Kazakhstan's Polymetal faces sanctions fallout despite selling Russian assets

According to a report in The Financial Times, Kazakhstan’s Polymetal faces ongoing challenges despite its recent sale of Russian assets. The gold producer, navigating the aftermath of divesting its operations, confronts persistent hurdles with European lenders intending to sever ties once debts are settled.

Polymetal, a Kazakh gold producer that recently sold its Russian operations, continues to grapple with the aftermath of its past dealings and current challenges amidst international sanctions. Despite rebranding efforts, European lenders such as Société Générale and Raiffeisen are eager to sever their ties once they recover their debts.

Previously a constituent of the FTSE 100, Polymetal executed a strategic move by divesting its eight Russian gold and silver mines to Mangazeya Mining for $3.7 billion in February. This decision was driven by the need to navigate between Western sanctions and Kremlin regulations, consolidating its focus to just two mines in Kazakhstan.

To mitigate concerns triggered by its association with Russia, the company plans to rebrand itself as Solidcore Resources. Their future strategy includes investing $800 million in constructing a processing facility in Kazakhstan and pursuing mergers and acquisitions to re-enter the London market by 2026. In 2023, Polymetal delisted after relocating its domicile to Kazakhstan in response to Russia’s full-scale invasion of Ukraine.

In an interview with the Financial Times, CEO Vitaly Nesis conveyed the challenges facing the company, citing investor dissatisfaction over the decision to withhold dividends until the new processing facility is completed in 2028, despite possessing $233 million in net cash reserves. Nesis acknowledged the precarious situation, emphasizing the difficulty of securing external financing for the ambitious facility construction amid persistent threats posed by sanctions.

Nesis noted that using Chinese suppliers for essential equipment was a necessity after Western providers from the UK, Germany, and France declined due to sanctions-related concerns. This shift, while practical, adds logistical complexity as the company strives to maintain operational continuity.

Despite the asset sale and strategic shifts, Polymetal faces potential profitability risks. It currently sends mined material from Kazakhstan to the Amursk processing site in Russia, now owned by Mangazeya. The ongoing viability of this arrangement hinges on maintaining access to specialized processing capabilities crucial for handling unconventional resources.

While the US Treasury has sanctioned the Russian assets that Polymetal sold, assurances have been given that the Kazakh entity can still utilize the Amursk site for processing under specific conditions. However, the company must navigate $400 million in debt due within the next 24 months to lenders such as Raiffeisen, Société Générale, and the European Bank for Reconstruction and Development.

Nesis expressed frustration with European banks' reluctance to continue relationships beyond debt repayment, despite Polymetal's compliance with sanctions. Looking ahead, he anticipates establishing new banking relationships, likely with American institutions, as existing European lenders phase out their involvement.

In seeking financial stability, Polymetal explores funding options including support from the EBRD and issuing renminbi-denominated Panda bonds. Nesis dismissed an immediate return to the London market, asserting that the company must first achieve a market capitalization of at least $4 billion and double its annual gold output to one million ounces within five years to regain investor confidence.

Despite these ambitions, Nesis cautioned that Central Asian gold miners may struggle to attract Western investors due to the financial losses suffered by shareholders of previously London-listed Russian gold producers like Petropavlovsk and Polyus. Thus, Polymetal navigates a complex path forward, balancing financial imperatives with geopolitical realities in its quest for sustained growth and investor trust.