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Russian miners to see 'upside jump' in investment despite ruble rally

A rally in the value of the Russian ruble impacted the results of Russian mining companies in the first quarter of 2017, pushing up cash costs and leading to profit losses.

Fertilizer producer PJSC Acron was one such case, posting a reduction in year-over-year profit of 88% for the first quarter of 2017 on May 30, which it partly attributed to the strengthening of the Russian currency and the associated higher costs.

Despite the negative impacts on the cost line of Russian metals producers, they still remain attractive to investment, CFA metals and mining equities analyst at Russia's VTB Capital Dmitry Glushakov told S&P Global Market Intelligence on a May 30 phone call.

In fact, Glushakov went as far as saying the Russian metals and mining sector is likely to see an "upside jump" once shareholders return to the market after the summer break.

"[The mining companies] definitely look attractive in terms of returns and in terms of cash cost positions. Whatever company you take in the Russian metals and mining space, it will be at the very front of the global cash cost curve of the respective commodity," he said.

Director of corporate ratings group ACRA, Maxim Khudalov, echoed Glushakov's opinion and said the ruble depreciation following the crash in 2014 put Russian metals and mining companies in good stead to compete with their global peers.

"The cost advantage achieved by Russian companies through ruble depreciation and increase in efficiency over the 2014-2016 period allows them to remain almost the most efficient in the metals and mining space," Khudalov wrote in an email to S&P Global Market Intelligence.

He compared the rally of the Russian ruble to other commodities-backed currencies that have strengthened over the last year, including the South African rand, Kazakh tenge, Chilean peso and Australian dollar. The only commodity-backed currency to depreciate was the Canadian dollar, which fell by 2.9%, he said.

"In general, most commodity-based currencies have experienced growth over the last year, so the relative appreciation of the ruble would not be a major problem for investors in Russian metals and mining securities," Khudalov said.

In an effort to weaken the ruble, the Russian finance ministry announced a plan in February to spend 6.3 billion rubles a day on foreign exchange transactions between February 7 and March 6. However, rising oil prices continue to strengthen the currency.

The value of the ruble against the U.S. dollar has grown by over 7% year-to-date, averaging at 57.11 rubles to the dollar in May, according to S&P Global Market Intelligence data. Head of the Russian Ministry of Economic Development Maksim Oreshkin forecast that, by the end of 2017, the exchange rate would be about 62 rubles to the dollar if the price of oil remains steady, Interfax reported June 1.

As of May 31, US$1 was equivalent to 56.77 Russian rubles.