Polymetal - value & growth potential? Gary Newman writes...

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If you want to invest in London listed precious metals producers your choice of shares is fairly limited, and has become even more so in recent years following takeovers of a couple of the popular miners. One of my personal favourites has always been Polymetal International (POLY) and with the share price back down at around the 1470p level I see this as a good time to be buying, especially with gold and silver starting to show some strength again. Like a lot of the big producers, it is very much a leveraged play on gold and silver prices and if we do see another big move in the prices of these metals it should perform well and is one where I can see the potential for a 10-15%, or more, upwards move in the share price.

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Some people are put off by the fact that it operates in Russia and Kazakhstan, but it is a well established company and has been mining in those countries for many years without any major issues. It did see a decline in production during Q2 of this year, down around 6% year-on-year, but that was largely down to reduced grades at its Kyzyl and Albazino operations, and was inline with its mining plan, so I don’t see that as any cause for concern, especially given that it is still on track to achieve 2021 full year guidance of 1.5Moz of gold equivalent, with all-in sustaining costs in the $925-975 per ounce range. During H1 2021 AISC was higher, at $1,019/oz, but that was due to investments in its Omolon, Kyzyl and Voro mines, and the company seems confident that it will drop during the second half of the year and will meet its full year guidance. During the period the company achieved revenue of $1.274 billion and that resulted in a net profit of $419 million, and earnings per share of $0.89. Extrapolating that and assuming that H2 is at least as good – given the guidance for the full year I have no reason to believe that it won’t be – that suggests that it is only trading on a PE ratio of around 11.3x. Net debt during the first half of the year did increase significantly by around 35% to $1.827 billion, as a result of its investment and spending, but it obviously feels comfortable with that, given the size of the dividend pay out, and I can’t see any real issue given the net debt/EBITDA ratio of just 1.05x.

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In terms of the future, things are also looking promising as the last reserves update at the start of the year showed that had grown by 10% to 27.9Moz gold equivalent and more than offset depletion. Plus there is plenty of potential to convert further resources to reserves, with resources standing at 21.8Moz GE, and assumptions for actually mining these reserves and resources are based on a gold price of $1,500/oz and $20/oz for silver, which to me seems very reasonable – especially so in the case of silver and potential future prices for the metal based on its industrial uses. The company recently announced that it will be fast-tracking the development of its Prognoz open pit silver-lead mine, with the ore processed at the Nezhda concentrator. That should see mining commencing in 2023 and annual production of around 6.5Moz until 2041, with an AISC of $13.8 per silver equivalent ounce. It is good to see that production has been advanced by three years or so, especially given the current silver price, and it makes sense to try and take advantage whilst silver is strong. So, in terms of current, and future, production there appears to be plenty of strength and potential – barring a meltdown in precious metals prices. The company also pays a decent dividend, with an interim dividend of $0.45/share declared and due to be paid on September 30, representing the distribution of around 50% of its net earnings during the period, and follows the payment of a final dividend of $0.89/share during 2020. That final dividend is the equivalent to around 65p/share and a yield of roughly 4.4%, and if we were to see similar for this year, in terms of the final dividend, that would give an annual yield of circa 6.6%, which is pretty decent for a mining company, especially when you also factor in the capital growth potential. It is certainly high enough to make it attractive to income investors as well.

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If you’re bullish on gold and silver, then Polymetal is definitely well worth considering if you don’t already hold it in your portfolio, as it gives good exposure to both metals, and with relatively low risks in terms of its operations and the fact that these are spread across a number of different mines. There is of course some political risk in these countries, but as I mentioned earlier, I don’t really see that as a concern myself, but do accept that some are wary of investing in this part of the world. So overall, I view Polymetal as a good buy at this price level, and whilst you’re waiting for the value of the company to go up, you will also be earning a decent income via the dividends.

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