On October 2, Polyus Gold reported its consolidated financial results for 1H 2008. Compared to the year-earlier period, the cost of production rose by 48.36% and revenue surged by 63.15% to USD 518.9 million, enabling the company to fully offset a steep rise in expenses. EBITDA amounted to 203.2 million and net profit reached USD 132.8 million.
Total Cash Costs increased by 28.6% y-o-y to USD 431 per ounce, with cost growth attributed to a change in extractive technology. In the surveyed period, the company distributed its gold output at an average price of USD 910.8/oz, after selling the metal at USD 659.7/oz in the year-earlier period. The company’s prices are usually close to market price, as the company does not apply hedging instruments to defend its market position. We should note that the company finally gave up export contracts in the reporting period, and now distributes its entire output among Russian banks on the domestic market.
Table. Polyus Gold: financial indices, USD mn
| Indicator | 1H2008 | 2H2007 | 1H2007 | 1H2008 + 2H2007 | 2007 | 1H2008/ 1H2007 | 1H2008/ 2H2007 |
|---|
| Revenue | 518.909 | 557.759 | 318.049 | 1076.668 | 875.808 | +63.15% | -6.97% |
| Cost of production | 315.085 | 330.614 | 212.374 | 645.699 | 542.988 | +48.36% | -4.7% |
| Gross profit | 203.824 | 227.145 | 105.675 | 645.699 | 542.988 | +92.88% | -10.27% |
| Gross margin | 39.28% | 40.72% | 33.23% | 40.03% | 38% | +6.05% | -1.45% |
| EBITDA | 203.216 | 238.300 | -43.691 | 441.516 | 194.609 | - | -14.72% |
| EBITDA margin | 39.16% | 42.72% | - | 41.01% | 22.2% | - | -3.56% |
| Operating profit | 147.583 | 145.805 | -94.311 | 293.388 | 51.494 | - | +1.22% |
| Operating margin | 28.44% | 26.14% | - | 27.25% | 5.88% | - | +2.3% |
| Net profit | 132.751 | 134.826 | -75.509 | 267.577 | 59.317 | - | -1.54% |
| Net margin | 25.58% | 24.17% | - | 24.85% | 6.77% | - | +1.41% |
Source: company data, Finam estimates
The first-half losses are linked to the company’s expenditure of USD 133 million on its executive incentive program. EBITDA dropped by 14.72% and net profit was down 1.54%. We also want to turn investor attention to the impact of seasonal factors on our comparative analysis. The company’s profit margins largely remained flat from the previous reporting period as favorable trends continued on the market.
We are positive on the recent decisions by the company’s management regarding the takeover of Kazakh Gold and the rejection of a share buyback program. We believe that the decisions will allow the company to save funds for capital investments, including those in the Natalka deposit project. Capital expenditures by the company remain at a high level, eating over 50% of its total revenues. Given the current environment on credit markets, the effectiveness of these investments will hinge on price trends on the gold market.
Our fair price for Polyus Gold shares is USD 36.2 per share, with an upside potential of 64%.
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