Russian Metals and Mining - Polyus: Closing Long Trade Idea

Polyus is facing a Covid-19 outbreak at its key production hub in Krasnoyarsk Region. While so far it has managed to keep the situation well under control without operations being interrupted, we believe that uncertainty about the scale of the problem may weigh on the stock price in weeks ahead. We thus temporarily close our long trade idea. > Covid-19 outbreak at key Polyus assets. Polyus has been a leader among Russian metals and mining companies in terms of Covid-19 testing, having implemented a broad testing program across all of its business units starting in late March. At its key production hub in Krasnoyarsk Region (home to the Olimpiada and Blagodatnoye assets), there have been a number of cases discovered. As of May 14, there were 303 confirmed, with some of the workers being transferred to hospitals in the towns of Severo-Yeniseisk and Krasnoyarsk for treatment. The workers, most of whom are asymptomatic, have been quarantined at medical facilities at Olimpiada. All contacts of the employees who tested positive have also been quarantined. The total number of people quarantined has not been disclosed. Meanwhile, all personnel on the sites are subject to regular testing, social distancing and mandatory use of personal protective equipment to minimize the risk of further infection. The Polyus Krasnoyarsk hub employs around 6k of Polyus's 20k total employees. People at the sites are working in several shifts, which change every quarter. According to the company, the incoming shift is currently on standby at a regional hub (the workers were isolated and tested). We expect the Krasnoyarsk hub to account for 62% of overall production and 67% of EBITDA marked to market this year.> We close long trade idea on Polyus, but keep fundamental BUY. This week, Polyus confirmed that the outbreak had not yet had any impact on its production or supply chain. Given the strict measures to contain the outbreak and the massive testing, we see the risk of a production disruption as very low. In the case of any potential difficulties, we think they would be short-lived and would not change our positive fundamental view on Polyus. However, lingering uncertainty could weigh on the share price in the coming weeks. Therefore, we close our tactical long trade idea to buy Polyus outright, which has generated a 56% total return since its inception and outperformed the RTS by 31%. > We turn our long Polyus/short palladium pair trade into an outright short of palladium. Since we opened our pair trade to long Polyus and short palladium (see our report), it has generated a 10% total return, with the spot palladium price falling 6% to $1,844/oz and Polyus's share price rising 3%. We turn this trade idea into an outright short of palladium.> Risks to our short palladium trade idea. Among the risks on the demand side, we highlight a possible V-shaped recovery in the global economy starting in 3Q20, a spike in car sales as people seek to avoid using public transport, and a strong rally in risk assets on the back of monetary and fiscal stimulus. On the supply side, we highlight possible prolonged quarantines in South Africa and a decline in palladium recycling volumes.