Polymetal still shining

To explain why, you need only look at the half-year results, a period in which Polymetal’s realised gold price averaged just $1,332 (£1,066) an ounce, well below the current spot price of $1,521. Rising output from the group’s Kyzyl mine in Kazakhstan, now at full capacity, helped to push up gold and equivalent production by 22 per cent while keeping a lid on all-in sustaining costs. As production picks up at the Svetloye and Mayskoye operations in the second half of the year, those costs are forecast to fall sharply, to within a guided full-year range of $800 to $850 an ounce compared with $904 in the first half.

Assuming currency rates and commodity prices remain where they are, that should mean second-half adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) of at least $500m, up from $403m in the first half. In a show of corporate optimism, the half-year dividend was lifted 18 per cent to 20¢ a share.

This gives you the current picture, but the recent track record has been strong, too. Earlier this month, with its return to the FTSE 100 index recently secured, Polymetal also returned to near the top of the leader board in our monthly IC Alpha quality large-cap stock screen, matching eight of the nine tests. In doing so, the group can point to an operating margin that has both grown and remained above the large-cap average over the past three years, a rising return on equity, a sensible price/earnings growth (PEG) ratio, an earnings multiple that is neither suspiciously cheap nor unsustainably high and forecasts for positive free cash flow and earnings growth.

Polymetal’s status as a ‘quality’ play is heavily caveated by volatile commodity prices and lumpy and large up-front capital costs. This was reflected in the only test failed, which was for above-average return on equity in each of the past three years. However, we still believe the company’s quality stands out for its sector.

Net debt is a potential concern following an increase over the 12 months to the end of June from $1.5bn to $1.7bn. Borrowings are not cheap, either, with most of its debt paying a rate of over 4 per cent. Still, interest cover looks manageable – first-half interest payments of $42m against profits before interest and tax of $252m. It is also reassuring that about 90 per cent of debt is classed as non-current. What’s more, net debt to Ebitda (earnings before interest, tax, depreciation and amortisation) is forecast to continue to fall, having dropped to 1.92 times at the half-year stage from 1.95 times a year earlier. Working capital drawdown in the second half of the year should “drive stronger free cash flow generation”, which should mean further progress on this front at the year end. Should spot gold and silver prices remain where they are, analysts at JPMorgan think a net-debt-to-Ebitda ratio of 1.2 is possible by the end of 2020.