The cost of Polymetal will decrease significantly due to the introduction of a flexible export duty

The introduction of a flexible export duty in Russia will reduce the cost of selling the Russian part of the business of precious metals manufacturer Polymetal Int. According to the company’s management, the discount will not be catastrophic, but significant. At the same time, they retained their intention to sell the business entirely in order to maintain the synergistic effect. Experts consider this decision to be correct. But the timing of the deal may drag on until at least the middle of next year.

Polymetal Int. (the parent structure of Polymetal JSC) may pay $30–40 million in export duty by the end of this year and $100–130 million in 2024, it follows from materials companies. Flexible rate linked to the ruble exchange rate will take effect from October 1, when the dollar exchange rate is above 80 rubles: 4% at 80–85 rubles. per dollar, 4.5% – at 85-90 rubles, 5.5% – at 90-95 rubles. and 7% – if you exceed 95 rubles. Now the ruble is trading around 96 per dollar. Against this background, according to Polymetal’s estimates, the company’s free cash flow will decrease due to the introduction of duties by $25–35 million this year and by another $70–100 million in 2024.

As stated by the company’s chief executive officer, Vitaly Nesis, the introduction of the duty will have a significant negative impact on the price of Russian assets that the company has put up for sale. We are talking about eight production assets and four development projects, including one of the world’s largest platinum group deposits, Viksha, in Karelia. The company is not expecting a catastrophic discount, but their prices will be lower than historical multiples. Their value was estimated at $1.5–2.3 billion excluding net debt.

According to Mr. Nesis, several potential buyers from Russia and China are interested in them. “The sanction status of Russian business, an important factor for structuring the sale, will probably scare off some buyers,” says Vitaly Nesis. “But I confidently say that the deal will take place. There is a lot of interest… The appetite for sanctions risk varies; for some market participants it is non-zero.”

The top manager noted that the increase in the fiscal burden will also affect the timing of transactions, which have shifted “a little into the future.” Previously, Polymetal expected to sell assets in Russia, which accounted for 68% of total production and 53% of EBITDA in 2022, within six months, but now we are talking about nine months.

At the same time, the company has not changed its decision to sell assets exclusively in the form of an entire business and does not intend to sell them in parts. “In this way, we significantly simplify the structure of the transaction and can control the timing. We are selling a business, not a collection of assets; we are not destroying the value of the company, which is also valuable for its team,” explained Mr. Nesis.

Sergey Zhitelev from VELES Capital Investment Company recalls that Polymetal released strong financial statements for the first half of 2023. Increased sales volumes, combined with higher prices for mined metals, as well as moderate cost growth, allowed the company to significantly improve its financial performance, he says. Thus, adjusted EBITDA according to IFRS grew by 31%, to $559 million, revenue – by 25%, to $1.3 billion, of which 70% was earned in Russia. Adjusted net profit increased by 28% to $261 million versus a net loss of $321 million for the first half of 2022.

The expert considers the decision to sell the Russian business entirely logical, taking into account the synergistic effect and the value of the management team.

My Investments maintains a “cautious view of Polymetal shares”, given the corporate risks associated with the sale of Russian assets. Meanwhile, they note that the gold miner’s shares are now trading at attractive levels – with an EV/EBITDA multiple of 2.9x (50% discount to average historical levels) and an FCF yield of 20%.

Olga Mordyushenko