Polymetal’s Screaming Buy, Blackrock Doubles Stake – At What Political Risk?

Polymetal (LON: POLY) shares have been, at times in these past few days, a screaming buy. That’s if we work by the traditional measure of share valuation that is. Polymetal is a mature gold miner. It’s also a well-run gold miner, one with all in costs around the $1,100 to $1,200 per ounce level.

When the Polymetal share price has hit £3 or so, which it has intraday, this means a trailing 30% dividend yield. That’s absurd, a screaming buy, for a mature gold miner. Especially when we consider further details about the company.

Gold tends to increase in price in troubled times so that value of output is increasing. It’s also true that most costs – the costs of mining and the labour force – are in rubles and the collapse of that currency thereby reduces extraction costs. So, Polymetal margins are widening from their already substantial level.

Also Read: Base & Precious Metal Trading Guide

Fund managers and investment firms like Blackrock can do this mathematics which might well be why Blackrock has just doubled its stake in Polymetal, from 5% to 10% of the outstanding equity. That holding is spread across some 90 different funds within the group.

However, there is also that considerable political risk to have to deal with. How far are those sanctions going to go? One reading could be that sanctions on gold exports are unlikely – they never did happen in Soviet times even. There are already restrictions upon the ability of Russia-based companies being able to raise further investment capital but that’s not a great worry for a mature miner. It’s feasible, possibly, that quotations will be limited, or even suspended, but that’s again unlikely unless hostilities spread, at which point we’ve all got rather larger problems.

What could be more significantly risky is policy changes within Russia. Will foreign companies still be able to own Russian mining assets, it’s possible to imagine scenarios where they can’t. On the other hand, there’s that argument that this is unlikely to be a long-running event, a resolution is likely one way or the other within likely investment horizons.

That is, unfortunately, the sort of political analysis that has to be done in order to make the Polymetal share price valuation. Clearly, Blackrock has done so and taken the plunge.

There is one more immediate Russian action which impacts Polymetal. The Central Bank has now said that exporters must remit 80% of foreign currency to said Central Bank, to be exchanged for rubles. This is a reversal to immediately post-Soviet conditions for gold and other miners. Specifically for Polymetal, this will restrict the hard currency available to pay the dividend. So it’s possible that we’ll see a reduction in that yield at the next reporting date.

By the usual objective measures, Polymetal is a screaming buy. Add in those political concerns and it’s not so obvious that it is. Which leaves us as traders with the question – follow Blackrock or not?