2022 has been a rough year for the Polymetal (LSE:POLY) share price. Following Russia’s invasion of Ukraine, investor sentiment surrounding the Russian mining group hasn’t exactly remained intact. And consequently, the stock is down over 75% over the last 12 months.
However, those who decided to use the crash as a buying opportunity in early March are probably quite chuffed. Why? Because the Polymetal share price has more than doubled in just one month!
Is this a short-term boost or the start of a long-term recovery? Let’s explore.
The bull case for Polymetal’s share price
It’s not exactly hard to understand why this business took such a beating in the public markets. With Western sanctions placed against Russia, running a mining business in the region will likely be disrupted. Yet, looking at the latest announcements from management, that doesn’t appear to be the case.
Material shipments out of Russia to Kazakhstan and East Asia have been temporarily impacted. But this appears to be caused by a switch in logistic service providers rather than the war. Meanwhile, local demand for gold is on the rise as Russian investors seek to protect their wealth from the drop in the ruble. And so far, in the words of management, “sanctions announced in the period between 9 March and 30 March did not have a material impact on the business”.
As a result, the company reiterated its 2022 production guidance for 1.7 mega ounces of gold equivalents. This is obviously positive news. And after taking such a beating, seeing the Polymetal share price enjoy a burst in growth after these announcements is hardly surprising.
Taking a step back
As encouraging as the operational updates have been, the damage isn’t as non-existent as it seems. Mining is a pretty expensive process that requires a lot of capital, usually secured through bank loans. With the Russian banking sector cut off from SWIFT, securing additional funds will be a challenge.
Polymetal does have around $500m of undrawn credit available from non-sanctioned financial institutions. But depending on how long the Ukrainian conflict lasts, this may not be enough. Russian banks are offering loans to businesses. However, these loans are only available in rubles and with the central bank boosting interest rates, Polymetal can currently only get loans with a massive 23-25% interest rate!
Consequently, management has started to delay their early-stage mining projects to reduce costs. But suppose the group has to start taking out these expensive loans to keep operations going? In that case, I think it’s fair to say Polymetal’s margins will suffer considerably, taking its share price with it.
Time to buy?
The fate of this business seems to be ultimately tied to the situation in Ukraine. And while I’m hopeful for a swift and peaceful resolution, there is no guarantee of that happening. Polymetal’s leadership has already begun discussing splitting its Russian and Kazakh operations into separate companies, which only adds more uncertainty to the future of its share price.
In my opinion, an investment in this business is more like gambling – something I’m not interested in doing with my portfolio.
