CASH FLOWS
2022
US$m 2021
US$m Change
Operating cash flows before changes in working capital 679 1,192 -43%
Changes in working capital (473) 3 n/a
Total operating cash flows 206 1,195 -83%
Capital expenditure (794) (759) +5%
Net cash inflow on asset acquisitions 123 (5) n/a
Other (8) (24) -67%
Investing cash flows (679) (788) -14%
Financing cash flows
Net changes in borrowings 838 276 +204%
Dividends paid - (635) -100%
Acquisition of non-controlling interest (24) - n/a
Proceeds from royalty arrangement - 20 n/a
Contingent consideration paid (27) (33) -18%
Total financing cash flows 787 (372) n/a
Net increase in cash and cash equivalents 314 35 +797%
Cash and cash equivalents at the beginning of the year 417 386 +8%
Effect of foreign exchange rate changes on cash and cash equivalents (98) (4) n/a
Cash and cash equivalents at the end of the year 633 417 +52%
Total operating cash flows in 2022 decreased sharply y-o-y. Operating cash flows before changes in working capital dropped by 43% y-o-y to US$ 679 million, as a result of a decrease in adjusted EBITDA, additionally impacted by the twofold increase in interest paid in the period. Net operating cash inflow was US$ 206 million, compared to US$ 1,195 million inflow in 2021, affected by a surge in working capital.
Investment cash outflows totalling US$ 679 million, down 14% y-o-y, were mainly represented by capital expenditure (up 5% y-o-yr at US$ 794 million) offset by cash inflows on acquisitions. Cash inflows on acquisitions comprise a cash consideration of US$ 27 million paid for the Galka deposit and cash acquired as a result of consolidation of 100% interest in the Albazino power line. As a result of the latter transaction the Group assumed debt of US$ 161 million and acquired corresponding cash balances of US$ 150 million. Cash acquired is presented within investing activities as net cash inflow on acquisitions, with no effect on the Group’s net debt.
A gross borrowings increase of US$ 838 million is mostly driven by financing of the Group’s short-term working capital requirements.
The Group has US$ 633 million in cash deposited with non-sanctioned financial institutions, up 52% compared to 2021.
BALANCE SHEET, LIQUIDITY AND FUNDING
NET DEBT As at
31 December
2022
$m As at
31 December
2021
$m Change
Short-term debt and current portion of long-term debt 514 446 +15%
Long-term debt 2,512 1,618 +55%
Gross debt 3,026 2,064 +47%
Less: cash and cash equivalents 633 417 +52%
Net debt 2,393 1,647 +45%
Net debt / Adjusted EBITDA 2.35x 1.13x +109%
The Group’s net debt increased to US$ 2,393 million as of 31 December 2022, representing a Net debt/Adjusted EBITDA ratio of 2.35x. The increase in net debt was driven by a surge in working capital and upward Dollar re-valuation of Rouble-denominated debt driven by significant Rouble strengthening at 31 December 2022 compared with the prior period.
The proportion of long-term borrowings of total borrowings was 83% as at 31 December 2022 (78% as at 31 December 2021). All of the 2023 debt repayments are well covered by available cash balances of US$ 633 million.
The average cost of debt increased, but remained relatively low at 5.08% in 2022 (2021: 2.9%) supported by our ability to negotiate competitive margins given the excellent credit history of the Group. Lending in Russia is available in Roubles, Renminbi and Dollar, although the availability of Dollar loans has decreased significantly due to sanctions and Central Bank pressure on financial institutions.
2023 OUTLOOK
• The Group reiterates its current production guidance of 1.7 Moz of GE for FY 2023. Production will be weighted towards 2H 2023 due to seasonality.
• Polymetal expects its costs to be in the ranges of US$ 950-1,000/GE oz for TCC and US$ 1,300-1,400/GE oz for AISC . A minor y-o-y increase is mostly due to domestic inflation, stronger Rouble and royalty increase in Kazakhstan.
• Capital expenditure is expected to be approximately US$ 700-750 million. Major investment projects include Amursk POX-2, Albazino power line, Voro flotation and Prognoz.
• The Group currently forecasts positive free cash flow in 2023.
PRINCIPAL RISKS AND UNCERTAINTIES
There are a number of potential risks and uncertainties which could have a material impact on the Group’s performance and could cause actual results to differ materially from expected and historical results.
The principal risks and uncertainties facing the Group are categorised as follows:
• Operational risks:
– Production risk
– Construction and development risk
– Supply chain risk
– Exploration risk
• Sustainability risks:
– Health and safety risk
– Environmental risk
– Human capital risk
• Political and social risks:
– Legal and compliance risk
– Political risk
– Taxation risk
• Financial risks:
– Market risk
– Currency risk
– Liquidity risk
A detailed explanation of these risks and uncertainties can be found on pages 116 to 127 of the 2021 annual report which is available at www.polymetalinternational.com.
Subsequent to the publication of the 2021 Annual Report, and following sanctions imposed on Russia and counter-sanctions imposed by Russia in response in 2022 and its actual or potential impact on our operations, the Group has reassessed the level of the following risks:
– Exploration risk was upgraded from medium to high, as a range of exploration projects have been delayed due to a revised financing programme. Exploration for the existing operations remained intact.
– Legal and compliance risk was upgraded from medium to high due to the complex regulation on international sanctions and Russian counter-sanctions.
– Liquidity risk was upgraded from medium to high caused by temporary debt increase at 31 December 2022. The Group has secured enough liquidity to refinance its short-term debt, including US$ 0.35 bn of undrawn credit facilities in non-sanctioned banks and US$ 0.6 bn of cash, and will also utilize free cash flow for 2023 to decrease debt level.
The directors consider that, except for the changes mentioned above, the other principal risks and uncertainties have not changed materially since the publication of the Annual report for the year ended 31 December 2021 and continue to apply to the Group for the 2022 financial year.
Updates on impact of sanctions and counter-sanctions were published in a number of press-releases since March 2022.
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GOING CONCERN
In assessing its going concern status, the Group has taken account of its principal risks and uncertainties, financial position (including significant inflationary and logistical pressures), sources of cash generation, anticipated future trading performance, its borrowings and other available credit facilities from non-sanctioned banks, and its forecast compliance with covenants on those borrowings, and its capital expenditure commitments and plans. In the going concern assessment, the Group also considered the restrictions for moving cash between jurisdictions and assessed the ability to meet liabilities within each of the individual jurisdictions, whilst maintaining compliance with sanctions and counter sanctions.
At the reporting date, the Group holds US$ 350 million of undrawn credit facilities with non-sanctioned banks and US$ 633 million of cash, which is considered to be adequate to meet the Group’s financial obligations as they fall due over the next 12 months (US$ 514 million of short-term borrowings is due for repayment in the next 12 months). All of the 2023 repayments are well covered by available cash balances. No borrowing covenant requirements are forecast to be breached.
As referred to in Note 24 at the reporting date the cash balances include US$ 118 million of cash and cash equivalents held in Russia, that are subject to certain legal restrictions and are therefore not available for general use of the Company (but fully available for use by its Russian subsidiaries). The Group determined that these restrictions would not have any material effect on the Group’s liquidity position and its ability to finance its obligations.
The Group has taken legal advice on the implications of the sanctions to date as part of this assessment. None of the Group’s entities, nor its significant shareholders are currently subject to any specific sanctions.
The Board is therefore satisfied that the Group’s forecasts and projections, including the stress scenario, show that the Group has adequate resources to continue in operational existence for at least the next 12 months from the date of this report and that it is appropriate to adopt the going concern basis in preparing the year-end financial statements.
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DIRECTORS’ RESPONSIBILITY STATEMENT
The Directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors elected to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted for use in the United Kingdom (IFRS). The financial statements are required by law to be properly prepared in accordance with the Companies (Jersey) Law 1991. International Accounting Standard 1 requires that financial statements present fairly for each financial year the Group’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s ‘Framework for the preparation and presentation of financial statements’.
In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. However, the Directors are also required to:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
• provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and
• make an assessment of the Company’s ability to continue in operation and meet its liabilities as they fall due over the reasonably reliable lookout period of three years.
The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies (Jersey) Law 1991. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK and Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the Companies (Jersey) Law 1991 and International Financial Reporting Standards as adopted for use in the United Kingdom, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
• the management report, which is incorporated into the strategic report, includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
By order of the Board,
Evgueni Konovalenko
Senior Independent Director
Vitaly Nesis
Group Chief Executive Officer
15 March 2023
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POLYMETAL INTERNATIONAL PLC
CONDENSED CONSOLIDATED INCOME STATEMENT
Year ended Year ended
Note 31 December 2022 31 December 2021
US$m US$m
Revenue 5 2,801 2,890
Cost of sales 6 (1,690) (1,307)
Gross profit 1,111 1,583
General, administrative and selling expenses 10 (311) (226)
Other operating expenses, net 11 (142) (149)
Impairment of non-current assets 14 (801) -
Impairment of investment in associate 17 (24) -
Operating (loss)/profit (167) 1,208
Foreign exchange (loss)/gain, net (32) 5
(Loss)/gain on disposal of subsidiaries, net 3 (2) 3
Change in fair value of financial instruments 21 (20) 4
Finance expenses 12 (119) (66)
Finance income 8 7
(Loss)/profit before income tax (332) 1,161
Income tax 13 44 (257)
(Loss)/profit for the year (288) 904
(Loss)/profit for the financial year attributable to:
Equity shareholders of the Parent (288) 904
(288) 904
(Loss)/earnings per share (US$)
Basic 22 (0.61) 1.91
Diluted 22 (0.61) 1.88
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POLYMETAL INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended Year ended
Note 31 December 2022 31 December 2021
US$m US$m
(Loss)/profit for the year (288) 904
Other comprehensive income, net of income tax 338 (42)
Items that may be reclassified to profit or loss
Fair value gain arising on hedging instruments during the year 21 16 -
Exchange differences on translating foreign operations 365 (36)
Currency exchange differences on intercompany loans forming net investment in foreign operations, net of income tax (43) (6)
Total comprehensive income for the year 50 862
Total comprehensive income for the year attributable to:
Equity shareholders of the Parent 50 862
50 862
POLYMETAL INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Year ended Year ended
Note 31 December 2022 31 December 2021
Assets US$m US$m
Property, plant and equipment 15 3,392 3,314
Right-of-use assets 16 131 33
Goodwill 14 14
Investments in associates and joint ventures 17 13 28
Non-current accounts receivable 31 28
Other non-current financial assets 24 29
Deferred tax asset 13 142 67
Non-current inventories 18 133 96
Total non-current assets 3,880 3,609
Current inventories 18 1,057 781
Prepayments to suppliers 185 119
Income tax prepaid 64 11
VAT receivable 148 123
Trade and other receivables 103 79
Other financial assets at FVTPL 10 12
Cash and cash equivalents 24 633 417
Total current assets 2,200 1,542
Total assets 6,080 5,151
Liabilities and shareholders' equity
Accounts payable and accrued liabilities (264) (223)
Current borrowings 19 (514) (446)
Advances received (6) (134)
Income tax payable (11) (21)
Other taxes payable (68) (54)
Current portion of contingent consideration liability 24 (9) (31)
Current lease liabilities 24 (25) (7)
Total current liabilities (897) (916)
Non-current borrowings 19 (2,512) (1,618)
Contingent and deferred consideration liabilities 24 (112) (111)
Deferred tax liability 13 (107) (206)
Environmental obligations (76) (50)
Non-current lease liabilities 24 (106) (29)
Other non-current liabilities (28) (18)
Total non-current liabilities (2,941) (2,032)
Total liabilities (3,838) (2,948)
NET ASSETS 2,242 2,203
Stated capital account 22 2,450 2,450
Share-based compensation reserve 35 31
Cash flow hedging reserve 21 16 -
Translation reserve (1,543) (1,865)
Retained earnings 1,284 1,587
Total equity 2,242 2,203
Total liabilities and shareholders’ equity (6,080) (5,151)
Notes on pages 40 to 67 form part of these financial statements. These financial statements are approved and authorised for issue by the Board of Directors on 15 March 2023 and signed on its behalf by:
Vitaly Nesis
Group Chief Executive Evgueni Konovalenko
Senior Independent Non-Executive Director
POLYMETAL INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended Year ended
Note 31 December 2022 31 December 2021
US$m US$m
Net cash generated by operating activities 24 206 1 195
Cash flows from investing activities
Purchases of property, plant and equipment 15 (794) (759)
Net cash inflow/(outflow) on asset acquisitions 3 123 (5)
Proceeds from disposal of subsidiaries 3 5 2
Investments in associates 17 (7) (3)
Acquisition of shares held at FVTPL - (5)
Loans advanced (12) (36)
Repayment of loans provided 3 18
Contingent consideration received 3 -
Net cash used in investing activities (679) (788)
Cash flows from financing activities
Borrowings obtained 24 3,885 3 360
Repayments of borrowings 24 (3,029) (3 080)
Repayments of principal under lease liabilities 24 (18) (4)
Dividends paid 22 - (635)
Acquisition of non-controlling interest 3 (24) -
Proceeds from royalty arrangement 24 - 20
Contingent consideration paid 24 (27) (33)
Net cash from/(used in) financing activities 787 (372)
Net increase in cash and cash equivalents 314 35
Cash and cash equivalents at the beginning of the year 24 417 386
Effect of foreign exchange rate changes on cash and cash equivalents (98) (4)
Cash and cash equivalents at the end of the financial year 24 633 417
POLYMETAL INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Note Stated capital account Share-based compensation reserve Cash flow hedging reserve Translation reserve Retained earnings Total equity
US$m US$m US$m US$m US$m US$m
Balance at 1 January 2021 2,434 31 - (1,823) 1,318 1,960
Profit for the year - - - - 904 904
Other comprehensive income, net of income tax - - (42) - (42)
Total comprehensive income - - - (42) 904 862
Share-based compensation - 16 - - - 16
Shares allotted to employees 16 (16) - - - -
Dividends 22 - - - - (635) (635)
Balance at 31 December 2021 2,450 31 - (1,865) 1,587 2,203
Loss for the year - - - - (288) (288)
Other comprehensive income, net of income tax - - 16 322 - 338
Total comprehensive income - - 16 322 (288) 50
Share-based compensation - 13 - - - 13
Own share exchanged in the year 22 - - - - - -
Transfer to retained earnings - (9) - - 9 -
Consolidation of non-controlling interest 3 - - - - (24) (24)
Balance at 31 December 2022 2,450 35 16 (1,543) 1,284 2,242
1. GENERAL
Corporate information
Polymetal Group (the Group) is a leading gold and silver mining group with operations in Russia and Kazakhstan.
Polymetal International plc (the Company) is the ultimate parent entity of Polymetal Group. The Company was incorporated in 2010 as a public limited company under Companies (Jersey) Law 1991 and has its place of business in Cyprus. Its shares are listed on the London and Moscow stock exchanges and Astana International Exchange.
Significant subsidiaries
As of 31 December 2022 the Company held the following significant mining and production subsidiaries:
Effective interest held, %
Name of subsidiary Deposits and production facilities Segment Country of incorporation 31 December
2022 31 December 2021
Bakyrchik Mining Venture LLC Kyzyl Kazakhstan Kazakhstan 100 100
Varvarinskoye JSC Varvara Kazakhstan Kazakhstan 100 100
Komarovskoye Mining Company LLC Komar Kazakhstan Kazakhstan 100 100
Gold of Northern Urals JSC Voro Ural Russia 100 100
Pesherny
Svetloye LLC Svetloye Khabarovsk Russia 100 100
Magadan Silver JSC Dukat
Lunnoe
Perevalnoye Magadan Russia 100 100
Mayskoye Gold Mining Company LLC Mayskoye Magadan Russia 100 100
Omolon Gold Mining Company LLC Birkachan
Tsokol
Burgali Magadan Russia 100 100
Albazino Resources Ltd Albazino Khabarovsk Russia 100 100
Amur Hydrometallurgical Plant LLC Amursk POX Khabarovsk Russia 100 100
South-Verkhoyansk Mining Company JSC Nezhda Yakutia Russia 100 100
Prognoz Silver LLC Prognoz Yakutia Russia 100 100
GRK Amikan LLC Veduga Khabarovsk Russia 100 100
Going concern
In assessing its going concern status, the Group has taken account of its principal risks and uncertainties, financial position (including significant inflationary and logistical pressures), sources of cash generation, anticipated future trading performance, its borrowings and other available credit facilities from non-sanctioned banks, and its forecast compliance with covenants on those borrowings, and its capital expenditure commitments and plans. In the going concern assessment, the Group also considered the restrictions for moving cash between jurisdictions and assessed the ability to meet liabilities within each of the individual jurisdictions, whilst maintaining compliance with sanctions and counter sanctions.
At the reporting date, the Group holds US$ 350 million of undrawn credit facilities with non-sanctioned banks and US$ 633 million of cash, which is considered to be adequate to meet the Group’s financial obligations as they fall due over the next 12 months (US$ 514 million of short-term borrowings is due for repayment in the next 12 months). All of the 2023 repayments are well covered by available cash balances. No borrowing covenant requirements are forecast to be breached.
As referred to in note 33 at the reporting date the cash balances include US$ 118 million of cash and cash equivalents held in Russia, that are subject to certain legal restrictions and are therefore not available for general use of the Company (but fully available for use by its Russian subsidiaries). The Group determined that these restrictions would not have any material effect on the Group’s liquidity position and its ability to finance its obligations.
The Group has taken legal advice on the implications of the sanctions to date as part of this assessment. None of the Group’s entities, nor its significant shareholders are currently subject to any specific sanctions.
The Board is therefore satisfied that the Group’s forecasts and projections, including the stress scenario, show that the Group has adequate resources to continue in operational existence for at least the next 12 months from the date of this report and that it is appropriate to adopt the going concern basis in preparing the year-end financial statements.
Basis of presentation
The Group’s annual condensed consolidated financial statements for the year ended 31 December 2022 are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the United Kingdom (‘UK’), provisions of the Companies (Jersey) Law 1991, and the Disclosure and Transparency Rules of the Financial Conduct Authority. The financial statements have been prepared on the historical cost basis, except for certain financial instruments which are measured at fair value as of end of the reporting period and share-based payments which are recognised at fair value as of the measurement date.
The following accounting policies have been applied in preparing the condensed consolidated financial statements for the year ended 31 December 2022.
New standards adopted by the Group
• Amendments to IFRS 9 Financial Instruments, IFRS 1 First-time Adoption of International Financial Reporting Standards and IFRS 16 Leases, resulting from Annual Improvements to IFRS Standards 2018–2020, effective for annual periods beginning on or after 1 January 2022.
• Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets resulting the costs to include when assessing whether a contract is onerous, effective for annual periods beginning on or after 1 January 2022.
• Reference to the Conceptual Framework (Amendments to IFRS 3 Business Combinations), effective for annual periods beginning on or after 1 January 2022. The amendments update an outdated reference to the Conceptual Framework in IFRS 3 without significantly changing the requirements in the standard.
The Group has early adopted for the annual period beginning 1 January 2021 the amendments to IAS 16 Property, Plant and Equipment. The amendments prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the Company is preparing the asset for its intended use, effective for annual periods beginning on or after 1 January 2022 with early application permitted. These amendments did not have a material impact on these condensed consolidated financial statements.
New accounting standards issued but not yet effective
The following amendments to the accounting standards were in issue but not yet effective as of date of these condensed consolidated financial statements:
• Amendments to IAS 1 Presentation of Financial Statements regarding the classification of liabilities as current and non-current, effective for annual periods beginning on or after 1 January 2023;
• IFRS 17 Insurance Contracts, effective for annual period beginning on or after 1 January 2023 with earlier application permitted;
• Amendments to IAS 1 and IFRS Practice Statement 2 requiring that an entity discloses its material accounting policies, instead of its significant accounting policies, effective for annual period beginning on or after 1 January 2023 with earlier application permitted;
• Amendments to IAS 8 replacing the definition of a change in accounting estimates with a definition of accounting estimates, effective for annual period beginning on or after 1 January 2023 with earlier application permitted;
• Amendments to IAS 12 clarifying that the initial recognition exemption does not apply to transactions in which equal amounts of deductible and taxable temporary differences arise on initial recognition, effective for annual period beginning on or after 1 January 2023 with earlier application permitted; and
• Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures regarding the sale or contribution of assets between an investor and its associate or joint venture, the effective date of the amendments has yet to be set. However, earlier application of the amendments is permitted.
The Group has determined these standards and interpretations are unlikely to have a material impact on its condensed consolidated financial statements or are not applicable to the Group.
2. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
In the course of preparing the financial statements, management necessarily makes judgements and estimates that can have a significant impact on those financial statements. The determination of estimates requires judgements which are based on historical experience, current and expected economic conditions, and all other available information.
Estimates and underlying assumptions are reviewed on an ongoing basis, with revisions recognised in the period in which the estimates are revised and in the future periods affected. The judgements involving a higher degree of estimation or complexity are set out below.
Critical accounting judgements
The following are the critical accounting judgements (apart from judgements involving estimation which are dealt with separately below), made during the year that had the most significant effect on the amounts recognised in the financial statements.
Determination of CGUs and Indicators of Impairment
The Group considers both external and internal sources of information in assessing whether there are any indications that CGUs are impaired. The external sources of information the Group considers include changes in the market, economic and legal environment in which the Group operates, that are usually not within its control, and are expected to affect the recoverable amount of CGUs. Internal sources of information include the manner in which mining properties, plant and equipment are being used or are expected to be used; and indicators of the economic performance of the assets, historical exploration and operating results. The primary external factors considered are changes in spot and forecast metal prices, market rates of returns that inform discount rates, and changes in laws and regulations. The primary internal factors considered are the Group’s current mine performance against expectations, changes in mineral reserves and resources, life of mine plans and exploration results.
Impairment charges are assessed at the CGU level. Significant management judgement is applied in determining the Group’s CGUs, particularly when assets relate to integrated operations, and where changes in CGU determinations could impact the impairment recorded.
CGUs identified by the Group generally represent production facilities with the related satellite deposits. Nezhda and Prognoz represent relatively adjacent mining operations in Yakutia, Russia (noting the 675km distance between the mines), which are now planned to share the existing Nezhda concentrator processing facilities. Management judge the Nezhda and Prognoz mines are interdependent, such that the lowest level of identifiable cash inflows that are largely independent of other assets is both mines on a combined basis. The two operations are therefore assessed for impairment as a single CGU.
Accounting for acquisitions
To determine the appropriate accounting approach to be followed for an acquisition transaction, the Group applies judgement to assess whether the acquisition is of a business, and therefore within scope of IFRS 3 Business Combinations, or is of a group of assets that do not constitute a business and is therefore outside scope of IFRS 3. In making this determination, management evaluates the inputs, processes and outputs of the asset or entity acquired. Judgement is used to determine whether an integrated set of activities and assets is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. The acquisitions of subsidiaries during the reporting year have been assessed as asset acquisitions.
Use of estimates
The preparation of financial statements requires the Group to make estimates and assumptions that affect the amounts of the assets and liabilities recognised, amounts of revenue and expenses reported, and contingent liabilities disclosed, as of the reporting date. The determination of estimates is based on current and expected economic conditions, as well as historical data and statistical and mathematical methods as appropriate.
Key sources of estimation uncertainty
Key sources of estimation uncertainty reflect those sources of estimation uncertainty which may have a possible material impact of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year. They include: cash flow projections for impairment testing and impairment reversal, valuation of contingent consideration assets and liabilities and calculation of net realisable value of stockpiles and work-in progress, mineral reserves and resources assessment and life of mine plans, useful lives of production and other assets, environmental provision and recoverability of deferred tax assets.
DCF models are developed for the purposes of impairment testing, valuation of contingent consideration assets and liabilities and calculation of net realisable value of metal inventories. Expected future cash flows used in DCF models are inherently uncertain and could change over time. They are affected by a number of factors including ore reserves, together with economic factors such as commodity prices, exchange rates, discount rates and estimates of production costs and future capital expenditure.
• Ore reserves and mineral resources - Recoverable reserves and resources are based on the proven and probable reserves and resources in existence. Reserves and resources are incorporated in projected cash flows based on ore reserve statements and exploration and evaluation work undertaken by appropriately qualified persons (see below). Mineral resources, adjusted by certain conversion ratios, are included where management has a high degree of confidence in their economic extraction, despite additional evaluation still being required prior to meeting the required confidence to convert to ore reserves.
• Commodity prices - Commodity prices are based on latest internal forecasts, benchmarked against external sources of information. Polymetal currently uses flat real long-term gold and silver prices of US$ 1,800 per ounce for 2023, US$ 1,700 per ounce from 2024 (2021: US$ 1,800 for 2022 and US$ 1,500 from 2023) and US$ 20 per ounce for 2023, US$ 21 per ounce from 2024 (2021: US$ 22 for 2022 and US$ 20 from 2023), respectively.
• Foreign exchange rates – foreign exchange rates are based on observable spot rates, or on latest internal forecasts, benchmarked with external sources of information for relevant countries of operation, as appropriate. The RUB/US$ exchange rates are estimated at 65 RUB/US$ for 2023, at 73 RUB/US$ for 2024 and 75 RUB/US$ from 2025 (2021: flat long-term rate of 72 RUB/US$). The KZT/US$ exchange rate are estimated at 495 KZT/US$ for 2023, at 502 KZT/US$ from 2024 (2021: 420 KZT/US$), respectively.
• Discount rates – The Group used a post-tax real discount rate of 14.1% for Russia assets and 9% for Kazakhstan (2021: 8.0% both for Russian and Kazakhstan). Post-tax cash flow projections used in value in use impairment models are discounted based on this rate. In 2022 the separate discount rates were estimated to avoid averaging, as Kazakhstan and Russia are expected to have different country risks, considering the sharp drop in Russian credit rating and the effect of the sanctions in place.
• Operating costs, capital expenditure and other operating factors - Cost assumptions incorporate management experience and expectations, as well as the nature and location of the operation and the risks associated therewith. Underlying input cost assumptions are consistent with related output price assumptions. Other operating factors, such as the timelines of granting licences and permits are based on management’s best estimate of the outcome of uncertain future events at the balance sheet date.
Sensitivity analysis
Impairment charges of US$ 801 million for property, plant and equipment was recognised during the year ended 31 December 2022 (Note 14). The recoverable amounts were estimated based on a value in use calculation.
The Group has two CGUs to which goodwill was allocated, being Mayskoye (US$ 11 million) and Dukat (US$ 3 million). No impairment charge for goodwill was recognised during the year ended 31 December 2022.
The impairment assessment is inherently sensitive to plausible changes in certain economic and operational key input assumptions within the next financial year, which could increase or reduce the CGU’s recoverable value estimate.
The management has performed an analysis as to whether a reasonably possible adverse change to any of the key assumptions would lead to impairment.
The following scenarios were considered as reasonably possible and were used for this sensitivity analysis:
• 10% simultaneous decrease in gold and silver prices over the life of mine;
• 10% appreciation in RUB/US$ exchange rates;
• 10% increase in operating expenses over the life of mine; and
• 1% increase in the discount rate applied.
Each of the sensitivities above has been determined by assuming that the relevant key assumption moves in isolation, and without regard to potential mine plan changes and other management decisions which would be taken to respond to adverse changes in existing management projections.
The table below summarises the outcomes of the isolated scenarios described above. As a result if each isolated scenario the Group would recognise an additional impairment for each CGU as specified by the table below. Certain scenarios would result in impairment of goodwill, allocated to Dukat, and further impairment of non-current assets.
Scenario Nezhda-Prognoz Veduga Dukat
US$m US$m US$m
Decrease in gold and silver prices 258 101 76
Appreciation of RUB/US$ exchange rate 159 54 50
Increase in operating expenses 136 46 43
Increase in discount rate 41 35 -
No additional charges would be recognised for Kutyn CGU under all scenarios. No scenarios would result in impairment of Mayskoye CGU, including goodwill.
No sensitivity analysis was performed for investments in associates, as investment in Tomtor was fully provided for, due to suspension (Note 17) and the remaining investments are not considered material.
The sensitivities of contingent consideration liabilities measured at FVTPL (US$ 36 million at 31 December 2022; US$ 63 million at 31 December 2021) and inventories held at net realisable value (US$ 95 million at 31 December 2022; US$ 49 million at 31 December 2021) to a reasonably possible change in key assumptions described above are not considered material.
Climate change
We have assessed and set out the Group’s climate risks and opportunities as part of our commitment to climate disclosure within the Strategic Report. Mitigation and adaptation measures that may be required in the future to combat the physical and transition risks of climate change could also have potential implications for the Group’s financial statements. This would be the case where assets and liabilities are measured based on an estimate of future cash flows.
In preparing the Group’s financial statements, climate-related strategic decisions have impacted the following:
• Our decarbonisation and clean energy initiatives considered and approved by the Board were included in future cash flow projections, underpinned by estimates for recoverable amounts of property, plant and equipment, as deemed relevant.
• The provision for mine closure costs impacted by climate risks and opportunities is set out in the financial statements.
We have adopted both mitigation and adaptation measures within our climate management system. We focus on renewable energy, carbon-intensive fuel replacement and innovative technologies to both mitigate climate change impacts and to reduce our carbon footprint. The adaptation measures we use are based on climate models, which inform the design, construction, operation and closure of our mining assets.
Significant judgements and key estimates made by the Group may be impacted in the future by changes to our climate change strategy or in global commitments to decarbonisation. This could, in turn, result in material changes to the financial results and the carrying values of certain assets and liabilities in future reporting periods. As at the reporting date, the Group believes that there is no material impact on balance sheet carrying values of assets or liabilities.
Environmental obligations
The Group’s mining and exploration activities are subject to various laws and regulations governing the protection of the environment. The Group’s provision for future decommissioning and land restoration cost (US$ 76 million at 31 December 2022; US$ 54 million at 31 December 2021) represents management’s best estimate of the present value of the future cash outflows required to settle the liability which reflects estimates of future costs, inflation, movements in foreign exchange rates and assumptions of risks associated with the future cash outflows; and the applicable interest rate for discounting the future cash outflows. Actual costs incurred in future periods could differ materially from the estimates. Additionally, future changes to environmental laws and regulations, life of mine estimates and discount rates could affect the carrying amount of this provision.
3. ACQUISITIONS AND DISPOSALS
Galkinskoye acquisition
On 10 March 2022, the Group acquired 100% of shares of PSU-Holding JSC, a parent company of PSU LLC, which owns the license of Galka gold-sulfide ore deposit. Total cash consideration comprised US$ 27 million.
Transaction represents an asset acquisition in accordance with IFRS 3 Business Combinations, as the acquired company did not have any substantive processes that have the ability to contribute to the creation of outputs. The consideration paid was mainly attributable to the acquired mineral rights of US$ 29 million and other current liabilities of US$ 2 million.
Albazino power line acquisition
In December 2021, the Group entered into a preliminary lease agreement to lease on pre-agreed terms the grid power line from Gorin to the Albazino production site. The power line was planned to be built, owned and operated by AEK LLC, an independent grid management company. The construction is funded by the 8-year senior loan and 8-year subordinated loan facility, while Polymetal provided guarantees to the lenders in connection to the senior loan and lease payments to AEK.
In 2022 Polymetal made the decision to consolidate 100% of the project entity in order to take full control of the project. The acquisition was completed by 28 June 2022 for total consideration of 10 thousand RUR (approximating USD$ 177), representing the nominal share capital of the entity. The Group determined that it represents an asset acquisition in accordance with IFRS 3 Business Combinations, as the acquired company did not have any substantive processes that have the ability to contribute to the creation of outputs. Assets and liabilities acquired are detailed as follows:
Assets acquired and liabilities recognised at the date of acquisition US$m
Capital construction in progress 19
Cash and cash equivalents 150
Other current assets (8)
Borrowings (161)
Fair value of the net assets acquired -
Cash and cash equivalents acquired 150
Acquisition of non-controlling interest in Novopetrovskoye LLC
On 22 March 2022, following completion of the initial JORC-compliant Mineral Resource estimate, the Group increased its interest in Novopetrovskoye LLC from 75% to 100%. The Group purchased the additional 25% from an unrelated party for a consideration of US$ 24 million, payable in cash. The Group has previously determined that Novopetrovskoye LLC meets the definition of a subsidiary and therefore it was consolidated from the date of the 75% share acquisition. The increase in interest in the entity was recognised as an acquisition of the non-controlling interest and recognised within equity. As of 31 December 2021 Novopetrovskoye did not give rise to a significant non-controlling interest to be presented within equity, income statement and statement of comprehensive income.
Disposal of Tarutinskoye
In December 2022, the Group sold its 100% interest in a minor subsidiary Tatutinskoye to the third party for total cash consideration US$ 7 million. Assets and liabilities disposed of comprised mineral rights of US$ 9 million and the intercompany debt of US$ 10 million, which was assigned to the buyer as a part of transaction. As a result the Group recognised loss on disposal of subsidiary of US$ 2 million. Cash consideration of US$ 5 million was received in December 2022, which the remaining amount payable in equal installments on first and second anniversary of the disposal.?