Polyus Vs. Polymetal: The Current Difference And Which Is Better

Stock Market


Gold bullion on pile golden coins a lot of

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Gold and Russia

There are a number of Russian gold mining companies. There’s also a war on and the subsequent series of sanctions. It’s even true that the Russian economy is currently in significant and serious trouble as a result of those sanctions.

It might be a bit capitalist to think about this while the shooting is still going on but there is that definite temptation that there are bargains out there available for the risk loving.

The gold miners would seem to be an obvious target for such thoughts. Inflation and disruption with the internal to Russia economy would, with the associated ruble devaluation, actually reduce their costs. Gold itself is usually sold at the global price, which tends to rise in times of uncertainty and war.

So, we might think that this is the time to pile in. It’s even true, as I’ve pointed out just recently, that gold miners like Polymetal (OTCPK: POYYF) (OTCPK: AUCOY) are underpinned in a way that many other Russian stocks are not. So, this should be true of Polyus (OTCPK: OPYGY) as well, right?

Well, no, not exactly.

Polymetal and Polyus

They’re both gold miners, mature and developed ones. They both operate in Russia (Polymetal also has a Kazakh business which is perhaps 20% of the overall one). They’re both highly profitable.

However, there’s one massive set of differences. These matter right now in a way that they did not before. These matter in a very big way too.

That big difference is that Polymetal is a British (actually, Jersey, but that counts) company with the main listing in London and assets in Russia. Polyus clearly also has assets in Russia but it’s a Russian company with the main listing in Moscow. What is outside is either the American or Global Depositary Receipt. ADR, GDR, it should be fungible (with a bit of work) into the Moscow stock in normal times. Now, well, maybe not so much.

No, really, this is a problem

The Moscow exchange is closed and might well be for the next week too. There will be significant limits on what people may do once it reopens as well. So, we’ve no price discovery going on and it’ll be sketchy at best when it does reopen. But that’s not really the grand problem.

How much is an ADR or GDR worth right now? Sberbank GDRs were trading at 1 cent US before the London Stock Exchange stopped trading in them. Gazprom at 2 cents. Now, it’s true that a bank can suffer a run and become worth nothing near overnight. But one of the world’s largest natural gas companies?

Well, the company is not going to be worth nothing, no. But the claim to a share of ownership of it might be. There’s a story going around London at present which says that those ADRs and GDRs might in fact become entirely valueless.

No, we do not know

Think about the nuts and bolts of this for a moment. An ADR is a “depositary receipt”. Someone, somewhere, owns the underlying stock. The ADR is the ticket that lays claim to changes in the value of that underlying. So, what happens if sanctions mean that no institution can now that underlying? The ADR suddenly represents a claim on something that no one outside Russia can own. So its value becomes, what’s that word, moot somewhat. For no one can be that depositary that issues the receipt.

That’s the extreme case of course. If this is all over in a week or three then my expectation is that everything will be cleared up. “No, no, that would never have happened, Ha Ha!” and so on. But if this lasts for months, as it well could do, then it is at least remotely possible.

Polyus and Polymetal again

Whether or not GDRs get entirely wiped out or not is something the future will tell us. But the risk of GDRs being entirely wiped out is higher than that of the equity of a Jersey (note this is the Channel Island, between UK and France) company with the main listing on the London Stock Exchange.

What this means is that we can not take the price performance of Polymetal (horrendous, of course, but holding at some level above zero) as being an accurate guide to the price performance of Polyus.

This is all rather hyperbolic

I know, I know, this is looking at things as bad as they could possibly get. But there is still that risk that ADRs and GDRs on Russian main listed stocks become worth nothing at all. Simply because no intermediary bank will be able to continue to hold the Moscow stock that the ADR is the receipt for.

As I say, I’m not sure how true this story is, nor what the risk is of it actually happening. What I do insist is that there will be a significant price disparity between seemingly similar operating businesses based on just this difference. Polyus and Polymetal being used as my example simply because mature gold miners are fairly easy to understand.

My view

Overall I worked either in Russia or the Russian metals business for 15 years or so. Obviously, I know nothing about how the war is going to go nor how long for. But it would not surprise me at all if there were not some sort of reaction to the imposition of sanctions. Along the lines of not being all that accommodating with foreigners getting their ownerships back if you see what I mean. Unless this is all over real soon I do not see it all springing back to the situation we had before.

The investor view

The point of this though is that I am certain that we’ve got to distinguish between foreign companies that have assets in Russia (Polymetal) and Russian companies that issue GDRs (Polyus). Even when they’re objectively in the same position, gold miners. Sure, even I think that the Gazprom GDRs at 2 cents a piece (if they can be bought, not an obviously true thing) are worth having a bet on in the same sense that there’s fun in having a few dollars on the outsider in a horse race.

We can not use the prices of the foreign companies with Russian assets as guides to the value of those GDRs.



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