. Processing will start in the H2 2018 with first full year of production in 2019.

Commenting on the result of the Feasibility Study Vitaly Nesis, Group CEO said: "I am pleased to report the results of the Kyzyl feasibility study that confirmed the robust economics of the project and endorsed our development approach. With significantly reduced capital expenditure, compelling high grade reserves and straightforward execution plan, Kyzyl is set to become a significant free cash flow contributor for Polymetal".

Note: (1) Mineral Resources and Ore Reserves are estimated as of January 1, 2015.

CONFERENCE CALL AND WEBCAST

Polymetal will hold a conference call to discuss the result of the Feasibility Study on Monday, 16 November 2015 at 9:30 am London time (12:30 noon Moscow time).

To participate in the call, please dial:

8 10 8002 4902044 (toll-free from Russia), or

0808 109 0700 (toll-free from the UK), or

+1 866 966 5335 (toll-free from the US), or

+44 (0) 20 3003 2666 (from outside the UK, the US and Russia), or

follow the link: http://webcast.instinctif.tv/p/795-1028-14368/en 

Please be prepared to introduce yourself to the moderator or register.

A recording of the call will be available immediately after the call at +44 (0) 20 8196 1998 (from within the UK), +1 866 583 1035 (from within the US) and 8 10 8002 4832044 (from within Russia), access code 4815475, from 12:00 noon London time Monday, 16 November 2015 until 12:00 noon London time Monday, 23 November 2015.

This summary should be read in conjunction with the full text of this announcement.

Enquiries

FORWARD-LOOKING STATEMENTS

THIS RELEASE MAY INCLUDE STATEMENTS THAT ARE, OR MAY BE DEEMED TO BE, "FORWARD-LOOKING STATEMENTS". THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS AT THE DATE OF THIS RELEASE. THESE FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, INCLUDING THE WORDS "TARGETS", "BELIEVES", "EXPECTS", "AIMS", "INTENDS", "WILL", "MAY", "ANTICIPATES", "WOULD", "COULD" OR "SHOULD" OR SIMILAR EXPRESSIONS OR, IN EACH CASE THEIR NEGATIVE OR OTHER VARIATIONS OR BY DISCUSSION OF STRATEGIES, PLANS, OBJECTIVES, GOALS, FUTURE EVENTS OR INTENTIONS. THESE FORWARD-LOOKING STATEMENTS ALL INCLUDE MATTERS THAT ARE NOT HISTORICAL FACTS. BY THEIR NATURE, SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS BEYOND THE COMPANY'S CONTROL THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON NUMEROUS ASSUMPTIONS REGARDING THE COMPANY'S PRESENT AND FUTURE BUSINESS STRATEGIES AND THE ENVIRONMENT IN WHICH THE COMPANY WILL OPERATE IN THE FUTURE. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE. THERE ARE MANY FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENTS ARE BASED.

ASSET / INFRASTRUCTURE OVERVIEW

The Kyzyl Project is located in north-eastern Kazakhstan, 750 km east of the capital city of Astana, and 75 km west of the mining and metallurgical industry centre of Oskemen (formerly known as Ust-Kamenogorsk, population of approximately 300,000). The Kazakhstan-Russia border is within 120 km and the Kazakhstan-China border is within 330 km from the mine site.

The mine site, located adjacent to the town of Auezov (population of approximately 3,000), is well serviced by existing infrastructure, including electrical power, roads, and communications. A railway station and railhead are operational at Chalobai, six kilometres from the Kyzyl Project site on the new railway line connecting Oskemen to Shar (in eastern Kazakhstan). This line provides rail connections to Russia, China, and Europe. The Kazakhstan-China railway crossing at Alashankou is 510 km away from the project site.

The mine facilities have access to electrical grid power, potable water, heat, and sewage treatment. The town site has the capacity to accommodate mining personnel.

Qualified mining and processing personnel are available within Kazakhstan as well as in the surrounding FSU states.  Recent industrial development in Kazakhstan provides low-cost local consumables such as cement, fuel, and explosives.  Mining operational supplies such as drilling and ground support consumables are, with a few exceptions, available within the country. Much of the process and heavy equipment is imported, although some equipment is available locally.

GEOLOGY

The Kyzyl gold deposits are hosted in the Kyzyl Shear Zone (KSZ), which is an 11.5 km long zone that dips 30˚ to 40˚ north and ranges in width from 10 m to 240 m. The KSZ has been traced to depths of 1.5 km in the west and 3.5 km in the east and is suggested to terminate at the granite basement. Granite basement rocks underlie the sedimentary rocks at depths of one kilometre to four kilometres. 

The Bakyrchik deposit structure and geotechnical characteristics are determined by the large near E-W fault (the KSZ) with different folding on either side of the structure. The gold sulphide mineralization, identified within the KSZ, is characterized by irregular shape and variable thickness and occurs in mud shale, siltstone, various-grained sandstone, interstratified rocks and diorite-porphyry. The hanging wall rocks are represented mainly by siltstone and sandstone, the footwall rocks consist of foliated carbonaceous-argillaceous shale.

The deposits are shear zone-hosted epigenetic deposits in which the gold is fine grained and associated with arsenopyrite and, to a lesser extent, pyrite.  Gold is intimately associated with the sulphides.  Sulphide distribution is related to host rock permeability and coarse-grained sandstone contains greater concentrations of sulphide mineralization and gold.  The host rock averages 3% total carbon, of which approximately 50% is organic.

Polymetal's exploration activities at Bakyrchik deposit since the acquisition were concentrated on drilling holes to collect representative bulk samples for sulphide metallurgical testing purposes. A total of 31 holes were drilled for 6,055 m.

MINING

The mine plan envisages a large open pit using a conventional drill and blast, truck and shovel operation, followed by an underground mine employing mechanised underhand cut and fill methods (UCF) with cemented tailings paste backfill (48% ore feed or 43% of gold contained in ore will come from the pit).

The ultimate extents of the open pit were determined via pit optimization, including consideration for a cost trade-off with underground mining. Open-pit cut-off grade of 2.0 g/t Au was used. Average wall slope angle was estimated at 41-48 degrees.

Open pit mining is scheduled at a maximum mining rate of 63 Mtpa, to produce 1.8 Mtpa of mill feed. Average LOM stripping ratio is 25:1 waste to ore (excluding pre-stripping in the period of 2016-2017). Although open pit mining involves a relatively high stripping ratio, optimization work shows that a large pit can yield better economic results than underground mining on an operating cash flow basis. Open pit mining cost per tonne of ore is estimated to be significantly lower than underground mining cost per tonne. Open pit mining also provides lower initial capital costs, and reduced risk in dealing with poor ground conditions.

Past studies have confirmed that underhand cut and fill method with tailings backfill is the most advantageous providing for maximum ground stability. In the FS a cut-off grade of 3.7 g/t Au was applied to underground mining.

The underground production rate is scheduled at 1.2 Mtpa. 

Pre-stripping at Bakyrchik pit will start in 2016 and ore mining will commence in 2017 and complete after 10 years in 2026. Underground mining is scheduled to start in 2026 and continue until 2039.

METALLURGY AND PROCESSING

Kyzyl ore is projected to be treated at a rate of 1.8 Mt per annum. The FS confirmed that the multistage process flowsheet developed by Polymetal is a viable flowsheet for processing the highly carbonaceous, preg-robbing Kyzyl ore.

The process design for the Kyzyl Project is based on extensive metallurgical testwork performed by JSC Polymetal Engineering with over 100 open cycle rougher and cleaner flotation tests conducted using samples from the Bakyrchik deposit. Results from the test work have established that high gold recoveries in the range of 93% to 95% can be achieved with a conventional multistage flotation process. The FS is based on a conservative estimate of 91% gold recovery.

The multistage process flowsheet was also selected for its flexibility, as it includes two stages of flotation and allows the process plant to operate in two modes, producing, if required, two different types of concentrate. The base mode will produce the combined sulphide concentrate, and an additional gravity separation mode allows dividing the bulk sulphide concentrate into low-carbon and high-carbon concentrates.

The selected process flowsheet consists of removal of the carbonaceous material by flotation in the first stage and subsequent flash or intermediate flotation stage followed by secondary sulphide flotation stages that include rougher flotation, scavenger flotation, and three stages of cleaner flotation.

MARKETING

Based on Polymetal's solid track record of trading refractory gold concentrates from current operations to off-takers in China, this was selected as the primary route for sale of the concentrate produced at Kyzyl.

The concentrate can be sold either to West China, which is closer to the mine site, or to the East China where the existing processors of Mayskoye concentrate are located. 

Preliminary negotiations with third-party processors were held in Q3 2015 with the goal to send the bulk samples for pilot processing in the 1H 2016. All existing buyers of Mayskoye concentrate expressed their interest in off-taking concentrate from Kyzyl. Polymetal will provide updates on the marketing process in due course.

DOWNSTREAM PROCESSING OPTIONS

In the meantime, Polymetal intends to continue to assess and compare various downstream processing options, including construction of a stand-alone pressure oxidation (POX) plant to process the refractory gold concentrate in-house, as it may help to maximize the potential revenue from the Project, or an extension of the existing POX plant in Amursk.

Polymetal believes pressure oxidation may be the most suitable processing technology for the Kyzyl Project, as it should enable a higher and a more sustainable gold recovery ratio. The Company has successfully deployed this technology at its Amursk pressure oxidation facility and believes it may bring certain material metallurgical, economic and environmental benefits for the Kyzyl Project.

PROJECT DEVELOPMENT TIMELINE

Polymetal envisages the following development timeline for the Kyzyl Project:

·      Start of construction in Q1 2016

·      Pre-stripping starting in 2016

·      Ore mining starting in 2017

·      First production: Q3 2018

·      Full capacity: 2019

PROJECT ECONOMICS, CAPITAL EXPENDITURE AND FINANCING

Initial capital costs are estimated by Polymetal to total US$ 328 million, excluding Value-Added Tax (VAT). An additional US$ 69 million will be invested in pre-production stripping for the period 2016-2017.

Total underground mine start-up costs are estimated to total US$ 202 million for the period 2024-2027.

Average annual sustaining capital is estimated at approx. US$ 6 million for open pit operation and US$ 13 million for underground operation (a total of US$ 228 million for the life of mine).

The FS cost estimate is based on exchange rates of RUB:USD 55:1 and Tenge:USD 180:1. Based on these assumptions average All-in Sustaining Cash Cost are estimated at US$ 630/oz of gold and average Total Cash Cost at US$ 591/oz of gold.

Based on current exchange rates of RUB:USD 64:1 and Tenge:USD 300:1, Polymetal estimates that the initial capital cost will fall to US$ 272 million or to US$ 322 million including the additional pre-stripping cost of US$ 50 million.

Contingency, averaging 8% of initial capital costs, was estimated using the following factors:

·      Open pit facilities - 15%.

·      Underground facilities - 15%.

·      Mobile equipment (based on firm quotes) - 0%.

·      Process equipment - 10%.

·      Process construction/installation - 15%.

Polymetal expects that it will finance the projected capital expenditure with both debt and cash flows generated from its existing operations. Available financing options include project financing through Russian or international banks or general corporate financing. Polymetal overall leverage is not expected to exceed 2x Net Debt / EBITDA over the course of main construction period (2016-2017).

Project IRR of 27% (after tax) and US$ 538 million NPV at 10% discount rate were estimated at the gold price of US$ 1,200/oz, RUB/USD exchange rate of 55 and Tenge/USD exchange rate of 180. The project economics are robust, with the project IRR for the stress scenario (gold price of US$ 1,000/oz in accordance with the Company policy to stress the project at a 20% discount to spot price) estimated at 19%.

RESERVE AND RESOURCE STATEMENT

RPA reviewed data for Bakyrchik and has independently confirmed that the Polymetal Ore Reserve and Mineral Resource estimates have been completed to a level that meets industry standards and are compliant with the terms and definitions provided in the JORC 2012 Code.

The Ore Reserves are summarised in the table below:

Kyzyl (Bakyrchik Deposit) Ore Reserves as of January 1, 2015

1)   JORC (2012) definitions were followed for Ore Reserves.

2)   Ore Reserves are estimated as of January 1, 2015, and have been depleted for historical production.

3)   Ore Reserves are estimated using an average long-term gold price of US$1,200 per ounce.

4)   Ore Reserves are estimated at cut-off grades of 2.0 g/t Au for open pit and 3.7 g/t Au for underground.

5)   Ore Reserves include modification for dilution and extraction. 

6)   Numbers may not add due to rounding.

The Mineral Resources are summarised in the table below:

Kyzyl (Bakyrchik Deposit) Mineral Resources (additional to Ore Reserves) as of January 1, 2015

1)   JORC 2012 definitions were followed for Mineral Resources.

2)   Mineral resources estimated as of January 1, 2015

3)   Open pit Mineral Resources are estimated at a cut-off grade of 2.0 g/t Au, constrained by a resource pit shell.

4)   Underground Mineral Resources are estimated at a cut-off grade of 3.7 g/t Au. 

5)   [Mineral Resources have been depleted to account for historical production. Mineral Resources are estimated using a long-term gold price of US$1,200 per ounce.

6)   Bulk density is 2.60 t/m³.

7)   Mineral Resources are exclusive of Ore Reserves.

8)   Crown pillar is excluded from Mineral Resource estimation.

9)   Numbers may not add due to rounding.

Technical information contained in this press release was reviewed by independent Competent Persons, Mr. Ian T. Blakley, Mr Jason J. Cox and Ms. Kathleen A. Altman.

Ian T. Blakley, P.Geo.

Ian Blakley is Vice President and General Manager, RPA UK Ltd., and is based in London, U.K. He is a Principal Geologist with over 30 years' experience in exploration and mining geology. Mr. Blakley has proven successful experience from grassroots through to mines exploration, production operations, mineral resource and reserve estimation, and strategic senior management backgrounds. Prior to re-joining RPA, Mr. Blakley held the position of Vice President - Exploration for Altynalmas Gold Ltd. Mr. Blakley is registered as a professional geologist in the province of Ontario, Canada.

Jason J. Cox, P.Eng

Jason Cox is a Principal Mining Engineer specializing in project management, mine design, cost estimation, and cash flow forecasting. Mr. Cox has over 18 years of experience in all stages of mine development; resource and reserve estimation, engineering studies, construction, operation, and closure. As RPA's Executive Vice President of Mine Engineering, Mr. Cox leads project teams in engineering studies, with responsibility for the final product, reviews metal price guidance for the company, and conducts peer review of mining work. His experience as a consultant includes base metal, gold, nickel, PGM, rare earths, uranium, and other commodities in a variety of environments across Canada, as well as the USA, Latin America, Africa, Australia, Europe, and Asia. Mr. Cox is registered as a professional engineer in the province of Ontario, Canada. 

Kathleen A. Altman, P.E., PhD.

Kathleen Altman is a Principal Metallurgist specializing in evaluation of metallurgical samples, metallurgical data, and process designs.  Dr. Altman has 35 years of experience in many diverse aspects of the mining industry including operations, research, process design, teaching, and consulting. As RPA's Director of Metallurgy and Mineral Processing, Dr. Altman provides evaluations of metallurgical sample selections to ensure they are representative of the material that will be processed in mining operations; metallurgical data interpretation; process design reviews; reviews of capital and operating cost estimates for processing, infrastructure, and environmental facilities; and general oversight of the metallurgy related work that is completed by RPA. Dr. Altman is a registered professional engineer in the State of Colorado, USA based in RPA's Denver office and a Qualified Professional Member of the Mining and Metallurgical Society of America. 

The full Mineral Resource and Ore Reserves reports are available upon request. The previous assessment of Mineral Resources and Ore Reserves for Kyzyl was reflected in the Group's Annual Report 2014 as a part of Ore Reserves and Mineral Resources update.