- Vitaly Nesis flags US election as gold price risk
- Says newcomers to the London gold space offer very little to generalists without being in FTSE indices
Two Russian gold miners stand astride the London precious metals sector, producing well over a million ounces (oz) a year and handing out hundreds of millions in dividends every year. Polyus Gold (PLZL) is larger than Polymetal (POLY) by market capitalisation, but also more tightly held by the Kerimov family.
Polymetal this week said it had reached a record free cash flow level in the September quarter, on the back of revenue of $884m, a 35 per cent increase on last year. On the same day, Polyus, with sales of $1.4bn in the September quarter, announced a maiden reserve for the Sukhoi Log project of 40m oz, with grade of 2.3 grams per tonne (g/t). The company said this makes it the largest gold deposit in the world, although a more detailed study is needed for a production decision on what will be a multi-billion-dollar investment.
Outperformance
Polyus’s share price is up 93 per cent this year, while Polymetal is up 51 per cent, both driven by the gold price. Mining leaders have continued to talk up gold’s potential to rise further despite sitting over $1,900 an oz for some months now.
Polymetal chief executive Vitaly Nesis was more circumspect when talking to Investors Chronicle. “I remain very cautious about the gold price outlook,” he said. “I think the price strength is driven mostly by speculative inflows into ETFs, and the direction of those flows may change.”
Mr Nesis said the US election was a possible inflection point.
This thinking is not against the tide completely, judging by the most recent 'Commitments of traders' report released by the Chicago Mercantile Exchange. This weekly report – which tracks funds’ positions in various futures markets – showed that there was a heavy swing into gold short positions, which have grown by 21 per cent in the week to 13 October. Other risks to the company’s final months of 2020 include a greater Covid-19 outbreak. As of 20 October, there were 112 active cases among the company’s workers.
At the same as a potential shift in gold investment, the Russian majors will have more competition in London. Yamana Gold (AUY) added a secondary listing this month and Wheaton Precious Metals (Ca:WPM) will do the same in weeks, if not days. Yamana has pitched itself as a more stable gold option of its Americas-based operations.
Mr Nesis said secondary listings would have little consequence in the London market. “Getting a secondary London listing won't change anything in terms of investor access for those Canadian companies,” he said. “If a company is not in the FTSE index it will remain largely inaccessible and unattractive for the vast majority of UK generalists.”
Mr Nesis said fellow Canadian producer Endeavour Mining (Can:EDV) bringing its primary listing to London would be more interesting for investors, given it would join the major indices. The company said in August that it was considering shifting from Toronto to New York or London, following a merger with fellow gold miner Semafo. It would still sit a rung below Polymetal or Polyus in terms of production and valuation but could offer a new West Africa-focused option for investors who did well out of Randgold Resources. It failed to buy out Centamin (CEY) in an ambitious all-share deal that fell apart at the start of 2020.
Paying up
What the Russians have over almost all other gold miners worldwide is the hefty dividends they pay. These have caused fights in other Russian miners’ board rooms – see Norilsk Nickel – but given the cash flow increases, even higher payouts could be on the horizon.
Polymetal has already doubled its payout this year and brought in a policy of 50 per cent underlying net income as a minimum for the final dividend.
The capital needs of the company are high – capex is forecast to peak at $479m in 2020, as per FactSet consensus – but free cash flow will be helped by the cancellation earlier this month of an underground expansion project. The production will be taken up by a separate new source of gold ounces, with Mr Nesis saying guidance for 2022 and 2023 would not be affected.
Consensus estimates see Polymetal’s free cash flow almost doubling by 2023, from $806m in 2020. The new dividend policy also allows the company to hand over all free cash flow to investors.
