THE GOLD MINING INDUSTRY IS entirely STABLE, DESPITE SANCTIONS
- Against the backdrop of ongoing sanctions pressure on the Russian economy, the stability of the gold mining sector is extremely important for the country, given the predominantly export-oriented nature of this industry and the Russian Federation’s significant share in global gold production (around 9%).
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Russia ranks second in the world after China by volume of gold mining. At the same time, by share of gold in international reserves it is ahead of China and takes fifth place behind the US, Germany, Italy, and France. Prior to the imposition of sanctions, gold mining accounted for around 3.5% of the country’s export revenues.
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In recent years, there has been significant growth of gold purchases by central banks due to lower confidence in reserve currencies. According to World Gold Council surveys held among central bank representatives, 81% of respondents stated that managers of banks responsible for forming reserves will continue to increase the share of gold reserves over the next 12 months.
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Total global demand for gold (including OTC transactions) amounted to 1,313 tons in Q3 2024, which is an absolute record both in terms of physical volume and in monetary terms (the first time ever that demand has exceeded USD 100 bln). The inflow of money to exchange traded funds (ETFs) from July to September was the main driver of growth in demand for gold and partly the reason for its price appreciation, with the average price at USD 2,474 per ounce.
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Based on the dynamics of gold futures, investors expect further price growth. High inflation in the world, geopolitical instability, and mistrust of the main reserve currencies determine the increased investment attractiveness of gold.
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The gold mining companies included in the analytical sample for this study are the largest representatives of the industry, accounting for around 65% of the total volume of gold mined in the country. Their high profitability of production is associated with a relatively low (compared to comparable international companies) total cash cost (TCC), which, along with the current fairly high price of gold in the world market, ensures a stable operating cash flow. The average debt burden (ratio of total debt to FFO before net interest payments) of the analyzed companies based on the results of 2024 will be 2.6x, and the average debt service ratio (FFO before net interest payments to interest payments) will be 5.6x.
structure of global gold supply
Russia ranks second in the world after China by volume of gold mining.
Figure 1. Largest gold producing companies in 2023
Source: World Gold Council
The structure of global gold supply consists of primary extraction (more than 70%) and secondary processing (around 30%). At the same time, over a long horizon (for example, since 2010) global gold supply has not changed significantly and for that period averaged 4,600 tons per year (Fig. 2). The volume of supply is clearly influenced by primary gold extraction, which may considerably depend on the quality of the resource base, its gold content, the percentage of extraction, and the complexity of the technology used for this. Over time, as extraction depth increases or more complex refractory ores are used in processing, these parameters deteriorate worldwide, leading to an increase in production costs.
Figure 2. Structure of global gold supply, tons
Source: World Gold Council
Previously, gold mining companies reported on TCC as part of a universal approach to assessing production costs. However, this indicator does not take into account overheads related to the sale of gold and investments in developing deposits to extend their operational lifespan. The all-in sustaining cost (AISC) indicator is currently used for a more adequate assessment of the cost of gold production. According to the World Gold Council, which has been calculating the global cost of gold production since 2012, a steady trend of growth in the cost of production has formed in recent years (Fig. 3).
There is an opinion that the determining factor in the formation of the price of gold is the cost of production. It is difficult to disagree with this, comparing the graphs that show the dynamics of changes in the cost of production and the price of gold. However, a number of additional factors have an impact: the investment attractiveness of gold, the specific structure of demand for it, the geopolitical situation, and the degree of confidence in traditional reserve currencies.
Figure 3. Dynamics of the cost of gold mining in the world, AISC, USD/oz
Source: World Gold Council
STRUCTURE OF GLOBAL GOLD DEMAND
The structure of global demand for gold is formed by the jewelry industry (around 50%), production of coins and bars (27%) and central banks (13%); technological consumption accounts for 8% of demand, while the rest is demand from ETFs that invest in gold. Global gold consumption, like supply of this metal, does not have a pronounced trend toward growth or decline. Instead, there is certain volatility as part of cycles. There were three of these cycles from 2010 to 2023 (Fig. 4), while average gold consumption in this period amounted to 4,400 tons per year.
Figure 4. Structure of global gold demand, tons
Source: World Gold Council
By some estimates, around 213,000 tons of gold have been mined throughout human history, of which about two thirds have been mined since 1950. Most of the metal mined to date has been used to produce jewelry (45%), as well as coins and bars (22%), with 18% and 15%, respectively, held in central bank vaults and other forms. Proven gold reserves amount to about 59,000 tons, or 28% of the volume already mined (Fig. 5).
Figure 5. Gold use and volume of proven reserves, tons
Source: World Gold Council
The gold price largely depends on demand and changes in the structure of demand. For example, jewelry producers increase gold procurement to replenish their reserves during times of relatively low gold prices and curtail purchases if prices start to rise. ETF funds, banks, and retail investors act in line with their investment strategies, increasing gold investments during local price declines, as well as during periods of growing geopolitical tensions or economic downturns.
Figure 6. Average annual gold price, USD/oz
Source: World Gold Council
In recent years, gold purchases by central banks have grown significantly, as confidence in reserve currencies has fallen. Turkey, Poland, Brazil, Kazakhstan, Russia, and China have shown the most interest in gold as a reserve metal. Since 2010, China has more than doubled its gold reserves (to 2,200 tons), while Russia has increased them by almost three times (to 2,300 tons). The six countries with the largest gold reserves account for 67% of global reserves (Fig. 7).
Figure 7. Six countries with the largest gold reserves, tons
Source: World Gold Council
Gold demand hit the historic high of USD 100 bln in Q3 2024.
According to surveys conducted by the World Gold Council among representatives of central banks from different countries, 81% of respondents indicated that bank managers responsible for reserve formation will continue to increase the share of gold reserves in the next 12 months. This is the highest figure in annual surveys since 2019. The respondents cited the general increase in economic risks and the expected persistence of global political and economic instability as the main reasons for the increase in the share of gold in reserves.
Global demand for gold (including OTC transactions) amounted to 1,313 tons in Q3 2024, which is an absolute record both in terms of physical volume and in monetary terms (demand exceeded USD 100 bln for the first time ever). The flow of cash into ETFs in July–September was the main driver of the demand and, partly, the price of gold, which averaged USD 2,474 per ounce. In general, the investment demand for gold (including the flow of cash to ETFs) was impressive during this period, due to lower interest rates, geopolitical instability, investors’ efforts to diversify their portfolios, as well as sporadic purchases amid rising gold prices. At the same time, the volume of gold purchased by central banks decreased in the third quarter, but is expected to remain at last year’s level by the end of 2024.
Based on the dynamics of gold futures, investors expect further price increases (as of December 25, 2024, the 24-month futures traded at USD 2,930 per ounce). High global inflation, geopolitical instability, and distrust of major reserve currencies determine the increased investment attractiveness of gold.
Figure 10. Gold futures, USD/oz
Sources: COMEX, World Gold Council
Gold mining volume is fairly stable in the Russian Federation.
In recent years, the volume of gold production in the Russian Federation has not changed significantly, consistently exceeding 300 tons annually since 2019. Taking into account that gold production over 9M 2024 increased by 3.4% year-on-year, as well as the multidirectional trend over the quarters, ACRA expects the volume of gold production in Russia to grow by about 2% to 328 tons in 2024. PJSC Polyus, the largest gold producer in the country, showed an 8% year-on-year production increase in the first half of the year and raised its forecast for 2024 to 2.75–2.85 mln ounces. On the contrary, a number of companies in the sector reported a decrease in production due to various reasons. In nine months of 2024, the production volume of PJSC Seligdar decreased by 5% year-on-year due to the planned involvement in the processing of previously mined and stored ore with a lower gold content. PJSC YGK is expected to show a decrease in production volume by the end of the year due to the suspension of operations at a number of fields.
Figure 11. Gold mined in the Russian Federation, tons
Sources: COMEX, World Gold Council
SANCTIONS RESTRICTIONS
In March 2022, the London Bullion Market Association (LBMA) suspended the Good Delivery status of Russian refineries1. The LBMA’s decision concerned gold and silver bullion. At the same time, bullion produced during the effective period of the specified status continue to be considered a Good Delivery, but now it is the buyer’s responsibility to determine the bullion production date.
In June 2022, the United States imposed a ban on the import of Russian gold (with the exception of gold that was outside Russia at the time of the sanctions). In July 2022, Japan, Canada and the United Kingdom imposed similar sanctions, and the European Union imposed a ban on direct and indirect transactions with Russian gold. In September 2022, Switzerland imposed a ban on the purchase, import and transportation of gold and gold products from Russia, as well as on services related to these goods.
In response to the sanctions, Russia found new markets and reviewed the logistics of export sales. Russian gold supplies have been rerouted from London to the UAE, Hong Kong, and Turkey.
1 Krastsvetmet, Novosibirsk refinery, Uralelektromed, Prioksky Non-Ferrous Metals Plant, Shchelkovsky Plant of Secondary Precious Metals, Moscow Special Alloys Processing Plant.
credit metrics of the sector
Competitive TCC of Russian goldmining companies
The sample companies (PJSC Polyus, JSC Polymetal, Vysochaishy PJSC, PJSC YGK, HIGHLAND GOLD JSC, PJSC Seligdar) are the largest gold mining companies that account for about 65% of the total volume of gold mined in Russia.
The average TCC of the sample companies was USD 830 per ounce in 2023. The values of this indicator ranged between the minimum (USD 389 per ounce) and the maximum (USD 995 per ounce). For comparison, the TCC of the world’s largest gold mining companies, Barrick Gold and Newmont Mining, was USD 989 and USD 1,050 per ounce, respectively (Fig. 12).
Figure 12. Total cash costs of the largest global goldmining companies and sample companies, USD/oz
Source: ACRA
Moderate leverage
The leverage of the sample companies is assessed as moderate, although the absolute value of debt in 2023 almost doubled compared to 2022 and grew by another 16% in 2024. This growth is due to corporate shareholding events affecting a number of large companies in the sector rather than to an increase in debt across the sample.
The average leverage (debt to FFO before interest payments and taxes) for the sample companies was 2.5x in 2023 vs. 2.1x in 2022. A slight decrease in this indicator is expected by the end of this year, since growth of FFO outstripped growth of absolute debt due to higher gold prices.
Figure 13. Total debt (RUB bln) and leverage (debt to FFO, х) of sample companies
Source: ACRA
The sector’s debt coverage is fairly high.
ACRA believes that the absolute debt of the sample companies will not fundamentally change in 2025, although there is potential for an increase. For example, in the coming years, PJSC Polyus will make significant investments in the development of the Sukhoi Log deposit, where the first line of the gold extraction plant is to be launched in 2028. Given the total amount of investments in the development of this field (USD 6 bln), the company is likely to partially fund these investments through borrowings. On the other hand, if the gold price remains at the current level (USD 2,600–2,800 per ounce), the sector’s FFO will grow, compensating for the increase in absolute debt; therefore, next year’s leverage (the ratio debt to FFO before net interest payments) may remain at the level of 2024.
The sector’s average coverage is expected to be 6.8x by the end of this year, which is lower than in 2023 (9.1x) and is associated with rising interest rates. According to ACRA’s methodology, this level of coverage is considered to be high. ACRA believes that the industry’s coverage will worsen in 2025 if the key rate of the Bank of Russia is higher than 20%. However, the Agency does not expect coverage to fall below 5.0x, so it could be assessed as moderate.
Figure 14. Interest payments (RUB bln) and coverage (FFO before net interest payments to interest payments, х) of the sample companies
Source: ACRA
Medium cash flow assessment
The medium assessment of the cash flow of the sample companies is associated, on the one hand, with a low score for the ratio of capital expenditures to revenue (above 20%), and on the other, with a very high score for free cash flow (above 10%). It should be noted that ACRA excluded the probability of PJSC Polyus paying dividends in 2025 and 2026 from the analysis (against the background of its large-scale investment program for the development of the Sukhoi Log deposit). If these dividend payments are included, the ratio of FCF to revenues of the sample companies will not exceed 10% in 2025–2026.
Figure 15. Cash flow indicators of sample companies
Source: ACRA
In conclusion, we note that the financial situation of the sample companies is fairly stable, which is underpinned by the high profitability, relatively low production costs, moderate leverage on average, and the high coverage. The credit scores of these companies range from ‘aaa’ to ‘a+’.
