After facing a few bumps in the road, Russia's biggest gold miner is wooing investors in London.
Never trust a chef who won’t eat his own cooking, so the saying goes. So how about a gold miner who doesn’t buy gold? There is a logic, says German Pikhoya, chief executive of Russia’s biggest producer of the precious metal, Polyus Gold (MCX: PLZL.ME - news) .
“I’m not buying gold,” he admits cheerfully. “At some point in time I asked people bankers 'Listen, should you advise me to buy gold?’
“They said, 'We do not recommend you do, because you are working in the industry. It’s going to be double jeopardy for you. If you want exposure you’re there. You forget about it!”
With a market cap of over $9bn (£6bn), it is the biggest gold producer to have a premium London listing, meaning it meets the highest regulatory standards.
It has been a long road, after plans for a premium listing which would then pave the way into the FTSE 100 (Euronext: VFTSE.NX - news) were announced way back in 2010. Polyus was already trading here via global depositary receipts - certificates for shares in a foreign company having done so since it was spun out of Russian metals giant Norilsk Nickel in 2006.
Polyus’s major shareholders, tycoons Mikhail Prokhorov and Suleiman Kerimov who together hold 78pc, were, says Pikhoya, “fully backing us and prepared to surrender control to the independent directors”. Today five out of the nine board members are independent, bringing the company in line with the governance requirements needed for a FTSE entry.
But outside forces threw a spanner in the works. Last year, a Russian foreign investment commission failed to rubber-stamp Polyus’s planned move to mainland Britain from Jersey, which would have helped it enter the FTSE share indices and, as a result, tracker funds’ sights. Some see the saga as politically motivated, since Mr Prokhorov is a vocal critic of the Kremlin (Berlin: KML.BE - news) .
With attempts to get that approval on hold for now, the slumping markets offer little incentive to Polyus to get into the FTSE another way, by raising its free float from the current 22pc to the 50pc needed given its Jersey base. Had it been able to reincorporate in London, it would need just 25pc.
“I think autumn this year might be the appropriate time to sit down and discuss it yet again [with the shareholders],” says Pikhoya. “Then we’ll reapply - how long it would take it’s difficult to say.” He also plays down talk of M&A, but speculation will continue now London gives Polyus access to a bigger pool of investors.
A veteran of the Russian gold mining, joining Polyus in 2002, Pikhoya is keener talk about Polyus’s focus on a “clear simple gold story”.
Despite the sustained rise of the metal’s price over the last decade, gold equities have not enjoyed the same climb. Part of the blame lies with the rise of exchange-traded funds (ETFs), which offer investors a way to gain simple exposure to gold.
“In a way it’s funny, because the gold mining industry was behind the establishment of ETFs and now they are kind of cannibalising [it],” says Pikhoya. “But the argument is simple: ETFs do not produce gold, they do not produce growth. The mining stocks may be more risky, because we all of us have execution and development risks, but at the same time there is a reward: we are growing.”
Now comes the plug for Polyus in particular, which is developing the huge Natalka gold deposit in the Magadan region of east Russia.
“For Polyus and other companies in the former Soviet Union, we can provide growth because we have the mineral base to support it,” he argues.
“The former Soviet Union, because of a number of historic and political reasons and geological, not to forget is one of the locations you can find new gold projects.”
Gold miners have also suffered in the past as their moves to hedge against the metal’s price swings sat badly with investors wanting to get direct exposure to gold.
“I started working in gold mining when the commodity price was $270 and for gold miners to hedge was a natural way to survive,” says Pikhoya. “We never hedged simply because we never borrowed. We enjoyed the full [gold] rally because not a single dime have we ever borrowed from big banks.”
And what a climb 2012 looks set to mark gold’s 12th consecutive year of gains.
Pikhoya is sanguine about recent sell-offs, blamed on investors liquidating their holdings to get their hands on ready cash at times of stress.
“When the commodity dived to the level of $1530 now it’s recovered [to around $1,600] - we were thinking, 'What’s going on there?’ What we notice is that at this point in time, none of the big commercial investment banks have revisited or revised their long-term forecasts for the commodity, despite the ups and downs.
“The big question mark is: is gold still the ultimate reserve commodity?” he asks. “Well, I think it is.”