Interactive Investor

Stockwatch: double-digit yields for this FTSE 100 stock?

30th March 2021 12:37

Edmond Jackson from interactive investor

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The company is currently out of favour, but could become an attractive medium-term investment.

I’d like to draw your attention to a well-established gold miner, offering a fat yield while its stock is out of favour.

At £14.13 a share, Polymetal International (LSE:POLY) is capitalised at £6.7 billion in the FTSE 100 index. Its chart is currently testing a support line for a rally that began in August 2018 from around 600p, and tested £20 last August, but has since been in a downtrend. 

Gold particularly affected by self-reinforcing trends 

Chiefly behind this drop is a near 20% fall in gold prices since testing $2,100 (£1,525.9) an ounce last August. Gold price is very much a function of what people are prepared to pay, with trend-following more apparent than for assets governed by industry fundamentals.

Yet as a store of value gold has a massively longer history than bitcoin and enjoys the credibility of central banks’ buying. 

The pandemic’s sudden manifestation a year ago triggered a flight to safety, hence a bull run in gold which overshot by late summer, replaced by a similar self-reinforcing trend down.

This week has started badly, with a test of $1,700 seen as key, albeit this is just near-term sentiment.

Medium-term perception will likely be influenced by inflationary expectations, where the jury is currently undecided. However, higher commodity prices since late last year look set to affect goods, and indeed services where transport, i.e. oil, is involved.  

There is also soaring government debt world-wide, both to cope with Covid-19 and with a Democrat-controlled US senate opting for debt-financed economic aid to its citizens.

Meanwhile, the US Federal Reserve’s mood music is to help the economy boom and worry about inflation later. 

So, in terms of managing a portfolio for different scenarios, it could be timely to take advantage of gold’s current weakness to buy into selective miners as a hedge against latent inflationary risks.  

In the top 10 of world gold producers  

With a reserves base of 27.9 million ounces, Polymetal is based in Cyprus. It owns nine gold and silver mines and has three development projects across Russia and Kazakhstan.

For some investors that will add country risk to the inherent uncertainties of mining, despite its FTSE 100 listing. It does reflect geographic exposure of the precious metals industry.    

The company focuses on high-grade assets and utilises the pressure oxidation technology that has similarly transformed extraction from refractory ore deposits at mid-cap Petropavlovsk (LSE:POG).

The 2020 results in early March showed production up 4% to 1.6 million ounces (of gold-equivalent overall) ounces with 1.5 million guided for 2021 and 1.6 million for 2022.  

Page 12 of the 2020 annual report (see the company’s website) does cite advances at two key POX projects, so possibly management is justified with its longer-term optimism.  

Yet the indicated numbers are more of consolidation than growth, making Polymetal somewhat hostage to fluctuations in commodity prices. Moreover, despite costs easing 3% to $638 an ounce of production in 2020 (due to favourable currency translation, with costs denominated in weaker Russian and Kazakh currency) they are guided at $700 to $750 an ounce going forward.  

So, it is not altogether surprising that Polymetal has seen bias against its stock since last year while appetite for growth plays became predominant.

With gold prices continuing to ease in 2021, it has not benefited from an aspect of switching into cyclical recovery stocks either. 

High rates of return on capital employed and equity 

Despite the apparent lack of near-term intrinsic growth appeal, the table shows a very respectable progression in financial return ratios to rival plenty of expensive growth stocks.   

Robust free cash flow also supports a strong record of dividend growth that implies a 6.6% yield, based on sterling translation of the 129 cents total payout in respect of 2020.

If consensus expectations are fair, for this to reach 160 cents this year and 203 cents in 2022, then there would be an 8.2% and a10.4% yield, respectively.  

That strikes me as speculative relative to the production and cost profile, as well as inherent uncertainties of commodity pricing. But I am cynical enough to regard most published earnings and dividend forecasts as guided by finance directors – or at least checked, if detaching from reality – so I would still pay attention. 

Impressive 2020 results buttress the company financially 

While revenue jumped 28% to $2.9 billion – broadly tracking gold and silver prices which both rose 27% - profit numbers jumped greater due to inherent operational gearing of a miner’s business model. Operating profit soared 84% near $1.5 billion and net profit by 125% to $1.1 billion, with earnings per share (EPS) up 130% to $2.3. 

Mind how the actual volume of gold sales only edged up 2% and silver actually fell 13%.

Costs eased by 3%, chiefly due to favourable currency conversion to the US dollar which outweighed Covid-related costs, as well as an increase in royalties.  

Net cash flow from operations jumped 71% to $1.2 billion, supporting a 34% rise in capital expenditure to $583 million. This was 8% above guidance to mitigate effects of the pandemic on project schedules, similarly operational stability measures. 

Even so, free cash flow (i.e. what is left after capital expenditure etc) rose 133% to $610 million. This allowed a total dividend payout of $608 million, or $1.29 a share, which was 57% up on 2019. Net debt has also been reduced by 16% to $1.35 billion. 

It meant that year-end cash had risen 53% to $386 million, where, for example, a 160 cents dividend (as projected for 2021) would cost $339 million.

So yes, the payout is ‘buttressed’, so-to-speak, but this year’s cash flow profile properly needs to grow. 

Polymetal’s financial dynamics will be affected by inherent uncertainties of precious metals prices – here, chiefly gold, also silver and copper – and exchange rate conversion to the US dollar.

For example, the dollar could strengthen if the US Covid-19 vaccination rate continues successfully, but already there is concern that the infection rate is rising again. There are many variables at work here. 

I would therefore take the 2021-22 dividend payout projections with a pinch of salt, while feeling comfortable that a circa 6% yield is a fair benchmark for the medium term. This ought to constitute support for the stock. 

Polymetal International
Year end 31 Dec

  2015 2016 2017 2018 2019 2020
Turnover - $ million 1,441 1,583 1,607 1,706 2,241 2,865
Operating margin - % 33.3 36.7 28.1 29.9 34.2 51.4
Operating profit - $m 480 581 451 510 767 1,472
Net profit - $m 221 395 354 354 480 1,086
Reported EPS - cents 52.2 92.6 69.8 78.1 104 227
Normalised EPS - c 52.2 92.8 70.0 80.6 109 225
Operating cash flow/share - c 116 124 122 114 146 249
Capital expenditure/share - c 48.5 63.6 87.9 76.4 91.5 122
Free cash flow/share - c 67.2 60.7 34.4 37.5 54.6 127
Dividend/share - c 21.0 27.0 44.0 48.0 62.0 129
Dividend growth - % 0.0 28.6 63.0 9.1 29.2 108
Earnings cover - x 2.5 3.4 1.6 1.6 1.7 1.8
Return on capital employed - % 28.9 23.8 15.5 14.9 20.1 38.7
Return on equity - %   53.8 26.6 26.2 30.0 55.3
Cash - $m 51.8 48.0 36.0 379 253 386
Net debt - $m 1,298 1,330 1,420 1,520 1,511 1,384
Net assets/share - c 115 229 304 294 410 424

Source: historic company REFS and company accounts

Three directors have been adding modestly to their holdings 

While hardly showing great conviction, the pattern reinforces my sense that Polymetal is shaping up as an attractive medium-term investment to begin averaging into. 

On 16 March, the chairman added nearly £23,000 worth of shares, at £15.14, to own 22,716 shares overall. Earlier this month, a non-executive director bought £25,650 worth at £17.10 and another £4,400 worth at £14.69. 

Dividends are currently out of favour in a mature bull market, as traders obsess over latest capital gains. Yet this loses sight of the fact that, the higher the price goes, the less value you get by way of discounted long-term returns.

I suggest Polymetal’s dividend record and prospects are now attractively priced, making this an attractive, if higher risk, addition to a diversified portfolio. ‘Buy’. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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