By John Helmer
MOSCOW - The future for Russian gold-mining companies this year is bleak - even if the price of gold goes up.
The major Russian gold-miners are all expected to fail to reach their mine output targets, so they will be able to sell less gold at what are expected to be higher costs. But there's worse. In order to qualify for listing on the London Stock Exchange (LSE), Polyus Gold - the property at present of Mikhail Prokhorov and Suleiman Kerimov and Russia's leading gold-miner - will have to sell their shares. This isn't the first occasion in which those two have felled the share price by signaling their desire to sell.
Polymetal, Russia's second largest goldminer, is controlled by four shareholders who are likewise not recognized for being long-term investors - Petr Kellner (21%), Alexander Nesis (18%), Alexander Mamut (10%), and Kerimov's sidekick, Alexander Mosionzhik (4%). Last November they managed a scheme to meet the free-float and share liquidity rules of the LSE, reclassifying Mosionzhik's stake as if it wasn't a controlling one.
Investors don't usually put their money on magic rabbits, so Polymetal's scheming has generated the reverse of confidence in the intentions of its shareholders to retain their shares. One or more of them is thus expected to sell.
Add this negative expectation to what had already been a downward trend for the share prices of Polyus Gold (PLGL), Polymetal (POLY), Petropavlovsk (POG - the property of the Hambro and Maslovsky families), Highland Gold (HGM - Roman Abramovich, Barrick Gold), and High River Gold (HRG - Alexei Mordashov), and this is what the share price picture looked like in mid-January:
Factor into the forecast the way in which gold itself has been moving over the past year, and you may conclude that the peak prices above US$1,800 per troy ounce, registered last August and November, won't be seen again, at least not this year:
The bottom line, according to a report just released by Alfa Bank analyst Barry Ehrlich, is that there will be declines in projected earnings (ebitda - or earnings before interest, taxes, depreciation and amortization) across the Russian board. At best, forecasts Ehrlich, only two out of the five Russian goldminers are likely to see their share prices go above their current levels, while three - Polymetal, Polyus, and High River - will go down or go flat.
Polymetal's share price decline looks to be dramatic. This is explained, Ehrlich says, because its gold output (and gold-equivalent volume of silver) will fall far shorter of the company's target than its Russian peers; because Polymetal is having trouble carting equipment into mines and gold out; because mining costs will jump 34% this year; and because new reserves won't be as numerous as the company has been leading the market to anticipate.
But on top of the particular problems of these goldminers, there's a bigger one that hasn't been well understood until now.
Simply put, because so much of the demand for gold is driven by the Chinese, the price of gold is no longer a stable global hedge against volatility in the marketplace. Instead of conserving value and standing apart, while currency rates and share prices charge up and down, gold is moving in line with the value of everything in the emerging marketplace, China first of all, with India a close second. According to the World Gold Council, 43% of worldwide jewelry and investment demand for gold comes from China; another 27% from India - 70% in all.
Ehrlich expresses the point by demonstrating that the correlation between the price of gold and the movement of the reserve dollar and emerging market share prices has been shifting from a low of 0.2 to a high of 0.8:
Source: Bloomberg: Correlation of 5-day smoothed average daily over 90 days.
What this suggests is that as domestic risks to stable value rise in China and India, such as inflation, nationalization, tax, public protests, and political instability, the demand for gold jumps, and thus the gold price moves in step with the emerging market indexes.
What makes this situation different from the past, reports Ehrlich, "is that when US and European consumers were the driving force in the gold market, consumers would shift to a preference for investment gold only in a weak environment. In other cases, they preferred real investment assets."
If this reading is correct, then there is double or triple uncertainty for shares of mining companies owned by individuals like Prokhorov - first Russian risk, then China risk, then India risk. That gold around the Chinese neck is turning into an albatross around the Russian's.