Russian Gold Producers - Downgrade Polyus, Polymetal to HOLD; Close Polymetal Trade Idea

A wave of economic stimulus across the globe, coupled with the thus far successful lifting of lockdowns in China and the EU, has fueled a risk-on move in markets, and investors might be funding their purchases of high-beta stocks by selling gold producers. In addition to the pressure from the sliding gold price, Russian gold miners are feeling heat from the rising oil price and ruble appreciation. We think these trends will continue. We downgrade Polyus and Polymetal from BUY to HOLD and also close our trade idea to BUY Polymetal with a 40% total return.> We upgraded Polyus and Polymetal to a BUY on March 6, anticipating that Russian gold stocks would be supported by strong gold prices as massive fiscal and monetary stimulus was rolled out across the globe, the ruble was weak and uncertainty about the spread of Covid-19 and its impact on the global economy was high. We also opened a tactical trade idea to buy Polyus and Polymetal outright on March 23, seeing a drop in gold from $1,650/oz to below $1,500/oz amid a wider market correction as a good buying opportunity, which proved right. > As major global economies have started to gradually remove quarantine measures and continue to roll out massive stimulus, sentiment has turned risk-on. We believe that investors are funding the acquisition of high-beta stocks by selling more defensive assets like gold miners. Besides the falling gold price, Russian miners will feel pressure on the cost side on the back of ruble strengthening amid oil price growth. > Having incorporated new stronger USD/RUB projections from our FX team (64 at end-2020), we update our financials for Polyus and Polymetal. In the case of Polyus, we keep our production forecasts for 2020-21 unchanged as we await a company update in July, when it is due to assess the consequences from the Covid-19 outbreak at its Krasnoyarsk division. Though we have said that Polyus should trade at a 10-15% premium to Polymetal due to its superior asset quality, we now incorporate a smaller premium in our target multiples due to the yet unclear impact of the Olimpiada coronavirus outbreak to Polyus's short-term production. We downgrade the stocks from BUY to HOLD. We decrease our target price by 5% for Polyus and by 16% for Polymetal. We also remove Polymetal from our trade ideas list (total return 40%).