In an Aug. 16 research report, BMO announced it initiated coverage on London-listed Polyus Gold (PLZL:LSE; OPYGY:OTCPK), "an established large gold producer with a suite of long-lived, low-cost mines in Russia that place the company at the low end of the all-in sustaining cost curve and top end of reserve life relative to peers," according to analyst Andrew Kaip.
The firm assigned Polyus an Outperform rating and a $47 per share target price, "implying a 33% return," Kaip stated. The target "is based on an equal weighting between 1.5x net present value (NPV) 5% and 10x 2018E price:cash flow per share (P:CFPS)."
Kaip outlined the primary features of the Polyus story:
1. Growth: With an attractive growth profile, Polyus is well on track to achieve "gold production growth of 44% to 2.8 Moz by 2019," BMO estimated. "Delivery of Natalka, which is in the late stages of development, represents the majority of this growth and a key catalyst once commercial production is declared mid-2018," Kaip wrote. In 2016, the miner produced "just under 2 Moz of gold."
2. Valuation: Trading below peers, the company has a valuation that looks good, Kaip stated. Currently, Polyus "trades at 1.1x NPV 5% and 8.0x 2018E P:CFPS versus peers at 2.1x NPV 5% and 9.4x 2018E P:CFPS. It is the attractive combination of low cost and long life that supports the company's peer-leading dividend yield of 6.4%," the analyst explained. Further, "excluding non-operating reserves, Polyus screens well on the size of reserves and on grade relative to peers."
3. Liquidity: Liquidity is improving, the analyst said. "In conjunction with listing global depositary receipts on the London exchange, Polyus has increased free float to 16.4%," wrote Kaip. Also, the company is expected to get listed on the MSCI Russia and Emerging Market indices, "which should broaden investor interest."
4. Opportunity: Polyus presents a "world-class opportunity," Kaip said. "We can count on one hand the number of undeveloped deposits with the potential to produce +1 Moz of gold annually." Kaip added that "advancement of Sukhoi Log over the [next] three to four years to a development decision will be transformative for Polyus."
Additionally, there are "a number of opportunities for Polyus to add value," Kaip indicated, via resource conversion at Olimpiada, Verninskoye and Natalka; further brownfield expansion; and greenfield development of Chertovo Koryto and Sukhoi Log.
Summing up his thesis, BMO's Kaip wrote, "An investment case for Polyus is supported by peer-leading asset quality, growth, dividend yield and attractive valuation. We believe these attractive investment parameters can offset recognizable risks, including country exposure, liquidity and potential concerns of ownership alignment."
Polyus Gold is currently trading at about $35.98 per share.
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Disclosures from BMO Capital Markets, PJSC Polyus, Aug. 16, 2017
Analyst's Certification" I, Andrew Kaip, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in
generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.
Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Company Specific Disclosures:
Disclosure 1: BMO Capital Markets has undertaken an underwriting liability with respect to PJSC Polyus within the past 12 months.
Disclosure 2: BMO Capital Markets has provided investment banking services with respect to PJSC Polyus within the past 12 months.
Disclosure 3: BMO Capital Markets has managed or co-managed a public offering of securities with respect to PJSC Polyus within the past 12 months.
Disclosure 4: BMO Capital Markets or an affiliate has received compensation for investment banking services from PJSC Polyus within the past 12 months.
Disclosure 6A: PJSC Polyus is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: A) Investment Banking Services
Disclosure 16: A BMO Nesbitt Burns Inc. research analyst has extensively viewed the material operations of PJSC Polyus.
Disclosure 18: A redacted draft of this report was previously shown to PJSC Polyus (for fact checking purposes) and changes were made to the report before publication.
Disclosure 19: BMO Capital Markets Limited ("BMO CML") is acting as financial advisor to PJSC Polyus ("Polyus") in connection with a strategic investment in Polyus by a consortium led by Fosun International Limited (the "Consortium"). BMO CML will be paid a fee contingent on the successful completion of the transaction. BMO CML follows information control procedures which prevent its research analysts who are issuing research from having access to non-public information received by BMO CML's investment banking personnel in connection with the transaction. Accordingly, it is possible that individual employees at BMO CML may have material non-public information or opinions which are not included in, and may not be consistent with, the information and advice in this research report.