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Petropavlovsk ups guidance

BROKERS' TIPS: Russian gold miner Petropavlovsk has announced production figures that beat guidance provided just last month.
January 22, 2010

■ Full-year production is ahead of guidance

■ Double-digit output growth expected in 2010

■ Dividend payment resumed

IC TIP: Hold at 1055p

Shares in Russian gold miner Petropavlovsk (formerly Peter Hambro Mining) gained on a trading update this month, which revealed a 487,000oz full-year 2009 gold production figure. That's some 4 per cent ahead of the 470,000oz figure flagged by management in mid-December, when guidance was cut from the previously targeted 500,000oz due to since resolved operational issues. The final full-year output was 21 per cent up year-on-year and Petropavlovsk now expects 2010's production to come somewhere in a 670,000-760,000oz range. Management says cash costs were in line with forecasts and that the average realised gold sales price in 2009 reached $975 per oz, as opposed to $845 in 2008.

The group is paying an interim dividend, too, of 7p per share on 30 March 30 (record date: 24 February). While there won't be a final dividend beyond this first payment for the 2009 financial year, the company expects to resume paying both interim and final dividends thereafter.

Petropavlovsk has also retained an independent consultant to work towards producing fully Joint Ore Reserves Committee (JORC) compliant statements. Last year, the company suffered from misunderstandings about the differences between JORC standards and the different Russian standards that the company also uses.

LIBERUM CAPITAL SAYS...

Buy. Petropavlovsk has had a difficult month and confidence that management can deliver on target has taken a battering. But 2010 production guidance is largely intact, representing 38 per cent growth on 2009. We calculate net asset value at £7.98 per share (assuming a $1,000/oz gold price) and estimate a fair value of between £11.97 and £15.96 per share. And, with year-end net debt of $24m (£15m), the balance sheet looks strong. On current gold prices Petropavlovsk trades at 9.9 times 2010's expected earnings, falling to nine times for 2011. That's too cheap for a company with such high quality growth potential - even after allowing for project delivery risk. We expect full-year adjusted EPS of 168¢ (from 91¢ in 2009).

FAIRFAX SAYS...

Buy. Petropavlovsk's shares should rerate higher as confidence returns, providing that gold prices are maintained near current levels. A broad range of projects, expansions and new mines should enable the group to expand on a number of fronts and provide for positive newsflow throughout 2010. Inclusion in the FTSE 100 also looks likely this year on the announcement of progress at the Pioneer, Albyn and Malomir gold projects, as well as at the group's iron ore projects. Our target price currently stands at 1,800p.