There’s a certain mystery about the Petropavlovsk (LON: POG) share price. Of course, the price collapsed with the news of the unpleasantness and so on, but the last few days have seen a considerable rise – 200% and more in fact. Yet the news from the company is that the sanctions are having a most unwelcome effect on the company’s ability to operate. In fact, there’s even some doubt over Petropavlovsk’s ability to continue in business at all.
It’s possible to take conform from the peace talks going on of course. But it could also be that the details of what the company itself is announcing just isn’t properly sinking in. It’s even possible that this is a result of Polymetal’s share price rise which is a very different thing. For the situations are entirely different even though both are gold miners in Russia.
The difference is that Polymetal seems to be trading through the sanctions with very little effect upon operations. This is not true for Petropavlovsk. There the situation is entirely different.
There are no sanctions against Petropavlovsk itself. The Russian gold market appears to be operating pretty much as normal. Exports can still happen – yes, Russian refinery bars are no longer good delivery to the London Bullion or CMET markets but that’s something entirely solvable. The shares can and do still trade in London. So, what’s the problem?
The problem is that Petropavlovsk banks with Gazprombank. Which is a sanctioned organisation. As a British company, Petropavlovsk cannot conduct business with Gazprombank. This is a bit of a problem if you cannot deal with your own bank. Of course, one solution is to switch banks. But that’s also a problem.
As Petropavlovsk has pointed out, working capital requirements are financed by Gazprombank. In return, Gazprombank has the right to purchase 100% of gold output. The gold to be produced in the future is the security against the working capital loan that is. Which is the very problem.
Petropavlovsk cannot deliver gold against the loan contract because that is to deal with a sanctioned entity. It’s also not possible to refinance elsewhere and pay off Gazprombank because that is to deal with a sanctioned entity.
As announced today this gets even worse. POG can’t pay the interest on the working capital loans because that is to deal with a sanctioned entity. In fact, they’ve already missed an interest payment ($half a million, which is not all that much to be fair) because they can’t deal with a sanctioned entity. Be late in your interest payments for long enough and you risk being in default – which makes the assets of the company at risk.
The sanctions have Petropavlovsk in a bind. They can’t perform according to their contracts. But they also can’t refinance to pay off those contracts. The way out of this is for the sanctions regulations to be tweaked to resolve this impossibility.
But then that’s the risk for Petropavlovsk shares. That the regulations aren’t tweaked to resolve this problem and so, well, no one really knows. Will internal to Russia law allow this to be smoothed over? Or will adherence to local contracts be enforced? That’s the risk. It may not be a large risk, it’s entirely possible to assume that something will be done. But if it isn’t then there’s that significant problem of being in default.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.