Earlier this year we considered what the future might hold for Jersey-based miner Polymetal International LON:POLY. Although based in the Bailiwick and headquartered on the southern shores of Cyprus at Limassol; the company originates in Russia’s second largest city, St. Petersburg and this week its Russian subsidiary, JSC Polymetal, was placed on the US Specially Designated Nationals and Blocked Persons list (SDN).
Polymetal, as previously reported, has operations in Russia and Kazakhstan, but had very few links with the Moscow hierarchy or Ukraine. The company, as reported, has over a third of its assets in Kazakhstan and is in the process of re-domiciling from Jersey to Astana, where it will hold its primary listing in order to hive-off its Kazakh business from Russia. Yesterday (22nd May) the company reiterated its desire to relocate to Astana, subject to a general meeting of shareholders scheduled for the end of this month.
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But this was not enough for the Biden administration, and induction onto the US SDN list means that US nationals are prohibited from transacting with JSC Polymetal and any entities that are owned, directly or indirectly, 50% or more, by JSC Polymetal, including its Russian-registered subsidiaries.
Kazakh quarantine
However, the company said in a statement yesterday that JSC Polymetal administers only the Russian assets of Polymetal International, and has no oversight or influence over the group’s Kazakh assets, which management highlighted means that there is no prohibition to anyone dealing with any parts of the company outside the Russian Federation. So, to the world, management claims it is business as usual, which is a fair claim given that its LSE listing isn’t sanctioned and the Kazakh mines can still sell precious metals.
Nevertheless, the market took a dim view of the development, with Polymetal shares falling from 188p at the opening of trading yesterday to 141p almost immediately. As of 10:00 today (23rd May) Polymetal was back up around 190p, above Monday’s opening price, justifying management’s confidence in the bigger picture.
The company’s shares opened trading today (6th January) at 183.25p but have fallen -23.2% year-to-date and fallen -22% from where it was a year ago, which is a fair bit behind the market, but given the events of the last year, no disaster.
By way of comparison Evraz LON:EVR, the London-listed Russian steel and vanadium producer, was suspended from trading in March 2022, ejected from the FTSE100 with no sign of a return as it was perceived to have much closer links to the Kremlin than Polymetal, and was considered to be more critical for the Russian war effort in Ukraine than the gold and silver miner from Jersey (via St. Petersburg, Astana and Limassol).
Polymetal has a market capitalisation of GBP887m with its shares ranging between 125p and over a 362.3p over a 52-week period. Less than two years ago, shares in Polymetal were changing hands of 2,028p during the height of the Coronavirus pandemic.
Regardless of the political, social and macroeconomic backdrop, Polymetal is still a significant gold production company, even taking into account just its Kazakh operations. Although Polymetal did drop out of the top-10 global gold producer list in 2022, recent research from Finbold is testament to the robust nature of the yellow metal with, as reported, demand for gold from large buyers like central banks increasing. Added to ongoing market uncertainty and the ‘safe haven’ that gold traditionally offers, Polymetal isn’t going to short of buyers for the gold it produces from its Kazakh operations, with a lot of that heading East.
As reported, the world’s leading gold mining companies are seeing their produced gold hit a market that is currently experiencing a return to demand, driven by various factors. In addition, the consumption of gold in the form of products such as jewellery is also on the rise, further driving demand for the commodity.
Regaining its luster
Add the silver mines into the mix – where Polymetal despite the sanctions was the sixth biggest producer globally in 2022, with 21 million ounces, according to Statisa – Polymetal is more than operational; and if shareholders agree later this month (to not do so would be akin to turkeys voting for Christmas) the future can still glisten for the company established in 1998.
As The Armchair Trader reported earlier this month, silver has been one of the best-performing metals in April and it looks set to continue trading higher in the medium term as the market remains in deficit. Although a precious metal, over half of demand for silver has been coming from manufacturers of solar panels, lithium batteries and electronic components, not jewellers (though the jewellery and luxury goods market has remained robust throughout the economic downturn, evidenced by Watches of Switzerland Group LON:WOSG, the UK-based retailer of high end luxury watches and its peers recording record revenues over the last year), and as the theme of energy transition continues apace, demand is going to continue to outstrip suppy.
Walking Away
However, the bluebottle in the face cream for UK shareholders is Polymetal’s abandonment of London. On one hand, the company has navigated the impact that sanctions has had on the company with changes in the boardroom and a switch of addresses, stating the intention to insulate Kazakh operations from its Russian assets.
In its last update management was quite chipper, despite revenue decreasing 3% to USD2.8bn, with a third attributable to Kazakhstan, the firm’s CEO, Vitaly Nesis said: “We start 2023 from a position of relative strength and expect the resumption of free cash flows and a reduction in net debt over the course of the coming year,” after suspending dividends in 2022. The company posted a loss for the first time in almost a decade.
The company saw net debt increase 45.3% to USD2.4bn, driven by the decline in profitability, the persistently high capital intensity of the business and a very significant expansion in working capital, but Nesis was quite positive looking forward with Polymetal noting: “Disruption in sales channels resulted in a huge gap between production and sales in 2Q22 to 3Q22 but was largely eliminated in 4Q22. The remaining gap is expected to close during the course of 1H23.”
Polymetal confirmed full-year guidance of 1.7 million ounces of gold. Polymetal operates ten gold mines in Russia and Kazakhstan, employing 14,700 people.
But the golden elephant in the room remains the delisting and relisting process. Although management said: “The group’s preferred option is the potential re-domiciliation of the parent company, Polymetal International plc, into the Astana International Financial Centre (AIFC), a financial hub in Astana, Kazakhstan, taking into account the group’s significant operations and presence in the region, the AIFC legal system, tax regime and the ability to execute such a re-domiciliation.”
Continuing: “The key objective of any re-domiciliation will be to preserve shareholder value, restore our ability to pay dividends and increase the strategic flexibility to conduct our operations, as well enabling us to pursue different strategic developments for the Russian and Kazakhstan businesses,” the accessibility of Polymetal to UK shareholders is in doubt.
Difficult access
Although moving the company to the Astana International Exchange (AIX) would allow the Kazakh business to swerve any sanctions, it becomes quite difficult for UK investors to buy or sell shares – to date there are no UK brokers or platforms that facilitate trading on the AIX, so the question arises what exactly are UK shareholders supposed to do about the shares they own come July 17th, the proposed D-day for delisting?
Presumably, UK investors will be offered something like warrants or bonds, but as of now if UK shareholders want to retain their holdings, they have less than two months to transfer to a broker in Europe or Asia that would allow them to trade Polymetal shares in Astana. That’s a big and complicated call.
As far as Polymetal is concerned, the relisting in Kazakhstan could and should open up a universe of new shareholders not only in Central Asia, but more specifically in East Asia (China is a significant buyer of gold and silver for industrial use as well as for jewellery and bullion for the nouveau riche), but as collateral damage could destroy the relationship it has with UK shareholders.
Right now, Polymetal shares can be picked up at nearly 90% of the value they had at the height of their success. Apart from the Russian connection, Polymetal is a well-run company that for a miner is top of the charts in ESG performance and has historically paid solid, sustainable dividends and strong yields, with a serious price-to-book ratio given the company is a near GBP1bn entity, which should give shareholders a significant safety net.
However, the switch of listings is food for thought. Polymetal remains ‘one to watch’ for a plethora of reasons.
