Research Notes

Polyus Gold - an Up and Coming Blue Chip Soon to Go Public

Abundant free cash, ambitious plans and also favorable conditions on gold market have set the stage for Polyus to achieve dynamic expansion in the future. The company, whose stocks have not yet been listed on any exchange, deserves close attention on the part of investors. Little time is left before Polyus is listed, but unofficial valuations have already been set on the OTC market.

At the beginning of 2006 Norilsk Nickel’s gold assets were spun off into a new company, Polyus Gold, which received all assets of Polyus. The new company plans to obtain a listing on RTS and/or MICEX in April-May 2006. Meanwhile, the company’s shares are already trading on the “grey” market at $35-37.

The sale of Polyus’ 20% stake in Gold Fields announced on March 2, 2006 will fetch the company around $2 bln (in turn, Norilsk Nickel acquired this equity position earlier for $1.2 bln). Meanwhile, all of Polyus Gold’s funds are estimated at over $2.6 bln.

We view the sale of a stake in Gold Fields as advisable. Despite its plans Norilsk Nickel has failed to expand cooperation ties with this foreign gold miner and the effect of this transaction will be neutral for Polyus’ operations. Upon completion of the transaction Polyus will have the financial resources to execute a large-scale investment program ($2.8 bln in 2005-2010), or the funds raised could be spent on other acquisitions, which the company does not rule out.

A positive factor for Polyus is gaining control over Yuzhno-Verkhoyanskaya Mining Company (in which Polyus previously held a 50% stake) through the sale of its 20% equity position in Irish Celtic. The main value of this asset is the Nezhdaninskoye field in the Republic of Yakutia which ranks second in Russia by gold reserves after Sukhoi Log and is marked by high gold content.

The company’s cost side is on the rise, as a result of which we also revised Polyus Gold’s cash expenses.

We amended our valuation model for the company, as a result of which the target price of Polyus Gold shares was upgraded primarily thanks to an increased forecast for gold prices on the global market and also taking into account other factors set forth in this research report.

According to our estimate, Polyus Gold is valued at $8.4 bln or $44 per share.

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Nataly Kocheshkova

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Sector: Metals, Non-Ferrous Metals
Company: NorNickel, Polyus Gold

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