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Investors remain wary, given past problems and risks over sanctions

Highest ever levels of production, profit margins and cash generation made 2016 a record year for Polyus Gold, Russia’s largest gold producer. But you would not know it from looking at the company’s valuation.

Despite a surge in investor interest in global gold producers over the past year, Russia’s miners have been left out as investors remained wary of a bet that has turned sour in the past, much to the chagrin of executives.

“There is a big Russian risk discount,” says Mikhail Stiskin, chief financial officer at Polyus, the world’s fourth-largest gold miner by reserves and ninth by output. “There is clearly a role being played by the overall low propensity for Russian risk among the international investment community.”

After several years of repairing balance sheets and cutting costs, gold miners rallied in the wake of the recovery in gold prices that started at the beginning of 2016. Gold mining stocks have risen 35 per cent in the past 12 months, according to the NYSE Arca Gold Miners Index, which includes companies such as London-listed Randgold Resources and Canada’s Barrick Gold.

But while Randgold and Barrick — the world’s largest gold miner by production — trade at share price multiples of 35 times earnings, Polyus stock reflects a multiple of just 10. Nordgold, another Russian gold miner, this month said it would delist, in part due to a perceived undervaluation.

“Russian mining companies, and gold mining companies in particular, are clearly under-invested by the international investors,” says Pavel Grachev, chief executive at Polyus. “The multiples which currently available among the Russian mining industry are still lower than international peers.”

Analysts say that while Russian companies have leveraged lower costs and increased production during rising gold prices to post strong results, investors are still wary of the risks of non-traditional management structures and other local factors.

“With the number of options that exist for investment among gold miners in North America and Europe, there is just a significant discount because of the jurisdiction,” says one mining equity analyst, who declined to be named as he was not permitted to speak to the media.

“The corporate governance and structure is not that transparent. There is usually ownership structures in place that [mean]equity holders have less say in things than perhaps other companies.”

Sanctions imposed on some Russian companies and individuals by western countries in 2014 following Moscow’s annexation of Crimea dented investor confidence, as did the subsequent slump in Russia’s economy caused mainly by the fall in commodity prices.

But Mr Stiskin also admits that a checkered history of Russian mining ventures means many investors are still wary of the sector, and leaves companies like Polyus battling to restore a reputation that overshadows financial performance.

“There have been so many disappointments in terms of delivering projects by [Russian] gold miners, which has affected sentiment and the approach to risk,” he says.

“If you look at some of our peers, they have failed spectacularly. And clearly that has repercussions even for our image, and we are suffering as a result.”

Russian companies also suffer from a perception that management standards and their approach to investor relations below western standards.

“Typically, a lot of Russians tend to do a poor job in investor relations: they do not see why they have to try so hard,” says Jonathan Guy, an analyst at Numis Securities in London. “There is also a feeling, rightly or wrongly, that you’re getting the news a day or two after the Russians are — you are going to be behind the curve.”

“When I was road-showing, the buy side would bring up companies and in 40 meetings Randgold would come up 40 times and Russian miners would come up two times,” he adds.

One Russian gold miner that has outperformed peers is Polymetal, which Mr Guy says has worked hard to convince investors that it employs best-practice management standards. Its stock price has more closely matched western rivals than other Russian rivals.

Polyus has outperformed its own annual production estimates over the past three years.

On Tuesday, the company announced adjusted earnings before interest, taxation, depreciation and amortization of $1.54bn, up an annual 20 per cent, on a record ebitda margin of 62 per cent. This reflected reduced costs on a devalued local rouble and increased efficiency at its six mines.

“The combination of this cost profile and growth profile should support our valuation, but we are not seeing that,” says Mr Stiskin. “It is frustrating, but it takes time.”

Part of rebuilding an investor profile are plans under consideration to relist in London after withdrawing in 2015 as part of a wider retreat by Russian companies to the domestic market following the imposition of sanctions.

“Clearly nothing can supplant London in my view right now as a provider of capital to global mining companies,” Mr Stiskin said, but declined to provide details on a possible timeline.

Polyus is also working on increasing its free-float on the Moscow exchange to 10 per cent of the company’s capital. It raised $1.3bn in two eurobond issuances over the past four months.

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