Daily analyst comments

On December 23, the Polymetal mining company reported its performance in 1H 2008. Revenue surged by 86% amid favorable price trends on the precious metals market. The company says gold sales volumes were up 32% in the reporting period. Polymetal also says that it has fully given up the practice of hedging its positions, thus giving investors the opportunity to have an instrument more sensitive to metal prices. The company managed to restrain growth in production costs, which rose just 14.8%, by outsourcing services and personnel. Selling, general and administrative expenses (SG&A) soared by 183.7% as the company fulfilled the next stage of an executive incentive program. Administrative expenses were up 62%, with growth driven by a rapid increase in wages and the cost of leasing premises.

Table. Polymetal: financial indicators for 1H 2008, USD mn

Despite Polymetal’s affirmations of its financial stability, we are quite concerned about the company’s net debt, which grew by 18.8% in 1H 2008 to USD 259.3 million, while the net debt/EBITDA ratio reached 2.93. The company’s cash expenses also rose slightly, but, in general, showed the company’s ability to limit the growth of production costs. We are also concerned about Polymetal’s silver segment, as the quality of silver ore has fallen, which may cause a rise in processing expenses. The company’s revenue structure by segments did not change much in 1H 08, with the silver and gold segments standing for 55% and 45%, respectively.

In our opinion, the published report will have a neutral impact on the company’s stock valuations, as it was quite belated. Polymetal’s business structure has undergone considerable changes in 2H 2008, and the company’s gold segment has taken the lead. Therefore, if investment demand for gold remains high, the company will primarily develop its gold operations. Our fair value for Polymetal is USD 7.5 per share with an 85.8% upside potential.