Why Are Petropavlovsk Results Interesting But Irrelevant?

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Tim Worstall
Updated: 22 Apr 2022

Key points:

  • Petropavlovsk, POG, shares are up 40% on Q1 production results
  • This is interesting but largely irrelevant to the actual POG share value
  • What matters is the effect of sanctions on the capital structure
  • POG – Just How Bust Is Petropavlovsk?

Petropavlovsk (LON: POG) shares are up 40% in London this morning on the back of the Q1 production report. The essential news there is that production is continuing, there’s little to no effect from current events, and that is being taken as a good sign. Which, within the limits of what is being reported, it is.

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But the problem at Petropavlovks doesn’t revolve around the actual mining activities, which is what is being reported upon here. Not is it about the gold price, which is the other usual major variant for a mature gold miner. Production and the global gold price are doing just fine at POG.

What’s killing the share price is the effect of sanctions. As Petropavlovsk keeps pointing out there are no direct sanctions upon the company. Nor are there on any of the corporate principals, or the line of business. So, the company should be free of such concerns – in the manner of Polymetal (LON: POLY) for example.

Except it’s still true that the company might go bust as a result of those sanctions. As the company has repeatedly pointed out and as makes the Petropavlovsk share price something of a mystery.

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The problem is that the corporate banker, Gazprombank, is sanctioned. This means that a London listed company cannot deal with, trade with, Gazpzrombank. But Petropavlovsk has an open working capital loan with the bank. As is usual in gold mining companies, this is associated with an offtake contract for the gold produced – the gold that will be produced is acting as security for the working capital loan.

POG can’t deliver gold to Gazprombank – sanctions. It also can’t pay off the loan even if it could get it refinanced elsewhere – sanctions. It can’t pay interest on the loan – sanctions. As the FT reports, this means a $300 million demand from Gazprombank. $300 million, which Petropavlovsk doesn’t have because it would need to refinance to get it. And $300 million which Petropavlovsk couldn’t pay to Gaxprombank if it did have it because that would be trading with a sanctioned entity.

Sure, the company has applied for its own gold expert licence and could even get one – this is allowed in Russia these days. Production carries on, there would be gold to sell. But unless Gazprombank waives its rights under that working capital arrangement POG would still be in breach of those loan terms.

Let’s be honest about it, we don’t think that a Russian court is currently going to go easy on someone breaking a contract because they’ve got to obey western sanctions laws now, do we?
Petropavlovsk itself keeps saying that they don’t know of a way out of this – OK, they call it consulting with advisors but that’s what is meant. Which means that a reasonable evaluation of the share price there is that it might well – as the company itself again says – go bust. Production reports are all very well and this production report is indeed all very well. But unless and until that sanctions problem can be sorted out, something that will almost certainly require political intervention, the Petropavlovsk share price seems unlikely to significantly recover.

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