Buy the gold dip with Polymetal

Polymetal has said it can do all of the above, so long as gold remains above $1,200 an ounce. Since the beginning of February, gold’s weekly average price has not dipped below this level. And there are macroeconomic and market factors that lead us to think this will persist.

But even if gold and silver prices drift, Polymetal shares offer investors value that neither of its two closest peers Randgold Resources (RRS) and Fresnillo (FRES) can match. On an enterprise value-to-cash profits ratio – a measure that takes into account debt levels – both companies are more than 50 per cent more expensive than Polymetal. Perhaps equity investors see that as a fair adjustment for Polymetal’s $1.5bn of net debt (although this is forecast to fall) and the risks of doing business in Russia. Then again, the precious metals on the books of Randgold and Fresnillo are found in the Democratic Republic of Congo (DRC), Mali and Mexico.

In fact, Polymetal’s rating is broadly in line with Centamin (CEY), a company we admire but which relies on production from one mine. Conversely, the Russian miner boasts eight discrete operations, and will next year bring a significant resource in the shape of the 7.3m ounce Kyzyl deposit. At an initial cost of just $375m, the mine will provide a decade of high-grade open-pit production, with all-in sustaining costs of just $518 an ounce. That equates to an internal rate of return of 33 per cent, assuming a long-term gold price of $1,200 an ounce and a 10 per cent project discount rate.

Getting Kyzyl over the line along with other projects requires capital expenditure to peak at $370m this year, before declining to around $250m in 2019. The fall-away in spending should start to boost free cash flows, debt repayments and the prospect of special dividend payments, the latter of which have occurred in each of the past three years, regardless of choppy precious metals markets.