Description

This is not investment advice. Please do your own work and diligence. Please do your own legal analysis on sanctions regimes, legal, and trading risk. Please make your own decisions on implications of owning businesses tied to various jurisdictions.

Polymetal is a gold miner. 60% of EBITDA is from Russian mines, but two mines in Kazakhstan account for $600mm of EBITDA and $200mm of capex, so Kazakhstan generates all of the company FCF. The company has $2.14b of debt, $0.28mm of cash, 475mm shares.

There is tremendous embedded optionality driven by monster technical selling which should reach a climax today due to FTSE ejection.

Polymetal is 24% owned by ICT group, which itself is owned by several Russians none of which is deemed to have control. Alexander Nesis owns 47.9% of ICT. Accordingly, Polymetal is not deemed to be a Russian controlled business and has not yet been delisted in London. Nesis is not in Putin’s broader circle (he wasn’t at the key business meeting in the Kremlin on 2/24) but he is an oligarch and there are few less sympathetic people than oligarchs. 4 independent directors were added today. POLY has, however, been kicked out of certain MSCI indices and now the FTSE, generating a tremendous amount of selling pressure.

There is still substantial risk that the stock is de-listed abruptly from the LSE. The listing rules are subjective. There is substantial risk of further sanctions. Every other tail risk is on the table. This should be sized appropriately for optionality and risk.  

We see four scenarios, we’ll leave everyone to assign their own probabilities

No peace deal, eventually gets de-listed, but things operate sort of as usual and maybe some good things happen:

In this scenario you still own the 2 mines in Kazakhstan which at a conservative multiple of 4x EBITDA (6x EBITDA – Capex) cover the EV of $2.7b today. It should generate FCF, has long mine life, and should eventually generate substantial FCF returns to shareholders. 0.50 / share of dividends not crazy after a couple of years. The company is likely actively deciding whether to pay the 0.50 dividend this year.

Shareholders have a good chance of retaining Russian assets in some form, though getting cash out of Russia will be very hard, and risk of theft/expropriation/etc is high.

There is optionality of a future sale/spinoff of Kazkhstan/re-listing in HK or otherwise.

No peace deal, doesn’t get de-listed, things operate sort of as usual and maybe some good things happen:

Same as above, but maybe there is a value premium for continued listing, more light shining on corporate governance and higher liquidity. Good chance that trades higher than current levels as technical clears and people realize Kaz worth a good amount and decent Russian optionality. Maybe there is a spinoff of Kazakhstan.

No peace deal, gets de-listed, everything gets stolen in the dark:

Russia and Kazakhstan are dicey places; lot of bad stuff can happen; especially when a company is private and can be pilfered in the dark. There is financial leverage which sanctions could make impossible to pay and force a default, if the sanctions regime escalates. It might be difficult to separate the Kazakh and Russia businesses to realize value. Caveat emptor.

Peace deal

Probably make 4 – 6x.

Let’s hope for peace.

Catalyst

Resolution of conflict, LSE decisions, corporate actions to crystallize or highlight Kazakhstan, clearing of technical selling.