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Over-reaction to sanctions against Russia offers a buying opportunity in Polymetal International

By Gary Newman | Tuesday 10 April 2018

Disclosure: I 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 ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Sudden large drops in share price as a result of a knee-jerk reactions to political world events can present great buying opportunities at times, and I certainly believe that to be the case with the falls we have just seen in the value of many companies with operations in Russia.

Many investors are already wary of companies operating in this part of the world, but to me the reasoning for that has seemed more to do with historical tensions between the former Soviet Union and the West, dating back to the Cold War and even earlier, rather than anything more substantial. Yes, operating in this part of the world can have its drawbacks and corruption can be rife, but then you could argue the same for many natural resources outfits, as the minerals which they are attempting to mine are often found in parts of the world which you certainly wouldn’t choose as somewhere to ideally do business, such as many parts of Africa.

Concerns over investing in companies operating in Russia could be seen as being justified today, given the large drops that we have just seen in the share price of many of these outfits, as a result of sanctions being imposed by the US. Rather than targeting Russia in general, this time the sanctions have been taken against seven oligarchs and shares in the companies which they control have tumbled – shares in aluminium mining giant Rusal pretty much halved in Hong Kong, and FTSE100 listed steel producer Evraz was off by over 14% for the day. Despite none of the oligarchs that have been hit by the sanctions having any major stake in it, shares in FTSE250 gold and silver miner, Polymetal International (POLY) were the worst hit in London, finishing the day down over 18%, to record a 12 month low of 591p at the close. This will have come as a big shock to any investors, as prior to that it was steadily trading in the low 700p range, and had been a fair bit higher prior to that.

Polymetal is a company that I have been bullish on in the past – it was actually one of my top picks for 2018 – and even more so now as I think the drop in share price has been a complete over-reaction and offers a great buying opportunity. It is worth remembering that all-out economic war between Russia and other nations is unlikely to benefit anyone, and even more so given the pressure that the US is currently under from China, which has often been an ally of the Russians. This share price collapse has also come at a time when gold in particular has been showing some strength and has been staying well above the $1,300 area, and silver hasn’t exactly been performing terribly either, although it has lagged gold.

Financially and operationally, nothing has happened to change my mind on this company, and the last set of financials for the full year, up to December 31 2017, showed that it was still in a strong position and performing inline with its forecasts. It does have high levels of debt as a result of bringing operations into production, but the net debt of $1.42 billion is well within the net debt/adjusted EBITDA ceiling of 2.5x.

Operationally, it also looks like Polymetal is going to continue to grow the business, albeit not quite at the 24% compounded growth rate that it has achieved in the 20 years since it was set up, and forecasts are for 1.55 million ounces of gold equivalent in 2018, and 1.7 million ounces in 2019. For instance, the Kyzyl project is due to start production later in the year, and that has around 7.3 million ounces of reserves, and is just one of many licences that the company holds.

As well as appearing to have great growth potential, the company also pays a healthy dividend per share – whilst managing its debt – and for 2017 that was $0.44, which at the current share price would equate to a yield of in excess of 5%, which is high for this type of company.

The main risk here is that tensions with Russia will continue to escalate further and will reach a stage where they damage the business, even just in the shorter term if that was to cause breaches of the debt covenant ratios due to a reduction in revenue. But I see that risk as being relatively low and think that the drop that we have seen is already well overdone – around £540 million was wiped off of its market cap in a single day.

I don’t hold any of these at the moment but am seriously considering adding – I was thinking about a bit more gold exposure in my portfolio anyway – and also see Polymetal as a good bet in an ISA or a SIPP with a longer term view, as well as a decent chance of a quick bounce back.

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