Polymetal (RTS:PMTL) on April 21 reported its 1Q 2008 production. The report says ore extraction expanded to 671,000 tons from 644,000 tons a year earlier, up 4% y-o-y. Gold production rose 8% to 60,000 ounces, with the upturn attributable to the higher gold content in the ore at the Khakandzhinskoye deposit and gold processing expansion on the Vorontsovskoye, Dukat and Lunnoye deposits.
The company applied open-cast mining for the bulk of ore extraction, at 75.3% of the total, with underground mining operations also up from 21.27% to 24.73%. The excess of gold production over gold sales reached 13.2%, down from 16% y-o-y. Silver production grew 32% to 4.7 mn ounces, and outpaced silver sales by 38.23%. Silver sales went up 2% y-o-y to 3.4 mn ounces, with the upturn linked to a state license being issued for the metal sales earlier last year. In 2008, the company aims to produce 250,000 to 270,000 ounces of gold and 17-18 mn ounces of silver, and targets an EBITDA margin at 50%.
1Q 2008 production results
| Indicator | 1Q | Change, % |
|---|
| 2008 | 2007 |
|---|
| Ore extraction, thous. tons | 671 | 644 | 4 |
| Ore processing, thous. tons | 572 | 502 | 14 |
| Production | | | |
| Gold, thous. ounces | 60 | 56 | 8 |
| Silver, mn ounces | 4.7 | 3.6 | 32 |
| Sales | | | |
| Gold, thous. ounces | 53 | 48 | 10.41 |
| Sivler, mn ounces | 3.4 | 1.7 | 100 |
| Revenue, mn USD | 107.5 | 53.8 | 100 |
In our opinion, the company may boost its revenue in the future amid inflation acceleration in the global economy. Prices for precious metals are increasing at a fast pace. Precious metals are likely to be popular with investors as a hedge against inflationary risks. The higher demand for the metals from investors offsets the lower consumption in the industrial sector. Demand from industrial consumers is expected to decline along with slackening consumer demand for finished goods, which includes domestic electronics.
We expect Polymetal to post 2007 revenue of about USD 380 mn, based on average prices for the company's products last year, up 20% y-o-y. With the company's market cap at USD 2.614 bn, its P/S 2007 multiple should be at 6.88. We expect the company to raise USD 560 mn in revenue in 2008, based on the current prices for precious metals and the company's targeted production at USD 560 mn. The company's P/S 2008 multiple would then stand at 4.67. The company's P/S 2008 ratio is much lower than the relevant multiples for peer companies, which currently average 11.63. The target price for Polymetal shares should be USD 10.6 per share, which implies an upside potential of 25% to the current stock valuations.
0.553
1.6
