Polyus Gold
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APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING INITIATION OF COVERAGE Polyus Gold Natalia Sheveleva Natalia.Sheveleva@gazprombank.ru RUS SIA Keep an eye on the gold giant Konstantin Asaturov Konstantin.Asaturov@gazprombank.ru > MET ALS & MIN ING EQ Gold market still faces challenges but price should recover from current spot UIT TICKER PGIL LN Y Closing price, $ 3.0 Target price, $ 3.2 Upside 9% Recommendation NEUTRAL We expect the gold price on average to fall 3% YoY in 2015 to $1,230/oz and RES decline slightly in 2016 to $1,212/oz on a stronger dollar and decreasing retail EAR gold investment. However, the end 2015 price should grow 2% from the current CH spot level. Source: Bloomberg, Gazprombank estimates Polyus Gold paid a special interim dividend of $500 mln in 2014 and improved its dividend policy in March 2015, raising the payout ratio from 20% of IFRS net income to 30% while adding that special dividends would be considered. The 2014 dividend yield is about 8%. The company has the strongest balance sheet among Russian metals and mining companies, with $1.5 bln in cash on the balance as of end 2014, and net debt/EBITDA standing at 0.3x. Furthermore, we believe that the company already passed its capex peak in 2013. Thus, the final 2014 dividend yield of 2.0% (excluding the interim dividend) and the cautious changes to the dividend policy seemed disappointing. Although we do not exclude a much higher dividend at a later date, this is not factored into our model at this time. 8,994 Net debt, $ mln 327 EV, $ mln 9,467 52-week high, $ 3.2 52-week low, $ 2.7 Source: Bloomberg Polyus Gold share price performance vs. RTS Index MAR 15 JAN 15 FEB 15 DEC 14 NOV 14 SEP 14 POLYUS GOLD OCT 14 JUL 14 AUG 14 130% 120% 110% 100% 90% 80% 70% 60% 50% JUN 14 2014 dividend was good but could be much higher in future MCap, $ mln APR 14 We think that Polyus Gold will finally start production at Natalka from 2016 (we model about 100 koz that year). Based on this assumption, the company should increase its gold production by 4% from the 2014 level in 2016 and by another 16% YoY in 2017. However, the Natalka deposit’s growth profile and key parameters are very uncertain, as its launch plans are still on hold and a major update on the project expected only by mid-2015. In addition, Polyus Gold recently decreased the Natalka project’s reserves dramatically (-48% from the previous estimate), which had a severely negative impact on the company’s execution track record. We note that recently the management noted the possibility to boost production from its brownfield projects by up to 500 koz (30% of 2014 production) in the medium term, which implies low capex. We model gold production potentially reaching 2,450 koz by 2020 compared with 1,696 koz produced in 2014, but adjust our NAV valuation for risks and uncertainties (relatively low for brownfields). SELECTED STOCK DATA MAY 14 Growth profile is strong and one of the best globally, but also very uncertain for Natalka and thus discounted sharply RTS INDEX Source: Bloomberg Our target price of $3.2 per share implies 9% upside and a NEUTRAL recommendation We value Polyus Gold based on NAV and relative valuation approaches with 50%/50% weights. Our target price of $3.2 per share (213 GBp) implies 9% upside and a NEUTRAL recommendation. We note that the Natalka update might finally provide some positive news and a good special dividend could be paid toward end 2015. The risks to our valuation mostly relate to the volatile gold price and ruble exchange rate; an update on the Natalka project and more details regarding brownfield expansion; the geopolitical backdrop; project execution risks (especially for Natalka); and M&A risks. Research Department 1 Copyright © 2003-2015. Gazprombank (Joint Stock Company) APRIL 28, 2015 Balance sheet statement, $ mln Valuation multiples 2013 2014 2015E 2016E P/E, x 17.6 19.1 13.6 15.6 EV/EBITDA, x 10.4 9.4 8.2 9.1 Accounts receivable 4.1 4.2 4.4 4.2 Inventories 0.0% 7.6% 2.2% 1.9% 1.4% EV/Revenues, x Dividend yield FCF yield -10.3% 3.9% 3.3% Cash and equivalents Income statement, $ mln 2013 2014 2015E 2016E Revenues 2,329 2,240 2,161 2,250 Operating costs 1,394 1,207 1,027 1,177 incl. SG&A 226 183 176 222 DD&A 214 182 210 212 907 1,012 1,149 1,041 EBITDA Operating profit Financial income net 222 847 939 829 7 5 -135 -129 Pretax profit 234 41 804 700 Income tax 91 222 161 140 Net income 511 472 661 578 EPS RUSSIA > EQUITY RESEARCH > METALS & MINING 0.17 0.16 0.22 2013 2014 2015E 2016E 809 1,217 1,296 1,183 27 11 11 11 702 440 375 429 Total current assets 1,880 2,014 2,027 1,969 PP&E 1,506 950 1,341 1,741 Total assets 5,709 4,814 5,218 5,561 Short-term debt 269 90 90 90 Accounts payable 260 154 131 150 Total current liabilities 582 827 804 823 Long-term debt 937 1,723 1,633 1,595 Total non-current liabilities 1,173 2,367 2,277 2,239 Total shareholders’ equity 3,679 1,474 1,991 2,353 275 146 146 146 5,709 4,814 5,218 5,561 2013 2014 2015E 2016E 422 810 897 736 Minority interest Total liabilities and equity Cash flow statement, $ mln Operating cash flow 0.19 incl. changes of w/c Key margins -283 30 43 -36 Investing cash flow -1,023 -774 -601 -612 -1,347 -461 -601 -612 493 450 -216 -236 2013 2014 2015E 2016E incl. CAPEX 9.5% 37.8% 43.4% 36.9% Financing cash flow EBITDA 39.0% 45.2% 53.2% 46.3% Change in cash -108 486 79 -113 Net income 21.9% 21.1% 30.6% 25.7% Free cash flow -925 349 295 124 EBIT Key leverage data, $ mln 2013 2014 2015E 2016E 1,206 1,813 1,723 1,685 Net debt 397 327 158 233 Total debt/Equity, x 0.3 1.2 0.9 0.7 Net debt/EBITDA, x 0.4 0.3 0.1 0.2 Total debt Source: company data, Gazprombank estimates 2 APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING CONTENTS Key assumptions and valuation ....................................................................................................................... 4 We use 50% NAV and 50% EV/EBITDA methodology. $3.2 target price implies NEUTRAL recommendation ...................................................................................................................................................................................... 4 Peers valuation ...................................................................................................................................................... 7 Relative valuation suggests stock is fairly valued ........................................................................................................................................... 7 Risks .......................................................................................................................................................................... 8 Company overview ............................................................................................................................................... 9 Description ........................................................................................................................................................................................................................ 9 SWOT analysis..................................................................................................................................................... 11 Assets ..................................................................................................................................................................... 12 Summary .......................................................................................................................................................................................................................... 12 Olimpiada — key operating asset and central to long-term strategy ................................................................................................... 13 Blagodatnoye — second-largest operating mine and the cost leader .................................................................................................. 13 Titimukhta — smallest mine in Krasnoyarsk region, just 2% of reserves, highest cost mine in the portfolio ......................................................................................................................................................................................... 14 Verninskoye — newest project and leader in TCC reduction .................................................................................................................. 14 Kuranakh — small and expensive ........................................................................................................................................................................ 15 Alluvials — largest gold placer asset in Russia............................................................................................................................................... 15 Natalka — ambitious project but reserves were slashed dramatically and launch was delayed with no guidance on timing ........................................................................................................................................... 16 Interesting brownfield expansion options plus exploration projects .................................................................................................................................................................. 19 Up to 500 koz of additional gold production per year could be delivered from brownfield projects;.................................................................................................................................................................................................... 19 Energy projects to support expansion and reduce costs ..................................................................... 20 Mixed delivery track record .......................................................................................................................... 21 Improved dividend policy but less than balance sheet and plans allow ....................................................................................................................................................................... 21 Debt position is very strong ........................................................................................................................... 22 Capex peak passed in 2013 ............................................................................................................................ 23 Shareholder structure...................................................................................................................................... 24 Trading volumes ................................................................................................................................................ 25 Management ........................................................................................................................................................ 26 Reserves and resources are still ample ..................................................................................................... 27 Gold Industry overview ................................................................................................................................... 29 3 APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING KEY ASSUMPTIONS AND VALUATION We use 50% NAV and 50% EV/EBITDA methodology. $3.2 target price implies NEUTRAL recommendation To value Polyus Gold we used NAV and relative valuation approaches with equal weights (see charts and tables below for our key model assumptions). We used a discount rate of 11% for all projects. Our final aggregate P/NAV is calculated given the project’s composition and specific related risks. Given the approach, we use 1.3x target P/NAV. Our 2015E target EV/EBITDA is 8.0x, representing a discount of around 15% to the global average. In both methods, we discount Polyus Gold for country risk, low share liquidity and the mixed project execution track record, which was dealt a severe blow by recent steps involving the Natalka project. We then applied premiums for the strong balance sheet. On balance, the discounts outweigh the premiums in our calculations and the company currently appears fairly valued by the market. Our target price of $3.2 implies 9% upside and a NEUTRAL recommendation. In terms of possible catalysts, we await an update on the Natalka project, more details regarding brownfield expansion opportunities, and special dividend payments. We carried out a sensitivity analysis assuming changes in the ruble exchange rate (we assume RUB/USD averaging 53 in 2015) and gold price according to our base scenario over the entire estimate horizon. Under our calculations, the gold price increase has a stronger impact on the target price than the same ruble devaluation. Production assumptions, koz Gold price and TCC assumptions, $/oz 3,000 1,800 1,600 2,500 1,400 2,000 1,200 1,410 1,266 1,230 1,212 1,260 1,000 1,500 1,329 1,400 1,471 1,545 800 1,000 600 500 707 400 200 0 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E NATALKA VERNINSKOYE OLIMPIADA KURANAKH TITIMUKHTA 585 469 528 580 580 597 596 582 0 ALLUVIALS BLAGODATNOYE 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E GOLD PRICE, LME Source: Gazprombank estimates CONSOLIDATED TCC Source: Gazprombank estimates * estimated by Gazprombank as (Revenues – EBITDA) divided by GE sold 4 APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING Key model assumptions 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E CAGR 14-17 CAGR 14-20 PRODUCTION Olimpiada koz 691 726 716 696 657 657 657 657 657 -3.3% -1.4% Blagodatnoye koz 395 394 388 388 388 431 500 500 500 -0.5% 3.4% Titimukhta koz 131 93 114 114 114 114 122 243 243 6.9% - Verninskoye koz 89 146 150 150 152 152 206 257 257 1.3% 8.4% Alluvials koz 205 190 170 170 170 170 170 170 0 -3.6% - Kuranakh koz 138 137 137 137 137 137 186 186 186 0.1% 4.5% Natalka koz 0 0 0 109 437 437 437 437 437 - - Total koz 1,650 1,696 1,674 1,764 2,054 2,097 2,277 2,450 2,280 6.6% 4.3% Olimpiada % 41.9% 42.8% 42.8% 39.5% 32.0% 31.3% 28.8% 26.8% 28.8% - - Blagodatnoye % 24.0% 23.2% 23.2% 22.0% 18.9% 20.5% 21.9% 20.4% 21.9% - - Titimukhta % 7.9% 5.5% 6.8% 6.4% 5.5% 5.4% 5.3% 9.9% 10.7% - - Verninskoye % 5.4% 8.6% 8.9% 8.5% 7.4% 7.2% 9.0% 10.5% 11.3% - - Alluvials % 12.5% 11.2% 10.1% 9.6% 8.3% 8.1% 7.5% 6.9% 0.0% - - Kuranakh % 8.3% 8.1% 8.2% 7.8% 6.7% 6.5% 8.2% 7.6% 8.2% - - Natalka % 0.0% 0.0% 0.0% 6.2% 21.3% 20.8% 19.2% 17.8% 19.2% - - SHARE IN PRODUCTION Gold price, LME $/oz 1,410 1,266 1,230 1,212 1,260 1,329 1,400 1,471 1,545 -0.2% 2.9% Gold price, LME % - -10% -3% -1% 4% 5% 5% 5% 5% - - $ mln 2,329 2,240 2,161 2,250 2,759 2,860 3,312 3,723 3,646 7.2% 7.2% Revenues TCC BY MINE Olimpiada $/oz 666 541 378 360 376 384 399 405 411 -11.4% -3.8% Blagodatnoye $/oz 479 442 379 413 424 416 455 462 470 -1.4% 0.9% Titimukhta $/oz 920 956 801 882 905 922 738 590 472 -1.8% -9.6% Verninskoye $/oz 869 594 484 531 537 547 548 556 564 -3.3% -0.7% Alluvials $/oz 880 735 614 676 693 707 715 723 0 -1.9% - Kuranakh $/oz 1,085 868 734 815 839 854 980 992 1004 -1.1% 2.1% Natalka $/oz - - 0 1050 827 823 833 845 857 - - Consolidated TCC $/oz 707 585 469 528 580 580 597 596 582 -0.3% -0.1% $ mln 907 1,012 1,149 1,041 1,265 1,333 1,658 1,967 2,026 7.7% 10.4% $/oz 550 600 686 590 616 636 728 803 888 0.8% 5.8% EBITDA EBITDA per oz EBITDA margin $ mln 39.0% 45.2% 53.2% 46.3% 45.8% 46.6% 50.1% 52.8% 55.6% 0.5% 3.0% EBIT $ mln 222 847 939 829 1,032 1,063 1,296 1,613 1,692 6.0% 10.4% Pre-tax income $ mln 234 41 804 700 908 948 1,214 1,575 1,669 178.9% 69.9% Net income, adjusted $ mln 511 472 661 578 726 776 989 1,278 1,353 15.4% 16.2% Source: Gazprombank estimates 5 APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING NAV by deposit DEPOSIT NAV, $ MLN Olimpiada 4,681 Blagodatnoye 2,781 Titimukhta 149 Verninskoye 727 Alluvials 251 Kuranakh 340 Natalka 1,026 Mines NAV 9,956 Source: Gazprombank estimates Fair price calculation by NAV methodology; 1.3 P/NAV multiple FAIR PRICE CALCULATION UNDER NAV Mines NAV $ mln 9,956 Overhead costs and other, NPV $ mln 1,269 Minority interest (2014) $ mln 146 Net debt (2014) $ mln 327 NAV $ mln 8,214 - 1.3x $ mln 10,939 mln 3032 $ 3.61 P/NAV Equity value Shares number Fair price Source: Gazprombank estimates Target price sensitivity to changes in ruble exchange rate (column) and gold price (row), % GOLD PRICE CHANGE/USDRUB CHANGE -5% -1% 0% 1% 5% -5% 2.81 2.90 2.92 2.94 3.02 -1% 3.07 3.16 3.18 3.20 3.27 0% 3.13 3.22 3.24 3.26 3.34 1% 3.20 3.29 3.31 3.33 3.40 5% 3.46 3.54 3.56 3.58 3.66 Source: Gazprombank estimates 6 APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING PEERS VALUATION Relative valuation suggests stock is fairly valued We compared Polyus Gold mostly with global senior gold companies. We forecast the company’s 2015 EBITDA margin at 53.2% compared to the global average for senior gold miners of 39%. The 2015E net debt/EBITDA ratio stands at 0.1x compared with the peer average of 1.4x, while the 2014-17 EBITDA growth rate is 7.7% compared with 12.9% for peers. Polyus Gold trades at a 2015E EV/EBITDA of 8.2x versus 9.4x for peers, placing the discount at 13%. EV/ GE reserves stands at just 144 compared with the global average of 280 (49% discount). That said, the discounts are mostly justified, in our view, given general country risks alongside the company’s modest medium-term growth profile and very uncertain long-term growth prospects for Natalka. We also note the relatively low share liquidity, mixed execution track record, and slow development of the reserves base. Peers valuation P/E COMPANY Polyus Gold MCAP, $ MLN 8,994 2014 19.1 NET DEBT /EBITDA EV/EBITDA 2015E 2016E EBITDA MARGIN 2014 2015E 2016E 2014 2015E 2014 2015E EV / GOLD RESER2016E VES ($/OZ) EV / GOLD RESOURCES ($/OZ) EV / GE RESERVES ($/OZ) EV / GE RESOURCES ($/OZ) DIV. EBITDA YIELD CAGR 20142015E 2017E 13.6 15.6 9.2 8.2 9.1 0.3 0.1 45.2% 53.2% 46.3% 144.2 106.7 144.2 106.7 7.7% 2.2% GLOBAL SENIOR GOLD MINERS Newmont 12,791 25.2 18.4 20.1 9.2 6.9 7.2 2.1 1.3 29.1% 35.1% 33.7% 240.6 181.6 234.6 177.0 12.6% 0.3% AngloGold 4,627 N/M 14.6 12.4 5.1 5.1 4.8 2.1 1.9 30.0% 31.5% 31.6% 137.6 47.3 137.6 47.3 -1.5% 0.9% Barrick Gold 14,978 N/M 22.4 16.0 6.2 7.0 6.5 2.3 2.6 43.8% 41.1% 43.3% 300.8 149.3 295.7 147.5 -0.1% 1.6% Goldcorp 15,921 N/M 29.5 20.9 17.6 10.0 8.5 2.4 1.6 31.8% 42.3% 46.2% 387.1 223.9 227.6 136.1 32.4% 3.1% Newcrest 9,040 N/M 24.3 15.9 8.9 10.0 8.1 2.8 2.3 38.3% 37.5% 41.6% 171.6 109.0 95.8 61.7 5.0% 0.0% Randgold Resources 7,011 29.8 27.0 24.2 16.7 14.0 12.1 -0.1 -0.4 39.4% 44.5% 47.3% 475.7 339.8 475.7 339.8 14.1% 0.8% Agnico-Eagle 6,514 78.5 50.9 36.6 10.9 9.0 8.2 1.7 1.2 37.0% 41.2% 44.0% 384.1 - 384.1 - 10.9% 1.1% Fresnillo plc 8,289 76.4 40.3 23.4 16.0 13.1 9.1 0.7 0.8 38.3% 42.1% 47.7% 894.0 652.8 385.6 276.0 30.0% 0.9% - 52.5 28.4 21.2 11.3 9.4 8.1 1.8 1.4 36.0% 39.4% 41.9% 373.9 243.4 279.6 169.3 12.9% 1.1% Average GLOBAL MID-CAP GOLD MINERS Sibanye 2,067 14.4 9.7 10.3 3.4 3.5 3.6 -0.1 0.0 34.3% 32.6% 31.1% 81.7 23.9 60.1 22.0 -5.5% 4.0% Kinross 2,640 N/M N/M 31.7 3.1 4.0 3.7 0.8 1.0 34.9% 30.4% 33.0% 109.4 65.5 97.7 60.1 -6.5% 0.0% Yamana Gold Inc 3,681 N/M 43.3 21.9 12.7 7.6 6.7 4.1 2.0 24.6% 36.4% 39.7% 219.0 117.9 87.4 59.0 30.9% 1.5% Gold Fields 3,499 N/M 25.9 19.5 4.4 4.6 4.3 1.3 1.2 39.9% 39.6% 40.9% 105.5 46.9 102.4 36.8 2.1% 1.2% Koza Altin 1,702 7.5 10.9 11.9 4.6 6.1 6.6 -1.8 -2.4 66.1% 62.9% 59.5% 354.4 165.2 351.4 164.0 -4.1% 2.9% Zhaojin Mining Industry 1,899 25.7 21.5 20.7 16.0 12.7 11.8 5.0 4.1 27.6% 31.6% 32.0% 154.4 336.2 154.4 336.2 11.8% 1.9% Eldorado 3,432 33.4 70.3 27.4 8.8 12.8 8.6 0.2 1.2 40.7% 34.1% 40.8% 147.8 108.4 118.4 81.1 17.2% 0.3% Average - 20.3 30.3 20.5 7.6 7.3 6.5 1.4 1.0 38.3% 38.2% 39.6% 167.4 123.4 138.8 108.5 6.6% 1.7% CIS GOLD PRODUCERS Polymetal 3,486 16.9 9.0 9.4 6.9 6.7 7.2 1.8 1.3 40.5% 44.9% 42.1% 263.0 228.3 219.5 189.3 1.8% 3.3% Centerra 1,191 N/M 26.4 77.7 2.8 2.7 2.7 -1.9 -1.1 32.6% 41.8% 36.0% 91.1 52.4 91.1 50.1 8.6% 3.0% Nordgold 1,130 11.5 14.5 27.9 3.6 4.4 5.0 1.1 1.4 41.9% 35.1% 32.2% 140.0 148.0 140.0 148.0 -4.8% 1.7% Average - 14.2 16.7 38.3 4.4 4.6 5.0 0.4 0.5 38.4% 40.6% 36.7% 164.7 142.9 150.2 129.2 1.9% 2.7% Source: Bloomberg, Gazprombank estimates 7 APRIL 28, 2015 RISKS High volatility in global gold prices, which significantly depends on investment demand, the visibility on which is low. Each 5% change in the gold price results in a 10% change in Polyus Gold’s valuation. Geopolitical risks. Volatile ruble exchange rate; significant strengthening of the ruble could influence our valuation negatively, as the company benefits from a weak local currency. Each 5% change in the ruble exchange rate results in a 3% change in our valuation of Polyus Gold. Very unclear development plans for Natalka; any estimates involve relatively high risks, while the project is challenging. Limited guidance on expansion projects regarding capex. M&A risks – potentially the company could acquire a project at a relatively high valuation or with challenging geology, although potential M&A targets are very limited. Cost inflation risks. 8 RUSSIA > EQUITY RESEARCH > METALS & MINING APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING COMPANY OVERVIEW Description Polyus Gold is Russia’s largest gold producer, with output in 2014 totaling 1.7 mln oz (+3% YoY), making it the world’s ninth-largest gold producer. Production guidance for 2015 stands at 1.63-1.71 mln oz. Based on our estimates, the company’s reserves total 65.8 mln oz of gold (fourth largest globally) with an average gold content of 2.2 g/t (third highest among the top 15 global production peers). Life of mine (LOM) is sufficient for more than 38 years. Polyus Gold’s 2004-14 production CAGR stood at 4.5%, with key growth occurring in 2006 and 2010-13. The company is a low-cost producer enjoying the second-lowest all-in sustaining costs (AISC) per oz among the top 10 global peers in 2014. The EBITDA margin in 2014 was a high 45% with a net debt/EBITDA ratio of 0.3x, which are remarkably strong financials for a global metals and mining leader. The company operates five open-pit mines in Krasnoyarsk and Irkutsk regions and the Republic of Yakutia, as well as alluvial operations in Irkutsk region. Polyus Gold plans to develop the Natalka project in Magadan region with reserves of 16 mln oz. The deposit’s resources were reduced dramatically at end 2014 — early 2015 and its start was delayed without guidance for a new launch time. The company has delayed the project and downgraded its characteristics several times, which has weighed dramatically on its delivery track record. Polyus Gold is currently finalizing its latest revision of the project, which is expected to be completed by mid-2015. Meanwhile, in March 2015, the company announced opportunities to additionally deliver up to 500 koz of gold from its brownfield projects (almost one-third the 2014 production level). Polyus Gold has a premium listing on the LSE. Polyus Gold production, mln oz 1.8 1.57 1.6 1.4 1.2 1.09 1.22 1.21 1.22 1.23 2006 2007 2008 2009 1.28 1.65 1.70 1.38 1.04 1.0 0.8 0.6 0.4 0.2 0.0 2004 2005 2010 2011 2012 2013 2014 GOLD PRODUCTION, MOZ Source: company, Gazprombank estimates 9 APRIL 28, 2015 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 28 1.4 POLYMETAL POLYMETAL SIBANYE KINROSS GOLD FIELDS GOLDCORP ANGLOGOLD POLYUS NEWCREST NEWMONT 18 2.2 1.1 1.0 1.0 1.0 Source: company data LOM, years 38 40 6.2 32 35 6.0 30 2.8 2.7 3.0 22 25 4.0 18 20 2.3 2.3 2.2 2.0 1.7 1.6 1.4 1.0 18 17 15 15 15 ANGLOGOLD 4.4 POLYMETAL 4.8 5.0 0.7 Source: company data Gold production in 2014, mln oz 7.0 0.7 NEWCREST 34 2.9 KINROSS 48 GOLDCORP 50 SIBANYE 57 NEWMONT 66 4.3 BARRICK 75 ANGLOGOLD 82 POLYUS 93 BARRICK 100 90 80 70 60 50 40 30 20 10 0 Reserves grade, g/t GOLD FIELDS Reserves, mln oz RUSSIA > EQUITY RESEARCH > METALS & MINING 15 14 10 1.1 1.0 0.8 0.8 5 Source: company data NEWCREST* NEWMONT 0 POLYUS 0 BARRICK 200 POLYMETAL 200 GOLDCORP 400 KINROSS 400 NEWMONT 600 GOLD FIELDS 600 ANGLOGOLD 800 SIBANYE 800 885 877 831 831 819 799 794 751 733 726 POLYUS 1,000 819 POLYMETAL 825 GOLD FIELDS 884 BARRICK 893 NEWCREST 949 ANGLOGOLD 1,200 KINROSS 1,026 1,023 1,002 973 SIBANYE 1,000 2014 calculated cash opex per GE oz*, $/oz GOLDCORP 1,080 KINROSS Source: company data 2014 AISC, $/oz 1,200 BARRICK NEWMONT GOLDCORP SIBANYE GOLD FIELDS POLYUS ACACIA IAMGOLD NORDGOLD RANGOLD POLYMETAL SIBANYE POLYUS GOLD FIELDS NAVOI MMC NEWCREST KINROSS GOLDCORP ANGLOGOLD NEWMONT BARRICK NEWCREST 0 0.0 Source: company data Source: company data, Gazprombank estimates * for 1H15 * estimated as cash operating costs divided by GE sold 10 APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING Map of assets PRODUCTION CONSTRUCTION NATALKA TITIMUKHTA BLAGODATNOYE OLIMPIADA KURANAKH ALLUVIALS VERNINSKOYE Source: company SWOT ANALYSIS STRENGTHS Strong global leader in terms of production, reserves, margins and market capitalization Good quality of reserves, extended LOM Low financial leverage High profitability margins WEAKNESSES High uncertainty regarding Natalka Mixed project delivery track record that deteriorated significantly due to the recent dramatic reduction of reserves at Natalka and another delay Focus on mining in Russia Slow development of extensive reserve/resource base Only open-pit technology for projects in operation No long or medium-term production guidance Established growth/management track record Relatively low share liquidity Premium listing on the LSE Limited guidance on expansion plans regarding capex Careful debt leverage policy One of the lowest AISC among peers OPPORTUNITIES THREATS Benefits from ruble devaluation Natalka deposit development Further significant expansion of brownfield projects with low costs Relatively high execution risks for Natalka Development of exploration licences M&A risks Further exploration potential M&A potential Higher dividend payments Source: Gazprombank estimates 11 APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING ASSETS Summary Polyus Gold operates five open-pit mines and alluvial gold operations in Russia. The company’s key projects are Olimpiada and Blagodatnoye, accounting for 43% and 23% of 2014 production, respectively. Natalka is current the only new project in the development stage, albeit large in scale. Natalka’s parameters were significantly decreased recently and its development was halted with no time frame given for its launch. Operating mines characteristics MINE LOCATION MINE TYPE TECHNOLOGY OWNERSHIP Olimpiada Krasnoyarsk, Russia Open pit Flotation-bioleach 100% Blagodatnoye Krasnoyarsk, Russia Open pit Gravity, flotation and cyanide leaching 100% Titimukhta Krasnoyarsk, Russia Open pit RIP cyanide leaching 100% Verninskoye Irkutsk region, Russia Open pit Gravity, flotation and cyanide leaching 100% Alluvials Irkutsk region, Russia Alluvials Sands washing 100% Kuranakh Republic of Sakha, Russia Open pit RIP cyanide leaching 100% Natalka Magadan region, Russia Open pit Gravity, flotation and cyanide leaching 100% Source: company, Gazprombank Operating mines key figures for 2014 RESERVES AT BEGINNING OF 2015 SHARE IN RESERVES OUTPUT SHARE IN OUTPUT LOM STRIPPING RATIO GOLD GRADE IN RESERVES GOLD RECOVERY koz % koz koz years - g/t % Olimpiada 29,300 45% 726 43% 39 3.6 3.3 75.9% Blagodatnoye 8,700 13% 394 23% 21 1.6 2.2 88.0% Titimukhta 1,500 2% 93 5% 15 3.9 3.5 83.7% Verninskoye 4,100 6% 146 9% 27 0.7 2.5 79.4% Alluvials 1,100 2% 190 11% 5 - 0.7 - Kuranakh 2,600 4% 137 8% 18 2.6 1.4 86.8% Natalka 16,200 25% 0 0% 32 0.6 1.6 - Consolidated 65,800 - 1,696 - 38 2.2 2.2 82.2% MINE Source: Company data, Gazprombank estimates *Calculated as gold reserves divided by gold production 12 APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING Olimpiada — key operating asset and central to long-term strategy Olimpiada is the largest producing gold mine in Russia and a true gem in Polyus Gold’s asset portfolio. The mine, located in Krasnoyarsk region, is an open-pit project developed via floatation-bioleach. Olimpiada’s share in reserves is 45% and the project accounted for 43% of the company’s production 2014. Olimpiada’s grade (3.3 g/t) is the highest among all of Polyus Gold’s projects, including Natalka and greenfields, while LOM is long (39 years). Olimpiada’s sulphide ores contain refractory sulphide minerals with concentration of 3-10%. We note that in 2014, ore mined at Olimpiada decreased due to a cutback of the Olimpiada pit, which started in mid-2014 and will last until end 2015. Its recoveries were improved in 2014, from 74.5% to 75.9% thanks to the mill’s automation. Olimpiada’s TCC was $541/oz in 2014, or 8% below the consolidated figure. Aside from the weaker ruble, a 19% YoY decrease in TCC in 2014 was achieved thanks to the management’s cost-cutting initiatives, including lower unit consumption rates and maintenance costs, as well as headcount optimization. We expect the asset’s performance to be rather stable for an extended period. According to Polyus Gold, successful exploration activities in the mine’s vicinity indicate the potential for substantial extension of the mine’s life. OLIMPIADA SNAPSHOT Location Krasnoyarsk region, Russia Mine type Open pit Technology Flotationbioleach Ownership 100% Reserves, koz 29,300 Share in reserves, % 45% LOM 39 Stripping ratio 3.6 Gold grade in reserves, g/t 3.3 Gold recovery, % 75.9% Source: company, Gazprombank estimates Olimpiada key figures 2014 2015E 2016E 2017E 2018E Production, koz 726 716 696 657 657 Revenues, $ mln 961 912 875 873 886 TCC, $/oz 541 378 360 376 384 EBITDA, $ mln 490 571 549 549 556 EBITDA margin 51.0% 62.6% 62.7% 62.9% 62.7% EBITDA per oz 675 797 788 836 847 Source: company, Gazprombank estimates Blagodatnoye — second-largest operating mine and the cost leader BLAGODATNOYE Blagodatnoye, Polyus Gold’s second-largest operating asset, is also located in Krasnoyarsk region just 25 km from the key Olimpiada mine. Its ore processing plant (6 mln tonnes) is the largest gold processing plant in Russia, and its mill in 2014 operated at 22% above nameplate capacity. Blagodatnoye accounted for 13% of Polyus Gold’s consolidated reserves and 23% of production in 2014. The asset is relatively new and was commissioned in 2010. The mine is open pit and operates via gravity, floatation and cyanide leaching technologies. The grades are close to the group’s average and LOM is 21 years. Blagodatnoye’s TCC stood at $442/oz in 2014, compared with the consolidated figure of $585/oz (24% lower than average). SNAPSHOT Blagodatnoye key figures 2014 2015E 2016E 2017E 2018E Location Krasnoyarsk region, Russia Mine type Open pit Technology Gravity, flotation and cyanide leaching Ownership 100% Reserves, koz 8,700 Share in reserves, % 13% LOM 21 1.6 Production, koz 394 388 388 388 431 Stripping ratio Revenues, $ mln 517 495 489 517 583 Gold grade in reserves, g/t 2.2 TCC, $/oz 442 379 413 424 416 Gold recovery, % 88.0% EBITDA, $ mln EBITDA margin 305 312 289 312 361 59.0% 63.1% 59.2% 60.3% 61.9% Source: company, Gazprombank estimates 13 Source: company, Gazprombank estimates APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING Titimukhta — smallest mine in Krasnoyarsk region, just 2% of reserves, highest cost mine in the portfolio TITIMUKHTA SNAPSHOT Titimukhta, Polyus Gold’s smallest mine in Krasnoyarsk region, is located just 9 km from the Olimpiada deposit, and thus its ore is processed using Olimpiada’s capacity. The mine, which is open pit and uses the RIP cyanide leaching technology, was also commissioned relatively recently (in 2009). Titimukhta accounts just for 2% of Polyus Gold’s total reserves and produced 5% of the company’s consolidated gold in 2014. Its grade in reserves is high (3.45 g/t), but the average grade in ore processed in 2014 was just 1.9 g/t and LOM is 15 years. Last year was a challenging one for Titimukhta, as its gold production fell by as much as 29% YoY on low grades. We note that despite numerous management initiatives, Titimukhta failed to reach its reserve grade. The management has been working to improve the mine’s performance and in particular has decided to integrate it with Olimpiada. In addition, intensive geologic exploration works continue at the mine. Titimukhta is a high-cost operation with TCC of $956/oz, or about 63% above the average consolidated figure in 2014. Titimukhta, key figures Production, koz 2014 2015E 2016E 2017E 2018E 93 114 114 114 114 Revenues, $ mln 123 144 142 150 153 TCC, $/oz 956 801 882 905 922 27 47 35 41 41 22.0% 32.6% 24.9% 27.2% 26.9% EBITDA, $ mln EBITDA margin Location Krasnoyarsk region, Russia Mine type Open pit Technology RIP cyanide leaching Ownership, % 100% Reserves, koz 1,500 Share in reserves, % 2% LOM 15 Stripping ratio 3.9 Gold grade in reserves, g/t 3.5 Gold recovery, % 83.7% Source: company, Gazprombank estimates Source: company, Gazprombank estimates Verninskoye — newest project and leader in TCC reduction VERNINSKOYE Verninskoye deposit, located in Irkutsk region, was commissioned at end 2011 and is currently Polyus Gold’s newest project. It accounted for 6% of the company’s consolidated reserves and 9% of production in 2014. The mine is open pit and combines gravity, floatation and cyanide leaching. LOM is 27 years and grades are 2.5 g/t, slightly better than the company’s average. TCC was just $594/oz in 2014, with the figure down a remarkable 32% YoY in 2014 thanks to its achievement of nameplate capacity and an 8.9 pps increase of recovery in 2014. Moreover, the management expects recovery to improve further, to 86% by end 2015 compared with 84.4% at end 2014. Verninskoye key figures 2014 2015E 2016E 2017E 2018E Production, koz 146 150 150 152 152 Revenues, $ mln 192 190 189 202 206 TCC, $/oz EBITDA, $ mln EBITDA margin SNAPSHOT Location Irkutsk region, Russia Mine type Open pit Technology Gravity, flotation and cyanide leaching Ownership, % 100% Reserves, koz 4,100 Share in reserves, % 6% LOM 27 Stripping ratio 0.7 2.5 79.4% 594 484 531 537 547 Gold grade in reserves, g/t 89 102 91 102 104 Gold recovery, % 46.4% 53.4% 48.5% 50.6% 50.5% Source: company, Gazprombank estimates 14 Source: company, Gazprombank estimates APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING Kuranakh — small and expensive KURANAKH Kuranakh, located in the Republic of Yakutia, is an open-pit operation using RIP cyanide leaching. Ore is mined from numerous deposits at the Kuranakh ore field. It accounts for 4% of Polyus Gold’s reserves and totalled 8% of the group’s 2014 production. Its grades are relatively low at just 1.4 g/t compared with the group’s average of 2.2 g/t. LOM is about 18 years, while TCC was high in 2014 at $868/oz, or about 50% above Polyus Gold’s average. Despite the deposit’s relatively mature status, the management is considering initiatives to cut costs related to the project’s mining operations, processing and electricity use. SNAPSHOT Kuranakh key figures Location Republic of Sakha, Russia Mine type Open pit Technology RIP cyanide leaching Ownership, % 100% Reserves, koz 2,600 Share in reserves, % 4% 2014 2015E 2016E 2017E 2018E LOM 18 Production, koz 136 137 137 137 137 Stripping ratio 2.6 Revenues, $ mln 175 171 169 179 182 Gold grade in reserves, g/t 1.4 TCC, $/oz 868 734 815 839 854 Gold recovery, % 86.8% 50 59 44 50 50 28.6% 34.2% 26.2% 27.9% 27.7% EBITDA, $ mln EBITDA margin Source: company, Gazprombank estimates Source: company, Gazprombank estimates Alluvials — largest gold placer asset in Russia ALLUVIALS The Alluvials project, located in Irkutsk region, is the largest gold placer asset in Russia. Alluvials accounted for 2% of Polyus Gold’s reserves and 11% of production in 2014. The grades are 0.7 g/t and LOM is 5 years. TCC was $735/oz in 2014, or about 25% above the group’s average. SNAPSHOT Alluvials key figures Production, koz 2014 2015E 2016E 2017E 2018E 190 170 170 170 170 Revenues, $ mln 234 214 211 223 227 TCC, $/oz 735 614 676 693 707 70 88 73 81 82 EBITDA, $ mln EBITDA margin 37% 52% 43% 48% 48% Source: company, Gazprombank estimates Location Irkutsk region, Russia Mine type Alluvials Technology Sands washing Ownership, % 100% Reserves, koz 1,100 Share in reserves, % 2% LOM 5 Stripping ratio - Gold grade in reserves, g/t 0.7 Gold recovery, % - Source: company, Gazprombank estimates 15 APRIL 28, 2015 Natalka — ambitious project but reserves were slashed dramatically and launch was delayed with no guidance on timing Natalka acquired in 2004; delivery track record is deplorable Polyus Gold acquired Natalka in 2004 and began an exploration program that year (completed in 2006). The JORC audit was conducted in 2007. In July 2008, a pilot plant was launched. The development plan was changed several times (including the postponement of production), which, together with the recent dramatic decrease in reserves, has led to a very weak track record on project delivery. We note that the initial development plans were very aggressive, which resulted in significant disappointment among investors when it turned out that the deposit was much less promising than anticipated. At end 2013, Natalka’s development was delayed until summer 2015 and extended further at end 2014 without guidance on launch date In December 2013, Polyus Gold announced a delay in Natalka’s development until summer 2015. Several reasons were given at the time: 1) Gold prices declined sharply (15.5% YoY on average 2013), which led to the management’s decision to be conservative regarding financial risks, including financial leverage. 2) The initial schedule, which assumed active work in the winter period, was recognized as too aggressive in a weak price environment. 3) The management decided to use the opportunity to consider additional operational improvements to the project, including the use of photometric separation technology. That said, according to the management, it was operationally possible to commence production at Natalka according to the previous plan. Also, development works at the project continued, but at a slower pace compared to the initial plan. Later, at end 2014, the company decreased the deposit’s resources by 35-50% and shifted its launch from summer 2015 to an unspecified date. Details of Natalka’s revision of resource and reserves – 35-48% downward revisions Multiple reasons were given for the revision In February 2015, Polyus Gold lowered the project’s reserve and resource figures dramatically citing a change in the interpretation of deposit mineralization, more stringent requirements of the JORC Code (2012) compared to JORC Code (2004), the application of updated economic assumptions, and an increase in cut-off grades. Much of the previous data had been collected long ago (1945-2004). 48% downward revision to reserves The project’s proved and probable reserves currently stand at 16.2 oz, or 48% less than the previous estimate (31.6 mln oz). Gold grade valuation in reserves decreased from 1.7 g/t to 1.6 g/t. Measured indicated resources decreased 40%, from 42.6 mln oz at 1.7 g/t to 25.7 mln oz at 1.4 g/t. Inferred resources were slashed 35% from 17.05 mln oz at 1.7 g/t to 11.1 mln oz at 1.6 g/t. All resources (measured, indicated and inferred) decreased 38% from 59.6 mln oz to 36.9 mln oz, with the grade down from 1.7 g/t to 1.5 g/t. Even after the recent reserves decrease, Natalka’s reserves account for 25% of the consolidated figure Even after the dramatic decrease in reserves, Natalka’s reserves total 16.2 mln oz, or still 25% of the consolidated figure. New photometric separation might improve the project’s economics Polyus Gold has conducted two stages of pilot testing of new technology for preenrichmrnt of ore. According to the company, the test yielded positive results regarding the 16 RUSSIA > EQUITY RESEARCH > METALS & MINING APRIL 28, 2015 technology’s viability. Photometric separation is a pre-processing technology and might increase grades in ore at the processing stage from 1.6 g/t to 2.0-2.5 g/t. An update on the technology is expected this year and might serve as a catalyst, in our view. Tax breaks expected to be granted We note that the Natalka project is expected to be eligible for tax breaks. If granted, these breaks would be positive for the project, although our model does not assume any tax advantages at this point. Major infrastructure is already built for stage 1 Much of the key infrastructure of the Natalka project has already been constructed. Most of the engineering surveys have been carried out, as well as planning. The SAG mill and ball mill have been installed, foundations for the crushed ore storage facility are complete, and the temporary tailings dam is finished. Work continues on electricity pylons to bring 110 kV power lines to the facility, and most the necessary temporary roads have been constructed. Thirteen buildings providing canteens, recreation and accommodation facilities have been built, and key equipment has been delivered. $1.3 bln in capex out of an estimated $1.7-1.9 bln was invested by end 2014 A total of $1.3 bln has been invested in the Natalka project to date. In 2014, a total of $310 mln was invested, and in 2015 an additional $0.4-0.6 bln might be invested in the first stage of the project. We tentatively expect the project to start in 2016, but there is no clarity on the timing. Company may decide to develop the project’s capacity achieved during stage 1, but later might opt to develop it more extensively Earlier the management had considered the idea to proceed further and develop stages 2 and 3 of the project, targeting 1.5 mln oz of gold production per year. However, following the reduction of reserves to 16.2 mln oz, we think that the company will remain at stage 1. That said, we believe that should the gold market improve significantly, Polyus Gold could return to the idea of expanding Natalka’s capacity to develop the deposit in more extensive mode. Natalka project revision expected in mid-2015 and might be a catalyst; company is seeking a partner to share risks The management expects Natalka's operational review to be completed by mid-2015, which could serve as a catalyst. The current engineering studies are aimed at optimizing capex and building infrastructure. The management is considering various options to achieve these aims, including optical strong photometric separation technology, alterations in the flow sheet, and heap leaching. Polyus Gold confirmed its intention to develop the project and is in negotiations regarding a possible partnership agreement. 17 RUSSIA > EQUITY RESEARCH > METALS & MINING APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING Natalka at a glance Location Magadan region, Russia Mine type Open pit Technology Gravity, flotation and cyanide leaching Ownership, % 100% Reserves, koz 16,200 Share in reserves, % 25% LOM 32 Stripping ratio 0.6 Gold grade in ore reserves, g/t 1.6 Gold recovery, % Source: company, Gazprombank estimates Natalka key figures 2016E 2017E 2018E 2019E 2020E Production, koz 109 437 437 437 437 Revenues, $ mln 136 576 584 610 641 1,050 827 823 833 845 -9 178 188 209 234 -6% 31% 32% 34% 36% TCC, $/oz EBITDA, $ mln EBITDA margin Source: company, Gazprombank estimates Consolidated reserves before and after Natalka’s revaluation, as of beginning of 2014, Gazprombank estimates 90 83 mln oz -21% 80 70 66 mln oz 60 50 40 30 20 10 0 RESERVES AS OF BEGINNING OF 2014 NATALKA KURANAKH ALLUVIALS VERNINSKOYE RESERVES AFTER NATALKA REVALUATION TITIMUKHTA BLAGODATNOYE OLIMPIADA Source: company, Gazprombank estimates 18 APRIL 28, 2015 INTERESTING BROWNFIELD EXPANSION OPTIONS PLUS EXPLORATION PROJECTS Up to 500 koz of additional gold production per year could be delivered from brownfield projects; In March 2015, Polyus Gold presented an updated strategic asset review (aside from Natalka) with a number of medium-sized brownfield projects identified. The detailed engineering consideration of the opportunities has yet to be finalized. The company plans to finalize the review by end 2015, but has provided a number of the management’s key ideas and estimates. We note that the operating team was strengthened recently (May-October 2014). As of 1Q15, the management estimates that up to 500 koz of additional gold production per year could be delivered in the medium to long term, equivalent to around 30% of current production. Krasnoyarsk region (Blagodatnoye, Titimukhta and Olimpiada). Polyus Gold plans to increase the throughput capacity at Mill-4 (Blagodatnoye) by more than 30%, from 6 mln tonnes to 8 mln tonnes via equipment upgrades and de-bottlenecking. We note that the mill processed 7.3 mln tonnes of ore in 2014, and the capacity has exceeded nameplate over the past three years. Thus, the higher capacity should be stabilized and expanded only slightly. Earlier Polyus Gold had considered expansion of the mill’s capacity to 9 mln tonnes. Additionally, Polyus Gold might implement heap leaching at Blagodatnoye to process low-grade stockpiled ore and in situ ore. Heap leaching would allow the processing of 90 mln tonnes of off-balance ore with an average grade of 0.7 g/t and alone would add 40-70 koz of gold annually. Laboratory testing has confirmed that the ore is suitable for heap leaching. Moreover, if the technology is successfully implemented at Blagodatnoye, heap leaching may be implemented to process off-balance stockpiles at Titimukhta as well. As the raw material is in stockpiles, opex would be reduced. In addition, working capital release could be achieved. Another project is to expand the capacity of Mill-1 at Titimukhta (from 2.4 mln tonnes to 3.0 mln tonnes) to process high-grade ore from Olimpiada instead of low-grade ore from Titimukhta to produce gold. These measures might yield 300-350 koz of additional gold production from Krasnoyarsk region as soon as 2018. Verninskoye. The management sees an opportunity to increase production at Verninskoye by 100-175 koz annually (including recovery upgrade options). Such a result might be achieved via expansion of the plant’s capacity and an increase of the recovery rate. We note that in December 2014, the reserve estimate and feasibility study of the adjacent Medvezhiy Zapadniy deposit was submitted to the State Reserve Committee. The presentation and state registration of its reserves is expected in 1H15. The mill’s capacity might be extended from 2.2 mln tpa to 3.6-5.0 mln tpa in 2017-19 via the expansion alone, while the recovery grade may be increased from 83-84% to 86% as soon end 2015. The recovery increase capex totals just $11 mln and the increase in recovery would boost annual gold output by 15 koz. Kuranakh. Polyus Gold estimates incremental growth from the Kuranakh mine at 45-50 koz by 2018. The key idea is to implement heap leaching to process more than 100 mln tonnes of ore with a grade of 0.7-0.8 g/t. Lab testing work is planned for 1H15 and pilot works for mid-2015, with a decision on the project’s launch expected in 2H15. The launch is expected in 2016-19. 19 RUSSIA > EQUITY RESEARCH > METALS & MINING APRIL 28, 2015 ENERGY PROJECTS TO SUPPORT EXPANSION AND REDUCE COSTS In order to facilitate new gold production, energy supply is vital for Polyus Gold and thus the company if focusing on its next energy projects. Razdolinskaya-Taiga Grid (228 km) to expand production in Krasnoyarsk region The respective cooperation agreement regarding the Razdolinskaya-Taiga grid between Polyus Gold, Federal Grid Company (FGC) and the regional administration was signed in February 2014. The project is scheduled for 2015-16. Upon commission of the planned grid in 2016, it will be acquired by FGC with payments spread out over a 10year period. Cheaper external power currently accounts for 55% of Polyus Gold’s needs in the region, while the remaining 45% is provided by an expensive diesel station. According to the management’s estimates, the launch will save about $12 mln per year. Capex is estimated at $110 mln. Peledui-Mamakan Grid (280 km) to expand Verninskoye Construction of the Peledui-Mamakan Grid began in December 2013 and is expected to be completed in mid-2015. The project, with capex of $90 mln, will be conducted during two phases: phase 1 (2013-15) and phase 2 (timing undetermined). The first phase will be funded by Polyus Gold and the second by FGC (which will buy the grid following its construction). We estimate that the launch will result in savings of $15-17 mln annually. We note that the project will facilitate not only the expansion of Verninskoye, but also the development of Chertovo Koryto. Energy projects will also decrease costs We note that the projects are not only vital for the planned production expansion mentioned previously, but will also decrease power costs and enhance power reliability. 20 RUSSIA > EQUITY RESEARCH > METALS & MINING APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING MIXED DELIVERY TRACK RECORD Polyus Gold’s project delivery track record has been mixed. In particular, the company delivered rather significant production surprises in 2009-10, and in other years was roughly in line with guidance. Moreover, the management team was recently strengthened considerably, which might lead to improvement in the execution track record. That said, the large and ambitious Natalka project, which was repeatedly postponed and ultimately marred by a significant reserves cut without a new launch date, represents a black mark on the overall track record. 2006 2007 2008 2009 2010 2011 2012 2013 2014 Gold production, koz 1,215 1,214 1,222 1,261 1,386 1,497 1,569 1,652 1,696 Gold production target, koz 1,201 1,193 1,251 1,413 1,500 1,450 1,600 1,590-1,684 1,580-1,650 1.17% 1.76% -2.32% -10.76% -7.60% 3.24% -1.94% (+2;+3.8)% (+3%;+7%)% Difference between actual and forecasted production, % IMPROVED DIVIDEND POLICY BUT LESS THAN BALANCE SHEET AND PLANS ALLOW The final dividends for 2014 (net of special dividends paid earlier) amounted to $US 6.08 cents per share (or $184.5 mln in total), implying a yield of about 2%. The record and payment dates are scheduled for May 15 and May 29, respectively. Under the newly adopted dividend policy, Polyus Gold plans to allocate 30% of its adjusted net income for dividend payments. In addition, the company will explore the option of paying out special dividends ($500 mln in 2014), the size of which would depend on the company’s financial standing, FCF, financial leverage, and prospects. Earlier, Polyus Gold disbursed 20% of its net income in dividends. Given the new payout ratio, we estimate the FY15 dividends at $198 mln with a yield of 2.3% (for regular payments). There is a strong likelihood that the company will pay out special dividends (at least the same size as in 2014). Taking into account the proposed special dividends, the yield could reach around 8.0% in 2015. Polyus Gold has the strongest balance sheet among domestic metals companies. The company held $1,486 mln in cash as of end 2014, and net debt/EBITDA stood at 0.3x. Furthermore, we believe that the company has already passed the peak of capital investment (2015 capex is estimated at about $600 mln). Earlier, the management said that the company’s dividend policy could be improved. Thus, despite the higher payout ratio in the new dividend policy, we were disappointed by the changes to the dividend policy, as we expected a higher return to shareholders for 2014. However, the company could potentially postpone more favorable changes to the dividend policy and wait for the final consideration of Natalka, an improved global environment, a better understanding of the possible Kyrgyzstan deal, and better gold price dynamics. We think that Polyus Gold might pay a relatively high special dividend in the medium term, but visibility on total dividends is low. Having relinquished hope for higher dividends at an earlier date, investors might adopt a more conservative approach to this issue. Given the strong balance sheet and the expected stabilization of gold prices, special dividends could thus potentially be a positive surprise. 21 APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING DEBT POSITION IS VERY STRONG Polyus Gold’s net debt currently stands at $327 mln, with a net debt/EBITDA ratio of just 0.32x as of end 2014. Meanwhile, cash and bank deposits totalled $1,486 mln (including $1,217 mln in cash), with a total liquidity position (including unused credit lines) at a solid $2,197 mln. In 2015-16, the company must repay only $128 mln and $351 mln in 2015-18. Thus, we consider Polyus Gold’s liquidity position as one of the best in the Russian metals and mining universe and rather safe. Debt maturity schedule, as of end 2014 Available liquidity by currency 900 800 764 710 32% 700 600 500 400 55% 300 200 100 90 38 136 87 12% 0 2015 2016 2017 2018 2019 2020+ CASH BANK DEPOSIT UNUSED COMMITTED CREDIT LINES Source: company Source: company Debt by currency, as of end 2014, % Debt structure by type of rate, % 4% 27% 33% 63% 73% EUR RUB USD FLOATING-RATE DEBT, % Source: company FIXED-RATE DEBT, % Source: company 22 APRIL 28, 2015 CAPEX PEAK PASSED IN 2013 Polyus Gold’s capex stood at $525 mln in 2014, including $426 mln for development and just $99 mln for maintenance. We estimate that capex will increase moderately in 2016-17 amid brownfield expansion, and drop significantly staring from 2019. Estimated capex by project 1,600 1,400 1,200 1,000 800 600 400 200 0 2013 OTHER VERNINSKOYE 2014 2015E EXPLORATION TITIMUKHTA 2016E 2017E NATALKA BLAGODATNOYE 2018E 2019E KURANAKH OLIMPIADA 2020E 2021E ALLUVIALS Source: company data, Gazprombank estimates 23 RUSSIA > EQUITY RESEARCH > METALS & MINING APRIL 28, 2015 SHAREHOLDER STRUCTURE Oleg Mkrtchan and Gavril Yushvaev together hold approximately a 38% stake in Polyus Gold and reportedly (Vedomosti, Kommersant) are related to key shareholder Suleiman Kerimov. We note that Kerimov in the past reportedly proposed to merge the company with Polymetal, but the deal did not move forward as the parties were not able to agree on a price. We consider the probability of such a merger as relatively low at this point. That said, we do not exclude that the idea of a deal may resurface, which would have mixed implications. On the one hand, risks would be diversified throughout the project portfolio, management expertise would be optimized, investors would have access to a Russian gold company with global size, and liquidity would improve. On the other hand, Polyus Gold could potentially face M&A valuation risks, financial leverage would deteriorate and the company’s strategy might be altered. Shareholder structure 22.00% 40.22% KERIMOV MKRTCHAN YUSHVAEV FREE FLOAT 19.28% 18.50% Source: company 24 RUSSIA > EQUITY RESEARCH > METALS & MINING APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING TRADING VOLUMES In general, trading volume in Polyus Gold shares has been low in terms of the turnover to free-float market capitalization ratio. However, there have some spikes in trading volume dynamics, the last one occurring in November-December 2014 due to the Natalka reserves update and strong ruble depreciation. More recently, Polyus Gold’s monthly trading volume stands at $20-50 mln, equaling only 1-2% of the company’s market capitalization. Trading volume ($ mln) and share in free-float market capitalization (%) 500 14% 450 12% 400 10% 350 300 8% 250 6% 200 150 4% 100 2% 50 MONTHLY TRADING VOLUME, MLN $ 3-MONTH AVERAGE MAR 15 JAN 15 NOV 14 SEP 14 JUL 14 MAY 14 MAR 14 JAN 14 NOV 13 SEP 13 JUL 13 MAY 13 MAR 13 0% JAN 13 0 % OF FREE FLOAT MARKET CAP. Source: Bloomberg 25 APRIL 28, 2015 MANAGEMENT Pavel Grachev, Interim CEO Mr. Grachev is Chairman of the Board of Nafta Moskva (Cyprus) Limited. He is also a Member of the Board of Directors of JSC Federal Grid Company. Mr. Grachev served on the Board of Polyus Gold from 2009 to 2011. He has also served on the boards of Uralkali (from 2010 to 2012), PIK Group (from 2009 to 2011, including as Chairman from 2010 to 2011) and Polymetal (from 2006 to 2008). From January to September 2013, Mr. Grachev was General Director of Far East and Baikal Region Development Fund. From 2011 to 2013, he headed the Moscow representative office of Alpina Capital A.C.L. Limited (Cyprus). From 2010 to 2011, Mr. Grachev was General Director of Uralkali. From 2006 to 2008, he headed the Legal Department at Nafta Moskva. Mr. Grachev graduated from St. Petersburg State University and the University of Trieste (Italy) with degrees in law. Fyodor Kirsanov, General Director Mr. Kirsanov began his career as a consultant at McKinsey & Co. advising a wide range of clients in the mining, petrochemical and industrial sectors. This was followed by a number of senior executive positions in leading Russian companies, including United Shipbuilding Corporation, Russia’s leading industrial manufacturer, and SIBUR, Russia’s largest petrochemicals producer. He joined Polyus Gold in March 2013 as Deputy CEO and was promoted to his current role in November 2013. Mr. Kirsanov graduated with honors from the People’s Friendship University of Russia in Moscow with a degree in economics. He holds an MBA with honors in strategic management from the Fox School of Business at Temple University in Philadelphia, Pennsylvania and a master’s degree with honors in economics from the People’s Friendship University of Russia. Mikhail Stiskin, CFO Mr. Stiskin joined Polyus Gold in 2013 following a highly successful career in investment banking. Mikhail was managing director at Sberbank CIB (until 2011 known as Troika Dialog, where Mikhail was also a partner), a corporate and investment banking arm of Sberbank, Russia’s largest financial institution, where Mikhail was in charge of research coverage of the metals and mining/fertilizer sectors. For many years Mikhail’s team was rated as best in the sector within both the CIS and EMEA regions, according to annual Institutional Investor surveys. Mr. Stiskin has also been actively involved in a number of landmark transactions in the sector. He graduated with honors from the Moscow State Institute of International Relations with a degree in economics, and holds a master’s degree in economics from the University of Michigan (Ann Arbor). Vladimir Polin, Managing Director Mr. Polin joined Polyus Gold in August 2014 and has extensive managerial experience in the metals and mining sector. Prior to joining the company, Mr. Polin was COO at En+, a leading Russian industrial group with assets in the metals, mining and energy sectors. Before that, for three years, he headed the East aluminum division at Rusal, the world’s leading aluminum producer. Prior to joining Rusal, Mr. Polin spent almost 10 years at Mechel, a major coal and steel producer in Russia, in a variety of senior posts including CEO and Senior Vice President at Mechel Management. Mr. Polin graduated from Chelyabinsk Polytechnic Institute with a degree in metallurgy. 26 RUSSIA > EQUITY RESEARCH > METALS & MINING APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING RESERVES AND RESOURCES ARE STILL AMPLE Historically, Polyus Gold has been very successful in accumulating and expanding its resources, and even after the recent dramatic decrease in Natalka’s reserves and resources it still has a unique gold reserves and resource base among peers by a number of metrics (see charts below). As the world’s ninth-largest global gold producer, Polyus Gold holds the world’s forth-largest reserves base with LOM of approximately 38 years, which highlights its unique development potential. Moreover, the average gold grade in reserves is high (2.2 g/t) and the third-highest among global peers. On the other hand, the reserves base is not well diversified and Polyus Gold’s largest brownfield project, Olimpiada, accounts for 45% of the total while the only current project under development, Natalka, comprises 25%. We note that in our view, Polyus Gold’s management has been relatively slow in the development of its large reserves base. Thus, despite this excellent base, the market discounts the company’s valuation for the slow pace of reserves development. Reserves and resources (exclusive reserves) as of December 2014, mln oz Reserves by deposit as of December 2014 OLIMPIADA 4% 44% 52% BLAGODATNOYE 25% TITIMUKHTA VERNINSKOYE AND SMEZHNY RESERVES RESOURCES ALLUVIALS 4% 2% KURANAKH 6% 48% NATALKA 2% 13% CHERTOVO KORYTO Source: company, Gazprombank estimates Source: company, Gazprombank estimates Gold reserve grade by mine, g/t LOM by mine, years 3.5 TITIMUKHTA 3.3 OLIMPIADA 0.0 0.5 1.0 15.1 TITIMUKHTA 0.7 ALLUVIALS 18.0 KURANAKH 1.4 KURANAKH 21.1 BLAGODATNOYE 1.6 NATALKA 27.1 VERNINSKOYE 2.2 BLAGODATNOYE 32.4 NATALKA 2.5 VERNINSKOYE 39.4 OLIMPIADA 4.8 ALLUVIALS 1.5 2.0 2.5 3.0 3.5 4.0 0 GOLD RESERVE GRADE, G/T 10 20 30 40 50 LOM, YEARS Source: company, Gazprombank estimates Source: company, Gazprombank estimates 27 APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING Gold reserves and resources (JORC) as of December 2014 MEASURED AND INDICATED (INCLUSIVE OF RESERVES) PROVEN AND PROBABLE ORE, MLN T GRADE, G/T GOLD, MLN OZ ORE, MLN T GRADE, G/T INFERRED GOLD, MLN OZ ORE, MLN T GRADE, G/T GOLD, MLN OZ OPERATING MINES Olimpiada 277.2 3.29 29.3 304.3 3.38 33 160.3 2.78 14.4 Blagodatnoye 120.5 2.25 8.7 144.3 2.3 10.7 11.6 1.94 0.7 Titimukhta 13.3 3.45 1.5 17.5 3.19 1.8 1.6 1.72 0.1 Verninskoye( incl. Smezhny) 50.4 2.52 4.1 75.1 2.48 6 110 1.95 6.9 Alluvials 53.1 0.64 1.1 63.2 0.74 1.5 3.3 0.9 0.1 Kuranakh 57.1 1.39 2.6 85.3 1.71 4.7 7.8 1.35 0.3 571.6 2.57 47.3 689.7 2.6 57.7 294.6 2.37 22.5 319 1.58 16.2 559 1.43 25.8 218 1.58 11.1 34.5 2.12 2.4 50.5 1.84 3 2.1 1.64 0.1 Panimba - - - 16 2.32 1.2 24.4 1.79 1.4 Razdolinskaya - - - 9.8 3.94 1.2 17.6 3.5 2 Medvezhy Zapadny - - - - - - 23.5 1.83 1.4 34.5 2.12 2.4 76.3 2.21 5.4 67.6 2.24 4.9 925.1 2.21 65.8 1324.9 2.09 88.9 580.2 2.06 38.5 Total operating assets MINE UNDER DEVELOPMENT Natalka EXPLORATION PROJECTS Chertovo Koryto Total exploration projects Total Polyus Gold Source: company 28 APRIL 28, 2015 GOLD INDUSTRY OVERVIEW Gold is approaching a bottom but no strong catalysts on the horizon The gold price fell 10.2% YoY in 2014 amid multiple headwinds, making it one of the worst performing metals and mining commodities The average gold price decreased 10.2% YoY in 2014 to $1,266/oz, while the average price in 1Q15 stood at $1,219/oz (-5.7% YoY, +1.5% QoQ). The negative dynamics stemmed from several factors, including a strong dollar against global currencies, a continuing decrease in investment demand, and cost inflation (including a weakening of gold producer currencies and lower oil prices). We note that aside from bulks and silver, gold was the worst performer in 2014 among metals and mining commodities. Poor macroeconomic data from the EU and unsuccessful attempts by the ECB to encourage growth have provided additional support to the dollar. Uncertainty surrounding the situation in Ukraine and related tensions between the West and Russia have also had a negative impact on the euro against the dollar, adding to the latter’s strength. Key developed equity markets were generally attractive in 2014 (S&P 500 +12.4%, Nikkei 225 +9.7%, DAX +4.3%), which also reduced gold’s relative investment attractiveness given the lack of a need for a safe haven. According to Bloomberg, energy represents about 30% of gold miner costs, while labor/administration costs account for 20-45%. The inflation resulting from weaker currencies among a number of countries has significantly impacted the costs of gold producers globally. Retail investment demand to decrease with a CAGR of 2.7% in 2014E-2017E Based on GFMS figures, retail investment demand was down about 39% YoY in 2014 to 1,079 tonnes, mostly due to low interest from key Asian markets. Bar investment in China dropped 53% YoY to 171 tonnes. Aside from the general reasons for low investment in gold in 2014 that we mentioned earlier, the significant decrease was significantly influenced by the anti-corruption initiatives introduced by the Chinese government since April 2013, as gifting was a significant component of demand. The share of retail investment in physical demand decreased from 35.2% in 2013 (the highest level in recent years) to 26.0% in 2014. We believe that the figure will decline further in 2015-16 (flat in 2017), while retail investment demand should drop with a CAGR of 2.7% in 2014E-2017E. We note that the share of retail investment in gold demand increased during the 2008-09 crisis and totaled 31% on average during the 2008-13 period. The jump in retail investor demand for gold was unsurprising during the crisis and thereafter, as investors sought a safe haven amid turbulent conditions. However, assuming recovery in the global economy, moderate inflation risks and higher interest rates in the US, and a continuing rise in developed market equity indexes, we believe the share of retail investment in global gold demand should continue to normalize in the coming years. We estimate that the share of retail investment in global demand will decrease to 23% by 2017 (and could even decline at a faster pace). A fall in retail investment demand will be the key downward driver of demand in the medium term, with this part of physical demand being our prime focus. 29 RUSSIA > EQUITY RESEARCH > METALS & MINING APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING Figure: Retail investment (tonnes) and share of investment demand in physical demand 2,000 1,800 32% 1,600 35% 31% 27% 27% 1,400 40% 36% 35% 26% 1,200 1,000 12% 13% 12% 12% 800 25% 30% 23% 23% 20% 14% 15% 15% 15% 600 400 25% 10% 6% 5% 200 0 0% 2000 2002 2004 RETAIL INVESTMENT 2006 2008 2010 2012 2014 2016E RETAIL INVESTMENT, SHARE IN PHYSICAL DEMAND Source: GFMS, Gazprombank estimates Central banks will continue to buy gold (2% CAGR in 2015-17) For the past five years, central bank gold purchases were a significant upward driver in the gold market. Net purchases by the official sector were up 14% YoY in 2014, hitting a second highest level since the end of the gold standard (the highest level of 544 tonnes was seen in 2012). In particular, Russia (the largest buyer in 2014 among central banks, +173 tonnes) and Kazakhstan (+48 tonnes) were the main buyers driving the increased demand. Russia was strongly influenced by the deterioration in the geopolitical environment. We expect central banks to continue to increase their gold holdings (in particular, by diversifying away from euros), albeit with a relatively modest CAGR of 2% in 2015-17. That said, the CBR announced that it purchased 31 tonnes of gold in March 2015 (it did not buy in January-February). We note that some countries have a relatively low share of gold in official reserves, and thus their central banks will support gold demand. Among the top 10 countries in terms of official gold holdings, those with relatively low gold reserves include China (1,054 tonnes of gold but just 1% of reserves), Switzerland (1,040 tonnes, 7% of reserves), Japan (765 tonnes, 2% of reserves) and Russia (1,208 tonnes, 12.1% of reserves). Jewelry demand to grow but at a moderate pace (2.7% CAGR in 2014-17) Jewelry demand dropped 9% YoY in 2014 due to a dramatic decrease (-33% YoY) in Chinese offtake. The trend was the opposite in India, where demand was up 14% YoY to a five-year high. Chinese demand declined due to the high base of 2013 (+29% YoY), some forward consumption that year, and a slowing of economic growth. In India, the weaker rupee significantly aided demand. Assuming global economic recovery, we expect jewelry demand to grow with a CAGR of 2.7% in 2014-17. China (29% of global jewelry demand) and India (31%) will be the key demand drivers. China’s demand growth will likely be slower than expected but nonetheless remain a key factor. According to GFMS, jewelry demand accounted for a 53% share in 2014 and, together with retail investment demand, these two largest items accounted for almost 80% of total physical demand in 2014. As we expect retail demand to decrease, jewelry demand should be back in focus and gold prices will less volatile. Industrial demand to decrease in the long term on substitution in electronics and dentals Industrial fabrication (mostly electronics and dental & medical usage) accounted just for 10% of physical demand last year. Industrial demand continued to decrease in 2014, down 4% YoY driven by all major sectors. We expect industrial demand to decrease 30 APRIL 28, 2015 with a CAGR of 3.2% in 2014-17, primarily due to substitution in the electronics (-4.3% CAGR in 2014-17) and dental & medical (-9.2% CAGR in 2014-2017) subsectors. Mine supply to deteriorate in the medium term (-1.8% CAGR in 2014-17) Mine production increased 2% YoY in 2014, driven mainly by the ramp-up of projects that were commissioned in previous years. The positive mine supply trend seen in recent years is expected to turn flat as soon as 2015 as the contribution from projects decreases, and turn negative in the medium term. Given less capital investment in global industry due to the sharp decrease in the gold price amid deterioration of remaining reserves quality, we think that global gold mine supply will contract with a CAGR of 1.8% in 2014E-2017E. Based on GFMS figures, we estimate that mine production will account for 73% of supply in 2015 and scrap for 25% of the total. Scrap supply should soften in 2015-16 as a result of low gold prices (to 4,191 tonnes in 2016 vs. 4,362 tonnes in 2014) and rebound in 2017. Based on these factors, total supply should decrease with a CAGR of 1.5% in 2014-17. Mostly challenging environment will remain in place; we expect $1,230/oz in 2015 and $1,212/oz in 2016 The key negative factors seen last year, including a strengthening dollar, cost inflation, the relative attractiveness of key equity markets, and a normalizing share of investment demand in the total figure, to remain intact throughout 2015 and most of 2016 (only costs are expected to return to growth in 2016). Meanwhile, we expect the US to switch to a tighter monetary policy, which should further strengthen the dollar against other currencies. That said, the timing and pace of such a shift is unclear. We note that the National Association of Business Economists recently conducted a survey according to which 71% of economists said they expected the FOMC to increase the federal funds target rate this year. A total of 31% of respondents think that the Fed should increase the target in 1H15, while 34% expect the event to take place in 2H15. If the Fed does not raise the key rate in 1H15 (our base case), this might support the gold price in the short run, but we think that such support might be short-lived and insufficient to trigger a significant price increase. We expect the rate hikes by the Fed to be mild and gradual, and thus downside for the gold price should be limited. Moreover, as the hikes might be occur later and be less aggressive than the market anticipates, the gold price will increase from the current spot level in 2H15 (seasonality will also play a role). Our price forecast for 2015E stands at $1,230/oz, down 2.9% YoY. Backed by the previous aggressive sell-off in gold, we see low risks of further significant downside pressure in gold prices, but the prospect of higher interest rates and equity indexes should also keep gold from moving sharply higher in the short run. The challenging geopolitical situation poses upside risks to our base scenario. Decreasing gold supply alongside normalized investment demand, global economic recovery and cost inflation will result in a higher gold price in the long run. 31 RUSSIA > EQUITY RESEARCH > METALS & MINING APRIL 28, 2015 RUSSIA > EQUITY RESEARCH > METALS & MINING Gold supply-demand model 2011 2012 2013 2014 2015E 2016E 2017E CAGR 14-17 2,846 2,875 3,062 3,133 3,126 3,057 2,970 -1.8% YoY 3.8% 1.0% 6.5% 2.3% -0.2% -2.2% -2.8% Scrap 1,675 1,678 1,287 1,125 1,061 1,053 1,145 YoY -2.2% 0.1% -23.3% -12.6% -5.7% -0.8% 8.7% 18 -40 -39 103 84 81 50 -117.1% -320.3% -3.2% -366.5% -19.1% -3.6% -37.8% Supply 4,539 4,513 4,310 4,362 4,271 4,191 4,165 YoY 4.4% -0.6% -4.5% 1.2% -2.1% -1.9% -0.6% Jewelry 2,034 2,008 2,439 2,213 2,304 2,343 2,400 YoY 0.1% -1.3% 21.4% -9.3% 4.1% 1.7% 2.4% 468 426 419 400 389 377 363 -1.6% -9.0% -1.7% -4.4% -2.9% -3.0% -3.6% 330 295 290 279 267 257 245 -4.3% Dental & medical 43 39 36 34 32 28 25 -9.2% Other industrial 95 92 93 87 90 92 93 2.1% Net official sector 457 544 409 466 477 482 494 2.0% 490.9% 19.1% -24.8% 13.8% 2.5% 1.0% 2.5% 1,556 1,343 1,775 1,079 1,043 990 993 27.4% -13.7% 32.2% -39.2% -3.3% -5.1% 0.3% 1,230 1,039 1,394 829 801 760 762 -2.7% 327 304 380 251 242 230 231 -2.7% 4,515 4,321 5,042 4,158 4,213 4,191 4,250 0.7% 18.6% -4.3% 16.7% -17.5% 1.3% -0.5% 1.4% 24 192 -732 204 58 -1 -84 - ETF inventory build 185 279 -880 -160 -45 -65 45 - Exchange inventory build -6 -10 -98 1 0 0 0 - -154 -78 246 363 103 64 -129 - SUPPLY Mine production Net hedging supply YoY 0.6% -21.4% -1.5% DEMAND Industrial fabrication YoY Electronics YoY Retail investment YoY Bars Coins Physical demand YoY Physical surplus/(deficit) Net balance 2.7% -3.2% -2.7% Source: GFMS, Gazprombank estimates 32 APRIL 28, 2015 Gold price ($/oz) and S&P 500 dynamics RUSSIA > EQUITY RESEARCH > METALS & MINING Gold price ($/oz) and S&P 500 dynamics 1,700 2,200 1,700 2,100 1,600 1.45 1.40 1,600 1.35 2,000 1,500 1,500 1,900 1,400 1,800 1.25 1,400 1,700 1,300 1.30 1.20 1,300 1.15 1,600 S&P 500 Source: Bloomberg 10 550 5 500 GOLD PRICE JUL 14 OPEN INTEREST MAR 15 600 JAN 15 15 NOV 14 650 SEP 14 20 MAY 14 JAN 15 700 MAR 15 SEP 14 INVENTORIES NOV 14 JUL 14 MAY 14 MAR 14 JAN 14 SEP 13 NOV 13 JUL 13 MAY 13 1,100 25 MAR 14 1,200 750 JAN 14 1,300 30 NOV 13 1,400 800 SEP 13 1,500 35 JUL 13 1,600 850 MAY 13 1,700 40 MAR 13 11.00 10.50 10.00 9.50 9.00 8.50 8.00 7.50 7.00 6.50 6.00 JAN 13 1,800 30D VOLATILITY Source: Bloomberg Source: Bloomberg Gold/silver ratio Total gold net position (‘000 contracts) 80 20 75 10 0 70 -10 65 -20 60 GOLD/SILVER RATIO MAR 15 JAN 15 NOV 14 SEP 14 JUL 14 MAY 14 MAR 14 JAN 14 NOV 13 SEP 13 JUL 13 MAY 13 JAN 13 MAR 15 JAN 15 NOV 14 SEP 14 JUL 14 MAY 14 MAR 14 JAN 14 SEP 13 NOV 13 JUL 13 MAY 13 -50 MAR 13 50 JAN 13 -40 MAR 13 -30 55 TOTAL GOLD NET POSITION Source: Bloomberg Source: CTFC 33 Тысячи 30d gold price volatility (%) and open interest (‘000 contracts) Миллионы Gold price ($/oz) and inventories (mln oz) JAN 13 MAR 15 USDEUR RATE Source: Bloomberg MAR 13 JAN 15 NOV 14 JUL 14 GOLD PRICE SEP 14 MAY 14 MAR 14 JAN 14 SEP 13 NOV 13 JUL 13 MAY 13 1.00 JAN 13 JAN 15 1.05 1,100 MAR 15 SEP 14 GOLD PRICE NOV 14 JUL 14 MAY 14 MAR 14 JAN 14 SEP 13 NOV 13 JUL 13 MAY 13 JAN 13 1,400 MAR 13 1,100 1.10 1,200 1,500 MAR 13 1,200 APRIL 28, 2015 Gold supply RUSSIA > EQUITY RESEARCH > METALS & MINING Gold demand 3,500 6,000 3,000 5,000 2,500 4,000 3,000 2,000 2,000 1,500 1,000 1,000 0 500 -1,000 0 2010 -500 2011 2012 2013 MINE PRODUCTION 2014 SCRAP -2,000 2015E 2016E 2017E 2010 2011 2012 2013 2014 PHYSICAL DEMAND EXCHANGE INVENTORY BUILD NET HEDGING SUPPLY Source: Gazprombank estimates, GFMS 2015E 2016E 2017E ETF INVENTORY BUILD Source: Gazprombank estimates, GFMS Supply structure in 2014, % Demand structure in 2014, % 2% 26% 26% 53% 11% 72% 10% MINE PRODUCTION SCRAP JEWELLERY NET OFFICIAL SECTOR NET HEDGING SUPPLY INDUSTRIAL FABRICATION RETAIL INVESTMENT Source: GFMS Source: GFMS Mine production, tonnes Mine production structure in 2014, % 3,500 15% 3,000 2,500 51% 9% 2,000 CHINA AUSTRALIA RUSSIA 1,500 8% 1,000 USA PERU SOUTH AFRICA 500 7% 0 5% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 OTHER SOUTH AFRICA PERU USA RUSSIA AUSTRALIA OTHER 5% CHINA Source: GFMS Source: GFMS 34 APRIL 28, 2015 Scrap production, tonnes RUSSIA > EQUITY RESEARCH > METALS & MINING Scrap production structure in 2014, % 1% 7% 2,000 10% 1,800 2% 1,600 NORTH AMERICA 1,400 1,200 SOUTH AMERICA 1,000 EUROPE 800 CHINA 37% 600 OTHER ASIA 400 AFRICA 200 26% OCEANIA 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 OCEANIA EUROPE AFRICA SOUTH AMERICA OTHER ASIA NORTH AMERICA CHINA 17% Source: GFMS Source: GFMS Jewelry demand, tonnes Jewelry demand structure in 2014, % 3,000 3% 0% 3% 2% 17% 2,500 15% NORTH AMERICA SOUTH AMERICA 2,000 EUROPE 1,500 CHINA INDIA 1,000 OTHER ASIA 500 AFRICA 29% 31% 0 OCEANIA 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 INDIA CHINA OCEANIA EUROPE AFRICA SOUTH AMERICA OTHER ASIA NORTH AMERICA Source: GFMS Source: GFMS Industrial fabrication, tonnes Industrial fabrication structure in 2014, % 600 22% 500 400 300 8% 200 100 70% 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 OTHER INDUSTRIAL DENTAL & MEDICAL FABRICATION ELECTRONICS ELECTRONICS Source: GFMS DENTAL & MEDICAL FABRICATION OTHER INDUSTRIAL Source: GFMS 35 APRIL 28, 2015 Retail investment, tonnes RUSSIA > EQUITY RESEARCH > METALS & MINING ETF inventory build and identifiable investment (tonnes, lhs) and gold price ($/oz, rhs) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2,000 1,800 1,500 1,600 1,400 1,000 1,200 500 1,000 800 0 600 -500 400 -1,000 200 -1,500 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 MEDALS & IMITATION COIN FABRICATION OFFICIAL COIN FABRICATION PHYSICAL BAR INVESTMENT ETF INVENTORY BUILD GOLD PRICE (US$/OZ) Source: GFMS IDENTIFIABLE INVESTMENT Source: GFMS 36 HQ: 16/1 Nametkina St., Moscow 117420, Russia. Office: 7 Koroviy val St. Research Department +7 (495) 983 18 00 EQUITY SALES FIXED INCOME SALES +7 (495) 988 23 75 +7 (495) 983 18 80 EQUITY TRADING FIXED INCOME TRADING +7 (495) 988 24 10 +7 (499) 271 91 04 Copyright © 2003-2015. Gazprombank (Joint Stock Company). All rights reserved This report has been prepared by the analysts of Gazprombank (Joint Stock Company) (hereinafter — Gazprombank) and is based on information obtained from public sources believed to be reliable, but is not guaranteed as necessarily being accurate. With the exception of information directly pertaining to Gazprombank, the latter shall not be liable for the accuracy or completeness of any information shown herein. All opinions and judgments herein represent solely analysts’ personal opinion regarding the events and situations described and analyzed in this report. They should not be regarded as Gazprombank’s position and are subject to change without notice, also in connection with new corporate or market events that may transpire. Gazprombank shall be under no obligation to update, amend this report or otherwise notify anyone of any such changes. The financial instruments mentioned herein may be unsuitable for certain categories of investors. This report should not be the only basis used when adopting an investment decision. Investors should make investment decisions at their own discretion, inviting independent consultants, if necessary, for their specific interests and objectives. The authors shall not be liable for any actions resulting from the use of this report. Any information contained herein or in the appendices hereto shall not to be construed as a solicitation or an offer to buy or sell any securities or advertisement, unless otherwise expressly stated herein or in the appendices hereto. Gazprombank should in no way be viewed as soliciting, facilitating, brokering or causing any persons to invest in any instrument or otherwise engage in transactions that may be prohibited to those persons under applicable laws and regulations. Investors should independently evaluate whether any investment transactions undertaken after reviewing Gazprombank research materials are permitted under any applicable economic sanctions laws and regulations or other laws applicable to their investing activities.
