Russian gold miners Polymetal International (LSE: POLY) Petropavlovsk (LSE: POG) are two of the biggest fallers on the London market so far this year. But both the POG and Polymetal share prices are up by around 30% as I write on Tuesday morning.
This surge of buying seems to be linked to renewed hopes of a peace settlement in Ukraine. However, I think there’s a second reason why Polymetal shares are flying. The former FTSE 100 firm is investigating changes that could leave its shareholders free to receive generous dividends from gold sales, despite sanctions.
Polymetal dividend could boost share price
For me, the big news today is the possibility that Polymetal’s dividend could still be saved. It operates mines in Russia and in Kazakhstan. The company is reported to be considering whether it could split the Kazakhstan operations into a new business.
The Kazakh mines are low-cost operations. According to Polymetal, they generated revenue of $984m and sold more than 550,000 ounces of gold equivalent last year. Average cash costs were just $643 per ounce, making these mines highly profitable.
My sums suggest that Polymetal’s Kazakh mines alone might be able to support a dividend of up to $1 per share. Based on a Polymetal share price of 320p, that could give a 24% dividend yield.
Too good to be true?
Of course, this is an extreme scenario and there are serious risks attached. There’s no guarantee that a split will go ahead. Polymetal could struggle to devise a plan that’s compatible with financial sanctions against Russia.
Its Kazakh mines might also need fresh investment to maintain productivity. That could reduce the amount of cash available for dividends in future years.
On balance, I think Polymetal’s share price could rise further if the company confirms plans to create a UK-listed Kazakhstan gold miner. But this is a risky sector of the market, with a lot of uncertainties.
Petropavlovsk: bargain buy?
Shares in Russian gold miner Petropavlovsk have also risen sharply today. This former FTSE 250 company’s operations are all in the far northeast of Russia. They’re a long way from the conflict in Ukraine, but the company is still being affected by sanctions.
On Friday, Petropavlovsk admitted that sanctions against key banking partner Gazprombank meant that it could no longer sell its gold to the bank or make interest payments on its loans.
The company is working to find a new way to sell its gold, but says that current restrictions on gold sales in Russia could make this “challenging”.
What I’d do today
I’m not going to buy any Russian gold mining shares for my portfolio. They’re too speculative for me. But if I was going to make a purchase, I would probably choose Polymetal, but I’d only invest money in this situation that I was prepared to lose.
Even before the crisis broke out, Petropavlovsk had a track record of operational and financial problems. By contrast, Polymetal was a profitable FTSE 100 company with a track record of big dividends.
I think that Polymetal’s Kazakhstan operations might allow UK shareholders to retain some value, even if the Russian operations are effectively lost to overseas investors.
