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Although the Polymetal posted weak FY 2007 financials, the upbeat projections for its financial performance in FY 2007 could shore up its market value in fundamental terms. In 2007, the company incurred its main losses on future contracts for silver deliveries, which prevented the company from cashing in on favorable price trends on the market. 2008 promises to be a successful year for the company in light of price increases on precious metals, elimination of hedge buying, and production expansion.
On July 14 Polymetal released its financial and operating results for FY 2007, which appeared to be in line with downbeat expectations on the market. However, the projected production expansion at the company and high prices on precious metals laid the groundwork for growth in the company's value. In 2007, the company failed to cash in on favorable price trends on the silver market due to its futures contracts, requiring it to sell the metal at a fixed price. As a result, the company lost about USD 75 million in potential revenue, according to our estimates. Gold sales dropped by 8%, with gold output down 6%, but the average sales price on the metal increased by 16%, in synch with the market.
Polymetal: financial indices for FY 2007
| Indicator | Unit of measure | 2007 | 2006 | 2007/2006 |
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| Operating results | | | | | | Ore extraction | ton | 3029 | 2600 | 16% | | Including: open-cast mining | ton | 2430 | 2113 | 15% | | - underground mining | ton | 598 | 487 | 23% | | Processed ore | ton | 3135 | 2890 | 8% | | Sivler | mn ounces | 15,9 | 17,3 | -8% | | Gold | thous. ounces | 242 | 256 | -5% | | Financial results | | | | | | Average selling price on gold | USD/ounce | 701 | 603 | +16.3% | | Average selling price on silver | USD/ounce | 8.8 | 9.3 | -5.4% | | Revenue | mn USD | 308.7 | 315.6 | -2% | | Gross profit | mn USD | 54.1 | 144.3 | | | Gross margin | % | 17.5% | 45.72% | -28.22% | | EBITDA | mn USD | 31.7 | 134.1 | | | EBITDA margin | % | 10.27% | 42.5% | -32.23% | | Operating profit | mn USD | -15.6 | 94.7 | - | | Operating margin | % | - | 30% | - | | Net profit | mn USD | -22.8 | 61.7 | -47% | | Net margin | % | - | 19.55% | - | | Capital expenses | mn USD | 115.7 | 60.3 | +91.8% | | Net debt | mn USD | 220.8 | 404.4 | -45% |
Source:company data, Finam estimates
Ore processing costs rose by 22%, lagging behind overall industrial inflation in the country, which stood at 25% for the year. However, expenses per ounce of metal at the Dukat mines, the Lunnoye silver mines and the Kakanya gold mines surged by 33%, outpacing production price inflation. The high rise in expenses is attributable to processing ore with a low metal content. The company's capital expenses, including exploration and equipment replacement costs, nearly doubled to USD 116 million. By tapping the proceeds from an IPO of common shares, the company managed to reduce its net debt by 45% to USD 221 million.
In 2008 the company is to scale down its future contacts in a bid to boost its revenue from ore extraction and silver production. In addition, the company is set to increase its metal output on expectations of price rises on precious metals. We expect the company to earn over USD 500 million in sales revenue in 2008.
We estimate the fair value of Polymetal shares at USD 9.05, which implies an upside potential of 13% to the current stock valuations. Sulinov Aleksey
Other comments of the day
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Polymetal
Capitalization: $945 000 000,00
Common shares:
Price: $3,00
Delta week: 20,0%
Delta month: -40,0%
Delta year: -57,9%
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0.569
0.073
