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Polymetal: inflection point

The Russian precious metals miner comes with risks attached, and a few risks overplayed
April 26, 2018

For many investors, Russian companies are a no-go zone; a high-risk asset class forever encumbered by geopolitical tension on the one hand, and an inescapable web of Kremlin, oligarchic and financial corruption on the other. Doubters need only cite this month’s drama for evidence. No sooner had the US Department of State singled out an array of companies and businessmen for fresh sanctions on 6 April, than did the whole of Moscow’s main market sell off heavily. Investor nerves extended to precious metals miner Polymetal International (POLY), which lost a fifth of its market value in the immediate wake of the punitive actions. Yet neither Polymetal nor its shareholders are targets of the sanctions – a fact the FTSE 250 constituent confirmed to us on the record. Since their fall, the shares have crawled back, but remain waterlogged with doubt. While mindful of these risks, we think investors should consider this high-yielding, high-growth and heavily-discounted stock, especially following the sanctions’ dual-hit to the rouble.

IC TIP: Buy at 696p
Tip style
Growth
Risk rating
High
Timescale
Medium Term
Bull points

Production growth

Discount to peers

Low rating

Yield potential

Bear points

Metal and currency volatility

Debts

The latter point is worth explaining. With around two-thirds of the miner’s costs in roubles, you would expect Polymetal to benefit from the recent weakness in the currency. Indeed, one of the chief reasons for the shares’ weakness in 2017 was a stronger rouble against the dollar, as rising oil prices buffeted Russia’s resource export-led economy and brought inflation under control.

This in turn exacerbated Polymetal’s run-of-mine costs, just as capital expenditure ramped up 41 per cent amid the construction of its crucial Kyzyl project. Add to this a commitment to lift dividends to 50 per cent of underlying earnings, and there can be no surprise in the rise in net debt – a figure that climbed from $1.42bn (£1.02bn) to $1.58bn in the first three months of this year.

But there are several reasons to believe that the current £7-a-share nadir will come to be seen as an inflection point. Foremost is Kyzyl, which is progressing ahead of schedule, and set to enter first production in August. For upfront costs of less than $400m, the high-grade, open-pit mine will provide a decade of production at average all-in sustaining costs of just $518 an ounce, more than 40 per cent under the upper-end group-wide costs. It's estimated the investment will produce a 33 per cent internal rate of return (IRR), assuming a long-term gold price of just $1,200, a level that few commodities analysts are predicting gold to fall to any time soon.

By 2020, Renaissance Capital estimates that annual output from the mine should reach 340,000 ounces of gold-equivalent, bringing the five-year compound volume growth rate to 8 per cent and doubling the dividend in the process to 98¢. That prospect alone should help attract purchases from income-hungry investors. And while Kyzyl has the potential to simultaneously fund Polymetal’s long-term development projects, including Nezhda, Prognoz and Viksha, shareholders will first want to see net debt become a smaller multiple of cash profits. Those hopes are reflected in Numis’s forecasts for the next two years, which assume gearing will drop to 56 per cent by December 2020. And while warranted, any concerns about the current debt pile should be tempered by the relatively high interest cover ratio, and the fact that 98 per cent of loan maturities fall beyond 2018.

POLYMETAL INTERNATIONAL (POLY) 
ORD PRICE:696pMARKET VALUE:£3bn
TOUCH:696-697p12-MONTH HIGH:1,072pLOW: 578p
FORWARD DIVIDEND YIELD:5.8%FORWARD PE RATIO:9
NET ASSET VALUE:299¢NET DEBT:109%^
Year to 31 DecTurnover ($bn)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20151.442765251
20161.585649355
20171.824438244
2018*1.913847136
2019*2.2760711356
% change+19+58+59+56
Normal market size:2,000   
Matched bargain trading    
Beta:0.96   
£1=$1.40. *Numis forecasts and adjusted pre-tax and EPS numbers. ^As of 31 Dec 2017.