On January 10 it was reported that Polymetal (RTS: PMTL) completely fulfilled its obligations to sell silver at fixed prices to ABN AMRO. Therefore, starting from this January, Polymetal is to sell silver to buyers at market prices which are considerably higher than prices under the fixed agreement. Because of this agreement Polymetal in the previous years lost millions of dollars. Therefore, with the end of the hedging position we might expect a considerable improvement of the company's financial results which would have an impact on its stock price.
In 2004 two Polymetal subsidiaries, Silver of Territory and Silver of Magadan, entered into forward agreements with Standard Bank to supply silver in 2005-2009 as a condition of a USD 105 mn loan agreement. The selling price was fixed until the end of 2007. In 2006 the loan was refinanced by ABN AMRO and it assumed the rights under this hedging agreement. In 2005 and 2006 Polymetal shipped banks 8.1 Moz and 9 Moz of silver in the price range of USD 6.66-7.95 per ounce. At the beginning it was a good deal for Polymetal. But in 2006 silver prices started to grow and Polymetal began to lose money. In 2007 the company had to ship to ABN Amro 13.9 Moz of silver at the price of USD 7.25-8.6 per ounce while the market price peaked at USD 15 per ounce. To fulfill its obligations under the agreement with ABN Amro, Polymetal even had to purchase the metal in the market. In January the company purchased 0.6 Moz at a price of USD 13.55 per ounce and 0.8 Moz were purchased in December at a price of USD 13.998 per ounce.
According to the company's estimates, Polymetal's hedging agreement in 2006 lost around USD 40 mn and around USD 75-80 mn in 2007. Therefore in 2008 we expect a considerable growth of Polymetal's key financials.
Presently, we are upgrading the fair value of gold mining companies due to the considerable growth in gold prices in the last months and revision of the long-term gold and silver prices. However, based on financial multiples the fair value of Polymetal's stock is USD 10.5. This implies 30% upside.
0.553
1.6
