Polymetal solves its Russian problem with sale of its assets

By Rhod Mackenzie

Through the acquisition of Polymetal's Russian assets, Mangazeya, owned by Sergei Yanchukov, has become one of the largest gold mining companies in the Russian Federation. The transaction is valued at $3.7 billion,however, only $300 million is to be paid in cash. Polymetal will also be relieved of $2.2 billion in debt that the Russian structure owes. Mangazeya will gain access to refractory ore processing, while Polymetal will receive funding for development in Kazakhstan and relief from sanctions.
Polymetal has sold its Russian business to Sergei Yanchukov’s Mangazeya company for $300 million plus $3.4 billion of debt. This transaction allows Polymetal to retain its assets in Kazakhstan, which generate slightly less than half of the group’s EBITDA, while also eliminating its connections with Russia and sanctions risks, as well as most of the debt. However, in order to achieve this, Polymetal shareholders had to agree to a significant discount.

The company's Russian business was valued at 3.6x based on forecast adjusted EBITDA for 2023 of $1 billion for the deal. The total transaction amount, taking into account external and intragroup debt, will be $3.7 billion. However, the buyer will only pay $50 million with its own funds. Before closing the transaction, Polymetal will receive $1.419 billion in dividends from the Russian structure, but at the same time, it will return the intra-group debt of $1.15 billion to it. Simultaneously, the Russian company will retain the net debt of $2.2 billion on its balance sheet. Consequently, Polymetal will receive only $300 million after taxes and the buyer's payment. The board of directors intends to use this amount to finance the construction of the Irtysh MMC in Kazakhstan and improve the group's liquidity after the transaction.

The management explained that the transaction was necessary due to the sanctions risks for the entire group, after the Russian legal entity was included in the Sanctions list.
The circular also notes that the economic climate in Russia is favourable for the government to introduce new laws and restrictions that may affect businesses. The Board of Directors is also aware of cases where Russian divisions of large foreign companies have been nationalised, which is a cause for concern.

Polymetal will maintain its listing on the Kazakhstan exchange AIX. It is unclear whether the shares of Polymetal JSC (MOEX: POLY) will continue to be traded after the transaction. A representative of Mangazeya declined to comment on the deal. Following the announcement of the sale, Polymetal shares in Kazakhstan fell by 3.5%, and on the Moscow Exchange by 8%. In their commentary on the deal, Alfa Bank analysts Boris Krasnozhenov and Elizaveta Degtyareva note that the option chosen for minority shareholders may not be attractive as the company has no plans to pay dividends based on the results of the transaction for the sale of Russian assets.
Furthermore, during a teleconference, Vitaly Nesis, the head of Polymetal, announced that the company would delay the decision on dividend payments for 2023. Additionally, the company may opt for smaller payments in the future. While the previous Polymetal was recognized for its consistent dividends, the new Polymetal may not have a high yield for some time. According to a quote by Reuters, the speaker suggests that investing in growth is necessary and dividends may become less important.

Additionally, analysts have noted that there is uncertainty regarding the process and timing of exchanging Russian shares of Polymetal on the Moscow Exchange for shares in Kazakhstan.

Currently, Russian shares of Polymetal are trading at a significant premium compared to securities in Kazakhstan. Polymetal historically had a high volume of free-float, over 75%. After the exit of the ICT group of Alexander Nesis, Mercury Investments International (MII LLC), a structure of the state investment fund of Oman, became the largest shareholder.

The Mangazeya Group

Back in 2022, Mangazeya announced ambitious plans to become one of the five largest Russian gold producers. In 2022, Mangazeya’s production amounted to 3.2 tons of gold, says Sergei Kashuba, head of the Union of Gold Miners of Russia. Production of the acquired Russian assets of Polymetal was 38 tons.

“Mangazeya operates in the Trans-Baikal Territory with total gold resources of 282 tons. It is developing gradually, but at a serious annual pace. As far as I know, the company has been eyeing refractory ores for a long time. The management team of Polymetal, as well as the Amur MMC and, in the future, AGMK-2, allow it to gain a foothold in this market,” notes Mr. Kashuba. He clarified that, in accordance with the agreements, Polymetal will continue to process concentrate from the Kyzyl deposit in Kazakhstan at the AGMK, which, together with the Polymetal and Mangazeya deposits in Russia, “allows us to talk about high prospects for the AGMK’s utilization.”