Petropavlovsk (LON: POG) shares may or may not be worth anything at all. This is the implication of their announcement to the Stock Exchange this morning. The problem is sanctions. Petropavlovsk cannot obey the current sanctions on Russia and also meet its contractual commitments. That’s what the company itself says, so we’ll have to take it as being true.
A company that cannot meet its contractual commitments also has another name, bust, or bankrupt. The only way out of this appears to be some sort of Hail Mary pass into politics. How well that’s going to work in the current climate is anyone’s guess. The end result of all of this is as Petropavlovsk says “It is not currently clear what return, if any, may be secured for shareholders or the holders of the Bonds or Notes as a result of this process.“
It’s not even true that there are sanctions on Petropavlovsk as a company. They mine gold in Russia, but that’s still a permitted activity. Their shareholders, management, they are not sanctioned. But their bank, Gaxprombank, is sanctioned. This means that as a British company then Petropavlovsk cannot trade or deal with Gazprombank. This is where the problem lies.
Gazprombank finances the working capital at Petropavlovsk. In return, there is a contract that says 100% of gold production will be sold through Gaxprombank. This is not an unusual arrangement. But, given sanctions, Petropavlovsk cannot pay interest or principal to Gazprombank. It also cannot deliver gold in lieu of interest payments. It cannot even – even if it were possible to do so – refinance by paying off Gazprombank and then using another bank for both working capital and gold delivery.
There’s also the slight problem that Russian law now says that you can be in breach of Russian law for not upholding Russian contracts by obeying western sanctions.
There’s more to it though. Petropavlovsk does not hold substantial cash offshore outside Russia. But there are outside The Russia financings which need to be serviced. Which cannot be done if gold cannot be delivered, money received and then transferred out of Russia.
It might, vaguely, be possible that Gazprombank will waive its right to 100% delivery of gold produced. Also, to hold on demanding repayment. Quite what they’d do that is anyone’s guess. Other than that, well, what other than that?
As the company itself says in that announcement, there’s always the possibility of selling all of the operating assets. But to whom and at what price? Which is what leads to that statement that whether there would be anything left for the equity is unknown. Even, it’s unknown as to what recovery for bondholders would be.
Is there another way out of this? In theory, yes, through politics. The British government could – could – say well, that’s not quite what we meant, no. We didn’t mean sanctions would lead to a British company going bust, British shareholders losing out. And so relax, for Petropavlovsk alone, the restrictions upon dealing with Gazprombank. One way of reading today’s Stock Exchange announcement is the board of Petropavlovsk trying to make it clear to British politics that this is the only solution.
Which leaves the value of Petropavlovsk shares reliant upon British politics. How to trade that will depend upon your view of British politics of course.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.