Russian Gold Producers - Polymetal TP Raised to GBP27.50, Polyus TP to $166 per GDR

Having added the two gold stocks to our top pick list in a strategy report published on July 10 given the strong outlook for gold, we are now increasing our target price for Polymetal to GBP27.50 per share and upgrading it to a BUY. We maintain our BUY for Polyus and further raise our target price to $166.00 per GDR.> Negative real dollar rates, driven by massive monetary and fiscal stimulus in the US, have caused the dollar to weaken versus DM peers and boosted precious metals prices. In addition, safe-haven demand for gold stocks remains solid because Covid-19 is not yet under control in certain regions (e.g. the US, Latin America, Australia and South Africa) and US-China relations remain tense. We added Polymetal and Polyus to our top picks in mid-July in the quarterly Russian Eagle strategy report. While both have posted a strong performance since then (up around 35%), we believe that the macro backdrop will remain supportive for gold miners and that there is more room for the share prices to rise.> Polymetal has underperformed Polyus and global peers in the last three months given the three ABBs for a combined 7.2% stake. Otkritie still holds a 3.9% stake and PPF a 3.8% stake. Their lock-up periods are just 60 days and end in September. Overall, we think the overhang may continue to affect the share performance in the coming months, though once it is passes, the discount of 24% to Polyus on 2021E EV/EBITDA at spot commodity prices may shrink. We use a 10% discount (a target EV/EBITDA of 7.6 versus 8.5 for Polyus) to account for Polyus's superior asset quality. > Having re-run our scenario-based valuation and assigned a 40% weight for a bull case where gold hits $2,500/oz, we increase our target price for Polymetal to GBP27.50 per share, raising it from HOLD to BUY. For Polyus, such a positive gold price outlook and the upcoming feasibility study for Sukhoi Log have encouraged us to add the project into our valuation model with at least15% of target equity value (see our report). We increase our target price from $112.00 to $166.00 per GDR and reiterate our BUY call. > While we believe Polymetal will post stronger volume growth in the short term, Polyus's long-term growth prospects are clearly brighter. Polymetal is set to launch Nezhda in 4Q21, which we expect to contribute to a 4% production and 13% EBITDA CAGR over 2020-22E at spot prices. Over the next seven years (2020-27), however, the contribution from growth projects Veduga and Prognoz will only help to offset the depletion of Dukat and Omolon. Hence, assuming no M&A, we project the 2020-27E production CAGR at just 2%. Meanwhile, we expect Polyus's production to be flattish at 2.7-3.0 moz per year through 2025, but the development of Sukhoi Log, slated to launch in 2026, should help ensure 75% growth by 2027, for an 8% 2020-27E CAGR.