Polymetal International (LSE:POLY) investors woke up this morning understandably horrified to see the share price has crashed by over 50%! Typically, such volatility is triggered by an unpleasant company announcement. Yet today, the firm has so far been silent.
So what’s going on? Let’s explore.
The crashing Polymetal share price
As a reminder, Polymetal primarily mines for gold, silver and copper. And looking at its recently released fourth-quarter results, the group has been making steady progress in recovering from the impact of Covid-19.
While revenue remained flat, the increased prices significantly contributed to expanding free cash flow. And, subsequently, the net debt position has improved. What’s more, the December delays in silver sales are expected to come in this year, resulting in a significant boost to 2022 half-year revenue.
Yet despite these encouraging results from only a month ago, shareholders are still dumping the stock for one simple reason. All of Polymetal’s assets are located in Russia and Kazakhstan. With the ongoing geopolitical situation in Ukraine, Western nations have begun placing sanctions against Russia. And there is an understandable fear that these will significantly disrupt the firm’s operations.
With that in mind, I’m not surprised to see the Polymetal share price take a hit. But what happened over the weekend that has investors so worried?
Investigating the problem
Last week, management told shareholders that current sanctions have not affected the group’s operations. That’s obviously a reassuring statement. Yet it doesn’t seem to have calmed any nerves.
There are undoubtedly a lot of contributing factors at play. In last week’s statement, the company warned that more severe sanctions could be put into place should the Ukrainian situation escalate. And over the weekend, that’s precisely what’s happened. Russian banks have been cut off from the Swift international payment network. That means moving money in and out of the country will be rather tricky.
Why does that affect the Polymetal share price? Directly, it doesn’t. Indirectly, it’s potentially a massive problem. Mining is expensive, and developing a new extraction site requires a lot of funding that Polymetal has historically secured through bank loans. But with the Russian banking system now cut off from its international partners, securing additional capital no longer appears to be a viable strategy.
With additional bank funding practically evaporating, combined with rising fears of disruptions to resource exports, Polymetal and its share price could be in for a rough ride.
Taking a deep breath
As frustrating and worrying as things may be, it’s worth remembering that Polymetal still has nearly $300m (£224m) of cash reserves. That should be enough to keep the lights on for now. Meanwhile, Russia and Ukraine have agreed to enter talks, marking what could be the beginning of the end of this crisis.
Investors may be overreacting to recent developments. And today’s rapid sell-off in Polymetal’s share price has pushed the price-to-earnings ratio to a tiny 4.6. But as cheap as that seems, there remains a lot of unknowns. So, personally, I’m going to keep this business on my watchlist for now.