Polymetal: 2016 results overview

Recommendation Buy with 12M TP of GBp 1271 per share.

Dias KabyltayevMarch 31, 2017

The Company’s annual financial results, in general, were within our expectations. Due to higher prices for precious metals and stable production results, the adjusted EBITDA of the Company increased by 15% yoy to $759 mn. The Company’s 2016 strong operational and financial results in view of stable prices for precious metals allow us to increase our 12M TP to GBp 1271 per share.

Strong 2016 results.  Due to higher prices for precious metals, the revenue in 2016 amounted to $1583 mn, showing the growth of 10% yoy. The cost price in turn increased by 9% yoy, mainly due to inflation in Russia, growth in the volume of outside ore and concentrates purchases, as well as, appreciation of Russian ruble. At the same time, the Company managed to restrain the growth of administrative expenses at the level of $120 mn, which decreased by the end of the year by 6% yoy. Due to higher prices for precious metals on the one hand and an increase of cost price on the other hand, the adjusted EBITDA of the Company increased by 15% yoy. The growth of net income in the amount of 79% yoy largely was caused by a reduction of currency exchange losses related to strengthening of the current exchange rate of Russian ruble. Net income, adjusted for the amount of exchange differences and change in the fair value of contingent liabilities, increased by 16% yoy. 

Forecasts for 2017. In 2017, the Company plans to concentrate its efforts on completing the construction of the Kyzyl project (Kazakhstan). The Company confirms the production plan for 2017 and 2018 in the amount of 1.40 mn ounces and 1.55 mn ounces of gold equivalent, respectively. It is expected that the cash costs in 2017 will be $600-650/ounce and will increase by 10% yoy on average. The increase in costs is due to the increase in prices for diesel fuel and the strengthening of the Russian ruble. The capital expenditure plan for 2017 totals to $370 mn, which is $99 mn more than in the previous year's plan.

The gold market. The average price of gold in 2017, according to our estimates, amounts to $1241 per ounce, which is 7% below our previous forecast. The decline is mainly connected with more positive view of analysts on the growth of the US economy in 2017. Since our last report in December 2016, the mood in the precious metals market acquired a less bullish character. However, we maintain a neutral outlook regarding the prices of precious metals, given the consensus forecast of Bloomberg, we expect a moderate increase in gold prices in the period of 2017-2022, on average by 6-7% of current levels.

“Buy” recommendation. In 2017, a tendency for ruble strengthening is observed, largely caused by a recovery of spot prices for oil. We have taken into account a possible negative impact of this factor on cost price. However, considering strong results of the Company in 2016 and forecasted moderate growth of prices for precious metals in long-term view with a significant level growth in production, we recommend to “Buy” shares of Polymetal with 12M TP of GBp 1271 per share.

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