Polymetal International PLC (LON: POLY) – Favourable commodity prices and tight cost control supporting the strong financial performance

Polymetal International PLC is a FTSE 100 index listed Company, which has a portfolio of nine producing gold and silver mines. With high-quality asset portfolio and exploration investments, it is among top-10 global gold producer and top-5 global silver producer with assets in Russia and Kazakhstan. In terms of production, it is the second-largest gold producer in Russia. It largely focusses on open-pit mines and set appropriate thresholds on head grades as return on investment in the precious metal industry is dependent on grades and mining conditions. The nine POLY mines comprise of Dukat Hub, Omolon Hub, Amursk Pox, Albazino, Mayskoye, Svetloye, Voro, Kyzyl, and Varvara. Moreover, the Company has two development projects, namely Amursk Pox-2 and Nezhda.

 (Source: Company Website)

Key Fundamental Statistics

Industry Outlook Dynamics – Gold Market

Market Overview: During 2019, the demand for precious metals were sparked by uncertainty around global economic prospects, rising geopolitical tensions, and declining interest rates. In 2020, the onset of the Covid-19 pandemic has made Gold’s relevance as a hedging tool even more prominent, which accelerated the price performance. The Gold prices increased by ~17% during the H1 2020 and soared by an additional ~10% in July. Meanwhile, the Gold-backed ETFs and similar products (Gold ETFs) reported the eighth consecutive month of positive flows. The Covid-19 pandemic may bring structural shifts to asset allocation, and there are strong fundamentals to support the Gold investment in the longer term.

(Source: World Gold Council)

The chart below shows the performance of LBMA Gold Price over the past 3 years, which closed at US$1926.30/oz on 4 September 2020, reflecting around 44 percent growth over the last 3 years.

(Source: World Gold Council)

Snapshot of global demand and supply in Q2 2020 (ended 30 June 2020) can be seen in the table below:

According to the global demand trends report from WGC (World Gold Council), the gold demand fell in H1 FY20 vs H1 FY19. However, the increased investment by Central banks and robust inflows into gold ETFs amid the pandemic zoomed the Gold prices.

Key Risks

• The scale and continually evolving nature of coronavirus pandemic is causing unprecedented disruption to the supply chain. It can lead to reduced gold production as small-scale refineries and fabricators also halted their operations during H1 2020.
• With travel restrictions, logistical and supply concerns can deplete the dealer inventories for coins and small bars.
• According to the global demand trends report from WGC, the Gold demand in H1 2020 declined by 6% against the last year comparatives. The jewellery demand plunged 46% (year on year) in H1 2020 as consumers were deterred by the high price and with a reduction in the disposable income. Similarly, the bar and coin investment declined sharply in Q2 2020 due to Covid-19 led lockdown.
• Supply from gold producers can decline as only US$ 4.4 billion was spent on exploration in 2019 against US$ 11.8 billion in 2012. Consequently, there were only three gold discoveries in 2019 as compared to 42 major gold discoveries in 2000. In short, there would be less gold, if a lesser amount is invested on exploration.

Growth Catalysts

• Record inflows into Gold-back ETFs should continue to offset the demand weakness in other sectors.
• Central banks have been adding to the gold reserves since the financial crisis. Presently, the official reserves are more than 5,000 tonnes higher than they were in 2009. The central banks own nearly 35,000 tonnes of Gold, equivalent to ~17% of worldwide above-ground stocks.
• Reduced opportunity cost of holding Gold with persistently low-interest rates would bolster the demand for Gold being a source for long-term returns.
• Uncertainties arising from US-China trade tension and Brexit, followed by dented economic indicators after Covid-19 outbreak, has further encouraged investors to reconsider Gold as a traditional hedging tool in times of turmoil.
• Moreover, the economic downturn has devalued the Forex market, which is compelling investors to switch to more tangible metal resources.

Gold Outlook

Gold can act as a genuine diversifier tool in an investment portfolio for a long-term due to the attributes pertinent to scarcity, highly liquid and uncorrelated asset nature. Moreover, it has been proven over time that beyond merely a safe-haven asset during the high-risk time, it can also be an asset to outperform and generate positive returns too. Such dynamics are likely to persist amidst high political and economic uncertainty, battered stock and bond markets, and historically low-interest rates scenario.

Meanwhile, as per the report by Fitch Solutions Country Risk & Industry Research, Russia is expected to surpass China in becoming the world’s top Gold producer by 2029, with a projected annual growth rate of 3.7% year-on-year between 2020 and 2029. It is supported by the fact that one of the largest Gold producing mine, Polyus Gold’s Olympiada mine in the Krasnoyarsk region of eastern Siberia, have remained virus-free and operational so far.

Overall, the fundamentals for Gold bull market is intact. However, as Gold has moved sharply higher in the past month, the price may experience some consolidation in the near term. Nevertheless, if quantitative easing and other factors encourage investors to treat Gold as money, the potential for God price outperformance is extremely high over the next five to ten years.

Growth Prospects and Risk Assessment

POLY’s investments are attractively priced with high-quality assets, which enable them to generate consistent free cash flow and deliver sustainable returns for shareholders. With 9 operations across 2 countries (Russia and Kazakhstan), the Company is second-largest gold producer in Russia and among top-10 world gold producers. It has been investing in both greenfield and near-mine exploration to increase the reserve base in a cost-effective manner, while seeking attractive acquisitions opportunities as a source of long-term growth. The Company has paid out US$2.0 billion since the IPO, and it ensures 50% of underlying income to be paid out as dividend.

(Source: Presentation, Company Website)

Even in Covid-19 conditions, there were no interruptions in production, supply chain or sales of the Company. There is no material Covid-19 outbreak occurred at the operations as the Company is maintaining strict precautionary procedures at all sites. It has been incurring approximately US$2.5 million per month as additional COVID-related costs to ensure the business continuity at a good pace. 

However, the Company is also exposed to various risk and uncertainties. The Global Covid-19 pandemic could result in the suspension of operations and increase the labour absenteeism, and thus, the operation costs. The operation can also be impacted by the extreme climate conditions in the Russian Far East region. Furthermore, the financial performance is highly dependent on the Gold price, and the Gold market is cyclical and sensitive to the economic changes and numerous factors, which are beyond the Company’s control. Similarly, fluctuations in exchange rates can impact the collected revenues and operating costs.

(Source: Presentation, Company Website)

Key Shareholders Statistics

Recent Regulatory Developments

26 August 2020: POLY declared to pay an interim dividend of US$ 0.40 per share for the six months ended 30 June 2020. The total dividend amounted to US$189 million in total, representing 50% of the Group's underlying net income for H1 FY20.

10 August 2020: The Company announced a joint-venture with Rosgeology JSC for exploration in the Republic of Bashkortostan, Russia.

A Glimpse of Business Segments

 (Source: Presentation, Company Website)

Non-Financial Key Performing Indicators in FY19

 (Source: Annual Report, Company Website)

Financial Highlights (for the six months ended 30 June 2020 - H1 FY20, as on 26 August 2020)

(Source: Company Website)

• The Company reported decent financial performance in H1 FY20 with a substantial increase in the revenue led by surge in gold price and silver price realisation which was up by ~25% and ~10% (year-on-year), respectively.
• The Company witnessed robust growth in all profitability metrics driven by higher prices and production at lower unit costs.
• The total cash costs were down due to the weakness in RUB/KZT and supported by a change in production structure towards the lower-cost operations.
• During the period, the net debt increased to US$1.7 billion against the previous period (31 December 2019: US$ 1.5 billion), representing 1.3x of Net Debt/EBITDA, which was below 2019 year-end number and the mid-term target.
• Lower cost of debt at 3.6%, reflecting a decrease over 1H FY19 number of 4.5%.
• The Company has maintained a robust liquidity profile, with US$1.9 billion of undrawn credit facilities with a strong cash position.
• The Board has declared an interim dividend per share of US$ 0.40, an increase from the same period last year (1H 2019: US$ 0.20 per share. In 1H FY20, the Company has paid dividends totalling US$ 0.62 per share (including special dividend and final dividend for FY 2019).

Operational Highlights (H1 FY20)

There were no interruptions in production, supply chain and sales due to COVID-19 uncertainties. LTIFR (lost time injury frequency rate per 200,000 hours worked) improved by 70% year-on-year to 0.07, with only four minor injuries recorded for the period.

• In 1H FY20, the Gold equivalent production increased by 4% year-on-year to 723 Koz. This also represents a stronger production in the second half of 2020, with the traditional seasonal concentrate de-stockpiling at Mayskoye.
• Further, the Company stays on track to meet the FY20 production guidance of 1.5 Moz of gold equivalent.

Financial Ratios – Strong Profitability Margins versus the Industry Median

Reported profitability metrics for the first half of 2020 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Also, it has decent fundamental metrics as it has maintained an EBITDA margin above 40% for the last three years. Polymetal International Plc has delivered a substantial return for the shareholders’ as return on equity (ROE) of 21.3% was higher as compared to the industry median of 2.5%. The ROE recorded by the Company in the past three years was considerably above the peer’s average.

On the liquidity front, Polymetal International Plc’s current ratio was lower than the industry median of 1.86, but it has sufficient liquidity to meet short-term obligations and has robust liquidity profile to tackle the uncertainty due to COVID-19 outbreak. On leverage front, the debt-equity ratio was 1.26x, which was higher as compared to the industry median of 0.51x, reflecting that the Company is high leveraged as compared to the industry. 

Share Price Performance Analysis

 Daily Chart as on 7 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 7 September 2020, at the time of writing (before the market close, at 8:23 AM GMT+1), Polymetal International Plc shares were trading at GBX 1,947.00, up by 1.46% against the previous day closing price. Stock 52-week High was GBX 2,085.00 and Low of GBX 990.20, respectively.

Bullish Technical Indicators

From the technical standpoint, the shares were trading above the short-term support level of 50, 100 and 200-day simple moving average price. Also, the 14-day RSI is supporting the upside movement. MACD line is placed above the central line, indicating a bullish setup. The Company’s stock has delivered a positive return of around 36.15% in the last three months Also, it delivered a positive return in the last six and nine months of around 48.99% and 64.14%, respectively.

Polymetal International Plc Vs FTSE 100 Index (1 Year)

 (Source: Refinitiv, Thomson Reuters)

In the last one year, Polymetal International Plc share price has delivered 70.92% return as compared to negative 19.01% return of FTSE 100 index, which shows that the stock has outperformed the index during the last one year.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

To compare Polymetal International Plc with peers, Price/Earnings multiple has been used. The peers are EVRAZ Plc (Price/NTM Earnings was 7.78x), Fresnillo Plc (Price/NTM Earnings was 26.41x), Centamin Plc (Price/NTM Earnings was 16.13x), Polyus PAO (Price/NTM Earnings was 14.60x), Hochschild Mining Plc (Price/NTM Earnings was 13.92x) and Highland Gold Mining Ltd (Price/NTM Earnings was 9.14x). The Average of Price/NTM Earnings of the Company’s peers was 14.66x (approx.).

Business Outlook Scenario

In FY20, the Company is progressing well to meet production guidance of 1.5 Moz of gold equivalent. Also, with the launch of Nezhda in H2 FY21, the Company shall be able to deliver production of 1.85 Moz by 2023. At Kyzyl, sustained and stable production with continued high grades is expected, which would ensure consistent free cash flow.

Adjacently, the guidance for TCC (Total cash costs) and AISC (All-in sustaining costs) is maintained at US$ 650-700/GE oz and US$ 850-900/GE, respectively, as increased COVID-related costs are getting offset by the depreciation of the Russian Rouble and Kazakh Tenge. Meanwhile, POLY continues to invest in greenfield exploration for virgin deposits in the Former Soviet Union. The Company also look forward to disinvesting additional non-core assets in 2020. It will support the ambition of long-life and low-cost production.

Moreover, we believe that the fundamentals of the Gold bull market are still intact from a long-term perspective though short-term consolidation can be expected with demand downturn and supply chain disruption.

Overall, the Gold industry landscape is going through an unparalleled wave of change, which is arising from various aspects, such as demand patterns, regulatory changes, innovation, and the entrance of new participants. Furthermore, the resurgence of coronavirus cases denting equity market sentiments with speculations regarding another round of lockdown, which would eventually attract investors towards the Gold, as a safe-haven investment.

Polymetal Plc witnessed a CAGR growth of 11.73% in revenue over the period FY15 to FY19, while net profit recorded a CAGR growth of ~21.59% during the same period.

Considering the uptick in gold prices, strong financial performance, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Polymetal International at the current price of GBX 1,947 (as on 7 September 2020, before the market close at 8:23 AM GMT+1), with lower-double digit upside potential based on 14.66x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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