The rise in gold prices will continue. In 1H2019 gold prices have risen, reaching a maximum in July - USD1,446 per ounce. According to the forecasts of the World Gold Council for 2019, in the medium term the increase in global demand for gold will continue. The upward trend will be driven by the demand from central banks in developing countries, which will continue to increase gold reserves, and an increasing inflow of investments in ETFs against the backdrop of geopolitical uncertainty in the world, expectations of lowering the US Federal Reserve rate, and a slowdown in global economic growth.
Strong results for 1H2019 - a pledge of strong performance for the whole year. Production grew by 22% y/y, amounting to 756 koz in gold equivalent. The company confirms the current production plan in the volume of 1.55 mn oz in gold equivalent in 2019 and total cash costs (TCC) of USD600-650/oz of gold equivalent and all-in sustaining costs (AISC) of USD800-850/oz of gold equivalent. The Company expects a significantly higher production volume in 2H2019 due to the seasonal reduction of concentrate reserves at Mayskoye. As a result, we do not exclude over-fulfillment of the announced production plans for the year. Revenues increased by 13% y/y, reaching USD492 mn due to an increase in gold sales by 36% y/y. Net debt did not change and amounted to USD1,700 mn, while the Company expects a significant increase in cash flow in 2H2019 due to seasonal production growth and a reduction in working capital.
Attractive dividend yield of 6.7%. We expect that dividends by the results of 2019, based on the Company's net profit, will amount to 0.58 USD/share, which represents a dividend yield of 6.7% relative to the current price.
Kyzyl is a key driver of production growth. The Kyzyl field showed high production results due to the presence of soft near-surface rock with a high gold grade, due to which Kyzyl exceeded the design figures for ore content, productivity and production. According to the results of 1H2019, ore processing amounted to 988 ktons (+1 235% y/y) with an average recovery rate of 87.3% (1H2018: 41.7%). During the reporting period, the project produced 159.5 koz of gold (26.5% of the total production of Polymetal).
Focus on long-term development projects. The company focuses on large deposits with a long service life and high contents:
- Nezhda - an asset with a long service life, high gold grade in the ore (5.1 g/t) and low cost of production (total cash costs (TCC) will amount to 620-670 USD/oz, all-in sustaining costs (AISC) - 700-750 USD/oz). The average annual gold production will amount to 155 koz during the first fifteen years of operation. Commissioning is scheduled for 4Q2021.
- The construction of POX-2, which is of strategic importance for the Company, since it is expected that all refractory concentrate will be processed at its own production facilities, instead of being sold to third-party buyers against the background of tougher environmental requirements in China. Commissioning is planned for 3Q2023.
- Prognoz is one of the largest undeveloped primary silver deposits in Eurasia. According to the updated estimate, mineral resources amount to 256 mn oz of silver equivalent with a content of 789 g/t.
- Veduga is a refractory gold deposit with reserves of 1.4 mn oz of gold and a grade of 4.8 g/t, where additional mineral resources amount to 0.4 mn oz with a grade of 4.9 g/t.
- Viksha is one of the largest platinum group (PGM) deposits in the world, where mineral resources amount to 9.5 mn oz in platinum equivalent, suitable for opencast mining.
We include the Nezhda, POX-2 fields and Prognoz in our assessment and do not take into account the projects Viksha and Veduga due to the lack of a feasibility study.
Stake on rising production and cost reduction. In our calculations, we updated the forecast prices for gold and operational data. We expect an increase in production in the medium term due to the launch of the POX-2 in 2023 and Nezhda in 2022 and reduction of the Company's total cash costs in 2019 up to ~ 620 USD/oz (-4% y/y) and all-in sustaining cash costs to ~827 USD/oz (-4%) due to low-cost production in Kyzyl and the sale of non-core assets with a high level of cost of production. The net debt of the Company, according to our calculations, will amount to USD1,606 mn with a projected ratio of net debt to EBITDA at the level of 1.7x (with a threshold value set by creditors below 2.5x). Capital costs for the expansion and maintenance of production in the period 2019-2025 will amount to RUB 2,319 mn.
