Mining is vital. A real business, real profits
Most people would crack open the champagne on the news their company has broken back into the FTSE 100. Or in Vitaly Nesis’ case, perhaps a little vodka. Not so, says the chief executive of Russian gold miner Polymetal. “I don’t think there’s any novelty left. It’s a very mundane occurrence.”
True, Polymetal’s elevation to the blue-chip index in September – when it edged out Marks & Spencer, among others – marks its third time in the top league since listing in 2011. Nesis may downplay its significance, but he admits that joining the FTSE 100 gives the company access to a bigger pool of funds and investors who might not have given it a second glance.
None the less, Nesis insists, “size is definitely not the primary goal; the primary goal is to create value and pay dividends”. Polymetal has certainly done that: it has shelled out $1.5bn (£1.2bn) over the last eight years.
It has nine producing mines – seven in Russia and two in Kazakhstan – and turned out 1.56m ounces of gold last year. Pre-tax profits hit $426m on turnover of $1.9bn. Those numbers could drive even higher, thanks to a gold price rally: 2019 has been gold’s best year since 2010, rising 16pc to just shy of $1,500 an ounce.
It is a good time to be a gold miner. Polymetal’s shares are up 48pc this year, thanks to steady production and the ramp-up of its new flagship mine in Kazakhstan. Nesis notes it is now the largest gold producer on the London market, even if its profile remains low. But he is “moderately bearish” on the gold price, pointing out its rise has mostly been driven by US-China geopolitical tensions. “If there is a trade agreement with the US and China, it will be quite negative for gold,” he says.
Nesis, 43, has been in the job for 16 years, taking the reins from his billionaire brother Alexander, who founded Polymetal in 1998. He concedes he was always likely to enter the family business, although his original dream was to become a doctor. “Both my parents were doctors. I thought about applying to medical school but it was the early Nineties and my parents and brother said it was a bad deal. So they sent me to study economics in St Petersburg.”
From there, Nesis did a two-year spell as an analyst at Merrill Lynch in New York. “That’s one of the worst jobs that a college graduate can have – back then at least,” he recalls. “It was a terrible culture. Some of the people were just complete a——-.” His next job was with McKinsey in Moscow, before he joined a large Russian coal miner and ran operations in Siberia.
Then came the tap on the shoulder from his brother. Nesis describes his relationship with Alexander as “close and warm”. He insists Alexander is “uninvolved” in the running of Polymetal, despite owning 51pc. “He is much older and has other interests” (the age gap is 13 years). Alexander, whose net worth is put at $2.2bn by Forbes, has owned banks in Russia and is now invested in telecoms and tech ventures. “We meet regularly. If I feel I could benefit from his advice, I don’t hesitate to give him a call.
The last year has seen rapid consolidation at the top of the gold mining industry, with London-listed Randgold being bought by Barrick, and Newmont teaming up with Goldcorp. Nesis is sceptical: “Bigger is more noticeable for investors, but unless operations are next to each other, synergies are low.” A group with 25-30 big mines may become unmanageable, he adds, while smaller companies can struggle if they are dependent on just one mine.
Despite the mega-deals, mining is still dominated by mid-tier and small producers. “Fragmentation is a fact and I don’t think it will change,” Nesis says. Polymetal is wary of big acquisitions, favouring joint ventures with smaller explorers, or growing its existing mines. “Never say never, but during an upcycle in gold prices, it never makes sense to buy a producing mine because the valuations get out of hand very quickly.” Nesis suggests the miner may look to buy or develop copper and rare earth deposits, as both are likely to be in high demand for electric cars.
However Polymetal is unlikely to stray far from the former Soviet Union. “The key reason for that is the language barrier,” Nesis says. “We are no match for Australians and Canadians and francophones in West Africa. And it’s not like we are short of development opportunities in our home market.” That geographical focus means that Polymetal suffers from the “Russian discount”, with its shares marked down because of the perceived risk from doing business in the country. There are plenty of investors who can see through those concerns, Nesis says. “The relationship between the UK and Russia since the late 18th century has been developing over roughly 35 to 40-year cycles.”
When Polymetal first listed depositary receipts on the London stock market in 2007, that relationship was close to its peak, he says. “Then things deteriorated quite significantly. We’re hopefully coming off a 30-year low now – I’m cautiously optimistic.”
Nesis concedes mining has long had an image problem, from environmental damage to clashes with local people and governments. He argues that Polymetal was ahead of the curve in taking its responsibilities seriously – not just in terms of reducing emissions and water use but in keeping locals happy. “It’s not lip service. It’s a way to ensure your operations are not jeopardised by stakeholders who are p—– off because they feel they’ve been left behind.”
He cites Acacia Gold, which was taken over by Barrick this year after a two-year battle with the Tanzanian government over taxes.
In January a dam collapsed at an iron ore mine operated by Vale in Brazil, releasing a wave of mud and water that killed 250. “One company has screwed up very badly and clearly the image of the whole industry has been tarnished by this disaster,” Nesis says. “But you can’t lay the blame at the full industry’s feet. A lot of companies have been proactive, others have been laggards.” Polymetal has eight tailings dams; Nesis says it is looking at converting them to “dry” storage, a less risky but more expensive way of holding mine waste.
Despite these problems, “mining is a sector you should not overlook”, Nesis says. “It’s an essential industry. It produces a lot of stuff that is absolutely vital for the maintenance of the current way of life. It’s a real business with real profits.
Indeed recent initial public offerings (IPOs) from the likes of Uber, and the abortive float of office space provider WeWork, are part of a new trend, Nesis says.
“It’s representative of a growing class of public companies that don’t really care about current profits or even path to profitability. Even if you look at companies like Uber, it has a big problem with profitability. One thing that is definitely positive for mining stocks is they make money right now and pay dividends. It’s anybody’s guess when Uber will pay its first dividend.
“You have to be diligent and spend time understanding the differences between companies,” Nesis warns.
“You can’t just invest in gold stocks, that’s stupid. A lot of gold stocks are c—. Some are very good.”
He takes a swipe at some rivals for “unnecessary optimism” in giving production guidance to the market, only to miss targets and suffer painful share price falls.
“We generally are circumspect when we provide guidance: underpromise and over-deliver.”
Nesis hopes Polymetal can fill some of the gap left by the highly regarded Randgold, built up from scratch over 20 years to the biggest London-listed gold miner.
“It’s a long way for us to manage the prominence of that company. But we hope FTSE 100 membership will make Polymetal the default gold name for equity investors,” he added.