Polymetal International PLC

Polymetal International PLC (LON: POLY) is a FTSE 100 index listed Company, which has a portfolio of nine producing gold and silver mines.

On 24 January 2022, POLY expects to release its exploration program results.

Investment Rationale – BUY at GBX 1,194.00

• Decent Guidance: POLY has reiterated its FY21 production target of 1.5 Moz (million ounces) at full-year cost guidance of US$700-750 per gold equivalent ounces.
• Promising Outlook: For the long-term, 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.
• Technical Indicators: From a technical standpoint, the momentum oscillator 14-day RSI (~28.85) is in the oversold zone, while the stock price is hovering near the lower Bollinger Band.
• Better Profitability: In H1 FY21, POLY’s gross margin and net margin were 56.8% and 32.9%, respectively. Both the margins are higher than the industry median.

Key Risks

• Macroeconomic Uncertainties: The Gold prices are highly vulnerable to the rising bond yield and US Dollar.
• Pandemic Related Uncertainties: The Global Covid-19 pandemic could suspend operations and increase labour absenteeism.
  

Production Highlights (for the three months ended 30 September 2021, as on 26 October 2021)

 (Source: Company Website)

• Marginal decline in Production: POLY had shown around 8% year-on-year drop in the total gold equivalent production to 437 Koz during Q3 FY21 as it generated all-time quarterly production record during Q3 FY20.
• Maiden Production: The Company had managed to produce first concentrate from Nezhda on 16 October 2021. It remained two weeks ahead of the previously announced target date of 01 November 2021.
• Decent Top-Line Business: On a 9-months basis, the Company’s top-line business grew by around 4% to USD 2.09 billion during 9M FY21.

One Year Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

Polymetal demonstrated strong financial performance in FY21 so far, driven by steady operational delivery and favourable commodity prices. Subsequently, POLY has reiterated its FY21 production target of 1.5 Moz (million ounces) at full-year cost guidance of USD 700-750 per gold equivalent ounces with the announcement of Q3 FY21 production update. The stock made a 52-week High and Low of GBX 1,843.50 and GBX 1,184.25, respectively.

Based on the solid production results, revenue increase, reiterated production guidance, with support from the valuation conducted above, we have given a “BUY” recommendation on Polymetal International PLC at the closing price of GBX 1,194.00 (as on 7 January 2022), with lower double-digit upside potential based on 8.95x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Shanta Gold Ltd

Shanta Gold Ltd (LON: SHG) is a FTSE AIM All-Share listed Company, which is involved in gold exploration and production in Tanzania.

Investment Rationale – SPECULATIVE BUY at GBX 8.50

• Solid Fundamentals: SHG has robust net cash, low debt, ongoing government support, and a stable dividend policy to deliver sustainable returns.
• Promising Outlook: It demonstrated exploration success in FY21 and discovered new high-grade resources at both New Luika and West Kenya projects. It also looks confident of its long-term prospects. By 2023, SHG targets to become a 100,000+ ounce of the gold producer.
• Solid Momentum: The growth projects at West Kenya and Singida continued to be on track, and the Company expects to provide an update in early 2022.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~33.35) is in the oversold zone, while the stock price is hovering near the lower Bollinger Band.
• Valuation Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Earnings and Price/Cash Flow metrics are quite undervalued against the median of the Basic Materials sector.

Key Risks

• Reduced Guidance: On 7 December 2021, SHG reported that due to supply constraints from the third-party vendor, FY21’s production guidance has been reduced to 55,000 to 57,000 ounces from 60,000 to 65,000 ounces.
• Gold Price Fluctuations: The rising treasury bond yield and US Dollar strengthening can dent the gold prices trading around a two-month high level.
• Business and Macroeconomic Risks: New Luika mine is the sole source of revenue and change in mining rules can increase the State’s royalty take. The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Tanzanian Shilling, Euro and Sterling.

Production Update (as on 21 October 2021)

• Operational Safety: SHG recorded zero lost-time injuries during Q3 FY21, while surpassing 7.5 million man-hours.
• Dividend: It showed commitment to ongoing sustainable returns with an interim dividend of 0.10 pence per share.
• Liquidity: At the end of Q3 FY21, SHG reported cash and liquidity of US$27.5 million (Q2 FY21: US$28.0 million).

One Year Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (FY21) (Illustrative) 

Conclusion

SHG has increased grade control at New Luika underground deposits over the last six months, which shall create long-term opportunities for the Company’s portfolio. Moreover, SHG is well-funded with the available liquidity of US$24.7 million on 30 November 2021. Moreover, it had a negligible debt position of US$1.4 million. The stock made a 52-week High and Low of GBX 18.50 and GBX 8.00, respectively.

Based on the ongoing exploration success, solid fundamentals, positive outlook, with support from the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Shanta Gold Ltd at the closing price of GBX 8.50 (as on 7 January 2022), with lower double-digit upside potential based on 6.70x Price/NTM Cash Flow (approx.) on FY21E Cash Flow Per Share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*All forecasted figures and Peer Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

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

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