2022 has been quite a volatile year so far for the Evraz (LSE:EVR) share price. The mining company watched its stock plummet by nearly 50% year-to-date. But today, it’s up by double-digits on the back of its latest results. Is this a sign that I should be considering this business for my portfolio? Let’s explore.
Why is the Evraz share price exploding today?
Evraz’s commodity portfolio is pretty diversified. The group has several mines extracting coal and iron, as well as vanadium from the ground. And to top it all off, it’s a leader in steel construction and rail supplies.
As I’ve explained before, mining and metal production is primarily a fixed-cost process. So the increases in raw material prices, courtesy of inflation, are actually proving to be quite the tailwind in expanding profit margins. In fact, just looking at its 2021 full-year results, underlying margins have surged from 22.7% to 35.4%.
What’s more, with the pandemic no longer being as disruptive, revenue jumped by 45%. And when combined with the increased profitability, net income came in at a whopping $3.1bn (£2.3bn). That’s 260% higher than a year ago and 850% more than pre-pandemic levels!
Net debt fell by 20%, while free cash flow more than doubled. Needless to say, this was a very encouraging report. And seeing the Evraz share price jump by almost 20% as a consequence is hardly surprising to me.
Trouble on the horizon
Despite this incredible performance and ongoing industry tailwinds, I’m not touching these shares with a 10-foot pole. The reason is the same as why the stock fell so sharply earlier this week. Evraz’s operations are almost entirely based in Eastern Europe — specifically, in Russia and Ukraine.
Several NATO nations, including the UK and US, have announced sanctions against Russia following a recently launched military strike. Without getting political on the subject, these sanctions will undoubtedly cause disruptions to the firm’s operations. And if those don’t, a war certainly will.
This is obviously the worst-case scenario. But if the group cannot safely move its extracted resources out of the area, capitalising on the elevated commodity prices will be quite challenging. So, I wouldn’t be surprised to see today’s gains in the Evraz share price reversed if the war between the two nations continues to escalate further.
The bottom line
While this business seems to have flourished in 2021, the ongoing geopolitical situation in Eastern Europe could prevent the firm from continuing its growth streak.
But suppose Evraz can somehow continue to operate without interruption? In that case, at a price-to-earnings ratio of 2.2, its share price today does look like a bargain. But personally, I think there are simply too many unknowns out of management’s control at the moment. So, I won’t be adding this stock to my portfolio today.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.