Polymetal - Long-Term Growth Outlined; TP Upgraded on Higher Gold Price

Polymetal hosted an investor day on Tuesday, where it generally reiterated its production guidance for 2020-23 while outlining further growth through the addition of Veduga to the project pipeline. We remain positive on gold stocks given large-scale monetary stimulus and continuing uncertainty over the impact of Covid-19 on the global economy. After rerunning our Polymetal scenario-based valuation, we increase our target price by 13% to $22.95 per share and reiterate our BUY recommendation.> Medium-term production guidance generally reiterated. Polymetal basically reiterated its 2020-23 silver and gold production guidance, only adjusting it downward by less than 50 koz in 2022-23 to account for the faster depletion of old assets. We note that total output numbers in gold equivalent terms were changed, as the company increased the gold-to-silver ratio (GSR) from 80 to 120 (closer to the spot level of around 112). The targets are now 1.5 moz GE for 2020-21, 1.6 moz for 2022 and 1.7 moz for 2023.> Veduga project included in pipeline. Polymetal also added production guidance for 2024-25, which implies net 50 koz GE growth by 2025, as 140 koz lost from the depletion of old assets will be offset by the ramp-up of POX-2 to 120 koz GE in 2024 and the launch of production at Veduga in 1Q25 (150 koz in 2025 and 220 koz at full capacity starting in 2026). The final investment decision on Veduga is scheduled for 4Q21. This is a high-grade (5 g/t), low-cost project (TCC guidance of $600-650/oz for the LoM average - below Polymetal's guidance of $650-700/oz GE for this year on a consolidated basis), with an LoM of 20 years for a combined open-pit and underground development. The project capex estimate was increased from $250 mln to $400 mln. Assuming a gold price of $1,400-1,700/oz and USD/RUB of 70.8, we estimate the project's IRR at 21-30% and an NPV of $300-600 mln at a 9% WACC, or 3-6% of Polymetal's market cap. > Update on key development projects. Timelines for the key development projects (Nezhda and POX-2) were reiterated, with respective startups in 4Q21 and 2023. The Nezhda capex budget for 2019-21 was increased slightly, bringing the guided budget overrun relative to the feasibility study to 48% already, mainly on higher than expected pre-stripping costs. Assuming a gold price of $1,400-1,700/oz and USD/RUB of 70.8 and using the new capex guidance, we estimate the project's IRR at 22-29%. At a 9% WACC, the NPV as of today should be $600-970 mln. On a positive note, POX-2 capex in 2020-23 was cut by 13% to $340 mln despite small overruns on autoclave costs. Therefore, the net change in capex on the key growth projects implies savings of $37 mln compared with the guidance issued in March.> Brownfield projects: Same total production, lower capex. Polymetal updated its portfolio of brownfield projects aimed at extending the LoM of existing assets. The total expected production addition in 2022-24 was unchanged at 230 koz, while total capex was lowered 8% to $194 mln thanks to the addition and scaling up of lower capex projects at Omolon and Varvara and the scaling down of higher capital intensive projects at Dukat and Voro. We incorporate these minor changes into our production model.> Capex guidance includes Veduga development. Overall, the capex guidance for 2020 and 2021 was reiterated at $475 mln and $445 mln, respectively. Capex for 2022-23 was raised to around $400 mln per year to account for the construction of Veduga. Polymetal budgets its capex at USD/RUB of 63, while 40% of its capex is in local currency (ruble and tenge). Since we use USD/RUB of 70.8, we incorporate 4-5% lower capex into our model.> Capex becoming more costly, though projects still value-accretive. Overall, operating costs at Polymetal's growth projects are generally 5-10% lower than its consolidated TCC/AISC for this year. On a standalone basis, its two greenfields, Nezhda and Veduga, should deliver around $1.6 bln in NPV at the spot gold price and a 9% WACC, we estimate. That said, we note that while the brownfield additions, two greenfields and POX-2 should bring around 700 koz GE of annual production by 2025 (almost 50% of 2020 production), the net increase will be only around 250 koz due to depletion. Moreover, Polymetal's capex is getting more and more expensive, with current greenfield projects set to cost around $84/oz of LoM production versus $53/oz for Kyzyl at its initial economic parameters, which were weaker than the actual ones turned out to be. Polyus faces similar challenges with gradual depletion and grade deterioration at its flagship Olimpiada mine. Polyus's brownfield projects and small greenfield project, Chertovo Koryto, are set to deliver around 450 koz per year by the mid-2020s (16% of this year's production), which would offset current asset portfolio depletion. Unlike Polymetal, Polyus is yet to release capex and cost guidance on them after PFS and FS completion this year. That said, Polyus boasts a strong long-term growth outlook thanks to the launch of Sukhoi Log in 2026, which should add around 2.1 moz of production in 2027 (75% of the company's current production).> Positive view on gold stocks; TP upgraded. We incorporate our commodity team's latest gold and silver price forecasts. We remain positive on Russian gold stocks given the weak ruble and strong outlook for gold stemming from large-scale monetary stimulus and ongoing uncertainty over the impact of Covid-19 on the global economy. For our scenario-based valuation, we still use a target 2020E EV/EBITDA multiple of 7.5 to value Polymetal and apply a combined 55% weight to our spot and base cases, a 30% weight to our bull case and a 15% weight to our bear case. This derives a $10.86 bln target market cap and a TP of $22.95 per share (GBP 18.46). This should provide a 16% total return over the next 12 months, therefore we reiterate our BUY recommendation. At spot commodity prices and the current USD/RUB, Polymetal is trading at a 2020E EV/EBITDA of 7.3, a FCF yield of 6.8% and a yield on the dividends yet to be paid this year of 4%.> Stock overhang risk persists. We note a risk to the stock price from a potential stock overhang. Unlike Polyus, Polymetal has several big financial investors who could consider selling their stakes at the current attractive valuations. PPF sold half of its stake in Polymetal last year and now holds 6.5%. It has decided not to nominate a candidate for the BoD this year. Otkritie holds a 6.9% stake in Polymetal and has never had a BoD seat (though last year it nominated a candidate who was not elected). Alexander and Nikolai Mamut sold significant portions of their stakes last year and their holdings have both fallen below 3% (from a combined 9.5% stake as of end-2018), which is below the reporting threshold.