Polymetal (LON: POLY) shares jumped another 30% this morning in London as the gold miner responded to press speculation. The idea being floated is that the company would split into two pieces, one holding the Russian assets, the other the Kazakh.
The idea has been obvious enough since the current difficulties started. Polymetal does, rather neatly, split into two different operations. There’re the gold mines inside Russia, those in Kazakhstan. They both tend to sell concentrate, not gold bars, there are no sanctions against the company and the larger shareholders themselves are also not sanctioned. So, in theory, there should be no problem for the company at all.
Except as the case of Petropavlovsk shows this isn’t wholly true. That miner is also not sanctioned, not are investors. And yet the company’s bank is, which means that it cannot deliver gold against the working capital loans, cannot pay off those loans and so cannot break the contract to deliver gold to Gazprombank. That is, just because there are no direct sanctions doesn’t mean that there can’t be problems.
It’s also possible to wonder whether Russia’s reaction to western sanctions might include greater control over hard currency earning operations like gold mining. So, that Polymetal is a mixture of within and without Russian assets means that separating them into two separate companies might make good sense.
The news first appeared at Reuters and Polymetal has commented on those rumours this morning. They do not, of course, say that this is indeed what they’re going to do. Instead, they point out that they are thinking about such things and that the idea of distinct ownership in the different jurisdictions is something that could indeed be a solution.
It is possible to think that this is just so obvious that Polymetal should just get on and do it. As we know – for Polymetal has told us so – the process flow inside the company doesn’t really mingle. Not in any manner that would be difficult to manage as separate companies at least. There’s no one central processing plant without which one set or another of the mines wouldn’t work for example. So separation on the basis of physical processes would not be that difficult.
However, what would matter is where the debt burden goes. Properly allocating the corporate debt – the working capital – outstanding across the two new organisations would be somewhat more complex. The banks providing it would demand a say in how much was allocated to which sector. Any cross guarantees would be difficult to unpick.
The basic idea is an obvious solution to the problem which is why Polymetal shares have jumped again as it becomes public. It’s possible that the Kazakh assets are worth the current price alone – but there’s still substantial risk given the political background here.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.