With the yet unchanged slump for crude prices, the heavily oil-dependent Russian economy has not fared very well in 2015. There is at least one area, however, where things are just fine for the country: gold.
Russia's largest gold mining company, Polyus Gold (LON:PGIL), has turned in a steady performance for 2015 thanks to a fantastic surge during the third quarter. Helped by the weakness of the Russian ruble, the company has featured part and parcel in Russia's strategy of stockpiling gold as central bank reserves.
The Russian economy, already suffering under sanctions from various nations in the West, is built predominantly upon the sale of the country's abundant crude oil and natural gas resources. Before the regime of sanctions, Russia was the Number One energy supplier for Europe. Now, the country has attempted to pivot toward another neighbor with strong demand for energy: China.
The two countries recently agreed in principle to an ambitious energy trade deal, though its effects won't be felt until the necessary pipelines are constructed.
Nonetheless, the continued struggles of the Russian economy have mirrored the dramatic crash in oil prices. The country's prime export was trading above $110/bbl just last summer; today, the commodity sells for less than $50 per barrel.
One of the primary ways the Russian government has tried to mitigate this downturn has been through large purchases of gold. In what has proved to be a long-term trend, the Russian Central Bank has been a consistent buyer of gold bullion this year, including adding 1.1 million troy ounces (34.2 metric tonnes) in September, its largest contribution so far in 2015. The central bank now holds more than 1,300 tonnes of gold in its reserves, placing it 6th in the world (7th if the IMF is included). In fact, over the last decade, Russia has grown its gold reserves by better than 250%.
Polyus Gold Plays an Important Role
Polyus Gold is among the leading gold producers in the world, and boasts one of the largest proven and probable gold reserves with 65.8 million troy ounces (more than 2,000 tonnes) sitting beneath the surface at the company's various exploration projects in Eastern Siberia.
Russia generally doesn't import gold, instead buying up domestic production, much of which comes from Polyus.
Although Polyus Gold reported a 2% drop in year-on-year gold sales, it did post record-high gold production of 507,000 troy ounces—a 3% increase YOY. This likely places the company's final 2015 output at the high end of its projection of 1.6 million to 1.7 million troy oz.
After touching an all-time low as the calendar turned from July to August, PGIL surged roughly 15% from trough to peak and has held on to its gains, trading largely sideways in the two months since. It is still trading above £190 per share in London.
Another significant development for the gold industry in Russia has been the near-collapse of the ruble. The currency's steep slide is in most ways a bad sign for Russia's economy (although it does make their exports cheaper and thereby more attractive). The silver lining is that even as the gold price has been sluggish in terms of dollars this year, it's performed far better in terms of the weaker ruble. As business in Russia is obviously conducted in rubles more often than not, this has been a boon for domestic gold producers. The charts below demonstrate the different paths the gold price has taken depending on the reference currency.
The 20-year-old Said Kerimov, son of a Russian billionaire, has recently explored expanding his 40% ownership of Polyus Gold to take a 100% controlling stake in the firm. While Polyus claims that Kerimov's $9 billion valuation of the company (based on his offer to buy up shares at $2.97 each) is too low, it appears that a pair of other Russian magnates are ready to sell him their collective 39.8% share of Polyus. Once completed, the transaction would also likely entail the company switching from an Ltd. listing to a PLC.
For more on Polyus (with plenty of gold pictures!), check out this Bloomberg slideshow.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.