Polymetal: Review of 1H2017 financial results

"Buy" recommendation with 12M TP of 931GBp per share

Andrey KozhokaruSeptember 22, 2017

Polymetal’s results for 1H2017 turned out somewhat below market expectations. The Company’s financial indicators decreased, mainly due to Russian ruble appreciation from 70.2 RUB/USD in 1H2016 to 58.1 RUB/USD in 1H2017, which significantly increase production cash costs. Taking into account the Company’s traditional improvement of operational and financial performance in second half of the year, we expect that 2017 annual results will match Polymetal’s initial forecasts. Considering production growth in the medium-term, consolidation of gold and silver prices around current levels, and high dividends, we recommend to Buy Polymetal’s shares with 12M TP of 931GBp per share.

Stable growth of operating results. For the last 5 years, the Company has been regularly exceeding its own production forecasts. We consider 2017 will not be an exemption and Polymetal will slightly surpass its guidance of 1.4m ounces of gold equivalent. Main growth of production in the medium-term is expected on Kyzyl (Kazakhstan), Kapan (Armenia), and Mayskoye (Russian Federation). Polymetal has a strong management team and extensive experience of successful realization of different projects, which decrease operating risks of the Company. In forecasting the Company’s production for 2018-2020, we follow conservative approach expecting average growth of 8.5% y/y.

An anticipated increase in costs due to ruble appreciation. We consider the latest decrease in Company’s shares from 29 August to 21 of September (-15.6%) in part as the result of the revaluation of production costs due to ruble appreciation. After the devaluation of Company’s operating currencies, when average RUB/USD exchange rate increased by 14% in 2014 and by 59% in 2015, Polymetal considerably decreased its production expenses that appeared as one the reason for the rally in Company’s shares. All-in sustaining costs per ounce of gold equivalent decreased by 17.8% and by 17.9% in 2014 and in 2015, respectively. With the appreciation of Russian ruble, Polymetals shares began to look expensive. Nevertheless, there are no market expectations of a recovery of ruble and tenge exchange rates to the levels preceding devaluations. We believe that the Company will be able to maintain a good level of profitability, even with some strengthening of its operating currencies.

The growth of dividends directly depends on the growth of cash flow. One of the main strategic priorities for Polymetal is steadily growing dividends. Management of the Company noted the priority of dividend payments relative to the reduction of the debt burden. Polymetal provides one of the highest dividend payments in the sector. According to the new dividend policy, starting from 2017 the Company will direct to dividend payments 50% of its net profit (30% earlier), while maintaining the net debt/adjusted EBITDA below 2.5. Therefore, we expect the growth of dividend payments with the growth of the Company’s free cash flows.

Reducing the target price to 931GBp per share, maintaining Buy recommendation. We raised our forecasts for capital investments for 2018-2019 and reduced depreciation expenses for the entire forecasted period in accordance with our updated expectations and the latest forecasts by the Company. We have increased projected values for working capital for 2018-2022 and have adjusted the forecast of the prices for gold, silver, and copper for the period 2017-2022. When calculating our target price, we used GBP/USD exchange rate of 1.35. As a result, our 12M TP is 931GBp per share. Considering the recent correction of Polymetal's stock price, we recommend to Buy it.

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