Polyus shares: open shorts, close longs

Shares of Polyus, which is Russia's largest gold mining company, have risen 2.5 times since the beginning of the year, following gold prices. However, while experts are predicting a further rise in the price of the precious metal, insider selling took place in Polyus shares, according to TASS.

Does this mean that, at the very least, we should hold on to our purchases of Polyus shares and, at the very least, speculatively sell them? Nikolai Dudchenko, an independent financial analyst, answered Fortrader's question.

I told you...

- I don't really like to make "I told you so," but sometimes it's really nice to be right. In April of this year we discussed PJSC Polyus shares и PJSC Polymetal. Both companies showed good growth rates of capitalization on the background of the growing demand for precious metals. I set the target for the Polyus shares at 16200.00 rubles. As the result, the shares not only reached that target, but even managed to overcome the level of 18,000.00 RUR, after which the pullback started.

Traditionally, I try to look at the situation from two points of view: speculative and investment. I will say right away that speculatively I stick to the opinion - short. Why? Read about it below, in the technical picture section. And as for the investment, let's try to look at the financials of the company and try to answer the question - how badly undervalued / overvalued is the business? And even simpler - is it worth buying shares for the long term?

So, if we want to buy the entire business of the company, we will need to pay for it about 2.33 trillion rubles (capitalization). At the same time, all of the company's assets for 2019 amounted to about 515.5 billion rubles. That is, the market capitalization exceeds the value of assets by 4.5 times. So far, this seems to be a rather expensive acquisition.

Of the 515.5 billion assets, 403 billion are debts. That is, the level of "indebtedness" (debt ratio) is 78.2% and, by the way, this is not the worst situation for Polyus. The similar ratio for 2017-2018 was higher than 90%. But here it is important to understand that the decrease in the ratio in the last year was due to an additional issue of shares, which allowed the company to increase its equity capital and, consequently, the total value of assets.

And how is the company doing with revenue? In 2019, the company increased its revenues by almost 40% compared to the previous period. And this despite the fact that the company receives most of its revenue in foreign currency, and the ruble in 2019 felt good against both the dollar and the euro. Nevertheless, I would rather consider this growth as an isolated case and would not rejoice too much, despite the fact that 2020 is also likely to be successful for the company.

The market overvalues the company

Now back to the price again. The key ratios are significantly overstated relative to the industry. The P/E is 40.25 (in the industry, 13.36); the P/B (a particularly relevant ratio here) is 27.91 (in the industry, 5.3). From this we can conclude that fundamentally the market rather overvalues the company.

In a previous review, I said that the cessation of gold purchases by the Russian Central Bank could have a positive effect on operating costs, which can be seen as a positive factor for a long-term investment strategy, but when buying "long" I would still "pick up" promotions at more reasonable pricesI would simply not rush to open longs.

The stopping factor for buying for the long term right now is also the current market conditions. The crown crisis played into the hands of the company's capitalization. There is a rise in gold prices and devaluation of the national currency. So, I repeat, the statements for 2020 should be quite good. But the crisis will be over sooner or later, gold can unfold, as can Russian ruble. And in this case we may not see such growth rates of the company's revenues. It is not difficult to predict what will happen to capitalization in this case.

Technical picture of Polyus shares

Polyus stock has pulled away significantly from its 200 moving average. The daily chart shows all the signs of a reversal. This is the formation of the corresponding reversal candlestick formations and the breakdown of the local trend line, and the reversal signals from the trend indicators. I think it is worth waiting for a correction.

The first support level for now is 16690 (23.6% of the Fibonacci correction), the next support level is 15400.00 rubles (by the way, the unclosed one is approximately there). gap up from 27.07). I think that the probability of downward movement is high, which makes it possible to open speculative short positions. In case there are longs on shares, I think now might be a good time to take profits.