For a brief period on 17 February 2022, Polymetal (LSE:POLY) shares were changing hands for 1,221p. Less than three weeks later, on 8 March, the company’s shares closed at 92p. The fall of over 90% was a direct consequence of Russia’s invasion of Ukraine. Seldom has a stock been more badly affected by a one-off event.
Given that Polymetal owns eight gold and silver mines in Russia, and two in Kazakhstan, it’s not surprising that the company’s share price has been badly hit by war-linked sanctions and export bans.
The share price has since recovered somewhat to around 244p. And over the past nine months, it’s been reasonably stable.
This makes me wonder whether the shares are now a bargain. Is this the perfect time to buy a stock that under a year ago was a member of the FTSE 100?
All that glitters …
To my surprise, the company’s production hasn’t been too badly affected by international sanctions imposed on Russian exports. Production during the last quarter of 2022 was 15% higher than a year ago.
| Production by country (gold equivalent, thousand ounces) | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 |
| Kazakhstan | 149 | 144 | 140 | 125 | 139 | 105 | 133 | 164 |
| Russia | 245 | 215 | 317 | 342 | 233 | 220 | 357 | 376 |
| Total | 394 | 359 | 457 | 467 | 372 | 325 | 490 | 540 |
Last week, the FT reported that there’s been a recent “surge” in the number of Russian retail investors buying gold. Sales to Asian markets have also been largely unaffected by the restrictions. This is helping the company to reduce its stock of metals that had accumulated during previous quarters.
But the financial performance of the company has suffered.
Revenue during the first half of 2022 was 18% down compared to the previous year. And, the company reported a net loss of $321m in H1, compared to a profit of $660m during the same period a year earlier. However, this was due mainly to the write-down (by $689m) of its Russian assets. This is a non-cash accounting entry which is likely to be reversed once sanctions are eased.
An alternative — and more popular — measure of profitability is EBITDA (earnings before interest, tax, depreciation and amortisation). This was $426m in the six months to 30 June 2022, albeit 35% lower than in H1 2021.
Should I invest?
Gold is currently trading at around $1,930 an ounce. Predicting future commodity prices is difficult and subject to a huge number of influences. But Fitch Solutions is forecasting gold prices for the next four years of $1,850 (2023), $1,750 (2024), $1,700 (2025) and $1,690 (2026). If correct, and based on current production levels, future revenues at Polymetal will fall.
However, my biggest concern is that the company is considering moving its primary stock exchange listing from London to Kazakhstan.
At present, the Russian government is only permitting exports of precious metals to ‘friendly’ countries. By moving its domicile from Jersey, it’s hoped that the company’s Russian operations can be placed into a separate legal entity. This could then facilitate exports to a greater number of countries.
The move isn’t expected to take place until 2024 but it remains unclear how shareholders in the existing business will be affected. For this reason alone, I’m not going to invest.
