FTSE 100 miner Polymetal (POLY) slipped by 2% to £10.86 on market fears that it could miss 2013 production targets if problems are not fixed at a new processing plant (30 Jan). This overshadows news that the Russia and Kazakhstan-based group exceeded 2012 output targets by 6% to 1,063,000 ounces of gold equivalent (a mixture of gold and silver).

Polymetal began operating its Amursk POX (pressure oxidation) processing plant last year. It initially experienced mechanical problems but said towards the end of the year that the issues had been resolved.

The £4.2 billion cap now says the plant had to be temporarily shut down in December 2012 after finding high levels of chlorine in the water system and design weaknesses which has impacted metals recovery and corroded parts of the circuit. It remains confident of fixing the problems and achieving full throughput in the fourth quarter.

Despite the problems, Polymetal has maintained its 2013 production target of 1.2 million ounces of gold equivalent. It says output would only miss this target by 5% if there are further delays to hitting design capacity at the POX plant.

Investment bank Liberum calls the announcement 'even more disappointing than we had expected', given that it had already downgraded earnings forecasts three weeks ago (11 Jan) because of delays to starting Polymetal's Mayskoye concentrator which will provide metals-rich material for the POX plant.

Liberum says the Amursk POX facility contributes 20% of its 2013 estimates and 20% of operational earnings before interest, tax, depreciation and amortisation (EBITDA). Yet it notes that any downgrades will be offset by Polymetal recommencing sales of metal concentrate from its Albazino mine to China from the second quarter of the year.

The POX plant is the first of its kind for a gold miner in Russia. It is proven technology and readily used in locations including South America. Polymetal has a first-mover advantage as the processing facility will enable it to exploit geologically-complicated ore in Russia that has historically been shunned by miners because of the need for expensive processing equipment. Another Russia-based miner, Petropavlovsk (POG), hopes to have its POX facility operational in 2014.

The City has been awash with rumours that Polymetal may merge with local rival Polyus Gold (PGIL). Russian billionaire Mikhail Prokhorov is understood to be selling his 38% stake in Polyus, worth $4 billion, to several investors including Zelimkhan Mutsoyev, a large shareholder in Russian potash producer Uralkali (URKA). He already has a close relationship with Suleiman Kerimov, whose investment vehicle Nafta controls 40% of Polyus.

There is market speculation that Kerimov wants to repeat with Polyus and Polymetal what he has achieved by merging Uralkali with rival Silvinit in 2010, creating a global force in the potash industry. Analysts like the idea of putting the two miners together, saying Polyus has the development projects and Polymetal has the cash. Together there could be significant cost synergies.

Issue Date: 30 Jan 2013