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Chris Bailey
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Award-winning global investor who resigned from his job managing a set of funds with over US$2bn under management so he could take full advantage of the current financial market opportunities. Likes to fuse bottom-up insights with top-down macroeconomic thought. Looks at all sectors and, with a... More
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  • A Higher Grade Gold Opportunity 0 comments
    Aug 1, 2013 1:53 PM | about stocks: POYYF

    I posted some analysis just under a week ago which looked at the recent Newmont (NYSE:NEM) and Goldcorp (NYSE:GG) financial results. I want to buy gold stocks but neither of these investments today particularly excite me and this was mainly due to poor grade.

    Polymetal (OTC:POYYF) produced some H1 production numbers earlier in the week. The key highlights were:

    A maintenance of their 1.2m ounce production target for 2013 (12% production growth yoy). H1 2013 production was 559k ounces up 11% year-on-year;

    Operational improvement at the company's closely followed Amursk operation and the first concentrate sales at Mayskoye their new high grade mine;

    Writedowns of US$280-340m due to the impact on low grade ore stockpiles of the lower gold price

    Polymetal will have their full H1 numbers near the end of August so they did not provide a full set of financials, however this presentation from their corporate website given to investors in June shows that total cash costs in 2012 were US$1050. This clearly could be revised but compares favourably with Newmont and Goldcorp.

    (click to enlarge)

    The most interesting aspect from the results though was the grade split, which I worked out myself from the company disclosures provided. I present this below with the average for Goldcorp and Newmont (taken from my analysis posted on them) for comparative purposes

    Gold grade (g/t) Polymetal % production


    3-5g/t 11%
    1-3g/t 21%
    <1g/t 5%
    Gold grade (g/t) Ave of GG/NEM production
    >5g/t 27%
    3-5g/t 4%
    1-3g/t 51%
    <1g/t 18%

    The Polymetal numbers are the sort of grade split that we should be looking for. Higher grade gives a mining company so many more options.

    Pushbacks about a shareholding in Polymetal inevitably include their focus in Russia (despite being run by locals who are committed to running the company to the highest corporate governance which has included a total 8% dividend in 2012 including a 5% special) and that silver/copper represents a substantial minority of their production/profits (impact reducing but look solid operations).

    I think the grade split analysis is more important. Gold bulls looking to embrace opportunity should take a look at Polymetal shares. As with the HUI gold bugs index, they have struggled year-to-date.

    (click to enlarge)

    Postscript - conference call highlights (my notes) hosted by Vitaly Nesis, CEO.

    'the key is to generate free cash flow and to pay a dividend...the board remains confident of its ability to do this'. That is good news.

    board likely to exclude one-off non-cash items re the appraisal of a dividend for H1

    Formal guidance for 2014-15 at the time of the Q3 announcement in October

    Thinks writedowns on the stockpiles quite extreme as assumes no recovery in gold prices plus no ability to process the stockpiles profitability (which they think they can do at the current gold price, 10% headroom). Also noted the impact of a lower silver price.

    Talking about some gradual grade dilution at one of their high grade mines but under control

    Hoping for another off-take contract to be signed for some of their concentrate later this year although noted these are complex to negotiate / sign-off

    Said a couple of assets have improving H2 cost performance, particularly Albazino due to POX ramp-up, Mayskoye has the scope to be 8-9g/t grade

    Overall, a supportive conference call for the thesis this is structurally the type of gold mining stock to be looking at.

    Disclosure: I am long OTC:POYYF.

    Additional disclosure: I am specifically long Polymetal London listed shares.

    Stocks: POYYF
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