Gold: From Russia With Outperformance

BMO Capital Markets analyst Andrew Kaip makes the case for adding this miner to his firm's coverage universe.

In an Aug. 16 research report, BMO announced it initiated coverage on London-listed OJSC Polyus Gold (OTC:OPYGY), "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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