Results 2015: Gold in Russia – cheap and cool

Results 2015: Gold in Russia – cheap and cool


Moscow. December 24. World gold production is going through hard times: the decline proved more protracted than initially hoped experts, industry giants are selling assets in the struggle for efficiency and the reduction of the debt burden. “Over-indebtedness” and “industry consolidation” – these words sounded almost as often on other mining and exploration forum Minex in 2015, describing the situation as in mining in General and gold mining in particular.

But Russian gold mining companies were in a much better position compared to their global counterparts. The reduction of costs denominated mostly in rubles, increases their margins, it allows to generate sufficient cash flows not only to repay the loans and avoid the sale of assets, but also to please your shareholders a decent yield. In General, gold in Russia is once again “cool”.

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The world price for gold in 2015 continued to fall. Compared to 2014, on average they fell by another 8%, from $1266 to $1160 per ounce. And from the first of November 2015, the LBMA price and all the time remained below $1100, on Wednesday evening the benchmark amounted to $1068,25 per ounce.

In the basis of falling prices in 2015 were investors ‘ concerns in the tightening of monetary policy by the fed, explains Vice President of Golden coin house Aleksey Vyazovskiy. “The fed did raise rates, but not immediately, but only in December and at a modest 0.25 per cent,” he says. In 2016, according to experts, dollar quotations will stagnate.

“We believe that in the first half of 2016 the price of gold could fall below $1000 per ounce, however, due to various factors, the market should get good support that will allow prices to rise again above this level”, – said analysts of Sberbank CIB. According to their forecasts, the average price of gold in 2016 will be $1100 per ounce. “The dynamics of gold prices should be broadly neutral – about $1100 per ounce (+3% to the spot)” – I agree in BCS.

The same estimation is given by the Union of gold miners. “Weak demand for physical gold in the world amid the ongoing tense geopolitical situation will lead to high price volatility in the range of $1000-1250 per ounce, and our forecast average price of gold in 2016 is $1100”, – say the experts of the Association.

“I take the position of a group of people who believe that there will be failure, – said earlier in an interview with the CEO of Petropavlovsk, Pavel Maslovsky. And I hope that by the end of next year the price will start to recover. That is about $1200 we will see $1250”.

The main risk factor in gold prices – the pace and extent of rate hike by the fed, explain to Sberbank CIB. Also a sharper than expected slowdown in the global economy, along with the “hard landing” of Chinese economy, may result in sales and low demand for jewelry from retail investors. At the same time, institutional investors view gold as a reliable asset for investment, analysts say.

“The cost of gold is often influenced by investment demand, which is to evaluate or predict the impact on the price of the precious metal is a rare achievement. In the short term the gold price will remain volatile, – said General Director Nordgold Nikolay Zelensky. In the long run, we expect the price of gold will rise due to increasing demand from Asian countries, is associated, primarily, with improving the living standards of the population of these countries, as well as lower production volumes of the precious metal and rising costs”. The baseline scenario of Nordgold’s budget for 2016 calculated based on the price of gold at $1130 per ounce.

… VS costs

Despite the decline in prices, domestic gold mining companies of 2015 turned out to be quite successful. Due to the significant cost reduction (often associated with the devaluation of the ruble) they went back to comfortable profitability.

“This year the gold is cool,” says the head of the group of companies “Mangazeya” Sergei Yanchukov (in addition to gold mining is engaged in the construction and gas production).

The rate of decline in total cash costs of the Russian miners in 2015 was in the two digit numbers (e.g. 12% in the first half of the year – Polymetal, 21% of Nordgold, 34% – Polyus Gold), which more than compensates for the price dynamics.

“The devaluation of national currencies and running optimization program expenditures have positive impact on the cost of production of the world’s gold mining companies, for the second year in a row moving down cost curve. Russian gold producers are no exception, winning even more than others because of stronger devaluation of the ruble”, – says senior Vice-President, Finance and strategy “Polyus Gold” Mikhail Stiskin.

As a result, the margins of Russian producers is growing (Polymetal profitability adjusted EBITDA increased from 43% to 46%, Nordgold – from 40% to 52%, Polyus – from 39% to 58% in the first half).

As a result Polymetal, for example, again decided to pay shareholders special dividends – for a total of $127 million, Coupled with regular dividends that, according to estimates company, provides a dividend yield in the amount of 4.6%.

Petropavlovsk, in fact the entire 2014 held under the fear of default on Eurobonds in 2015 focused on maximizing free cash flow, control costs and reduce debt. As of the end of September 2015 the company’s net debt amounted to $675 million, by the end of the year, the company plans to reduce its approximately $600 million and to comply with financial covenants. Analysts at SP Angel, at year-end net debt-Petropavlovsk-to-EBITDA ratio will fall to 2.3 from 3.7 a year earlier.

In absolute terms, the highest debt level Polymetal – net debt $1,231 billion as at the end of the first half, but compared to this EBITDA is only 1.8. From the relatively large Russian gold miners a great debt is holding “Seligdar” (Top-15). The company’s net debt as at the end of the first half was 12.8 billion rubles, which is more than 5 times annual EBITDA.

“The debt burden of the world’s biggest miners has almost reached a record level of $200 billion, – said General Director, Wardell Armstrong Russia Yulia Boyko, speaking at Minex. – However, it is expected that revenue will fall to the lowest level for the last 6 years.” The rate of debt has grown 6 times in the last 10 years, and revenue is only 2.5 times, she said.

“Russian gold miners this applies to a very small extent”, – says the head of the Union of gold producers Sergey Kashuba. Russian banks have gained significant experience working with precious metals that will not allow companies to collect debts on which they cannot pay. “Remain isolated cases, but in General it is not Russia”, – said Kashuba.

According to Stickin, global gold mining industry generally cannot be called akreditovanniy compared with other mining companies: dozens of the world’s largest gold producers Barrick Gold, only the ratio net debt/EBITDA of close to three (2.8 m at the end of the third quarter). The following Newcrest is about 2.2, and the rest is below 1.7.

“The company over the past two years persistently reduce costs and capital expenditures, avoiding costly acquisitions, while separating and selling non-core or high-cost assets and focusing on generating cash flow to reduce debt load. In some small companies the situation is worse, but overall it doesn’t change the overall picture,” said Stiskin. However, at the current price of gold a significant part of world major manufacturers does not generate cash flow for shareholders. In addition, many new projects in the current market environment are unprofitable, he acknowledges.

Many manufacturers have helped by the devaluation of local currencies, not only in Russia but also, for example, in Canada, said Zelensky. “However, the potential for efficiency is not infinite, the effect of the devaluation is already earned, and costs can begin to grow in 2016 because of inflation,” he warns.

Consolidation?

Barrick Gold, the world’s largest gold producer, in 2015 as part of reducing the debt burden reached deals to sell assets (and delivery of metals) of $3.2 billion On the world gold market and had several large transactions: Newmont bought mine AngloGold Ashanti CC&V in the U.S. ($820 million), but sold its new Zealand subsidiary to a local company OceanaGold ($101 million). OceanaGold also in the process of combining exploration with Romarco, the main asset of which is enhanced by the project in the U.S. (the amount of the transaction is approximately $660 million). And so on.

On the Russian market of 2015 was marked primarily by megadisco – purchase structures said Kerimov and his father founded the Suleiman Kerimov Foundation, the Suleyman Kerimov Foundation is the largest domestic zolotodobychi Polyus Gold. The whole company was valued at $9 billion, the cost of Treasury shares was $5,38 billion (on the eve of the offer they owned 40.2 percent). After the tender offer followed by delisting of Polyus Gold with the London stock exchange and forced out the shares of minority shareholders. Now the parent company of the group is OJSC “Polyus Gold”, in which more than 95% of shares is controlled by Polyus Gold. “The pole Gold” will retain its listing on the Moscow exchange, and promises to adhere to the standards of corporate governance, a public company.

To call a transaction with Polyus Gold market is completely impossible, the most part of the structure Kerimov bought from friendly, to some extent, business people. The desire of the main shareholder to consolidate the company market experts often explain intent soon partially or fully to resell. The media even reported on the possible applicant – diamond digger “ALROSA”, but this is soon refuted all related parties.

Less loud, but more revealing was the deal on purchase of “Uzhuralzoloto” 100% “Sovrudnik”. As a result the combined company immediately got in the Top 5 domestic manufacturers of gold (the forecast for the end of 2015 and 12 tons of precious metals). The transaction amount was not disclosed.

There were a few smaller deals. For example, changed the owner in PJSC “Xenievskiy mine”. Also Swedish Auriant Mining signed an option agreement with the structures of Roman Abramovich and received the right to purchase 50% of five gold projects on the territory of Chukotka for $32.5 million (Auriant already performs functions of the sole Executive body of the Valunistoye mine and kanchalano-amguemsky area, and the rest of the three projects provides consulting services). The group of companies “Mangazeya” sold to a Chinese investor share in LLC “Geotweet” (mine of gold ore at the site of the Ancient Dnieper area in the Magadan region) for $8 million

By the end of the year, Polymetal and “the pole Gold” has announced the creation of a joint venture to develop Nezhdaninskoye (this is one of the country’s largest gold deposits, with 2006 fully owned by Polyus). In the first stage, Polymetal will receive 15.3 percent, he will pay the “Pole” of $10 million, and another $8 million invested in the project. In the second stage, the share of Polymetal may increase up to 50% in exchange for investment in the project in the amount of $72 million as Managing partner of JV will be Polymetal.

However, full consolidation of the industry, which experts have long promised the Russian market of gold mining, until it happens. According to a survey conducted by Ernst & Young together with the Union of gold miners among the Russian miners, with 28% of market participants expected growth in the number of mergers and acquisitions. The EY experts said that in 2015 and 2016, expect a burst of activity in M&A in Russian gold mining.

“Expected at the 2015 M&A deals planned at $1,200 per ounce. In fact the price was lower. But the producers received a respite, support in the form of the devaluation of the ruble. This pushed the need of M&A for a while,” explains Sergei Kashuba. “Due to high ruble price is no urgent need to sell assets to those companies that have a need to fundraise” – I agree Yanchukov.

Growth points

At the moment the head of the branch Union Kashuba identifies four “points of growth” of the domestic gold mining. First of all, the development of new large deposits: Natalka (unfinished “the pole Gold”) and Nezhdaninskoye, as well as kuchus and, of course, Sukhoy Log (still in the undistributed Fund; the auction for Sukhoi Log according to the latest information is expected in 2016, already has a clear favorite – “rostec”, however, the authorities have for many years to discuss the sale of this license).

Second, the creation of hubs for processing ores Neuperlach. A similar idea for several years, promoting Polymetal, which uses the transportation of ore to a single processing hub from different fields (often remote), both our own and other companies. To buy ore from independent mining companies and to carry on its own processing capacity is a good solution for manufacturers, said in 2014, CEO Vitaly Nesis. Polymetal itself has experience as a ore buy-side and sell.

Another direction – hubs for processing of refractory ores. For example, Petropavlovsk looking for a partner for autoclaved project, including ready to allocate it in a separate enterprise on the basis of Pokrovskiy autoclave-hydrometallurgical plant and resources and reserves Malomyrskogo field.

“The mass of refractory ores, refractory ores miners a lot, the number of concentrate producers is also growing, – explained his idea Maslovsky. – Transportation concentrate, when it contains 50-60 g/t and our hub is located near a railway is not so expensive. From somewhere in Siberia, Eastern, Western, or even from the European part to bring the autoclave to build. Trust me. I thought he was. Rates take and you will see that it will be penny in per gram, if you’re taking in a ton”.

Finally, the transition to underground mining, calls another trend Kashuba. The same could Petropavlovsk already in 2016 to start underground work at its pioneer project (to start experimental work, which will be produced a certain amount of gold), and also considering underground mining at Malomir. As explained Maslovsky, when the price of gold is $1150 per ounce open-pit mining at the Pioneer remains viable, but possible and underground mining, thus the company achieves another goal by providing a framework for further underground exploration, which will sooner or later need.

According to the forecast of the Russian gold producers Union, in 2015 gold production in the country will be 291 / tonne (about 1% more than in 2014). In 2016, the organization predicts the zero dynamics of the production or growth of 1%. Gold mining in the world and in Russia in particular, in 2014-2016 is experiencing peak volumes, said the head of the Union. “For 2017 I put a question mark,” he adds.

Estimated Zelensky, gold production in the world may begin to decline in 2016. “This is because in the past year more than a quarter of manufacturers produce gold with costs above market prices. Accordingly, it is possible to assume that if prices do not rise, these facilities soon will begin to retire,” he says.

To expand the trend of falling production is not easy. “If you look at the history of the development of the industry, we can see that despite rising gold prices in the early 2000s, production continued to decline until 2008. That is the gold mining industry will need about 7-8 years to develop a trend. The laws of cyclical economic development suggests that our sector this time may be faced with similar dynamics,” – says Zelensky.