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Petropavlovsk: That golden promise of riches

Publication Date: 18 Feb 2019 - By Permjit Singh By Permjit Singh
Actionable
Differentiated

Equity Fundamental Commodity Equity EU ex-UK UK Metals and Mining

Petropavlovsk (LON:POG) is one of Russia’s largest gold producers, operating gold mines in the Russian Far East. 

Gold production is poised to increase (targeting FY 2019 gold production of 450,000 – 500,000 ounces; an improvement on 2018 production levels) following the commissioning of technology to extract gold from the Company’s refractory ore through a pressure oxidation process - the Pokrovskiy POX Hub.  

The Hub will allow the company not only to unlock c.9.6 million ounces of ore but will also create a processing platform for refractory gold concentrate, thereby providing the Group with sustainable cash flows in the years ahead. 

Much of the company’s gold is sold at market price. However, forward contracts to sell an aggregate of c.200,000 ounces of gold at an average price of US$1,252/oz remained outstanding as at 31 December 2018. 

Petropavlovsk’s liquidity position has been significantly strengthened by gold sales contracts with Gazprombank, for a total of c.175,000 ounces of gold. These arrangements allow it to receive advance payments for 70% of gold with shipment to Gazprombank 

Once fully commissioned, the Hub will have the capacity to treat c.500,000 tonnes of refractory concentrate each year. Other mines will further improve the gold production profile as they reach steady state over the near term, whilst the Company looks to further increase the life of its mines through exploration. 

Petropavlovsk is also a shareholder (31.1%) of Hong-Kong listed IRC Limited, a vertically integrated Russian Far East iron ore producer.

Going forward, the company’s 2019 strategy could be summarised as below:

•    enhance capacity utilisation at the Hub facility 
•    improve the quality of reserves and resources.
•    focus on cash flow creation to de-gear the company

Conclusions: Buy in as stock price is low

Based on information and market sentiment at the time of writing, I’d say:

For: Low stock price; tangible Book Value; high current ratio; high EPS yield (15.4% YE 2017); strong interest cover; high revenue per £1 of share. As at H1 2018, cash generation and asset cover are high.

Against: Extremely high gearing; no dividend has been paid for years; exposed to price of gold and exchange rate (Rouble versus US Dollar)

Overall: Though performance in H1 2018 has been poor (See H1 2018 highlights above), the enhanced operational capacity bodes well for the company’s future performance. So it’s worth having a ‘buy' stance on the stock. 

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Permjit Singh

 

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