Gold miners such as FTSE 100-listed Polymetal (LON: POLY) have become increasingly unpopular among investors over recent months. Indeed, the Russia-focused precious metals miner’s share price has declined by 30% in the last year as investors have become increasingly concerned about the potential effect that a less accommodative monetary policy could have on the gold price.
Rising interest rates are widely expected to occur during 2022 to combat a rate of inflation that has proved to be more pronounced, and far more stubborn, than previously anticipated. While gold has historically been viewed as a worthwhile hedge against inflation, the increasing relative appeal of income-producing assets in an era of tighter monetary policy could prompt a more challenging period for the precious metal.
In addition, Polymetal’s shares may have lagged the FTSE 100 index due to other risks. Notably, political uncertainty in Kazakhstan, where some of the firm’s assets are located, as well as possible tax rises from 2023, may have been detrimental to investor sentiment. Meanwhile, Covid-19 and rising costs have the potential to cause ongoing challenges to the firm’s production and profitability in the coming months.
A margin of safety
Of course, Polymetal’s financial position suggests it is well placed to overcome heightened short-term risks. Its latest quarterly results showed that it is on track to deliver an all-in sustaining cost (AISC) of less than $975 per ounce for the 2021 financial year. This provides a wide margin of safety while the gold price is around $1,800 per ounce.
Moreover, the company’s interest coverage of 17 in the first half of the year indicates that, even though it has a relatively high net debt-to-equity ratio of around 90%, it could overcome an uncertain period for precious metals prices.
Furthermore, the company’s latest production update showed that it is on track to meet its previous guidance for the full year. Further details are set to be announced on 27 January when the firm reports its fourth quarter production figures.
Meanwhile, Polymetal’s valuation indicates that investors have adequately factored in potential threats to its financial performance. For example, its shares currently trade on a price-earnings ratio of around 7 and have a dividend yield of 7.8%. Clearly, profits and dividends could change materially depending on the gold price. However, they both appear to offer a wide margin of safety at the present time.
Investment potential
Although Polymetal faces an uncertain near-term outlook, it appears to offer a relatively attractive risk/reward opportunity.Ultimately, higher inflation is likely to lead to rising interest rates that may have a detrimental effect on the gold price.
Moreover, rising costs and disruption across the firm’s supply chain caused by Covid-19 may further squeeze short-term profitability.
However, with a sound financial position, low valuation and solid production figures, the long-term outlook for Polymetal appears to be relatively attractive. Its recent share price fall could provide a more attractive entry point at a time when many FTSE 100 shares offer little or no margin of safety following their recent gains.
