Polymetal publishes financial results for 1H2017

Andrey KozhokaruAugust 31, 2017

The growth in revenue in 1H2017 has been primarily brought by an increase in realization volume. Considerable increase in the Company’s cash costs were caused by the appreciation of Russian ruble. For the reporting period, adjusted EBITDA decreased by 12% yoy to $257m, adjusted EBITDA margin equaled to 38% versus 49% in 1H2016.

According to the results of 1H2017, the Company increased its revenue by 15% yoy to $683m. The Company’s total cash costs increased by 28% yoy to $656 per ounce of gold equivalent. All-in sustaining cash costs reached $906 per ounce of gold equivalent, increasing by 20% yoy. For the reporting period, adjusted EBITDA decreased by 12% yoy to $257m, adjusted EBITDA margin equaled to 38% versus 49% in 1H2016. Net income for 1H2017 equaled to $120m (-27% yoy), net income adjusted for the after-tax amount of write-down of metal inventory to net realizable value, foreign exchange gains and change in fair value of contingent consideration liability equaled to $117m (-6% yoy). As of June 30 2017, Polymetal’s net debt amounted to $1 582m versus $1 330m at 31 December 2016. Company reaffirmed its production guidance for 2017 at 1.4m ounces of gold equivalent.

According to the new dividend policy, starting from 2017 the Company plans to direct 50% (versus 30% previously) of its adjusted net income to dividend payments if net debt to adjusted EBITDA is below the 2.5 threshold. As a result, the Board of directors suggested interim dividend of $0.14 per share for 1H2017 versus $0.9 per share for 1H2016.

The growth in revenue in 1H2017 has been primarily brought by an increase in realization volume and a decrease in seasonal gap between production and realization at Albazino, Ducat and Omolon. Average realization prices of gold and silver for 1H2017 were practically unchanged from 1H2016. In 2H2017, significant increase in production is expected due to seasonal factors.

Considerable increase in the Company’s cash costs were caused by the appreciation of Russian ruble. Considering significant amount of fixed costs in total cash costs, in 2H2017 decrease of costs measures are expected due to higher production volumes. Polymetal expects that decrease in total cash costs and all-in sustaining cash costs in 2H2017 will eventually bring these indicators to the initially forecasted ranges for 2017, $600-650 and $775-825 per ounce of gold equivalent respectively.

An increase in net debt in 1H2017 attributed to seasonal increase in working capital and high capital expenditures on Kyzyl project. Peak of capex on Kyzyl is expected in 2017. Owing to the seasonal decrease of working capital and increase in production, the Company’s free cash flow is expected at around $300m in 2H2017. The Company’s management noticed that decrease of net debt is not top priority for the distribution of free cash flows; rather FCF will be directed to dividend payments. Meanwhile, Polymetal’s CEO did not rule out payment of special dividend in case of gold price would remain above $1 300 per ounce until the end of 2017.

Our opinion     

Considering forecasted increase in production and decrease in cash costs in 2H2017 in conjunction with gold prices staying around current levels, eventual financial results for 2017 will most likely meet our expectations. However, we notice significant dependence of the Company’s results on exchange rates of its operating currencies.

Polymetal remains one of the most generous companies in terms of dividend payments in the sector. After the peak of capital expenditures at Kyzyl and increase in its production volumes, we expect substantial increase in free cash flows. We consider payments of special dividends possible starting from 2018 given favorable price environment of metals and FX markets.

We forecast the main revenue growth for the Company due to the start and subsequent increase of production at Kyzyl project. According to our current expectations, attainment of full capacity at Kyzyl would take place no earlier than in 2020. In view of unstable FX rates of operating currencies, conservative forecasts for gold and silver prices and considerable time before reaching full capacity production at Kyzyl, we put our 12M target price under review.