Source: made by Author

Given the steady performance of Polyus (OTCPK:OPYGY) and the pretty high price of the stock in the last few quarters, now the investment case has become simpler than ever: it’s now about gold prices in the medium term and about Sukhoi Log deposit in the longer term. While Sukhoi Log brings more and more positive news, the short-term perspectives of gold don’t look encouraging. Thus, I remain neutral on the stock for now.

Q3 Production Results Overview

Source: Company data, Author’s spreadsheet

Total gold production in the third quarter increased by 2% YoY to 771 thousand ounces. In annual terms, gold production remained unchanged.

Source: Company data, Author’s spreadsheet

Ore production is up 5% YoY to 18,264 thousand tons due to the intensification of mining operations at Natalka, Verninskoye, and Kuranakh.

Source: Company data, Author’s spreadsheet

Estimated revenue from gold sales amounted to $1,444 million, up 36% YoY. At the same time, the estimated weighted average selling price of gold was $1,907 per ounce, 11% higher than in the second quarter of 2020.

Source: Company data, Author’s spreadsheet

Net debt as of September 30, 2020, is estimated at $2,299 million vs. $2,506 million at the end of the previous quarter.

Overall, Polyus reported strong operating results for the third quarter, which once again confirms the company’s resilience in the face of the pandemic.

Sukhoi Log Update

Polyus presented the first JORC Ore Reserve estimate for its flagship Sukhoi Log project and also published an updated Mineral Resource estimate for the deposit.

As of May 31, 2020, ore reserves are initially estimated at 540 million tonnes with an average gold grade of 2.3 g/t, which is equivalent to 40 million oz. Mineral resources of the Sukhoi Log are estimated at 1,110 million tonnes with an average gold grade of 1.9 g/t, while gold resources are estimated at 67 million ounces (previously estimated at 63 million ounces, an increase of 6%).

Source: Polyus

The figures may rise after more drilling and studies. The next important stage in the development of the Sukhoi Log will be the publication of the results of the Pre-Feasibility Study, which is expected by the end of this year.

For reference, Polyus is going to start developing the Sukhoi Log in 2023 and finish all necessary construction projects in 2026. The company has already started spending on infrastructure for Sukhoi Log, and it seems that the coronavirus won’t affect the timeline of the project.

On The Stock

Source: TradingView

Considering that Polyus operates flawlessly for quite a long time, I think that this factor is already fully priced in the stock. Since March, the company follows gold prices pretty close, and this looks like a defining factor for the stock’s behavior in the near term.

The gold outlook doesn’t appear promising in the next few months. Weak jewelry demand, sales of gold by central banks, and disinflationary trends around the world will keep gold prices under pressure, so it seems that we may see a better entry point for Polyus in the next few quarters.

Another interesting point is that the management gradually sold portions of shares this October:

  • CEO of Polyus Pavel Grachev reduced his stake by 0.0034%, from 0.2533% to 0.2499%
  • Senior Vice President of Polyus Vladimir Polin reduced the stake by 0.0029%, from 0.2171% to 0.2142%
  • Polyus’ CFO Mikhail Stiskin reduced the stake by 0.0016%, from 0.1200% to 0.1184%

These sales, though relatively small, come in line with a broader trend of selling stakes in gold miners we could notice in the Russian market these months. Polymetal’s (OTCPK:AUCOY) CEO Vitaly Nesis recently sold a 4% stake in the company, and Highland Gold (OTC:HGHGF) was sold to a new owner who bought out the majority of shares, including stakes of the company’s management.

Despite that, these sales have their own underlying reasons unknown to the broader public, it still makes me think that, probably, we wouldn’t see such insider activity if there was a perspective of seeing gold prices at much higher levels in the foreseeable future.

The Bottom Line

I keep my long-term positive view on Polyus and stay cautious on the mid-term outlook. From what we see at the moment, Polyus prioritizes deleveraging instead of increasing dividends, and that makes sense as the company needs to be prepared for developing the Sukhoi Log better than ever – with fully ramped up capacities and a strong, low-debt balance sheet. In this regard, I don’t expect dividend hikes anytime soon.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.