On 26 February, we will discover if shareholders in Petropavlovsk (POG) have backed an initiative to refinance a portion of the Russian gold miner's net debt, which stands at around $920m (£609m). Shareholders are being asked to approve a new $100m five-year convertible bond as well as a heavily discounted 157-for-10 rights issue. At 5p a share, the latter would generate a further £155m. Shareholders are faced with a stark choice: either back the refinancing or run the risk that Petropavlovsk will be liquidated by holders of its senior debt.
The rights issue is being underwritten by Petropavlovsk insiders, including co-founder Peter Hambro, through a combination of cash and debt-for-equity swaps. This obviously sends out the right message, particularly if investors are worried that they would simply be throwing good money after bad. You can vote for the initiative, but you needn't stump up the cash: shareholders have the option of selling their rights on the open market.
If the refinancing is approved, attention will turn to whether or not the miner will be able to fund its residual debt obligations through organic cash flows. Petropavlovsk has reduced its capital expenditure budget significantly, which will help. The company expects to produce 680,000-700,000 oz of gold during 2015 at a base cost of $700 an oz. With gold trading at $1,234 an oz, that cost estimate suggests margins will be healthy - but it may prove overambitious.
