UK 18:10 Wednesday, 7 October 2026
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Disclosure: I 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 ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
You would have thought that even being able to spell or say Petropavlovsk (POG) would give a trader some right to make money here. Er…no.
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Comments
Steve Hill
Chart is appalling I grant you but there is also an investment case here.
Assets include c 57p share for their future 40% holding in iron ore and ilmenite producer IRC, so with POG SP currently below 57, POG’s mine operations producing 730k oz gold and 10m oz reserves are valued at nothing.
For a company that generated $83m in net cash in H1 and is likely to earn $240m cash in H2, ie about a £1 a share for the year, this seems alarmingly cheap. Why? Apart from being one of the most heavily shorted gold miners, it has over $1bn debt, taken on in a dash for growth when gold was riding high and used to develop IRC and a refractory ore processing POX facility. The POX project is near completion but currently on hold as it needs gold around $1300 to be profitable. IRC is meeting targets and will quadruple production over the next 12 months. Its position on the Chinese Russian border assures a ready market for its products and it has attracted a significant investment from Chinese partners.
Although the debt is serviceable and reducing, it remains very high for a company with a market cap of £113m. A combination of strong earnings, 20% savings on admin costs and postponement of non-essential capital expenditure means projected net debt will be under $1bn at year end. Further out, one worry is how the company is going to repay $322.5m of outstanding bonds due 2015. These are currently trading at 64.5% face value, and have been the target of recent company repurchasing. Further repurchases are likely. Detractors sometimes raise the issue of debt covenants but the company has repeatedly denied a problem here. As for any cash needs, chairman Peter Hambro has excellent banking connections; co-founder and major shareholder Dr Pavel Maslovskiy is a respected industry specialist and Senator in the Federation Council of Russia (the Upper House of the Russian Parliament). Connections like these mean POG is unlikely to have problems raising cash if required.
With gold projected by many to remain below $1250 for some time, the company has had the foresight to establish hedges this year which allow them to sell 68% of their H2 production at $1558 an oz. A focus on higher grade ore in H2 and costs estimated between $950 – 1000 an ounce underline the predicted H2 cash generation. Next year, hedging 207.7k oz at an average $1470 should give them a reasonable buffer to the end of 2014.
As with many gold miners, there will be a technical loss this year due to non cash write-downs following depreciation and the fall in the gold, but you have to look at the cash generated as the real value product. Going forward there is uncertainty over the gold price but with hedges in place and IRC soon to be ramped up to full production on the back of a $238m injection of share capital from the Chinese, POG has a far stronger investment case than the market currently credits.
The continuing very poor sentiment towards gold can obscure the merits of particular miners. POG has an uphill battle convincing the market while gold remains below the marginal cost of profitable production. Due mainly to the 95% fall in SP over 3 years, Chairman Hambro is not everyone’s favourite. But it is hard to deny that he has consistently made some shrewd moves dealing with the consequences of a falling gold price.
It is unlikely the SP here is going to remain this low for long. After the last gold low in July, the SP went from 63 to 134 within 6 weeks. House broker Canaccord Genuity has a target of 190. This is ambitious in the current environment but 120 – 140 should be achievable within the next 6 months. The real payoff will come when gold recovers its mojo, but that is another story.