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POG – Just How Bust Is Petropavlovsk?

Tim Worstall
Tim Worstall trader
Updated 21 Apr 2022

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Key points:

  • There’s a significant risk that Petropavlovsk is going to zero
  • The problem is the interaction of sanctions and the capital structure
  • Without political intervention there might be no way out
  • Will Petropavlovsk Be Driven Bust By Sanctions?

Petropavlovsk (LON: POG) shares are down again on the most recent news about sanctions and Gazprombank. The real problem here is that the sanctions rules leave POG with no real way out of this corner they’re back into. Either the rules have to change – or be waived, or an exception made – or Petropavlovsk shares have a high likelihood of going to zero.

This is not just us making this statement, this is what the company itself is saying. We’ve made this point before about POG shares. Pointed to the Petropavlovsk risk more than once. Which brings us to the company announcement from POG.

As background, Petropavlovsk is not directly hit by sanctions. Gold mining in Russia is not a sanctioned activity. It is true that the central bank’s willingness to purchase gold at a fixed rouble price is putting a top on the domestic gold price but other than that POG should be fine.

Except the company’s bank is Gazprombank. And Gazprombank is sanctioned. That means that as an English company, POG cannot trade with Gazprombank. Except the POG working capital requirements within Russia are financed by GBP.

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As is standard enough in mining – especially for gold – the financing deal is that monies are advanced to finance working capital, and in return, interest is paid and so on, just like any normal loan. But on top of that, the bank becomes the seller of the gold production. We can even view such arrangements as presales of production to gain financing.

OK, but now Gazprombank is sanctioned, so Petropavlovsk cannot pay the interest on the loan(s). Even if it were possible to refinance with another bank, that couldn’t be done because paying off the original loans would be trading with a sanctioned bank, GBP. Finally, it’s not possible to deliver produced gold as per the terms of the contract because that’s again dealing in defiance of sanctions.

Within the rules, as they are, there’s really no obvious way out of this corner for Petropavlovsk. Well, it’s possible for Gazprombank to waive their rights under the varied contracts – to the gold, to repayment, to interest. Perhaps wait for things to settle down or change. But why should they do that?

Which is what the latest corporate announcement brings us up to date upon. Gazprombank is demanding repayment of those loans. That is, it’s not waiting around it’s exercising its rights under Russian law. Pay us back what you owe us given that you’re not delivering gold as per the contract – and so on.

You see the bind POG is in? GBP is entirely within its rights to ask for repayment. But Petropavlovsk doesn’t have the money to repay, can’t sell gold to anyone else to get it, can’t sell to GBP in lieu, can’t refinance because that would be to pay off GBP.

As Petropavlovsk has itself pointed out to us, given the current sanctions rules, it’s not certain – not even obvious – that there’s a way out of this for the company. It is entirely possible that POG will go to zero. There’s a fairly dark amusement at the thought that the first major corporate victim of sanctions could be a company that’s not actually sanctioned, but that could well be the way that it works out.

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.