Polyus Has Been Hit By The Coronavirus, And This Hit May Be Pretty Hurtful

Summary

• The epidemiological situation at Polyus' key asset is rapidly deteriorating. The management's negligence of safety measures has led to hundreds of COVID-19 infections.
• Even though the incident doesn't affect the long-term case, I temporarily downgrade the stock to Neutral until I see more clarity on the issue.
• It seems it's a good time for a partial take-profit.

Evacuation of infected Polyus' employees. Source: 24rus.ru

Last month I published an update on Polyus (OTCPK:OPYGY) where I mentioned that there were no interruptions in operation of the company's assets due to the coronavirus countermeasures. Now it seems these measures were not taken properly as the Olimpiada mine has become one of the local epicenters of COVID-19 infection. If the situation continues to worsen, I see a risk of a temporal suspension of the Olimpiada processing plant which will affect half of Polyus' gold production.

The stock, however, is still at its highs, so I see an opportunity to sell some shares and pick up the stock later at more attractive prices when the market realizes the risks and includes them into the price.

What Happened

The health and safety of Polyus employees remains the Company's utmost focus. - Polyus' statement on COVID-19

The Olimpiada gold deposit, located approximately 400 kilometers north of Krasnoyarsk, employs about 6,000 people, including Polyus' employees, contractors, and employees of subsidiaries.

The first cases of COVID-19 at the Olimpiada mine became known on May 6. Then it was reported that the coronavirus was confirmed for three workers. Then the number of infected began to increase dramatically: on May 9, 89 cases were reported; on May 13 - 303; and on May 18 - 866. On May 21, the company said that the tests showed positive results for 1,191 employees.

At the moment, more than a hundred doctors are deployed in the field, 130 of infected have already been taken out by air ambulance, five people are now on mechanical ventilation. Unfortunately, one worker passed away. Three patients with severe symptoms have already recovered.

Now a portion of criticism towards the management of the Olimpiada mine, which hasn't reacted properly to the outbreak. According to the tayga.info news agency, which covers news in Siberia, the management of the Olimpiada POX wasn't in a hurry to organize treatment for workers with visible symptoms. A quote of the dialogue of two Polyus workers from the tayga.info article:

I told him at some point: "Do you understand that your cough is abnormal? You have been coughing for two weeks now! How are you allowed to work? You need to go to the hospital!" And he answers me: "We are all being driven to work here, I'm not the only one here coughing." I asked him to quit, but he explained that even if he quits, he still won't be able to leave. "Polyus' buses don't take anyone out. And private drivers suspended regular routes to Olimpiada because of the coronavirus." He said that they had recently gathered men who were over 60, and said - let's go home for self-isolation. And they were not provided for any transport. These men just spent four days in a dormitory and then went to work - what is the point of them sitting for free.

This explains a lot why the outbreak at Olimpiada is so huge. It's unpleasant to see discrepancies between the management's words and real actions taken. I also read the comments under another article; a relative of a Polyus' worker shared quite shocking information that the testing wasn't organized properly, people were allowed to work with a fever, and due to the absence of transportation, 19 workers of Polyus' subsidiaries escaped from the mine through the woods. At the same time, another person noted that other business units of Polyus don't suffer from such a mess.

On The Stock

Source: TradingView

The stock has once again reached all-time highs last week. The share price declined only slightly after the news about the outbreak so it seems investors view it as a minor risk. Nonetheless, I see two scenarios what can happen next:

• The mine continues to operate even if all the personnel eventually gets infected. Polyus continues to claim that everything is under control just like it does now. However, it's actually not that easy to distinguish healthy employees from infected ones because the virus is barely detectable during the first few days and some tests may be false-positive or false-negative. Therefore, even if you test your workers every day (as Polyus says it does), some of them may be already infected but show negative results of tests for a while.
• The head office realizes that the situation is out of control at Olimpiada and shuts down the mine until the testing of all workers is fully finished, all infected are identified and evacuated from the mine. Given that the incubation period of the virus is around 2-3 weeks, the mine may be shut down for a period of up to one month. There's a certain probability that the authorities of Krasnoyarsk region may insist on a full stoppage of the mine to prevent a further spread of COVID-19.

At the moment, it's hard to say in what way the situation is going to develop, but as the stock is still close to its highs, some investors may try to sell high and buy low if the market finally reacts to this negative news. In fact, I'm not the only one who raises concerns about the issue: Sberbank CIB, for example, recently recommended liquidating long positions in Polyus until there will be more clarity on that matter.

There's also some news that require some clarification:

1. Holders of all outstanding convertible bonds of Polyus exercised their conversion right and the company completed the transfer of GDRs to the bondholders. This led to some dilution in shares and now the company's free-float amounts to 22,33%. Therefore, the overall effect is minor and neutral because the dilution is somewhat compensated by the fact that the stock may become slightly more liquid.

2. Polyus' shareholders will decide on the issuance of 3.13 million shares in favor of its subsidiary Polyus Krasnoyarsk. The shares will be used to return Polyus' shares borrowed by Polyus Krasnoyarsk under a securities loan agreement, which were used to transfer global depositary receipts to holders of convertible bonds issued by Polyus Finance plc.

The shares will also be used to execute the long-term employee incentive plan in 2021 and to pay for the next tranche under option agreements to further increase Polyus' stake in SL Gold, a joint venture with Rostech to develop the Sukhoi Log deposit.

Previously, Polyus had already carried out an additional share placement under a similar scheme to increase its share in Sukhoi Log and motivate employees. The company is acting within the framework of the previously outlined plan for consolidation of the project, therefore there should be no negative effect on shares.

Final Thoughts

Polyus, which was named the second-best Russian employer by Forbes Russia, has got a serious reputational hit. One incident is not enough to completely spoil the track record Polyus kept in the last few years, though now I'll be much more vigilant about the management's actions during emergency cases. I also hope that this incident will get enough media coverage and the managers at Olimpiada, who put under threat numerous human lives and operability of the largest asset, will be replaced by more competent folks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.