Sunday, February 20, 2011

Polyus' Gold Reserves: Under-Appreciated

Polyus Gold may have significantly larger reserves of gold than is credited to the stock by the market currently. Polyus Gold (ADR: OPYGY) is the gold mining spin off from Nolisk Nickel. Polyus has the world's second largest gold mine by reserves, Natalka, at 40.8M ou of gold in place -- this compares to all of Barrick's Gold's reserves of 138M ou.(Barrick is the world's largest gold miner).

Gold miners report proved (90%) and probable (50%) reserves all together, unlike oil which typically report only proven (90%). Barrick reports it has 138M ous of reserves of gold, when you look at the 40-F, it has 30.3M ou of proven gold, 109.4M ou of probable

In comparison, Polyus reports reserves in the Russian classification system, which is A,B,C1 and C2. According to Nikolai Vlasov, chief geologist, Peter Hambro Mining plc, A,B,C1 are roughly equivalent to proved and probable.

Polyus reports in its 2009 Annual Report 77M ou of A,B,and C1 gold reserves. Polyus also reports international standard reserves, mesaured of 14M ou and 66.3M ou of indicated. (total 80.4M)

Note that measured means that the reserves exist with high certainty (90%) but are not yet proven, in so far that they have not been proven to be economically mined through a feasibility study and

According to Polyrus' investor's relations, Natalka's mine life to 2073 (very large mine), average cash costs per ounce of $51.3 (should be very profitable)(this is the mine info). The mine will double Polyus' current output of 1.38M ou per year of gold towards 2020, in 2014 it will increase by 48%.

In comparison Barrick (market cap: $50.9Bn) produces 7.4M ou. Newmont (market cap $28.8M) produced 5.3M ou in 2009, reserves of 92 M ou.

Polyrus I'm not sure the market cap, one source is saying $10Bn, another around $5Bn -- it is really attractive at $5Bn. I will double check this.

You can find a comparison of the world's richest gold mines here: There are only 6 mines with reserves of 30M ou or above,and only 8 with total reserves of 20 M ou or above. Barrick does not own any of these top 8 mines, but has interests in many smaller mines -- it appears Barrick has consolidated many individual mines, to form the world's largest gold miner.

Natalka will come on-stream in 2013 - actually late 2013. The shares haven't moved up too much -- except for after the financial crisis.

Overall I can tentatively say that Polyus is comparable in size to Barrick, in so far that it is a major miner of gold (the Russian reserve show that Barrick has 80% more gold than Polyus) -- but the market cap of Barrick is far higher, $50Bn verses $10Bn. Of course this reflects geopolitical risk (mining in Russia) -- next steps would be to compare average costs per ounce -- it seems most gold miners would have higher than Polyus' cash costs since the mines will be located in many different locations (a single, large deposit will lower cash costs per ounce since the set up costs of the electricity, water, housing, roads, equipment etc can be depreciated over a longer mine life). Further next steps are to analyze political risk.

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