Pole overview: the largest Russian gold miner

Обзор «полюса»: крупнейший российский золотодобытчик

"Pole" (MCX, LSE: PLZL) - a huge gold mining company with assets in the Krasnoyarsk Territory, Irkutsk and Magadan regions and the Republic of Sakha (Yakutia). As of 2020, Polyus has the world's largest gold reserves, which are estimated at 104 million ounces, which is decent more, than most international competitors and almost three times more, than the closest Russian competitor - Polymetal.

About company

The company not only owns huge reserves of gold, she is also one of the leaders in terms of its production. As of 2020, Polyus became one of the four largest global producers with a result of 2.8 million ounces of gold, which is almost twice as much, than Polymetal. At the same time, the company's production volume has gradually grown in recent years - by 0.6 million ounces compared to 2017.. Production indicators for the first half of 2021 are slightly more modest, than in 2020, but slightly.

43% production at the end of 2020 was provided by the flagship field of the company - Olympiada, still by 16% - Natalkinskoe and Blagodatnoe.

An important competitive advantage of Polyus is the world's lowest production costs among major competitors. This can be achieved both due to high-quality deposits with a high gold content in the rock and that, that they are all open type, and at the expense of predominantly ruble costs and constant work to improve efficiency.

The company really does not stand still, but actively expands the business and increases its efficiency: compared to 2014, Polyus increased production by 63%, while reducing overall cash costs (TCC) on 38%. And the company doesn't stop there: capital expenditures for 2021 and the next few years are projected at $ 1-1.2 billion per year, despite the fact that in recent years they have been about half the size.

The company plans to spend a significant part of the money on the construction of a new gold recovery plant at the Blagodatnoye deposit., modernization and expansion of production at the Olympics and Kuranakh.

The main capital expenditures of $ 3.3 billion Polyus plans to spend in the coming years on the development of the new Sukhoi Log field. This is a huge field in the Irkutsk region with 40 million ounces of proven and probable reserves., and estimated and identified - 67 million ounces of gold with one of the record low production costs in the future. In 2017, a joint venture between Polyus and Rostec State Corporation won the auction for the right to develop Sukhoi Log., thereafter, Polyus gradually increased its share in it, fully consolidated in September 2020.

At the moment, a feasibility study of the project is being prepared, and the final investment decision is planned for 2022. It is assumed, that the launch of the gold recovery plant on Sukhoi Log will take place in 2027, and the average annual production is planned at 2.3 million ounces, which is not much less than the current production volume of the entire company.

Gold reserves of the world's largest gold miners as of 2020, Moz

"Pole"104
Newmont94
Barrick68
Newcrest49
Gold Fields49
Harmony35
Kinross30
AngloGold30
Polymetal28
Agnico Eagle24

104

Gold production by the world's largest gold miners in 2020, Moz

Newmont5,9
Barrick4,8
AngloGold3,0
"Pole"2,8
Kinross2,4
Gold Fields2,2
Newcrest2,1
Agnico Eagle1,7
Polymetal1,6
Kirkland Lake1,4

5,9

The volume of gold production by the company by years, Moz

20172,2
20182,4
20192,8
20202,8
1п20211,3

2,2

Gold production structure by company deposits in 2020

Olympics43%
Наталкинское16%
Blagodatnoe16%
Verninskoe10%
Quran9%
Placers5%

43%

Cash costs of the world's largest gold miners in dollars per ounce in 2020

TCCAISC
"Pole"362604
Polymetal638874
Newcrest616909
Gold Fields748969
Barrick719969
Kinross700970
Newmont7101045
Agnico Eagle7741051
AngloGold8191059
Harmony11461343

Financial performance

The company's revenue and EBITDA have grown in recent years and doubled compared to 2017-2018. Since Polyus's revenue depends on the price of gold, which is denominated in dollars, can be considered an exporter company.

The company's net profit also tends to grow, but quite volatile. The company actively uses derivative financial instruments to hedge gold prices and foreign exchange rates. Their revaluation periodically significantly increases or decreases profits.

The company's net debt has been declining in recent years, what is positive, especially against the backdrop of the upcoming increase in capital expenditures.

Revenue, EBITDA, net profit and net debt by years, billion rubles

RevenueEBITDANet profitNet debt
2017156,599,272,2177,2
2018184,7118,428,2214,4
2019257,8172,2124,2203,4
2020364,0269,5119,2155,8
1п2021168,6121,181,1150,0

Share capital

The history of "Polyus" stretches back to the Soviet era with the mine of the same name of prospectors. In the 1990s, the artel was corporatized, after which the shares were consolidated by its head Khazret Sovmen. In 2002 he was elected President of the Republic of Adygea, after which he sold his shares to Norilsk Nickel. In 2006, its gold mining assets were spun off into a separate company., Polyus went public, and in 2009, the main shareholder of Norilsk Nickel, Vladimir Potanin, sold a large block of shares to the structures of Suleiman Kerimov. Gradually, the Kerimov family increased their share in the company., and at the moment Said Kerimov is the controlling shareholder of Polyus with a share 76,34%.

In December 2020, the company conducted buyback of shares: about 1.43 million securities were purchased for the employee incentive program, deals M&A and for the consolidation of the assets of PJSC Lenzoloto, through which Polyus owns placer deposits.

Share capital structure of the company

Polyus Gold International Limited, beneficiary - Said Kerimov76,34%
Company management1,03%
Treasury shares0,78%
Free float21,85%

76,34%

Dividends and dividend policy

At the "Polyus" with 2018 the dividend policy is in effect, according to which the company plans to pay dividends on a semi-annual basis in the amount of 30% of EBITDA, if the value of the multiplier Net Debt / Adjusted EBITDA does not exceed 2.5. Dividend yield has been around 5% in recent years.

Dividends and dividend yield of the company

DividendDividend Yield
2016152,41 Р3,4%
2017251,42 Р5,5%
2018274,73 Р5,1%
2019407,73 Р5,7%
2020627,33 Р4,7%

Why stocks can go up

Growing industry leader with good multiples. Polyus is not just the leader of the gold mining industry in Russia - the company is constantly increasing its production and financial performance, increases business efficiency. And ahead of Polyus is the development of the giant Sukhoi Log field. Quite possibly, that in the future, the company's business will become much larger. And in anticipation of this growth, investors can also receive quite good dividends..

Moreover, Polyus has good multipliers in absolute terms, and in comparison with competitors. The company is less leveraged, than competitors. "Polyus" is somewhat more expensive, but it is logical: it is larger and more efficient.

Return on equity has dropped from prohibitive 222,3 to 62,1%, but this is because, that the company had a rather small net worth, and then he began to grow. Especially pleased with the multiplier Net Debt / EBITDA, the value of which was constantly decreasing and reached a very comfortable value of 0.52.

Defense sector. In times of stock market turmoil, investors massively buy defensive assets, and one of the main protective assets is gold. One of the options for investing in gold is buying shares of gold mining companies.. So they often have the opposite correlation with the whole market. Gold mining companies are exporters, since gold prices are set in dollars, which means, they also protect against ruble devaluation.

ESG. The company is actively working towards compliance with ESG standards: in recent years the agency S&P Global, MSCI, Sustainalytics and CDP Raise Polyus' Ratings by Several Notches, reflecting the company's achievements. These include a reduction in carbon dioxide emissions, reduction in water consumption, and in 2021, the company dramatically increased the percentage of energy used from renewable energy sources from 36 to 100%.

More precisely, then Polyus decommissioned some of its own thermal power plants and increased the share of energy consumed, produced in hydroelectric power plants, to 90%, and to compensate the remaining 10% bought green I-REC certificates. Given the popularity of ESG, these actions should help the company attract investments in its securities and in the future not pay gradually introduced taxes on carbon emissions.

Why stocks might fall

Market dependence. In reviews of commodity companies, we often draw attention to the fact, that their business is often highly dependent on market conditions. And if prices, eg, for oil and steel more or less depend on the balance of supply and demand, on the level of business activity in the world, then with gold everything is much more complicated. Total 8% of gold demand for 2020 was provided by the industry, yet 38% - jewelry industry, and the rest of the demand was associated with investment. That is, a significant proportion of gold buyers are private and institutional investors., confident, that it is a good investment asset, or those who want to make money on that, that many others are sure of this. And faith is a shaky question.

In general, all is well with the Polyus business: production and financial indicators are growing, but gold prices have declined from historic highs a year ago, and this immediately affected the company's quotes: over the past year, shares have fallen in price by about a quarter.

In addition to the volatility of the prices of gold itself, the financial performance of Polyus is significantly affected by exchange rate differences, as well as revaluation of derivative financial instruments.

Possible introduction of additional fees. In the summer of 2021, the authorities introduced temporary duties on the export of ferrous and non-ferrous metals. These duties did not affect gold miners, but a precedent has been created: possibly, in the near future we will see something similar for them, which will reduce the company's revenues and cause a drop in quotations on this news occasion.

Обзор «полюса»: крупнейший российский золотодобытчик

Обзор «полюса»: крупнейший российский золотодобытчик

The structure of global demand for gold in 2020

Jewelry sector38%
Ingots and coins24%
Exchange traded funds23%
Industry8%
Central banks7%

38%

Polyus multipliers by years

P / EROENet debt / EBITDA
20178,50222,3%1,79
201825,6112,6%1,81
20197,64110,8%1,18
202014,968,5%0,58
1п202113,962,1%0,52

Multipliers of the largest Russian public gold miners for the first half of 2021

P / EROENet debt / EBITDA
"Pole"13,962,1%0,52
Polymetal8,2156,7%1,05
"Petropavlovsk"LesionLesion1,9
"Seligdar"5,0234,7%2,31

Eventually

Polyus is the leader of the gold mining industry in Russia and one of the largest and most efficient players in the world in this market. In recent years, the company has shown good production and financial results and is not going to stop there.. Something "Polyus" reminds "Rosneft": despite the huge scale of the business, development of a giant field ahead of the company, which will help to significantly improve production performance.

But don't forget, that the gold mining industry is very specific: it does not just depend on raw material prices, but largely depends on the mood and belief of people in gold as an investment instrument.

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