Polymetal’s ADR Quotes Suspended; POLY Ticker Still Trades In London (POYYF) (AUCOY)

Gold bullion on pile golden coins a lot of

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Polymetal (OTCPK:POYYF) (OTCPK:AUCOY) is, as many will know, a UK listed company running gold mines in Russia and Kazakhstan. I’ve recently suggested that it’s an excellent medium term speculation. The details of the company and why I think it’s so are here. There’s no point in repeating all of that, so read that there.

There are – or perhaps were – five different ways of trading the stock. The main quote in London (LON:POLY) and similar quotes on the Kazakh and Moscow exchanges. All those three stocks are the same, entirely fungible one to the other. Moscow has problems these days of course and Almaty isn’t seeing much volume.

There were also two different US quotations, AUCOY and POYYF. The differences are explained here. At one point it was possible to sell the one to buy near twice as much of the other – despite the underlying being exactly the same. That arbitrage disappeared pretty quickly though, as detailed here.

Now we’ve something of a sanctions effect on two of those securities. As the company explained this morning:

Following the Executive Order 14066, 14068, or 14071 and subsequent clarification of the scope of the legislation by the Office of Foreign Assets Control, trading in Polymetal’s ADR program (tickers AUCOY/POYYF) has been halted since 15th of June, even though Polymetal’s shares have not been issued by a Russian entity. After consulting with the depositary bank administering the program and our legal advisors regarding the situation the Company confirms that no shareholder rights are affected by this event, including right to receive dividends and voting rights. Shareholders holding ADRs can apply for conversion and receive underlying shares.

While it’s not directly said what is meant is that USG has got things wrong here but arguing with City Hall doesn’t work. So, AUCOY and POYYF are suspended. It’s possible for holders to just sit tight and wait. Or, apply to collect the underlying. That would be POLY listed in London.

In comments on an earlier piece it appears that many to most American brokers aren’t allowing trading in POLY – presumably under the same mistake about the law. This is not a recommendation for these specific brokers but from what I know both Hargreaves Lansdown and AJ Bell in London are allowing trading. This is more an inference from the fact that Polymetal still appears on their lists of most traded stocks by their customers. Whether they’ll trade for American citizens, sorry, just don’t know, it will be necessary to try and find out.

The future

As I’ve been pointing out these past few months Polymetal isn’t directly affected by sanctions. The major shareholders aren’t sanctioned, their bank isn’t, gold mining isn’t – they seem to be threading through the restrictions. OK, there’s those ADRs but that’s not a huge and major problem.

They did have a problem with auditors. But even that was not really them. As a London listed stock they need a UK auditor. Doing business in Russia they need someone to audit there of course. But their London auditor sliced off their Russian business given sanctions – meaning that there was no longer the one integrated company to do the full audit. Today Polymetal announced they’d solved that problem too.

In the fuller announcement they also point out that there’s rouble inflation, local bank loans are more expensive. Sanctions are limiting the import of the most up to date equipment, thereby raising costs. On the other hand they’re still able to export gold, get paid. There’s no local market for silver bullion which is a problem, but that’s also only 5% of turnover. They’re stockpiling production while they try to solve that.

In effect the company has some problems, yes, but it’s still a highly profitable gold miner even given current constraints. They say that production is still on target for this year. The next announcement is going to be H1 2022 production at the end of July. But the really big announcement is going to be the dividend.

The dividend

Polymetal has a significant dividend policy and the 2021 final was to be $0.52 per share. Given events that was put on hold. Not cancelled, just the decision whether to pay or not put to one side for a bit. The previous interim (i.e., H1 2021) was $0.45. 45 cents that is.

So, given the very generous assumption that the dividend policy will be maintained, that’s roughly a $1 a year on a £2 stock. Given the $/£ we’re getting close to a 50% yield (no, it isn’t, but back of envelope and all that).

Now, one reaction to that is that given the dividend isn’t being paid of course the yield is nothing. Which is fair, even if perhaps harsh. Another could be that if they do reinstate the dividend they’re not going to at the old rate, no way. Because that would be ludicrous.

But here are two things. Firstly, Polymetal has confirmed when they’re going to make the decision about both the full year and also the H1 2022 dividend – 22 September. Or at least that’s when they’ll announce. That’s possibly a significant valuation change there. Imagine if they did actually pay both dividends as per past profits shares?

Now, normally, a dividend shouldn’t make any difference to a share price. Profits retained and profits paid out, same thing. But in current circumstances I think that Polymetal returning to the dividend list would create a significant revaluation. And if they pay out on the past dividend schedules then at current share prices there’s a 40% (which is more accurate than the 50% above) immediate cash return plus stock appreciation from that return to dividend paying.

So, why won’t they?

OK, so the company could decide that such a payout would just be ridiculous. And to some extent it would be. They’re not at any risk of a takeover so there’s no real reason for them to be striving for a high share price in the short term. We’re going to see some compression of the margins, from the high rouble, rouble inflation (and it’s weird to have both of those at the same time) and the greater expenses of having to use less than optimal equipment and subcontractors. So they may well not. May not pay a dividend at all, or perhaps limit any they do pay.

But there’s also this:

On the 3rd of June the European Union imposed sanctions on the Russian National Settlement Depositary (NSD) effectively blocking the operations between Euroclear and NSD. The Company is advised that this development makes it impossible for those shareholders who keep their shares in NSD (~22% of our share capital) to receive dividends and/or take part in any Company’s corporate actions. Polymetal is consulting with its legal advisors and regulators to confirm the outcomes of these sanctions and measures that could be taken to secure shareholders’ rights.

If they do declare a dividend, then the 22% of the shareholder base who register through the Russian system cannot receive it. I don’t see them screwing that much of their shareholder base to be honest.

This gives us a decision tree.

This is speculative, really, it is. There’s just not enough information here to be certain about anything. But here’s my read, for what little that read and opinion is worth. If Polymetal cannot solve that NSD problem, then they’re likely to continue to hold the dividend. If Polymetal can work out a way to pay to those Russian holders, then I think they will. Maybe not the full dividend as we’d expect in the absence of the current troubles but at least the last full year plus a reasonable interim.

Which becomes a speculation. Well, actually, it’s a bet although we can gussie it up in polite language and call it a speculation. If Polymetal resumes dividends – that last year full year plus an interim – then I would expect a significant rise in the share price. Plus, obviously, significant income to shareholders. In the absence of this I don’t particularly expect to see any great fall in the share price. The retained earnings would be, well, they’d be retained and reduce the debt burden or otherwise increase the corporate valuation.

The thing to look for is whether there are any announcements about solving that NSD problem. That, to me, would be the trigger tipping the decision one way or the other.

My view

I’ve said before that I think Polymetal is a good medium term speculation. I stick with that. What we’re now looking at is more detail about exactly how it might – or may not – work.

The investor view

This all seems a bit too technical, I get that. It’s if the dividend is paid, and the dividend might be paid if NSD and so on. And yet, well, that’s how real world decisions do get made. If Polymetal can pay a dividend to all shareholders, then come 22 Sept I think they will. That’s then an event to be long of the stock beforehand. If they can’t, then they probably won’t. So, the trigger for a significant position would be any announcement about solving that NSD problem.

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