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Questor: precious metals are one coronavirus safe haven, so Polymetal is worth buying
Questor share tip: the FTSE 100’s only miner of gold and silver offers a counter to any further stock market crash
Investors who hope to flee the stock market’s recent woes and capitalise on a rising gold price may find the task more difficult than expected. There is only one company in the FTSE 100’s precious metals and mining sector: Polymetal International.
It is a Russia and Kazakhstan-focused operation and its nine mines produce gold and silver. Unlike the wider FTSE 100, its shares have gained ground over recent weeks as the price of gold has risen to within 8pc of its record high.
Increasing risk aversion among investors in response to Covid-19’s impact on global economic growth is not the only reason for gold’s 11pc surge since the start of the year.
The Federal Reserve’s emergency interest rate cut increases the appeal of precious metals compared with income-producing assets. It may also weaken the dollar and make gold more affordable across the world.
In addition, the Federal Reserve’s swift action and the US government’s $8.3bn (£6.6bn) in emergency funding to fight Covid-19 show the scale of concern among policymakers about the possible impact of the disease on the world economy.
Such a scenario may attract a rising number of investors to precious metals miners, thanks to the perception that the commodities they produce offer a store of wealth in volatile times.
Rising gold and silver prices were not the only catalyst behind Polymetal’s 31pc increase in underlying earnings in 2019. The company maintained a disciplined stance on costs: its “all-in sustaining cash costs” (which incorporate those incurred in the complete mining cycle from exploration to closure) were broadly similar to the previous year’s, while higher production volumes compounded its profit increase.
The miner expects its costs and output to remain at similar levels to those recorded in 2019 over the next two years. It also expects production growth to resume from 2022 as new projects within its development pipeline come on-stream. This should mean a production increase of around 15pc by 2023.
Polymetal has a long history of making acquisitions to boost its asset base. It also intends to invest in greenfield sites while making asset disposals to focus its portfolio on long-life, low-cost mines that can make a tangible impact on its performance.
Investors are rewarded by a yield of 5pc and a dividend policy by which 50pc of underlying earnings are paid to shareholders each year. The business has also paid three special dividends in the past five years and used its improving free cash flow to reduce debt, which is now below its target level.
Although this helps to make the business less risky to some extent, a fall in the price of gold would affect profitability. This may not be an immediate concern for shareholders at a time when Covid-19 is widely expected to cause greater risk aversion among investors, but the speculative element of gold’s current price appears to be relatively high.
Polymetal’s exposure to Russia means it is susceptible to the continuing geopolitical risks in the region. However, a price-to-earnings ratio of 13.2 suggests that its shares offer a margin of safety.
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At a time when the near-term outlook for the world economy is uncertain and an accommodative monetary policy is being pursued in America, the company’s prospects appear to be improving.
The recent rise in the prices of precious metals is unlikely to continue unchecked forever. Polymetal, therefore, is unlikely to be a panacea for corporate and economic stress across the world economy.
But for investors who seek a possible counterweight to the FTSE 100’s recent decline and the possibility of further falls, the index’s only precious metals miner could appeal.
Questor says: risky buy
Ticker: POLY
Share price at close: £12.22½
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