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Russian Gold
Initiating coverage
Alexander Pukhaev
Research Analyst
(7) 495 933-9219
alexander.pukhaev@db.com
Olga Okuneva
Research Analyst
(7) 495 933-9239
olga.okuneva@db.com
Russian gold rush
Russian gold mining, which was probably the most fragmented sector in the
Russian economy at the end of the last century, consolidated significantly when
Norilsk Nickel entered the sector in 2002. Over the last five years, the leaders of
the Russian gold industry have started to crystalise out. In this report, we initiate
coverage of the two largest stocks: Polyus and Polymetal.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from
local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
DBSI in the United States at no cost. Customers can access this IR at http://gm.db.com, or call 1-877-208-6300 to
request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Initiation of Coverage
Top picks
Polymetal (PMTLq.L),USD7.00 Buy
Companies featured
Polyus Gold (PLZL.RTS),USD43.00 Hold
2006A 2007E 2008E
DB EPS (USD) 6.07 0.74 0.94
P/E (x) 7.6 58.4 45.7
EV/EBITA (x) 34.71 35.30 27.76
Polymetal (PMTLq.L),USD7.00 Buy
2006A 2007E 2008E
DB EPS (USD) 0.20 0.01 0.37
P/E (x) – 873.0 19.0
EV/EBITA (x) – 95.72 13.30
Russian resource base advantage
Russia is second only to South Africa in terms of gold reserves. However, Russia
is responsible for only 10% of global output and it produces less than not only
South Africa but also the US, Australia, China and Peru. However, Russian
precious metals companies are now starting to come to the fore on the reserves
front, with Polyus recently becoming one of the top five global gold companies by
reserves. Now the sector is entering the second stage, and attempting to increase
annual production significantly.
Two leaders
We are initiating coverage of the Russian precious metals sector with the two
largest stocks: Polyus gold and Polymetal.
Polyus
Polyus is the largest Russian gold producer, with 1.2 mn oz of production in 2007.
We rate Polyus as a HOLD and our target price is $40/share. However, we see
great potential for Polyus to re-rate, although this largely depends on higher
visibility over its long-term projects, such as the development of the huge Natalka
and Nezhdaninskoye deposits which are currently at the pre-feasibility stage of
development.
Polymetal
Polymetal is the third largest Russian gold company, with only 250 koz of gold
output in 2007. However, it is one of the global leaders in silver production, with
output of 17 mn oz in 2007. The gold-silver combination makes it the second
largest precious metals company in Russia. We set a 12-month target price for
Polymetal of $8.3/share and rate it a BUY.
Valuation & Risk
We use a DCF-based approach in valuing both stocks. We discount the cash flows
of the individual mines at 7.2% for Polymetal and 8.3% for Polyus (the difference
is mostly in the two companies’ equity/debt ratio). We then apply a 2.2x P/NAV
premium to gold assets which are currently in operation, a 2.1x P/NAV premium to
operating silver deposits and no premium to assets which are currently at the prefeasibility
stage. We see Polyus as a higher risk company, given its plans to
quadruple production over the next seven years. However, this might potentially
mean higher returns if it is successful. Polymetal’s ambitions are more modest.
More general risks include gold and silver prices as well as Russian inflation and
rouble appreciation.
Table of Contents
Gold market overview....................................................................... 3
Silver market overview..................................................................... 9
Russian gold market........................................................................ 12
Polyus Gold ...................................................................................... 15
Polymetal ......................................................................................... 51
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