Polymetal: Initiation of coverage

12M TP GBp 1004/share, recomndation "BUY"

Dias KabyltayevDecember 05, 2016

The continuing global economy instability once again stirs interest from investors seeking a safe haven in protective assets. Despite the presence of a number of large gold mining companies in Kazakhstan, none of them, at the moment, are available for investment. However, since 2009, the Russian gold mining giant – Polymetal has been actively engaged in the production and development of new fields in Kazakhstan. We believe that the company has a significant growth potential and recommend Buying shares of Polymetal

Stable financial performance and dividends. Year by year Polymetal demonstrates an excellent production results, exceeding production plan by an average of 3-4%. Company confirmed the production plan for 2016 in the amount of 1.23 million ounces in gold equivalent (-3% y/y). Polymetal shows one of the best potential production growth rates in the industry. Thus, in the next 5 years production growth will reach, on average,7% y/y, in contrast with competitor’s performance of 1.9% y/y. The EBITDA, despite of decline in revenue as a result of lower sales volumes during 1H2016 has decreased only by 1% y/y to $294 million. A slight decrease in revenues was offset by a reduction in production costs. Thus, the costs in rubles and tenge represent approximately 70-80% of the production costs. At the end of 2015, as a result of depreciation of the national currencies of Russia and Kazakhstan, the cost of production and its expenses, denominated in national currency, decreased by $207 per ounce (-15% YTD). The dividend payment and the return on them are one of the highest in the gold producers market. Over the last 3 years the dividend yield per share remained at the level of 5%, which is significantly higher than the market level of 1%.

Kyzyl - the main production driver. Kyzyl (East Kazakhstan) development will increase production and cash flow by 2019, but will reduce cash flow in the short term. According to our projections, the Company's production volumes will grow by 14.8% in 2019, with a decline of old fields by 6.3%, production at the Kyzyl deposit will take 18.4% of the total production.

Precious metals market is poised for growth. The macroeconomic situation in 1H2016 created a favorable environment for the precious metals growth. Since the beginning of the year, gold price rose by almost 29.2%, reaching a price of $1366 per ounce. The policy of negative interest rates, recently introduced by the central banks of Japan and Europe, the devaluation of the Yuan in China, delay of the expected rise in US interest rates, as well as a vote on a referendum for exit of Great Britain from the European Union («Brexit»), and, finally, unexpected results of presidential elections in the United States in November this year were the main factors of growth in gold and silver prices.

Attractive valuation. The Company's shares trades with the P/E 14,4x and EV/EBITDA - at 7,4x, indicating high growth potential. Moreover, Company has demonstrated one of the best RoE in the amount of 36.3%.

12М TP GBp 1004/share, BUY recommendation. Based on the gold and silver market study, which is currently in correction state and ready for growth  amid the instability in the world economy with excellent production and operational performance, and if the Kyzyl project will be timely commissioned, we believe that the fair 12M TP will be GBp 1004/share. This price implies a share price upside of 34.5% from the current price.

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