Page 125 - RusRPTMay19

resources rose to 191.5mn oz from 189.9mn oz in 2017.
Highland Gold’s FY18 earnings were in line with expectations. However, the delayed Kekura start-up, as well as the higher outlook on capex, mean a more conservative NAV estimate, so we are lowering our 12-month Target Price 12% to GBp 150. That implies an ETR of -17%, so we are downgrading the stock to Sell. The recent strong performance with the higher dividend payout resulted in a 20pp outperformance vs. the FTSE Gold index, and at 2019F EV/EBITDA of 6.5x and P/NAV of 1.3x (premia of 42% and 20% to peers) the company looks overvalued. We expect a catch-up to fundamentals. EBITDA in line, net income lower on higher tax rate. 2H19 EBITDA of USD 82mn was 1% below our estimates, driven by slightly lower sales volumes. At the same time, net income of USD 27mn was much weaker because of the higher effective tax rate of 53% in 2H19, due to the utilisation of deferred income taxes and dividends withholding taxes. Kekura start-up delayed by 2-3 years to 2023. Despite the capex acceleration in 2019, the risk of the Kekura project being delayed materialised (see our Highland Gold: Kekura Feasibility Study; mixed, but supports sentiment as project progresses, of 7 February 2018), as the company now expects commissioning in 2023, 2-3 years later than guided last year. By the end of 2019, the mine is planned be connected to the state grid, according to management, which might improve the project’s economics and allow for pilot plant construction to derisk the project.Capex to double in 2019 on Kekura spending kick-off. The company guides for capex to increase to $116mn in 2019 (average $RUBat 65), in line with our estimates. However, we had not expected an earlier start to pre-stripping at Kekura, which translates to $10mn in 2019F and an average of $26mn additional capitalised stripping in 2020-22F.
Highland Gold has reported a positive 1Q19 trading update, with production up 21% y/y to 72koz (15% above our estimates). This beat our expectations mainly due to the strong grade print atmnV. However, given that it was 18% above the average reserve grade, this might be a one-off. The company reiterated its FY19 production guidance of 290-300koz, which is in line with our view. The valuation of 5.8x remains demanding compared with global peers, in our view. Our unchanged 12-month Target Price of GBp 150 implies an ETR of -6%: Sell reiterated.
Gold miner Polymetal has reported a positive 1Q19 trading update. Output of 374koz was up 27% y/y on the back of Kyzyl ramping up and exceeded our estimates by 7% on higher grades at Omolon. As the Kyzyl upside has already been realised in 1Q19 and the sustainability of better mining conditions might be cemented in the 4Q19 reserve statement update, we reiterate our positive view on 2019 output (we are above the company’s guidance). Our unchanged 12-month Target Price of GBp 960 offers an ETR of 24%: Hold reiterated. 1Q19 gold equivalent output of 374koz was up 27% y/y and exceeded our estimates by 7%. This was primarily driven by the higher grade processed at Omolon, where higher grade ore from Olcha was introduced into the feed during the winter season. Meanwhile, the grade and recoveries at Albazino mine undercut our expectations, as the convergence towards the reserve grade of 4.3g/t (vs. 5.2g/t mined in 2018) occurred faster than we had anticipated. However, this was offset by the release of concentrate from stock and so there was little effect on 1Q19 output. Kyzyl output matches estimates: better mining conditions offset by higher offtake volumes. Output at Kyzyl of 78koz matched our expectations, despite the majority (71%) of concentrate being sold to off-take. Indeed, processing volumes (476kt) and the head grade (6.9g/t) both exceeded our estimate by
125 RUSSIA Country Report May 2019 www.intellinews.com