UPDATE 1-Polymetal hopes to boost output by 30 pct by 2019

Thu May 22, 2014 6:06am EDT

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MOSCOW, May 22 (Reuters) - Russian gold and silver miner Polymetal plans to increase output by a third in five years after signing a deal to buy a gold project in neighbouring Kazakhstan for $618.5 million, the company said on Thursday.

The deal with a firm belonging to Kazakh President Nursultan Nazarbayev's billionaire son-in-law Timur Kulibayev will be Polymetal's first large acquisition in more than four years.

Polymetal, the largest silver miner in Russia, signed the agreement with Kulibayev's Sumeru to buy the Kyzyl gold project, which comprises two goldmines with gold reserves of around 6.7 million ounces.

The London-listed company hopes to close the deal, half of which it plans to fund with new shares, in the fourth quarter of 2014, Pavel Danilin, deputy chief executive for strategic development, told Reuters by telephone.

Polymetal, part-owned by Russian tycoon Alexander Nesis, initially agreed to pay $318.5 million in cash and $300 million in new shares. It could pay more cash if gold prices or Polymetal's shares change significantly, but no more than $500 million, a statement from the company said.

The deal, under negotiation for two years, needs approval from Kazakh regulators and Polymetal's shareholders, Polymetal Chief Executive Vitaly Nesis, Alexander's brother, said during a conference call after releasing the statement.

The Kyzyl project comprises two goldmines, Bakyrchik and Bolshevik in northeastern Kazakhstan, which Polymetal hopes will boost its reserves by 50 percent.

"Bakyrchik will increase Polymetal's annual production by 2019 by roughly 30 percent, so we address the issue of the decline in our production from the existing base", Vitaly Nesis said.

The company plans to start building production facilities in the first quarter of 2016 and see the first gold in 2018.

Polymetal acquired its first project in Kazakhstan in 2009 - a gold and copper mine Varvara.

"This is an environment, which we understand very well ... a jurisdiction with relatively stable and transparent rules of the game", Vitaly Nesis said.

The company produced a 1.28 million troy ounces of gold equivalent in 2013 and plans to increase this to 1.30 million ounces and 2014. (Reporting by Andrey Kuzmin, editing by Elizabeth Piper)

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