Polyus - Strong 4Q19 Trading Update, Strong Quarterly Earnings Ahead

Polyus has reported its 4Q19 trading update. The full-year production guidance was beaten by 1.5% on better recovery rates from key assets in 4Q19, while sales volumes were strong in 4Q19 thanks to a release of flotation concentrate inventory from Olimpiada. We expect a very strong set of 4Q19 results: we see EBITDA at $885 mln (up 26% Q-o-Q) and LFCF at $376 mln, for a 2.3% yield. That would mean a 2H19 dividend of $477 mln, for an almost 3% yield. At the current gold price and USD/RUB rate, Polyus is trading at a 2020E EV/EBITDA of 6.5 (a 15% discount to Polymetal), providing an appealing valuation if the global risk-off mood continues (see today's comment in the CIS Market Daily). The company will host its 4Q19 trading update conference call today at 17:00 Moscow time (14:00 London) and is set to report its 4Q19 IFRS results during the week of February 10.> Production guidance beaten, better recoveries at key assets. Production in 4Q19 totaled 804 koz, up 26% y-o-y, bringing full-year output to 2.84 moz, up 16% y-o-y and 1.5% ahead of the 2.80 moz guidance. Despite the processing grade at Olimpiada deteriorating further as guided (to 3.9 g/tonne in 4Q19, down 3% both Q-o-Q and y-o-y), dore gold production grew 6% y-o-y to 338 koz, as Polyus managed to improve the recovery rate to 83.9% (up 1.4 pp Q-o-Q and 5 pp y-o-y), close to the 84% target guided for 2020. At Natalka, the recovery rate improved to 72.3% (up 0.7 pp Q-o-Q), so we think that achieving the guided 75% recovery rate there by the end of this year should be doable. The company reiterated its 2.8 moz production guidance for this year, although we think that another slight outperformance is likely. > Sales supported by release of gold in concentrate from Olimpiada. Sales totaled 894 koz in 4Q19, up 23% Q-o-Q and 39% y-o-y thanks to higher production and the release of around 90 koz of gold in flotation concentrate from Olimpiada. Gold revenues thus came in at $1.29 bln, up 21% Q-o-Q.> Strong set of financials ahead. Despite the stronger ruble in 4Q19, earnings should be supported by higher revenues, better recovery rates and higher sales of flotation concentrate (and thus a higher antimony by-product credit). We expect the TCC to come in below $370/oz in 4Q19, thus the full-year TCC might come 1-2% below the lower bound of the $375-425/oz guidance range. We estimate 4Q19 EBITDA at $885 mln (up 26% Q-o-Q), for a very strong 68% margin. This would bring 2H19 EBITDA to $1.59 bln. Based on a 30% EBITDA payout, the 2H19 dividend should come in at $477 mln, for a 2.9% yield. Reported net debt ($3.29 bln) declined by $32 mln Q-o-Q, and Polyus paid $342 mln in dividends during 4Q19. Taking into account that we estimate the FX effect on ruble debt at just $3 mln (almost all ruble debt is hedged into dollars), we expect 4Q19 LFCF at $376 mln, for a 2.3% yield.