Bad or good investing advice?

Evraz and Polymetal International are two of the largest mining businesses in the FTSE 100. Or at least they were, since both have now been removed from the index, and their respective share prices have plummeted by 73% and 92% in the last 12 months.

What happened? Well, both firms primarily operate within Russia’s borders. And with Western sanctions ramping up following the country’s invasion of Ukraine, these companies have been caught in the crossfire. So, it’s not surprising to see a massive sell-off from investors. But is this an over-reaction?

That’s what some social media investing advice would suggest. After all, most of the extraction sites aren’t near the conflict. And with inflation, alongside demand for raw materials, skyrocketing, metal prices are going through the roof. So surely now would be an excellent time to buy these shares while they’re on discount?

That certainly seems like sound logic. But unfortunately, the situation is a bit more complicated.

Why I’m avoiding Russian mining stocks

This investing ‘advice’ is accurate in that most of the mining operations belonging to Evraz and Polymetal aren’t directly exposed to the ongoing crisis in Ukraine. However, indirectly, there’s a problem.

Mining is a notoriously capital-intensive process that often requires a heavy amount of external financing. This is typically secured through debt. But with sanctions cutting off the Russian banking system from SWIFT — an international payment & transaction network — securing such funding is becoming exceptionally challenging.

Evraz recently had trouble paying off its debt, not for lack of trying. An $18m bond coupon payment was blocked on Monday by the Office of Financial Sanctions Implementation (OFSI). The matter has since been resolved. But if the situation in Ukraine continues to escalate, future blocked payments to debt holders, creditors, or suppliers could create substantial problems for both of these businesses.

Both companies have large lumps of cash on their balance sheets, which should be enough to keep operations running throughout most of 2022. This liquidity is obviously an encouraging sight, given the situation. However, as things currently stand, the mid-to-long-term fate of these Russian mining businesses is being determined by external factors completely beyond managerial control. Hopefully, the situation in Ukraine will come to a quick and peaceful conclusion. But when will that happen is anyone’s best guess. In the meantime, these companies are being financially squeezed.

Personally, that’s not something I’m interested in adding to my portfolio. And it’s why I think such investing ‘advice’ is just plain awful. In my opinion, there are far more lucrative and less speculative investment opportunities for my portfolio elsewhere.

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The stock was trading for more than 600p at the beginning of January. But the price sank to roughly 300p in the middle of February as tensions between the countries grew. Then, when Russia finally invaded Ukraine two weeks ago, the share price plummeted to around 50p.

Currently trading at around 80p (down more than 80% since the start of the year), is this mining giant too cheap to ignore?

Toxic association

Lots of shares are struggling right now. But it seems to me that Evraz’s stock is under extraordinary pressure. This could be because Roman Abramovich, the company’s major shareholder, is believed to be a close friend of Vladimir Putin. 

Russia also accounted for $5.5bn of the group’s total $14.1bn in revenues last year. It has a strong presence in the country and, like many steel companies, buys large quantities of raw materials there. Therefore, sanctions will hit Evraz disproportionately hard.

Even if the situation in Eastern Europe improves tomorrow, I doubt Evraz’s stock price will recover to its earlier heights. The war has damaged Russia’s image and many businesses may think twice before investing in the country again.

It’s not all bad news

Evraz is confronted with enormous obstacles, but there are some pieces of good news. For one, Evraz does not only operate in Russia. As previously stated, the area accounts for just around a third of the company’s sales. Asia, America, Africa, and Europe are home to the rest of the company’s businesses.

As far as we know, these enterprises are still operational and may be producing windfall profits as supply restrictions push up steel prices. This is something that investors should think about while evaluating a company. The corporation will have worth as long as these divisions continue to generate revenue for the group. But, because the situation is always changing, it is hard for me to quantify the worth of these procedures.

Share price outlook

In light of the events in Ukraine, I believe Evraz’s stock price will remain volatile for the foreseeable future. Companies with exposure to Eastern Europe are likely to stay unpopular with investors until we have more information on how the situation in the area will be resolved.

Nonetheless, if a solution to the crisis is found, the stock might skyrocket. If the uncertainty goes away, the company may be undervalued at its present levels.

Although the stock has potential in the best-case scenario, I will not add it to my portfolio. I believe there is now much too much uncertainty around the firm and the economy as a whole. I’m going to stay away from Evraz till things calm down.

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Is the Evraz share price in bargain territory?

It’s clear why the share price has plummeted this year after recent events involving Russia and the West. Imposing significant sanctions, such as cutting off Russian banks from the SWIFT payment network, makes managing and developing mining sites incredibly challenging.

Despite this, here’s why I think it’s worth looking deeper into this stock. The core products for Evraz include steel, coal, vanadium and various raw materials. Vanadium is particularly interesting as it’s used to increase the energy density and voltage of car batteries. Demand for vanadium is growing with the electric vehicle trend, and the price of vanadium has doubled over the last few years. Finally, many of the other core products for Evraz have increased in demand recently.

In North America, Evraz is the number one producer of rail, large-diameter pipe and steel plates. With steel prices increasing recently due to supply constraints, I think this could still be an area of growth for Evraz. However, I believe Western sanctions would likely cause most of the development from its steel operations to happen outside of North America.

Around two-thirds of its revenues are currently being generated outside of Russia, and the company doubled its free cash flow last year. Meanwhile, the company increased its net income in 2020 by 158.78% and a massive 233.6% for 2021. With a net income of £2.21bn and a free cash flow of £1.79bn for 2021, I think the business model has been as strong as steel over recent years.

Political risk

Regardless of what I think about the previously strong financials, I think it’s important to remember that in 2022, the Evraz share price has fallen like a knife through butter rather than steel.

The short-term future of the share price seems to be heavily linked with the geopolitical situation in Ukraine. With 39% of the company’s sales total coming from Russia last year, it isn’t easy for me to see how the Evraz share price can return to its previous highs any time soon. Additionally, the largest shareholder is Russian oligarch Roman Abramovich, who’s suffering from significant sanctions.

It’s difficult for anyone to predict political risk, and I think there’s too much uncertainty surrounding the company at the moment. Despite the Evraz share price substantially dropping this year, I’m avoiding it until the situation stabilises in Eastern Europe. A drop of over 80% in less than three months is a trend that I’d rather not fight against for the moment.

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First its share price tanked. It is trading at penny stock levels now. And it has also decided not to pay dividends. This is disappointing for an investor in the stock, like me. But not all is lost. There is a catch here. 

Evraz share price recovers a bit

Despite the crash in the Evraz share price recently, it has already shown a pretty smart recovery. In a week, its share price is up 65%. This means that some investors might already be seeing it as a stock with value. 

And it might just be. We really do not know what is going to happen tomorrow. It is possible that peace could be struck and Russia will cease to face the heat from the rest of the world. And that could provide some respite to the likes of Evraz. 

But that is one possibility. And not necessarily one with the highest probability. The war could also be a protracted one and it is even possible that it will have catastrophic consequences. But let us not get there. My point here is only to highlight that the future of the stock in discussion is hanging in balance for now. 

What happens next for the FTSE 100 stock

At a time like this, I find it difficult to make a case for Evraz for the medium-to-long term. Sure, there could be short-term speculative gains to be made. Buy on bad news on the war, sell on hopes that it will end. But that is not investing. That is just speculative trading. And that is fraught with risk. 

On my part, I am just letting my Evraz holdings be. They do not look like they are worth a whole lot anyway, so even selling them now will not do very much for the health of my investments. But if I just let them hang around in my investment portfolio, maybe in a few years they could provide an opportunity for a respectable exit from the stock. Or even growth in my capital, who knows?!

What I’d buy now

If I had to buy stocks, though, I think there are some pretty good choices available from among its peers. One example is Anglo American, which I wrote about recently as being a deeply undervalued stock despite its strong performance. But there are plenty of other FTSE 100 stocks that look both safe as well as potentially lucrative investments too. I would much rather focus on these. 

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But no sooner had my words been published than the London Stock Exchange suspended trading in Evraz shares. The reason? It’s all about Roman Abramovich.

Until Wednesday, Evraz maintained that for the purposes of sanctions regulations, it “does not consider itself to be an entity owned by, or acting on behalf or at the direction of, any persons connected with Russia and thereby caught by such legislation.” And the Evraz share price was steadying a little.

The company did admit that it could not be certain whether Mr Abramovich, along with several other major Russian shareholders, would be legally considered connected with Russia in terms of those new sanctions laws.

Abramovich sanctions

The UK government has now clarified that uncertainty.

Mr Abramovich has had assets frozen and is subject to travel bans. And a subsequent run on the Evraz share price led to the temporary suspension, by the Financial Conduct Authority, of Evraz share trading.

For its part, Evraz has reiterated that it “does not consider Mr Roman Abramovich as a person exercising the effective control of the company“.

With the market in Evraz shares halted, the price finished the day at 80.9p, down 12.6%. Had business continued as usual, I wouldn’t like to guess where the chart might have ended.

Free market suspended

I applaud the FCA’s suspension of Evraz shares. I support letting share prices go where they will when all information is open to all shareholders. But when a legal action interferes with the free market, and regulatory effects on the share price are not known, I think it is only right to suspend trading until legal outcomes are clarified.

To get back to my opening thought, on what investors need to know. I don’t think anyone can know anything more, right now, about the regulatory fallout from the sanctions on Abramovich. For now, shareholders simply need to sit it out and wait.

There is no way to buy or sell shares on the open market anyway, so I don’t see any practical point in worrying about that. Worry is, however, understandable.

Evraz share price future

This is pure speculation on my part now. But I hope that the wide international ownership of Evraz shares will lead the UK government to go easy on the company itself. Seize the stockholdings of Abramovich and any other Putin associates, sure. But don’t harm other shareholders who will surely almost universally oppose Russia’s war?

What do investors need to know about the long-term outlook for the Evraz share price? I think that still comes down to what I was saying Wednesday.

And that’s all about the fundamental performance of the company, the outlook for the steel business, and the timescale for Russia’s aggression to be defeated and Russia-based companies to return to respectability. We have no way to quantify much of that right now.

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Evraz: suspended

Coal and steel group Evraz (LSE: EVR) said on Wednesday that it didn’t believe it should be affected by UK sanctions against Russia.

Even so, Evraz’s board then decided to cancel the interim dividend it had declared on 25 February.

On Thursday morning, things got really serious. The government added Roman Abramovich, the company’s largest shareholder, to the UK’s sanction list. Evraz shares were suspended from London trading.

I can’t emphasise enough how quickly things happened. I saw the news about Abramovich at 10.48 on a newspaper’s live news page. At 11am, the London Stock Exchange suspended Evraz shares.

What happens next? Evraz shareholders won’t receive the March dividend. Although UK shareholders will continue to own the stock, they can’t sell it.

Evraz shares might return to trading at some point. Personally, I think a more likely scenario is that the company’s LSE shares will be cancelled. This would probably leave Evraz shares listed on the Moscow Stock Exchange only.

If this happens, I’d guess that most UK shareholders would be unable to sell and would have to write off their investment.

Polymetal: LSE shares at risk?

Will gold miner Polymetal International (LSE: POLY) follow Evraz into suspension? 

The company said on Wednesday that it “doesn’t consider itself” to be owned or controlled by Russian shareholders. I looked at Polymetal’s ownership in more detail here.

Polymetal’s management say that sanctions have had a limited impact on its mining operations and sales. But they’ve warned that financial restrictions could affect future dividend payments and limit access to bank facilities.

The board declared a final dividend for 2021 on 2 March. They haven’t cancelled it yet. But Wednesday’s statement included a reminder that the board “retains the discretion” to withdraw its dividend recommendation ahead of the group’s AGM on 25 April.

What happens next? I think Polymetal is likely to cancel its dividend to preserve cash.

I also suspect the company will find it easier to operate normally under sanctions if it withdraws from western financial markets. For this reason, I expect Polymetal to cancel its LSE share listing at some point.

Will POG shares be suspended?

Gold miner Petropavlovsk (LSE: POG) said on Wednesday that events in Ukraine had not interrupted its operations in the Far East of Russia. However, the company admitted that some of its Russian shareholders “may be restricted” under sanction regulations.

Having taken legal advice, Petropavlovsk says that it does not believe its LSE shares should be affected by sanctions. This is because its Russian shareholders control less than 50% of the company’s stock.

What happens next? POG shares rose following yesterday’s news but are down today. If operations remain unaffected then this stock could be very cheap, on less than two times 2022 forecast earnings.

However, buying POG shares looks like a big gamble to me. This company sells its gold within Russia and might choose to list domestically. Tighter sanctions could force a share suspension or delisting. Petropavlovsk is too risky for me to buy.

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I was so far off the case in thinking that weak trust in regulatory bodies might be the biggest Russian threat. Yes, operating in Russia did turn out to be a big risk. But I never envisaged Russia going to war with Ukraine and being globally ostracised. 

Even after a minor rebound, the Evraz share price is now down 85% over the past 12 months, at 80p. But in the first few days of March we were looking at a 90% loss.

Investors clearly fear any sanctions that might be applied to Evraz. Roman Abramovich is the company’s biggest shareholder. As well as him, a number of other Russian oligarchs hold shares.

Latest updates

But against those fears, Evraz this week released an “update on certain matters.” It said that for the purposes of sanctions regulations, it “does not consider itself to be an entity owned by, or acting on behalf or at the direction of, any persons connected with Russia and thereby caught by such legislation.”

That did seem to reassure the markets, and the Evraz share price ticked up a little. But so far, it hasn’t been able to stay out of the penny share range and hold above 100p.

The company did admit that it cannot be certain whether Abramovich and other Russian shareholders are “connected with Russia” for sanctions purposes. So sanctions fears have not gone away. And on Thursday, the UK government decided to sanction Abramovich.

Other than that, Evraz reckons its operations are largely unaffected.

The company has, however, decided that paying the previously declared interim dividend might not be such a good idea in the circumstances. So Evraz has now cancelled that dividend, and will review its approach to future payouts.

Evraz share price too low?

Is the price fall overdone, and is it now a good time for me to finally buy? I’ve been on the fence over Evraz a number of times. I like its cash generation and big dividends. I’ve always liked its business in steel production too, which is a commodity with potentially very strong long-term demand.

Had you told me a year ago that today I’d have the opportunity to buy at an 85% discount, on a penny share price, you would have had my attention. At the same time, though, I’d be wanting to know what the catch was. The catch is obvious, but I’m also held back by ethics. I won’t invest today in what’s essentially a Russian company.

But I’m thinking about a possible time when investing in Russia is ethically acceptable again. And I do think there could be future buying opportunities before the Evraz share price regains its strength.

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Recent updates

There was an encouraging update for Evraz today. In fact, the group confirmed that the current conflict had had “no material direct impact on day-to-day operations”. This was even though the sanctions were creating certain frictions across its supply chains, logistical operations, and flow of money. Considering the fact that the Evraz share price has sunk around 75% over the past month, this shows that the disruption may not have been as severe as initially feared. The group also believes that it is not an entity owned by, or acting on behalf or at the direction of, any persons connected with Russia, and this may enable it to avoid sanctions.

Further, the recent results were also extremely impressive. For example, FY2021 revenues were over $14bn and net profits increased to over $3bn, in comparison to just $858m the previous year. This also allowed a dividend of 50 cents to be announced, which is expected to go ex tomorrow. The interim dividend alone means that Evraz shares have a dividend yield of around 40%, clearly far higher than any other UK share.

However, this recent update did not consider the effects of the war. As such, although the effects of the conflict are extremely hard to judge, I highly doubt that profits will remain at these levels. This is a key risk to point out.

Is the Evraz share price set to soar?

Clearly, there may have been a slight overreaction over the past couple of weeks regarding Evraz shares, especially as many investment funds vowed to dump all their Russian stocks. From a valuation perspective, this has left the Evraz share price looking extremely cheap.

But although I believe that the Evraz share price has the potential to soar, I’m still not buying. Firstly, I’m not buying shares in any companies that are directly impacted from the dreadful conflict in Ukraine. This is due to the risks of significant volatility over the next few months. Secondly, due to the large number of Russian shareholders, I also have ESG concerns. This is a factor I believe could also depress the shares further.

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I think the dramatic movements in Evraz shares recently contain lessons for all investors. Here are two I am applying to my own investing approach.

Yield traps as warning signals

Right now, Evraz theoretically has a 114% dividend yield! In other words, I could more than get my money back in dividends alone within a year, by buying at the current Evraz share price.

In reality, what will happen is anyone’s guess. The company is still due to pay a 50c (roughly 38p) interim dividend this month. The record date is 11 March, which means that if I bought Evraz today then I would be in line for the dividend — if it ends up being paid. It could yet be cancelled and I see that as a real risk.

With a 114% yield on paper, the company currently looks like a classic yield trap to me. A yield trap is a share with a seemingly mouth-watering yield, which in reality could fall in future as it reflects heightened risk.

The lesson I draw here is always to pay attention when a share looks like it could be a yield trap, even on a less dramatic scale. Under a month ago, when Evraz yielded an unusually high 26%, I concluded that “I had decided not to buy it for my portfolio, as it looked too risky for me.” Since then, the Evraz share price has collapsed 70%.   

Political risk is very hard to price

Some of the movements in the Evraz share price recently – and arguably for most of its life so far as a listed company – reflect different investors’ assessments of what are known as political risks that might affect the company.

Such political risks include assets being seized, foreign exchange controls being imposed and contracts being legally voided. Such political risk is far more common than many investors may realise. It is especially common for natural resources companies that do business in countries often with a weaker rule of law than the UK. For example, a long-established company like Antofagasta could see revenues and profits fall if a new Chilean government nationalises mines.

The Evraz share price and political risks

Evraz has always faced sizeable political risk due its areas of operation. In fact, I think its experience of dealing with them could mean the recent share price fall is overdone – but I do not know. As it pointed out in its latest annual report, “Russia is considered to be a developing market with higher economic and political risks.” But there are such risks in its other large markets of Canada and the US too.

Political risk is very complicated to assess in advance, even for professional investors. I think most private investors lack the insight or tools to assess it accurately. So if a company faces unusually high risks like this, that will already often place it outside what I regard as my circle of competence as an investor. On that basis alone, I would not invest.

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At the beginning of January, the stock was changing hands for more than 600p. As tensions with Russia increased over the following weeks, the stock fell to around 300p in the middle of February. When the crisis in Eastern Europe deteriorated two weeks ago, the stock plunged to a low of about 50p.

That said, it has since recovered to around 90p, as bargain hunters have bought into this struggling enterprise.

Uncertainty prevails 

It is clear to me why the Evraz share price is facing so much pressure. Its largest shareholder is Roman Abramovich, who is reportedly a close friend of Vladimir Putin.

At the same time, the group generated $5.5bn of its total $14.1bn sales tally in Russia last year. It has a significant presence in the region and like many steel producers, acquires substantial volumes of raw materials from the area. 

Even if the situation in Eastern Europe calms down tomorrow, I do not think the Evraz share price will ever return to previous highs. In my opinion, the damage has already been done to Russia. Any companies with exposure to the region may have to take significant losses on their investments. 

But Evraz is not a pureplay Russian steel producer. As noted above, the company only generates around a third of its revenues from the region. The rest of its operations are located across Asia, America, Africa and Europe.

As steel prices rise due to supply constraints, these operations may be generating windfall profits. This is something investors need to consider when analysing the business. It is facing some significant challenges, but there are also opportunities to take advantage of. 

As far as we know, these businesses are still functioning. As long as these divisions continue to produce income for the group, the company will have a value. Although, with the situation changing almost every day, it is impossible for me to estimate the value of these operations. 

Evraz share price outlook 

Considering all of the above, I think the Evraz share price will remain volatile for the foreseeable future. Until we have some clarity on how the situation in Eastern Europe will resolve itself, companies with exposure to the region are likely to remain out of favour with investors. 

Still, if a solution to the situation does materialise, the stock could rise significantly. If the uncertainty disappears, the business could be undervalued at current levels. 

Even though the stock may have potential in the best-case scenario, I am not going to buy it for my portfolio. I think there is just too much uncertainty surrounding the company and the economy in general right now. Until the situation stabilises, I will avoid Evraz. 

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