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  • Writer's pictureIshfaaq Peerally


Boring day for the markets with the $SPX500 moving around the 3000 mark. Higher oil prices after OPEC thinks about further production cuts by December. This means it is a good day for our oil stock $CXO . $PE is down after some law firm started raising questions about the upcoming acquisition of Jagged Peak Energy. This news should worry shareholders of $JAG and not shareholders of $PE . $DGE.L down after more strengthening of the $GBPUSD . $FB also down after Marc Zuckerberg announces that China will never let them in. Who's surprised about that?


After researching dozens gold miners on the $GDX and $GDXJ ETFs, I've invested in Polymetal International $POLY.L which is a Russian gold and silver miner. The company has most of its operations in the Russian far east and in Kazakhstan. They currently have nine operations. 84% of their revenues come from Gold $GOLD while 16% come from Silver $SILVER . Polymetal is the third largest silver producer in the world. Polymetal process their own gold as it is more profitable to do so instead of having a third party doing it. They are able to reduce their AISC (All in sustaining cost) by about $100-$150, which means that they are increasing their profit margins by 25% just by processing the gold themselves. They 24 Moz of Gold equivalent in proved reserve and produced 1.56 Moz last year and according to their forecast, the average lifetime of a mine is 13 years. But they are are investing in exploration which will further expand their lifespan in the future. Last year, they opened a new mine, Kyzyl, which will become their largest mine in the future. They have the Prognoz mine in construction which will be one of the largest Silver mines in the world and there is the Viksha mine which will give them access to Platinum $PLATINUM and Palladium. Their new processing plant POX-2, which uses pressurized oxidation, will be ready by 2022. This will further reduce their AISC.

The AISC of Polymetal is around $900 right now and it was lower in the past. That's because they are spending much money on exploration. This is a big chunk of their capital expenditure. Revenues have been increasing even with falling gold prices, that's because they have been increasing production and they took advantage of a weak Russian Ruble to $USDRUB to expand their business. Net income is going up while free cash flow is fluctuating. It's because they are spending a lot of money on exploration. How can they afford this? They are taking debt. That's the one thing I don't like about this company. They have to repay most of their debt before the end of 2021. However, the level at which gold prices are today, they won't have any difficulty generating cash to repay these debt and after 2021 if all the new mines are ready, they will be able to produce gold at an AISC of $750 which will make them one of the most profitable gold miner in the world. Should we take this risk? I don't want to invest in a gold miner just because someone is saying that there is going to be a recession next year and gold prices will rise. I could have invested in Barrick Gold $GOLD. or any other miner if this was the case. But I want to invest in a company which I know can do good even if gold prices don't rise and even fall to $1000. That's why I'm investing in Polymetal. Let's not forget the Silver, Platinum and Palladium.

Investing in Russia right now is not such a bad idea. Stocks $RSX are quite cheap after all the sanctions and low $OIL prices. Of course, there is always bigger risks in Russia. I once invested in Yandex $YNDX but I had to sell when the government was getting involved. But mining and oil are key sectors to the Russian economy and the government would not want to do anything that could affect these sectors adversely. Yandex is the Google $GOOG of Russia and doesn't account much to the economy. Yandex is also partly owned by Sberbank $SBERL.RU , which is itself owned by the Russian government. Polymetal, on the other hand, doesn't have this problem. They on the only Russian company on the Dow Jones Sustainability Index and are in the 94th percentile on the FTSE4Good index scoring 5/5 both in corporate governance and anti-corruption. The risk is real but the upside is much bigger. When valuing the company, of course, I took all these risks into consideration. I won't say that it is at a wonderful price but it is at a good price(better than other miners) and has great potential.

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