By John Helmer in Moscow
Analysts at Moscow’s Renaissance Capital reckon Russian asset values are priced below bargain basement.
A typo in the lead cannot take the glister off Renaissance Capital’s fresh report on Russian gold buying opportunities.
The report, by analysts Rob Edwards and Andrey Krupnik, is entitled “CIS Gold and Silver: A Golden Opportunity”. The lead paragraph says: “We believe gold is well poisoned [sic] to make further gains in the near term. This is somewhat dependent on movements in the dollar, which has reversed its bull run against the world’s major currencies.”
RenCap analyzes just three of the Russian gold producers – Polyus Gold (PLZL:RU), which is currently trading at $25, 60% down over the past three months; Polymetal (PMTL:RU) at $5, down 40%; and Highland Gold (HGM) at 76 cents, down 75%. Peter Hambro Mining (POG:LN), which is London listed, is down 41%, and currently at 741 pence.
Edwards and Krupnik are recommending buy for Polyus and Polymetal, which they estimate to have upside potential of 157% and 160%, respectively. Polyus is still the object of a tugging match between former partners, Vladimir Potanin and Mikhail Prokhorov. Polymetal was sold by Suleiman Kerimov three months ago to Alexander Nesis, the original proprietor, plus two partners, Alexander Mamut, a Russian, and Petr Kellner, a Czech. Highland, controlled by Roman Abramovich, is reported by Edwards to have comparable upside, but his recommendation is to sell.
It is now the general consensus in the Moscow market that the sharp decline in global oil prices triggered the even sharper deterioration in Moscow share prices, and then the forced selling that led the Russian government to suspend share trading for two days in the Moscow market. A UBS analysis calculates this write-down in asset value to imply an oil price of about $50 per barrel. But even at that level – 33% below the current market price for oil – UBS is forecasting that the Russian economy would still be growing at a 5.2% annual rate of GDP growth; and with wages growth at 15%, with concomitant growth of domestic demand and consumption.
At $60 per barrel, UBS projects a contraction of net earnings for domestic sector companies – consumer goods, retail, pharmaceuticals, telecoms and banking – would average 15% below this year to date. Natural gas and coal would contract by 35% and 30%, significantly less than oil (69%) and steel (49%). But nickel and copper, whose commodity price drives Norilsk Nickel’s share price, are already at their floor because, UBS argues, “we believe the spot nickel price is below the marginal cost of production of Chinese nickel pig iron producers.”
It is this logic that encourages analysts to re-emerge from their bunkers to argue that roughly 50% of the asset devaluation is attributable to the oil price; another 15% to the downturn in metal prices, including gold. The international flight from risk has seen significantly more cash removed from Asian and Latin American emerging market funds than from Russia, although a handful of financial newspapers and US government officials claim to detect a backlash from the Georgian war. Inside the market, it is clearer that this week’s share price fall was driven by at least one, possibly more, default situations for broker banks, caught with inadequate cash and credit to handle the collapse of their share portfolios. Not so much a lack of liquidity, but the refusal of banks to accept counterparty risk and lend, buried equity values below bargain basement.
Edwards now argues that it is safe to re-emerge, and start buying again, especially gold.
“We see the following catalysts for stock price appreciation: Polymetal and Polyus publishing their 1H financial results at the end of September/beginning of October. We expect high gold prices, in combination with sold production numbers, to result in a strong financial performance for the first half of the year. As gold and silver prices rally further, we believe Polyus and Polymetal are set to benefit, as both are significant producers with full exposure to metal prices. We forecast both companies to be free cash flow positive this year. While Highland Gold also shows very high leverage to the gold price, most of its value lies in future projects and, according to our forecasts, the company will not turn cash flow positive until 2013. Foreign investors renewing their interest in Russian gold names. Both Polyus and Polymetal are Russian owned and operated companies and thus carry minimal political risk. We believe this will be recognised by investors, with the two companies representing very attractive value at this time.”