Polymetal - Strong 1Q20 Production Results

Polymetal has reported a solid production update that showed strong performance at Kyzyl, its flagship asset. The company is not seeing any significant impact from Covid-19 on its operations, aside from some problems with concentrate shipments to China in February. It will host an investor day next Tuesday. At spot commodity prices and the current USD/RUB rate, Polymetal is trading at a 2020E EV/EBITDA of 7.0 and FCF yield of 6.5%. We reiterate our BUY recommendation on the stock.> Strong production growth, driven by Kyzyl. Production expanded 5% y-o-y to 391 koz of gold equivalent (GE) in 1Q20 thanks to a strong performance at Kyzyl, Varvara and Svetloye, which offset grade declines at Omolon and Voro. Kyzyl again demonstrated a stellar performance, with record quarterly ore processing volumes (526 kt, or 5% above the average quarterly processing volume in 2019) and a record-high ore processing grade of 8.0 g/tonne (versus last year's average of 7.1 g/tonne), which brought quarterly production to 108 koz, up 40% y-o-y. Polymetal noted that the grade performance at Kyzyl was well above target and that it expects the grade to normalize in 2Q20. > Sales and cash flows weak amid concentrate inventory buildup. Gold sales volumes dropped 7% y-o-y to 271 koz (silver sales were flat y-o-y at 4.7 moz) due to a slowdown in concentrate sales to China in February stemming from the coronavirus outbreak there. Concentrate sales normalized in March. Net debt rose by $182 mln to $1.66 bln during 1Q20. The dividend paid during the quarter was $94 mln, so FCF in 1Q20 was around negative $90 mln (due to the concentrate inventory buildup and seasonal prepayments for fuel, etc.).> Production and cost guidance reiterated. Polymetal reiterated its production guidance of 1.6 moz GE this year, which looks achievable given the strong performance in 1Q20. Cost guidance (TCC of $650-700/oz GE and AISC of $850-900/oz GE) was also reiterated, though Polymetal acknowledged the material ruble and tenge depreciation and said it will revisit its guidance ahead of the 1H20 results. The 2Q20 trading update will be published in July and the 1H20 IFRS results will come in August.> Coronavirus still having a limited impact on operations. Polymetal said that it currently faces no problems with gold bullion sales to Russian banks (even though the CBR stopped purchasing gold in March) or with gold concentrate sales to Chinese off-takers. Polymetal has not reported any coronavirus cases and has experienced no interruptions to its production or supply chains in either Russia or Kazakhstan. With regard to capex, all critical equipment for Nezhda has already been delivered and can be installed by local employees or remotely. However, equipment shipments to the POX-2 facility could be delayed if quarantines in Belgium, Italy and France last for more than three to four months (i.e. if the lockdowns are lifted later than June or July).