Polyus - 1Q20 Trading Update Review and Earnings Preview

Polyus's trading update for 1Q20 showed a modest performance. Most notable was a decline in the processing grade at Olimpiada. We forecast the company's EBITDA in 1Q20 to come in at $588 mln, for a 68% margin, while we see LFCF at $195 mln, for a 1% yield. Polyus will report 1Q20 IFRS results in late May or early June. We remain positive on Russian gold stocks due to the massive monetary and fiscal stimulus being carried out in developed economies (which is supportive for gold) and the ruble depreciation due to the weak oil prices. At the spot gold price and current USD/RUB, Polyus is trading at a 2020E EV/EBITDA of 7.4, LFCF yield of 7.5% and yield on the dividends to be paid this year of 4.5%.> Production down Q-o-Q, modest performance at Olimpiada. Consolidated dore gold output dropped 8% Q-o-Q, or 5% Q-o-Q if adjusted for alluvials, from which there is no output in the first quarter. This drop was mainly driven by a weak grade at Olimpiada and maintenance at Natalka. At Olimpiada, dore output dropped 3% Q-o-Q to 324 koz on lower processing volumes and a very weak processing grade of 3.2 g/tonne (down 18% Q-o-Q), although this was partially offset by a rise in the recovery rate to 84.8%, slightly above the guided 84%. At Natalka, the average processing grade was flat Q-o-Q, though processing volumes and recoveries slumped due to scheduled maintenance. As a result, dore gold output at Natalka declined by 9% Q-o-Q to 106 koz. Consolidated gold output (refined and in concentrate) was seasonally weak at 595 koz (down 26% Q-o-Q) due to an inventory buildup at refineries, though it was flat y-o-y.> Sales volumes down 5% y-o-y; revenues up on higher gold price. Gold sales decreased 5% y-o-y to 533 koz despite flat y-o-y production. Reported gold revenues rose 16% y-o-y to $861 mln on a strong gold price, which was up 22% y-o-y.> Weaker grade to pressure earnings. The lower processing grade at Olimpiada and maintenance at Natalka should lift the TCC 17% Q-o-Q to around $400/oz in 1Q20 despite the ruble depreciation. We expect Polyus to post $588 mln in EBITDA in 1Q20, for a 68% margin. Reported net debt (including interest and FX derivatives) at end-1Q20 was $3.06 bln (down from $3.25 bln at end-4Q19), which suggests LFCF of around $195 mln, for a 1% yield.> All gold price hedges closed. Polyus disclosed that in March it closed its revenue stabilizer program, paying a $32 mln premium. There were no gold price hedges outstanding as of the end of 1Q20, which means the company is fully exposed to gold price fluctuations. > Conference call today. Polyus will host a conference call today at 17:00 Moscow time (15:00 London). We expect the company to comment on whether an improvement has been seen in the processing grades at Olimpiada and also to elaborate on the weakish 1Q20 sales volumes.