By Alexandre Anjarry, Samuel Smith, Rhodie Ferrer, Yancy Liu (University of Warwick) ; Argyro Charizona, Mikolaj Borowiak, Angelo Passaro, Rares Ionescu, Muhammad Adnan, Ruben van der Lubbe (Bocconi University)
Photo: Dominik Vanyi (Unsplash)
Overview of the deal
Acquirer: Mangazeya Mining Ltd (JSC Mangazeya Plus)
Target: Polymetal International PLC
Implied Equity Value: N/A
Total Transaction Size: $3.69 billion
Closed date: End of March 2024
Target advisor: N/A
Acquirer advisor: N/A
Polymetal International has reached an agreement to sell its Russian operations to Mangazeya Plus for approximately $3.69 billion, a strategic decision aimed at refocusing the company's efforts on its Kazakhstan operations. This divestiture is part of Polymetal's broader strategy to ensure a more accurate valuation of its Kazakhstani assets and to improve its risk profile and leverage situation. The Russian business encompasses eight producing assets and four major development projects, including notable ones like Amursk Pox-2, Veduga, Viksha, and Prognoz. Despite divesting these assets, Polymetal will maintain access to the Amursk POX facility for processing the Kyzyl refractory concentrate until its Ertis POX facility in Kazakhstan becomes operational.
The transaction, spurred by a strategic review following the onset of the Russia-Ukraine conflict in February 2022, is expected to bring Polymetal $300 million in net post-tax cash proceeds. These funds are earmarked for the development of the Ertis POX project and for bolstering the company's liquidity. The sale, described as quick, transparent, and compliant with sanctions, aligns with Polymetal's commitment to restoring shareholder value and resetting its strategic direction. Completion of the sale is contingent upon regulatory and shareholder approvals, with the goal of finalising the deal by the end of the following month.
This strategic divestment signifies Polymetal's pivot towards de-risking and optimising its investment focus in geopolitically stable regions, emphasising its commitment to enhancing shareholder value and adhering to sanctions compliance. The U.S. Department of the Treasury’s Office of Foreign Asset Control has indicated that it will not sanction non-U.S. persons engaging in or facilitating this transaction, reinforcing the transaction's adherence to international compliance standards.
"The Board, the Special Committee and the management team of the Group are set to deliver on our commitment to restore shareholder value and re-set Polymetal’s strategy by selling the Russian business of the Group. A quick, transparent, and sanctions-compliant exit under the terms of the proposed Transaction serves the interests of all stakeholders. The completion of the divestment will allow the Group to de-risk the Company’s business, deliver stable cash flows and pursue new investment opportunities. The Board recommends shareholders to vote for the proposed resolution” - Vitaly Nesis, Polymetal CEO.
Company Details (Acquirer - Mangazeya Mining Ltd)
Mangazeya Mining Ltd, a company focused on mineral exploration, development, and production, has a strategic focus on mining properties in the Russian Federation, particularly gold. The Savkinskoe Deposit, Ithakinskoe, Kochkovskoe, and Nasedkino gold ore are among the projects undertaken by the business. The company's activities in the Russian Federation generates all of its revenue. Mangazeya Plus was founded for the purpose of the transaction by Mangazeya Mining.
Founded in 2005, headquartered in Moscow, Russia
CEO: Mikhail Gusev
Number of employees: 596
Market Cap: N/A
EV: $222.36m*
LTM Revenue: $ 174.87m*
LTM EBITDA: $50.71m*
LTM EV/Revenue: 1.27x*
LTM EV/EBITDA: 4.38x*
*Numbers from 2022
Company Details (Target - Polymetal International Plc)
As part of Polymetal International Plc, Polymetal Engineering JSC (doing business as JSC Polymetal Engineering) is a Russian company located in St. Petersburg that produces gold and silver metals. It was founded in 2004. Valery Nikolaevich Tsyplakov is the CEO, in this role since 2010. This exit is part of the Anglo-Russian miner’s plan to leave the country to avoid nationalisation. Vitaly Nesis, Polymetal’s group chief executive, said in an interview with the Financial Times “Some shareholders might say that financially the terms are not the best we could get — and I would agree, But now it is more important to complete a satisfactory deal quickly than to continue striving for a good deal. It’s the question of uncontrollable risks of catastrophic nature.”
Founded in 2004, headquartered in St. Petersburg, Russia
CEO: Valery Nikolaevich Tsyplakov
Number of employees: 14,694
Market Cap: $1.28B (as of 27/02/2024)
EV: $3.80B
LTM Revenue: $3.07B
LTM EBITDA: $1.14B
LTM EV/Revenue: 1.24x
LTM EV/EBITDA: 5.29x
Projections and Assumptions
Short-term consequences
The Divestment of Polymetal Russia demonstrated the firm's commitment to making difficult decisions and making the most of less poor market conditions derived from continued geopolitical tension.
Strategically, this divestment is a pivotal step towards mitigating political, legal, and operational risks, with the overarching aim of restoring shareholder value and positioning Polymetal for sustainable growth. The future focus will pivot towards leveraging opportunities in Kazakhstan and Central Asia, underpinned by significant investments in infrastructure and exploration. This strategic realignment aims to fortify Polymetal's market position, ensuring its resilience and competitiveness in the global mining landscape.
The transaction involves vast changes to the companies financials, focusing on liquidity and debt de-consolidation. Before completion of the deal, Polymetal Russia paid a dividend of $1,429bn to Polymetal International where $278m will be used for general corporate purposes and $1,151m will be used to fully repay intra-group debt and related interest owed to the divested business. Furthermore, approximately US$2,210 million of net debt will be retained by Polymetal Russia, leading to its de-consolidation from Polymetal International's balance sheet. The result will be an improved liquidity profile for Polymetal International with a less abrasive capital structure and reduced interest repayments, freeing up vital cash for future projects giving the company the foundation to realise its plans of growth and operational independence in gold production.
Long-term Upsides
Polymetal will receive $1.48 billion in cash proceeds from the transaction, with $1.15 billion set aside to cover intra-group debt. The influx of capital, albeit less than fair value, offers Polymetal the financial freedom to engage in development prospects outside of Russia. Nesis announced aspirations to return to the London Stock Exchange after increasing non-Russian output to 1 million gold equivalent ounces over three years. The funds will be used to invest $300 million in Kazakhstan's Ertis POX project, which will streamline processing capacity and reduce dependency on Russian assets.
Divesting the Russian businesses, which accounted for 70% of output, allows Polymetal to simplify and concentrate on its remaining high-quality Kazakhstani assets, such as the Kyzyl mine. Concentrating on a fewer number of key mines can improve efficiency and profitability. Polymetal intends to stop dividends while it reinvests cash flows into its Kazakh operations, establishing this as the company's main long-term production base going forward.
Importantly, the withdrawal from Russia removes Polymetal's exposure to additional Western sanctions on its Russian companies. This safeguards the company's reputation and may lead to agreements with multinational corporations that had previously shunned deals owing to Russian links. It also protects Polymetal from any additional penalties that might impair existing Russian mines.
Risks and Uncertainties
Despite it being a necessary move to shield the company from an adverse geopolitical landscape, the deal is not without threats to Polymetal’s financial health.
An increased overdependence on Kazakhstan’s economy constitutes a first source of uncertainty. During their meeting on September 28th, Kazakh President Qasym-Zhomart Toqaev assured the German Chancellor Olaf Scholz that “Kazakhstan will not help Russia circumvent Western sanctions imposed over the war in Ukraine”. However, Kazakhstan is a close economic and military ally of Moscow, with respects to which remains an important source of parallel imports. If Kazakhstan were to fall victim to Western sanctions, Polymetal’s operations in central Asia would be completely shut down.
Looking at the long-term prospects of the company, Vitaly Nesis, Polymetal’s CEO, stated that the company had started looking into potential acquisition targets in Kazakhstan and Tajikistan, in an effort to build up the company to the production of 1 million ounces of gold in three years. However, with most of its cash flows being generated by its gold and silver mines in Russia – now sold to Mangazeya – and a debt-to-equity ratio of 157.71%, an acquisition could pose further strain on the company, unless properly structured.
Nesis also announced that part of $300m retained in post-tax proceeds would be invested in the construction and commissioning of the Ertis POX facility in Kazakhstan, which would allow the corporation to extract and process 250,000-300,000 tonnes of concentrate per year. A surge in demand for gold and precious metals in the next five years would justify trying such a considerable amount of cash into the project. However, Polymetal’s struggles to turn inventory into sales in Q4 2023, resulting in a 14% decrease in sales in the year ended Dec 31st, could signal that cash flows would be better spent in improving operational activities.