I have to admit that my bullish call on Polymetal (OTCPK:AUCOY, OTC:POYYF) earlier this June was a bit hasty, showing an 11% loss since that time. Gold prices are now trading below $1,900/oz as the US dollar regains some losses, but there’re plenty of positive points to keep a bullish view on the stock. A more predictable dividend policy, a potentially significant inflow of passive funds, and upcoming strong Q3 results make Polymetal a fundamentally attractive investment even if gold prices keep stagnating at current levels.
H1 Results Quick View
Source: Company data, author’s spreadsheet
Revenue increased by 21% to $1,135 million compared to the first half of 2019 due to high prices for gold and silver.
Net income rose 98% to $373 million vs. $188 million in 1H 2019.
Free cash flow in H1 amounted to $53 million and entered the positive zone for the first time in many years. It should be noted that Polymetal’s FCF is traditionally lower in H1 due to the nature of the company’s working capital.
Total cash costs (TCC) in 1H 2020 amounted to $638 per gold equivalent ounce, down 4% from 1H 2019. This is also 2% below the lower bound of the company’s 2020 cash cost forecast of $650–700 per GE-ounce, mainly due to the weakening of the Russian ruble and the Kazakh tenge.
All-in sustaining costs were $880 per GE-ounce, down 3% compared to 1H 2019, in line with a 2020 forecast for AISC of $850-900 per GE-ounce.
Polymetal performed very well in H1, and I don’t see anything at the moment that could hold the company back from reporting even better H2 results this year.
Updates To The Dividend Policy
Under the current dividend policy, Polymetal pays dividends twice a year with additional “special” dividends if the company has enough FCF to share with investors.
Starting in 2021, Polymetal will abandon special dividends. Instead, the Board of Directors can increase final dividends up to 100% of the FCF. While deciding on final dividends, the Board will take into account macroeconomic forecasts, the level of debt load, and future capital expenditures.
I prepared an explainer to make the change clear for investors.
Now, the company offers a more straightforward way of calculating dividends, and there’re some estimates to share. Russian investment firms, Aton and Sberbank CIB, expect a 6% dividend yield in 2020 and a 7-9% dividend yield in 2021 – one of the best yields you can find among gold miners.
A Stock Catapult
This September, some major shareholders of Polymetal decided to cash out amid a favorable market environment. As a result, the ICT Group, the main shareholder of Polymetal owned by Alexander Nesis (a brother of Polymetal’s CEO Vitaly Nesis), has reduced its stake in Polymetal to 23.99% from 28.01%. Even though it’s usually a bad sign when a major shareholder sells its stake, ICT Holding commented on the sale, noting that it stays confident in Polymetal’s perspectives:
The sale of shares was triggered by the need to repay current debt obligations of the holding and funding commitments of its investment projects. The reduced stake also allowed to decrease concentration in the ICT’s portfolio, which has been driven by Polymetal’s strong share price performance in the last few months, to an acceptable level.
ICT Holding reaffirms it continues to consider Polymetal an attractive investment and plans to remain Polymetal’s largest strategic shareholder in the long term.
Another sale was made by Otkritie bank, which sold a 3.4% stake in Polymetal this month. After the sales, the stock’s free float has increased to 75.2%.
The key positive point here is that the increased free float will lead to an increased weight of Polymetal in stock indices due to higher liquidity.
According to VTB Capital, the potential inclusion of Polymetal in the NYSE Arca Gold Miners Index (GDM index) will lead to an inflow of passive investments in the amount of over $300 million. Besides that, a potential increase of the company’s weight in the MSCI indices in May 2021 may also provide an inflow of passive funds of no less than $140 million.
With a noticeable inflow of funds, the stock will get a strong growth driver in the medium term.
Polymetal has become more attractive for investors but still remains quite cheap. I don’t see a risk of further stake sales as all interested entities have already sold their shares, so if you hesitated to buy the stock earlier – now it seems to be a good opportunity.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.