Miner delivers strong earnings despite gold being in limbo

Our stocks writer examines an update from Polymetal International against the backdrop of a stagnant gold price.

A gold price in limbo amid ongoing uncertainty over the outlook for US interest rates today helped FTSE 100-listed Polymetal International (LSE:POLY) deliver an 8% rise in half-year earnings.

Polymetal, whose assets include its “world-class” Kyzyl mine in north-eastern Kazakhstan, reported an average realised price 8% higher at $1,793 an ounce in the first six months 2021.

That's not much different to the current market price, which has been trading in a narrow range over recent weeks as recovery prospects for the US remain far from clear.

Gold is regarded as a hedge against inflation, but the yellow metal's dollar denomination also makes it vulnerable to a stronger greenback with the higher bond yields associated with an economic recovery raising the opportunity costs associated with holding no-yield gold.

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This means the latest comments of Federal Reserve chairman Jerome Powell will be closely watched in tomorrow's online address to the Jackson Hole economic symposium.

Wall Street will be hoping that Powell provides some kind of timeframe for the tapering of economic support, given that the US economy is now generally robust and expanded at 6.5% year-on-year in the second quarter.

A note this week from Liberum said holding gold bars and equities still made sense to protect against a wide range of macro risks, most notably the threat of a renewed surge in Covid-19 cases.

It also highlighted the potential for an inflation shock as governments attempt to return economies to normalised growth rates.

Liberum forecasts a decline in the spot gold price to $1,700 by the end of the year, before falling to $1,640 in 2022, although it concedes there is now an upside risk to its bearish outlook due to the recent resurgence of the virus in key economies, including the US.

Its favoured pick for UK exposure is Shanta Gold (LSE:SHG), which Liberum said had many bullish catalysts over the remainder of 2021 after strong drill results in its West Africa project. It has a target price of 35p, which would be the highest level in a decade and compares with 13.25p today.

Polymetal shares, meanwhile, were 43p lower at 1,480.5p after its latest results included an increase in capital expenditure guidance for this year due to materials and wage inflation.

It now expects a figure of between $675 million and $725 million (£491 million and £527 million), rather than the $560 million in previous forecasts.

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Higher prices for gold and silver against a backdrop of stable production meant underlying earnings rose 8% year-on-year to $660 million (£480.5 million).

Polymetal is handing 50% of its earnings to shareholders after announcing an interim dividend 13% higher at 45 cents a share.

Polymetal first joined the FTSE 100 index in 2011, when the gold price also traded at record levels. Its shares topped 2,000p last August after a surge in the gold price fuelled by safe-haven demand from central banks and private investors during the height of the pandemic.

The company's portfolio of nine producing mines makes it a top-10 global gold firm and the second largest in Russia, while it is a top-five global silver producer.

Kyzyl was acquired in 2014 for $618.5 million, with its large high-grade reserves and low capital intensity making  the facility the main source of medium-term growth and significant shareholder returns.