Petropavlovsk shares (LON: POG) have been smashed by its exposure to Russia caused by the Russian invasion of Ukraine. However, the question is, are the damages permanent?
Petropavlovsk’s shares have fallen nearly 80% since the start of January 2022. The gold producer shares were once trading at 16.00p in February 2022, just before the invasion began. The stock closed at 3.85p on Monday as the stock rebounded from its lowest levels around 1.50p.
Petropavlovsk
Petropavlovsk is a major integrated Russian gold producer with JORC Resources of 19.50Moz of gold, including 7.16Moz of gold reserves.
Pioneer, Malomir, and Albyn, as well as the Pokrovskiy Pressure Oxidation (POX) Hub, are all located in the Amur Region of Russia’s Far East.
Since its inception in 1994, Petropavlovsk has produced a total of 8.7Moz of gold and has a proven track record of mine development, growth, and asset optimization.
Petropavlovsk is amongst the region’s leading employers and a major contributor to the region’s long-term economic growth.
The gold miner made headlines in January as KPMG found corporate governance problems including wrongdoing such as inflating the cost of mining licenses and conflict of interest to benefit senior management. Petropavlovsk’s chairman acknowledged the errors found in the report and reiterated that the company is installing new rules, policies and procedures in place to instil a “culture of zero tolerance for improper business practices.”
Later in January, the announced its sales and production report for Q4 2021 where the company noted a 26% year-on-year increase in total gold production from 1.135koz to 1.431koz as a result of improved output across its mines.
The group’s sales in Q4 2021 increased to 1.301koz from 1.131koz in Q4 2020.
The total gold production in 2021 for the group amounted to 4.498koz which was 18% lower than 2020. However, the group’s gold out was well within the guidance of 4.3koz to 4.7koz.
For 2022, Petropavlovsk had further reduced its gold production guidance between 3.8koz and 4.2koz which didn’t help investor sentiment.
Impact of Russia
Russia invaded Ukraine on the 24th of February after which Russian stocks began to crumble, with of course Petropavlovsk taking a barrage of punches due to its exposure in Russia.
As a result, Petropavlovsk was booted out of the FTSE 250.
The group released an announcement regarding the implications of Russian sanctions on the company in hopes to regain investor confidence in early March. Petropavlovsk said it does not consider its shares or debt instruments to be securities in which dealings are limited under the regulations.
Due to 50.10% ownership of Petropavlovsk being free from Russian entities and being domiciled in the UK, the company believed it would not be subject to sanctions.
However, Gazprombank, a financial institution with which Petropavlovsk has “substantial commercial and financial relationships” was impacted negatively due to the imposed sanctions. The bank faced an asset freeze which ultimately stumbled Petropavlovsk’s shares.
Petropavlovsk has a $200m term loan and an $86.7m revolving credit facility with Gazprombank the company addressed in a statement.
The conditions of the facilities enabled Petropavlovsk to sell its gold to Gazprombank which was hindered due to the clauses of the sanction.
“Restrictions on purchasing and selling gold in Russia may make it challenging to find an alternative purchaser for the group’s gold output,” Petropavlovsk warned.
The sanction led asset freeze resulted in the company defaulting on payments such as an interest payment of $560,000 due on the term loan and the rouble equivalent of $9.5m under its revolving credit facility.
The assets being locked up with Gazprombank would lead to a barrier in operations and financial obligations for the gold miner. In order to prevent future issues from rising, the company began to discuss possible restructuring of the group’s debt with its advisers and the bank.
Last week, Petropavlovsk started gathering advisers such as AlixPartners to help restructure its debt.
The alternative options however remain unclear for the company as factors such as the length of the sanctions impacting Gazprombank also play a role.
The company also announced the resignation of Natalia Yakovleva an independent non-executive director from the Board on Monday.
Petropavlovsk Valuation
Petropavlovsk shares once peaked at 27.66p during April 2021. The company has since lost 84.3%.
The group has a market cap of £152.4m and a ROCE of 19x.
Even though Petropavlovsk’s shares plummeted since the start of 2022, on Monday the shares gained 13%. Is that a sign of optimism for the gold miners? Maybe.
The reality is, apart from the exposure to Gazprombank, Petropavlovsk has a limited association with Russia. If the company establishes a successful plan to restructure its debt and avoid failure of future payments, there may be hope.
Based on current speculation, a goal of 16p for the Petropavlovsk share price seems difficult, but not unachievable.