Polymetal: Worth It As A Medium Term Speculation (OTCMKTS:AUCOY)

Ukraine and war

Yes, there’s a war on even if it’s not officially called that as yet. People on both sides are dying, we’d have to be scabrously uncaring to merely think about money at a time like this. On the other hand, having agreed that war is bad, supported the varied things that our governments and individuals are doing about it all, there is still that issue of money there on the table.

Back three months it was still possible, just, to believe that this was going to be a matter of weeks. Matters would bounce back to something close to where they had been and share prices rally and so on. It’s now also pretty obvious that it’s all going to take rather longer than that. We can’t throw darts at a list of Russia-related stocks and assume that bounce-back that is – a certain more fundamental analysis is required.

As I’ve said, I think Ferrexpo (OTCPK:FEEXF) (OTC:FEEXY) is going to survive this and that there will be a significant rise in the stock price as and when. As I’ve also said, I think that Petropavlovsk is going to get eaten by the details of sanctions regimes and could well have no value to shareholders at all.

There are, of course, the varied ADRs of Russian stocks but those all have more sanctions problems around them. Even for those which are still trading, which are very few indeed, possibly only one.

Polymetal

This brings us to Polymetal (OTCPK:AUCOY) (OTCPK:POYYF) (LON:POLY) which seems to be threading through the varied problems rather nicely. We’ve talked before about the arbitrage across the different instruments, at one time, it was possible to get POYYF at half the price of AUCOY, despite them being the same underlying stock.

That particular arbitrage is gone now, but it’s worth having a look at that to understand the differences between the three stocks. POYYF seems cheaper, but there are higher settlement costs than with AUCOY. The larger the size you deal in, the better POYYF looks. I prefer POLY simply because I’m normally London and sterling based. Your choice there.

What interests me here is that clearly Polymetal is affected by the war, sanctions and all that. There’s always the possibility of an extinction event here – Putin and his friends might decide that foreigners owning gold just wasn’t one of those things they’re going to continue to allow. Having lived and worked there through the 1990s, really, they could.

But the question has to be the likelihood of this? I think that – think, note – this is receding. The level of sanctions, at least on the gold industry, seems to have levelled out. So, I think that the discount to true value is excessive for this reason alone.

There’s also the operating report. There’s nothing in there that would make us worry if this were not wartime. Sure, costs are going up – and note that the largest one is having to use local, not international, contractors (less than optimal) – but not excessively. There’s significant ruble inflation and wages do normally lag that so a certain amount of that cost increase will self-correct.

Russia and Kazakhstan

We need to recall that the company is split, roughly and, approximately, two-thirds Russia, one-third Kazakhstan. It’s possible to think that the Kazakh assets are worth the current valuation alone, the option on Russia coming for free. My back of the envelope tells me that could well be true.

They have at least floated the idea of a split, but the difficulty there would really be over the allocation of the debt. The burden there is some $2 billion, and who gets what portion of that will determine the equity value of any split-out parts.

OK, so what’s the deal here?

Why do I think this is something to buy into – and I do, given certain restrictions on how much and for how long.

One part is simply that I really do think that things aren’t going to get worse. Of course, military matters can, but I don’t think that economic matters affecting the gold industry are. Gold miners will be permitted to operate, export gold, receive payment. The Petropavlovsk problems are because its own bank is sanctioned.

A well-run and solid gold miner looks likely to remain a well-run and solid gold miner to me.

But there’s one more thing. The dividend is currently on hold. If it had been paid, the last announced divi, it would have been 52 cents a share (call that 25% among friends) and there’s an interim usually as well. In normal times we’d be talking about perhaps a $ a share per year in income. When the prices is at £2.20, that’s terribly, terribly tempting.

But, of course, the dividend isn’t being paid. Indeed, it isn’t. We’ll know more in late July, when we get this half year’s production results. And then the declaration of an interim, whether the full year will be paid, is penciled in for late August.

So, a potential dividend which isn’t being paid. What use is that to us? Well, the thing is that the money doesn’t go anywhere. It can be used to invest further in the company, expanding operations. It can be used to pay down that $2 billion debt burden. Or it can be paid out as a dividend. There’s nothing in those choices which leads to a reduction in value for us as shareholders.

Yes, obviously, this is assuming that profits continue to be made but then I am making that assumption already. If they’re made they have to go somewhere and wherever they do go they’ll enhance shareholder value.

My view

This is going out on a limb somewhat but is my considered opinion. As and when some form of normality returns, then Polymetal dividends will be substantial, given the current share price. Yes, it might be 18 months from now, but at that point, there would be, I think at least, three divis (possibly a fourth) to pay, I’d expect them to be at least 50% of this current share price. And if management decides that’s ridiculous, that level of yield, then the same money still gets used to increase shareholder value by investment or debt reduction.

The argument against this is that the Big Bad Bear is going to steal the whole thing. Which could indeed still happen – hey, I worked in Moscow when Yukos was going on – I’m just assigning a low probability to it.

The investor view

I’ve a little cash coming in to take a speculative position, so this is the one I’m going to take. This is medium term – the aim is to collect the dividends which will boost the share price. It’s risky, it’s a speculative position, this is not widows and orphans. It’s also not leveraged. It’s necessary to be able to sit for a year, more perhaps.

My analysis is that the dividend yield will pay some substantial portion of the entry cost into the position. But that very dividend yield will lead to substantial capital appreciation.