We study the reporting of "Polymetal": first negative effects of sanctions

Изучаем отчетность «Полиметалла»: первые негативные эффекты санкций

We study reporting «Polymetal»: first negative effects of sanctions

We study reporting «Polymetal»: first negative effects of sanctions

PolymetalPOLY252.40 BuyService in partnership with Tinkoff Investments. Quotes are updated every 15 minutes

In mid-July, Polymetal presented a report for 1 half of 2022, which recorded the first negative effect of international sanctions against Russian gold. Basic moments:

  • ore mining increased by 26% — up to 9.4 million tons — thanks to the high results of new fields;
  • gold production decreased by 8% — up to 587 thousand ounces — against the background of the planned shutdown of the Amur MMC;
  • gold sales fell by 23% – up to 456 thousand ounces – due to weak sales in 2 quarter;
  • revenue year-on-year decreased by 18% — to $1.048 billion due to low sales volumes in 2 quarter;
  • net debt rose immediately by 42% — to $2.8 billion — and reached its multi-year high.

Operational results

Polymetal produces and sells gold and some silver. Production takes place at existing fields: in Kyzyl, Ducate, Albazine, Omolone, Varvara, Maiskoe, Light, Vorontsovsky, Nezhda.

Production of gold equivalent by deposits for 6m2022

Red−26%
Varvara−1%
Ducat−6%
Albazino−23%
Omolon−14%
Nezhda+61 000 ounces (the field did not work)
Light−19%
Vorontsovskoye−4%
Mayskoe−60%

−26%

The worst results were shown by the fields in Kyzyl, Albazine, Maysky and Svetly because of the stop at 40 days of the Amur MMC for the maintenance and introduction of logistical restrictions by China due to the increase in the incidence of COVID-19.

The best results were shown in Nezhdaninsky, Varvara, Vorontsovskoye and Dukata thanks to the launch of the new Nezhdaninskoye deposit and the inclusion of large volumes of rich third-party ore in the processing.

IN 2 Quarter due to sanctions, Polymetal's Russian enterprises accumulated 130,000 ounces of gold and silver reserves in gold equivalent bars. The company predicts, that the gap between sales and production will be eliminated already in 3 quarter, as the gold miner increases exports in Asian markets.

Weak production indicators and strong growth in stocks of raw materials led to, that the total revenue of the gold miner in the first half of the year decreased by 18% — to 1.048 billion dollars, of which $ 605 million was earned by the Russian division, and $443 million — The Kazakhstan segment.

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Polymetal's overall results for 6m2022

6м20216m2022The change
Ore mining, million tons7,59,426%
Ore processing, million tons7,68,411%
Gold production, thousand ounces635587−8%
Silver production, Moz9,48,8−6%
Gold equivalent production, thousand ounces753697−7%
Realization of gold, thousand ounces595456−23%
Sale of silver, Moz88,79%
Revenue, billion dollars1,2741,048−18%
net debt, billion dollars1,6472,80170%

Sale of Russian assets

Two days before the publication of the operating results, management said, that the company is considering the sale of Russian assets, to focus on operations in Kazakhstan. Thanks to this step, Polymetal expects to restore shareholder value by revaluing Kazakhstan's assets and reducing geopolitical risks..

In Russia, the company develops 7 operating fields: Ducat, Albazino, Omolon, Mayskoe, Light, Vorontsovskoye and Nezhdaninskoye, — which produce a total of 1.2 million ounces of gold equivalent per year and have approximately 17.8 million ounces of raw material reserves. Besides, Polymetal still has two growth projects: Viksha deposit and Pacific MMC.

Possible options for action against the Russian unit:

  1. Company management buys assets.
  2. Sale of deposits to third parties.
  3. Separation of Russian assets into a separate company. Then all shareholders will simultaneously own the shares of two companies, Russian and Kazakh.

The second option can be considered the most negative scenario for shareholders, because the assets will be sold at a large discount. If we focus on the latest deal in the Russian gold mining sector , Kinross Gold sold its assets in the Far East for $ 340 million, which mined about 500 thousand ounces of gold equivalent per year, — then we get an estimate of the Russian division of Polymetal at $ 816 million, excluding growth projects.

The third option will be the most positive for shareholders. In this case, the Russian division will be able to pay dividends after changing the foreign registration to a local one..

We study reporting «Polymetal»: first negative effects of sanctions

Management forecasts

At the press conference, management made two important predictions:

  1. The company will not pay dividends at the end of 2021. In March 2022, management announced the final payment for the last year in the amount of 0,52 $ per share, but changed his mind.
  2. Annual production target is 1.7 million ounces, of which 1.2 million ounces will be mined in Russia, and 500 thousand ounces in Kazakhstan. But management warns, that there is a risk of non-fulfillment of the promised indicators in the event of increased quarantine and logistical problems in China.
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What's the bottom line?

Polymetal showed expectedly weak operating results in the first half of 2022 amid the introduction of foreign sanctions against Russian gold. In addition, the company announced a future transformation of its corporate structure., which the market generally did not like: for the week, the shares of the gold miner fell by 20%.

How fairly is Polymetal now priced?? To answer this question, let's take four historical assessments of the company.: behind 2019, 2020, 2021 years and current.

Operational estimates for Polymetal

20192020—2021Current
Capitalization, billion dollars692,04
The cost of the Russian segment, billion dollars46,20,816
The cost of the Kazakhstani segment, billion dollars22,81,224
Mining, Moz1,51,61,7
Gold price per ounce1400 $1700 $1700 $

If you count, that the value of the Kazakhstan segment will no longer be subject to sanctions risks due to Russian business, and for the Russian business the company will receive money according to our assessment, then Polymetal can be estimated at least 2.816-3.616 billion dollars. In this way, the company is now rated at a discount from 38 to 77% relative to historical figures.

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