Gold is the traditional store of wealth in times of crisis, so not surprisingly prices soared an average of 25% during the annus horribilis of 2020, topping $2,000 per troy ounce briefly in August last year.

But after the slew of coronavaccines started getting certified last autumn, economies and commodity markets began to recover in November and the counter-cyclical gold prices began to slide. By January they had dropped below the $1,800 mark and are expected to stay there for much of this year, although things remain sufficiently uncertain that some predict another gold price rally in 2021.

Goldman Sachs in November had a target of $2,300, as recovery from the coronavirus-related recession fuelled higher inflation and demand, pent up for a year, was finally released. India and China in particular went back to buying.

Capital Economics takes a more cautious view of the pace of recovery. The upside to the gold price in 2021 will be limited to around $1,900 in 2021, or $92 above the average price for the first nine weeks of this year.

GV Gold is one of the top five gold producers in Russia and strategy director Roman Schetinsky told bne IntelliNews in an exclusive interview that he has a positive outlook on gold and agrees that the price will stay at least $1,900 in 2021, but could go even higher.

“There will be a growth tsunami: the water leaves the shore as the wave approaches, but then it comes crashing back,” says Schetinsky. “The price could rise as high as $2,000 and then stay there a long time.”

Part of what could drive gold prices higher is the US debt that currently requires more than $300bn a year to service, but annual gold production is only worth $200bn a year. That will keep the pressure on gold’s price, denominated in US dollars, upward in the long term, argues Schetinsky.

However, the company doesn't base its investment decisions on these predictions. It has a working assumption of $1,500 per oz to assess the viability of a deposit with IRR more than 15%. “We remain very conservative when considering a new project,” Schetinsky adds.

There have been some big changes in the global gold market in the last year. Russia has been actively building up gold as a share of its gross international reserves (GIR) since 2007, as part of a long-term policy to accumulate more non-US dollar reserve assets, and holds 2,298 tonnes of the yellow metal according to its last report at the end of the fourth quarter of last year. Russia’s gold reserves were worth $130.3bn as of March 1. (The central bank delays the release of some of its reserve information, like bullion tonnage, so as not to affect the market.)

The CBR was one of the biggest winners in the 2020 gold price rally because of this pile of gold: Russia’s gross international reserves (GIR) rose from $570bn in February 2020 to $586bn a year later in the same month, after the value of its monetary gold gained over $25bn in value by the end of August 2020 to $144.6bn before falling back again in the first months of this year.

The CBR was already comfortable with the level of gold in its reserves in the middle of last year and after 13 years of buying it abruptly stopped accumulating gold. CBR Governor Elvira Nabiullina said last year that the CBR’s “comfort level” for reserves is $500bn, but now that point has long been left behind the CBR has relaxed a bit.

“I think it is also connected to the [coronavirus] COVID-19 pandemic, as the central bank wanted to free up more cash to fight it,” says Schetinsky. “But it doesn't affect us, as there are no restrictions on gold producers to sell their gold to anyone who wants it based on LBMA price.”

GV Gold works with the private Russian bank and international players represented by Société Générale that buy gold and trade on the bullion markets. In 2020, the company opened accounts on the Moscow Exchange and gained access to foreign exchange trading and trading in precious metals

Obviously 2020 was a good year for all gold producers, but it was an especially good year for GV Gold, which has been enjoying faster than average growth for several years now. Profits were up 90% in 2020 and Ebitda more than doubled compared to 2019.

“It was a combination of factors. Production rose by 4.8% in 2020, the costs (AISC) fell by 12% year on year due to operating efficiency” says Schetinsky. The company reported an impressive set of results for 2020 as reported by BCS Global Markets.

• Total gold sales stood at 276 koz, up 14% y/y.
• Revenue reached $471mn (+41% y/y).
• Total cash costs decreased by 4% y/y to $694/oz, driven mainly by the 14% y/y increase in total gold sales, the completion of the Taryn Mine open-cast reconstruction project and the depreciation of the Russian ruble.
• Adjusted Ebitda doubled, achieving the record-breaking $248mn on the back of larger tonnages of gold produced and higher gold prices, as well as the effect of the operating efficiency improvement programme.
• Adjusted Ebitda margin reached one of the highest levels in the company’s history, 53%, having risen by 17 pp y/y.
• Net profit grew by 90% y/y and totalled $137mn.
• Capital expenditures increased to $109mn (+9% y/y) due to investments in open-cast development at the Golets Vysochaishy and Ugakhan Mines.
• Net debt decreased by 6% y/y and totalled $191mn as of 31 December, 2020. The net debt/adjusted Ebitda ratio declined significantly from 1.69x to 0.77x.

The company has followed a strategy of increasing its production steadily and plans a rise from the 272,200 oz in 2020 to more than 400,000 oz by 2025 via organic growth from the existing assets.

“That is a compound average growth rate (CAGR) of 8.5% over the last five years – much higher than our peers and a rate of growth we intend to maintain for the next five years,” says Schetinsky. “There would be a steady increase in growth every year as we invest mostly into brownfield projects.”

And GV Gold has at least two new projects due to be developed – Svetlovsky and Krasny – that should boost production further.

Part of the reason for this faster growth is GV Gold has focused on developing smaller deposits than its rivals, starting with around 1mn oz of recoverable gold, versus the 3mn oz that Polyus Gold and Polymetal – the two other big gold companies in Russia – look for. These are big deposits by Russian standards.

Polyus scored a big victory in improving its asset base when it won the licences to exploit the Sukhoi Log, one of Russia’s biggest gold deposits that has been lying in limbo for decades, in early 2017.

Another really big gold deposit may come under the gavel soon: the Kuchus gold deposit is due to be auctioned off by the Federal Agency on Subsoil Use (Rosnedra). However, Schetinsky says the government has not even started the bidding process yet, nor announced a date for the auction, but GV Gold would be interested in taking part once the deposit is put on offer.

The price might be an issue, as GV Gold's historical cost of reserves replacement is around $21.3/oz, which is about $10 less than that of its closest peers among Russian gold miners, and one of the advantage of going after the mid-size deposits is there is less competition.

Funding for development so far has been largely drawn from the retained earnings. Indeed, in 2020 the net debt to Ebitda ratio fell significantly from 1.6x to only 0.8x – a very low number.

All in all, the company has invested around $550mn over the last five years into developing its assets. And the capex requirements for further developments are modest. The two new deposits at Svetlovsky and Krasny will each cost similar amounts to Ugakhan Mine (circa $165mn), being split over several years.

Earning strong profits, GV Gold has been able to return significant profits to its shareholders and paid out over $250mn as dividends over the last five years.

The anticipated rising profits have bought space to improve the dividend payments of the company further; a new policy to raise dividends to 40% of Ebitda was recently introduced – one of the most generous rates in the industry.

“We expect to pay around $100mn in dividends for 2020 to our shareholders and we have already paid out $63mn on the first nine months,” says Schetinsky.

And soon international investors may be able to avail themselves to the company’s largesse. GV Gold remains a privately owned company, but as bne IntelliNews reported, there was talk of an IPO in 2018 and those plans may be back on.

“An IPO is one option we are looking at and the market conditions are good; the demand is there,” says Schetinsky.

Despite being privately owned the company has already made most of the reforms needed to clear the way for a floatation in terms of corporate governance and business processes. If the management decide to pull the trigger the IPO could happen very quickly.