Polyus: Sector leading growth and yield (BUY - initiation of coverage)

We initiate coverage of Polyus with a BUY rating and a price target (PT) of USD 54.8/GDR. Polyus has some of the best assets in the global gold sector, producing c.2.4moz in 2018, with cash costs close to the bottom of the cost curve, with short-term growth of 0.4moz in 2019E from the Natalka project. Its FCF yield should rise to 6.6-7.9% in 2019-21E, on our estimates, as Natalka capex falls and EBITDA rises. This alone should justify a higher valuation, in our view. In addition, Polyus is developing one of the largest undeveloped gold deposits in the world (Sukhoi Log), which would add 1.6moz p.a. to Polyus’ production profile, with cash costs that Polyus expects to be below USD 470/oz. Sukhoi Log should be a significant value driver for the stock in the medium term, which Polyus should be able to self-fund, whilst continuing to pay a c.5-6% dividend yield. Gold stocks are notoriously low dividend payers, and few pay over 5%. Even fewer have the potential to grow output 86% whilst doing so. We believe that sanctions risks and execution risk around Natalka have resulted in Polyus trading at a discount to its peers but, with these risks diminishing, we expect Polyus’ valuation to improve going forward.