Polyus (formerly Polyus Gold International Limited, Polyus Gold) is a Russian gold mining company. It’s one of largest in the world and the most effective in Russian gold industry.
It was founded in 2006 during the allocation of gold mine asset of OJSC MMC Norilsk Nickel into an independent public company based on CJSC POLYUS. Its assets was 100% subsidiary of Norilsk Nickel.
Russian businessman Sulleiman Kerimov bought 37% stake in Polyus Gold from Vladimir Potanin for $3.1 billlion in 2009. In 2011 the New Kazakhstan Group Limited became the new holding group as the result of reverse takeover, which in the same year was renamed Polyus Gold International Limited (PGIL). In June 2012 PGIL shares received a premium listing on the LSE.
December, 2015 family structure of Suleiman Kerimov consolidated 100% PGIL, which was delisted from the LSE. At the same time, it was announced that the new holding company of the group will be PJSC Polyus Gold (it as changed its name to PJSC Polyus in 2016).
There was a secondary placement of its shares, in which 9% of the shares were placed as $800 million in June, 2015. And in April, 2019 Polyus has the second largest gold reserves in the world (proven and probable reserves according to the 68 million ounces to the international classification) as the foundation for stable production growth.
Polyus develops ore and placer gold deposits by the main enterprises located in Krasnoyarsk, Magadan, Amur region and Yakutia (Kuranakh). The largest asset is the Olympiad field in Krasnoyarsk territory.
So the most important fact for analyze is shares “buy back” in 2016 $2.5MM. Shares repurchase from minority shareholders in 2015 $5.4MM. Based on these facts we can see negative value of the net profit growth in 2014 and its positive in 2015. To service the bank loan of repurchase Polyus need to pay dividend despite of company’s current state so the dividend has crazy growth: 3.2% in 2014 and 206.3% in 2015. In consequents of high next years dividends, the company has decreased free cash flow growth to past years. Noticed about debt to equity ratio – it has a high-level borrowed capital 8.8x – 14.7x that takes Polyus a dependent company.
Due to the fact the company has high industry margin and decrease trend in inventory turnover and fixes asset turnover. Despite of all indicators Polyus has a good interest coverage that shows the company can service its bank loan finally with no doubts. Also there is not so good returned on capital employee and we can’t interpretive objectively the return-on0equity ratio.
Gold market macro review.
Gold industry is a fundamental market that used a lot in different spheres so we can see increasing demand on stock products reached up their total volume to a 6-year maximum of 2548 tons. Speaking of material product, it has decreasing demand on bullion and coins caused by high volatility of gold price. Central Bank of Russia has a high volume of purchases for gold reserves that exceeds similar figure 57% higher. Jewelry market has a neutral market position.
As the result we see increasing demand from institutional investors, Central Bank and the population. In spite of low demand on coins and bullions its characterized rate rising gold price in nearest 2 years so this investment tool till the gold will be unavailable price for ounce ($2000 for 1 ounce, 2019).
Value chain.
Gold production takes place in specially designed quarries by extracting precious metal from ore. The breed extract from the mine or quarry powerful equipment, then fragments and sifts into a special mechanism. To accelerate the excavation of the ground at the mining sites it used explosive and drilling methods, which allows for the issuance and processing of larger volumes of rock in a short period of time.
A standard bank bullion has 999.9 samples and weighs from 11 to 13.3 kg that is regulated by the state. Ingots intended for investment in most cases have an average weight of 1 kg. According to October 1, 2019, the cost of 1kg of gold was amount to 3,091.6 rubles or $ 1,497.47.
Search for suppliers is carried out on a tender basis. It refers that all companies has their own advantages. So small companies provide flexible terms of service and large companies has their own economies of scale suppliers.
Main contracts.
1. The social partnership agreement for 2017 was signed by Vladimir Polin, Executive Director of Polyus gold, and Vladimir Pechenyi, Governor of the Magadan region.
2. The controlling shareholder of Polyus, Russia's largest gold producer, said on Wednesday it would sell a 3.5% stake in The company through accelerated bookbuilding (ABB) in 2019-2020.
3. Polyus, together with its subsidiaries, signed an agreement to provide a new credit line to Sberbank for a total amount of 65 billion rubles with repayment in 2024, as well as to refinance the existing credit line of Sberbank with repayment in 2019.
Business model overview. Polyus market position.
The clientele of the company are banks of the Russian Federation, jewelry factories and technological productions. The largest players are Sberbank, VTB and Otkritie Bank. Noticed that Otkritie Bank increased their orders volume and contains over third of the supply of Polyus. The main platform for finding new partners and clients can be identified as tender trading platforms on the Internet, as well as exhibitions in specialized forums, such as Eastern Economic Forum. Directly with clients the company is expected more personal support in the execution of tenders, and in partnership with manufacturing companies there is established automated approach.
Financial stability.
Polyus maintains a fragile balance with the expense over the next decade, because it has a rather high debt load due to repurchase of half of the shares from former minority shareholders and former cofounder (Mr. Potanin). On the other hand the production and resource efficiency of the company allows it to service the debt without critical consequences.
Key resources.
Polyus business model covers the entire gold production cycle explorations, mining, processing of ore and sale of final products. Among of distinctive features there are a large-scale open-pit mining in Russia, effective cost control and strict adherence of stable development. Key resources are rich deposits, such as Sukhoy Log (exploration), Olympics, Blagodatnoe, Verninsky, Kyranach, placer deposites in Irkutsk and Natalka.
Speaking of fundamental loyalty in a business the company has a single owner Suleiman Kerimov in spite of the official owners of over 60% of shares. Yushvaev and Mutsoev businessmen (the former sharholders Mr. Potanin) are shows Kerimov family structure, which due to its government status ensure development and safety of the system from external risks.
Recently there is deal with ALROSA to integrate efforts to create infrastructure in Irkutsk placer. Also interested fact that the company assets are actively interested by The Basic Element Group of Mr. Deripaska for several years.
Constrains in business model.
Gold mining industry divides deposits according to their profitability, based on the amount pf precious metals for a certain soil, i.e.:
· rich deposit - 10gr. per ton of rock/sand;
· profitable deposit – 3gr. per ton of rock/sand.
Consider the fact that Polyus has the richest quarries in all aspects, they have their own limits that entails more expensive mining production in the future and it will be more difficult to service the financial debt for the company.
Polyus has a subsidiary “Lenzoloto”. It has the highest cost of production in placers over $1011 per ounce. Current value of gold is $1310 per ounce. There is too small gold content in the deposits over 0.3gr. gold per ton of ore when the remaining Polyus deposits has an average 1.6gr..The entire Polyus product is in quarries so deposits of Lenzoloto is an exception. Perhaps, due to this facts Lenzoloto may be sold it future. Strongly speaking Polyus has a 64.08% of Lenzoloto shares that takes entire cost of production more expensive. And this is a hard argument to sell this asset.
Competitors.
In the scope of activity, it’s better to compare Polyus other foreign companies and Polymetal. (i.e. Polymetal - get rid of inefficient deposits and launch a new large deposit in Kazakhstan at full capacity).
Figure 1. Industry Multiple, FY 2019
Figure 2. Highest EBITDA margin in the gold industry
Newmont Goldcorp took the top spot of the largest gold mining companies list in 2019, with its significant operations in North and South America, as well as Asia, Australia and Africa.
In early 2019, the miner acquired Goldcorp in a US $10 billion deal, followed by a joint venture with Barrick Gold in July called Nevada Gold Mines. The venture is located in Nevada, and according to the gold companies’ collaborative press release, resulted in the creation of the world’s greatest gold complex. Nevada Gold mines is 61.5 percent owned and operated by Barrick and 38.5 percent owned by Newmont Goldcorp.
Barrick Gold dipped down from the top spot in 2017 to land in second place of top gold producers within the mining industry. Although production was down last year, 2018 and 2019 have seen large steps forward for the gold producer. In addition to merging its Nevada assets with Newmont Goldcorp on July 1, the company acquired Randgold Resources in September of 2018.
The Nevada Gold Mines venture comprises 10 underground and 12 open pit mines, two autoclave facilities, two roasting facilities, four oxide mills, a flotation plant and five heap leach facilities. Nevada production is expected to be 1.5 million ounces in 2019.
Coming in third on this top gold mining companies list is AngloGold Ashanti, which produced 106.1 tonnes of gold in 2018. The South African company has 17 gold operations in nine countries, as well as numerous exploration projects around the world.
Kinross Gold has projects in Brazil, Chile, Ghana, Mauritania, Russia and the US. Last year, the company achieved its seventh consecutive year of meeting or exceeding production and cost guidance.
The Australian company - Newcrest Mining - operates mines in four countries. According to Newcrest, it has one of the largest group gold ore reserves of any company in the world. With an estimated 69 million ounces of gold ore reserves, its reserve life is approximately 27 years.
Polyus Gold International produced 75.9 tons of gold in 2018 in sixth place of top 10 gold companies. The company is the largest gold producer in Russia and holds over 68 million ounces of proven and probable gold reserves. Its principal operations are located in Eastern Siberia and the Russian Far East; those include five operating mines, alluvial operations and several advanced development projects.
Figure 3. FY 2019, EBITDA in the industry by the world companies, $M
Figure 4. FY 2019, Gold Poduced in the industry by the world companies, tons