SIF Folio: Turning Back To Gold With Polymetal

4th Nov '20 by Roland Head

7 comments 3035 reads

I take a fairly relaxed approach to diversification in my SIF folio. My focus is mainly on ensuring that the companies I select don’t duplicate my exposure to particular markets.

For example, the main reason why I ruled out Polar Capital a couple of weeks ago was because SIF already holds Tatton Asset Management. Although the two companies aren’t direct equivalents, their share price performance appears to have been closely correlated in recent years.

I don’t have a fixed target for the number of different sectors I want to include in the portfolio, but if pushed I’d suggest that four out of the 10 high level sectors would probably be the minimum that I’m comfortable with.

Unfortunately, the portfolio has reached that stage now:

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The portfolio has shrunk to 15 stocks in recent weeks, reducing sectoral exposure. I’m not entirely comfortable with this, especially as we enter what could be an uncertain and volatile winter.

Fortunately, my SIF screen has what could be the ideal suggestion: FTSE 100 gold miner Polymetal International, which sits in the Basic Materials sector.

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This was a role that should already be filled by Egypt-based Centamin. However, this FTSE 250 firm recently made a rapid exit from SIF when it breached my profit warning and stop-loss rules.

Polymetal International (LON: POLY)

FTSE 100 group Polymetal International operates a number of gold mines in Russia and Kazakhstan.

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Source: Polymetal International investor presentation 15/09/20

It was founded in 1998, to “capitalise on the opportunity to revive a series of inactive assets left over from Soviet era exploration”. It’s the type of company I mentally refer to as an oligarch stock - founder Alexander Nesis’s ICT Group controls 24% of the firm, giving him a stake that’s worth £1.8bn at current levels. Since 2003, the company has been run by Mr Nesis’s brother, Vitaly Nesis.

However, Vitaly Nesis has proved an able CEO, in my view. Polymetal has been listed on the London market since 2007, during which time it’s paid a decent string of dividends, delivered significant production growth and joined the FTSE 100 on more than one occasion.

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Given that ICT’s holding makes it a minority shareholder,…

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James Weston

4th Nov '20

Hi Roland,

Is there any way to adjust the figures for an extreme bull case scenario for gold prices, say $2,200/oz?

Is it safe to assume the extra revenue achieved through a higher gold price is pure profit? I can't think of any reason why this wouldn't be the case so this would surely lead to an increase in share price and dividend?

I would appreciate your thoughts

Many thanks

James

LongValue

Just adding a little colour to Roland's excellent analysis of Polymetal International (LON:POLY). The company is one of the few Gold miners that can process refractory Gold ore. It has a major facility, the Amursk POX hub, which in 2019 produced some 430,000 oz of Gold equivalent. The important point is this. Russia has substantial reserves of refractory Gold ore but it's very difficult to exploit. Globally, the low-hanging Gold fruit has been taken. The result is that it's generally getting more difficult and expensive to mine Gold. For sure, there are jurisdictional risks associated with Russia. But the company's ability to process refractory ore does go some way to mitigating its overall risk. It's also in the throes of building a second facility to exploit refractory Gold ore, POX-2. That is due to go into operation in late 2023. And, yes, I'm a shareholder.

Roland Head

Hi James,

All else being equal, then I'd expect an extreme increase in the price of gold to result in a big increase in short-term profits for Polymetal International (LON:POLY) (and other gold producers). In the short term, I'd expect costs to be stable, so profit margins would rise.

I say "short term" because history suggests that if the gold price stayed elevated for too long, costs would start to rise. This tends to happen towards the tail end of a commodity boom due to increased competition for resources and support services. We saw this in the oil sector quite recently after several years of $100 oil, for example.

An extreme bull scenario is not something I'd generally model, for two reasons.

1. I think it's unlikely.

2. Good news takes care of itself! It's the downside risks that worry me.

I hope this makes sense.

Thanks,

Roland

Snowbum

Great point LongValue. I have previously been a holder of both Polymetal International (LON:POLY) & Petropavlovsk (LON:POG) for precisely the reasons you mention wrt to refractory gold reserves and POX plant ownership.

Having sold out of both as Gold peaked, to secure profits from the previous year, i am currently looking to re-enter Polymetal International (LON:POLY) . Perhaps the recent pullback is due to other holders doing the same after a >100% gain over this period?

Still concerned about the corporate governance issues at Petropavlovsk (LON:POG) but may still establish a small long position again when the chart settles out (possibly basing around 27p just now for 'spring' like trade entry).

https://www.tradingview.com/x/...

aflash

Nesis, JP Morgan and BGF Gold fund have all taken some profits between June and September. See 'Shareholder Activity'.

Logical David

Hi Roland, talking about the drop in both the share price & Momentum for Polymetal International (LON:POLY) (I hold) and the fact that its Relative Strength is down -8% for the last 3 months... in the back of my mind I seem to remember that the company's biggest share holder sold around 30% of their holding during September (worth £hundreds of millions) and this is why I understand £POLY is currently 21% off its 52w High (but I could be wrong).

Having listened to various interviews and having read several articles, I am under the impression that the price of gold is predicted to peak around 2024/25 as inflation rises but nobody can say for certain where the price of gold will be in several years time. Currently, I am planning to sell my holding during this time period.

Ramon Vasquez1

9th Nov '20

Hi , as a past professional gold trader in Australia , my "Nebulosities " tells me to exit all gold holdings and run for the hills , even though l hold none .

Best wishes , Ramon .

SIF Folio: Turning back to gold with Polymetal

Polymetal International (LON: POLY)

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Roland Head

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