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Petropavlovsk – Going for gold

There is every reason to think this gold producer's shares can go higher, says Michael Taylor
June 18, 2020

Petropavlovsk (POG) is a Russian gold producer. Naturally, this may sound the warning bells for many readers. Stocks that operate in foreign jurisdictions can be higher risk, and should anything go south there is often little shareholders in London can do about it.

Foreign stocks generally aren’t as favoured as UK operated businesses. Perhaps this is home bias, or perhaps it is something else. If a company delists, for example, investors could end up holding shares in a private entity thousands of miles away.

But Petropavlovsk is Main Market listed. Unlike Aim, the Main Market is much stricter in terms of who can and cannot list (although Muddy Waters Research proved that just because a business is in the FTSE 100 doesn’t mean it can’t go to 0p – and quickly).

One of the big attractions of Petropavlovsk is that it will benefit positively from an uptrending gold price. The company is operationally geared with relatively fixed operating and mining costs, and so every dollar that gold increases is a dollar that will trickle down to the bottom line. However, operational gearing is a doubled-edged sword – it’s great when the going is good, but when the asset being produced is dropping then every dollar is an additional cut into profit.

Looking at Chart 1, we can see the value destruction on offer at Petropavlovsk. From a height of close to 500p to a fall to around 5p, a 95 per cent drawdown shows that traders who do not cut their losses can lose almost everything. Such a drawdown would require a 1,900 per cent gain to get back to break even, which is a seemingly impossible feat. Granted, shares can and do rise such stratospheric amounts; however, one must take into account shares in issue too. The more shares in issue, the more diluted shareholders are, and the more gargantuan the task of achieving the previous share price becomes.

If we look to the left of the chart, we see the moving averages begin to point down. As we saw last week in my article ‘How to trade bouncing Burford, 11 June 2020’, this is a warning sign for traders that a new downtrend may be beckoning. That was indeed the case here with Petropavlovsk and we see the stock test the all-important 200 exponential moving average (pink line) twice and fail to hold, before dropping and falling again. It is only when we get to around 2015 that the stock appears to have large volumes and a potential base beginning to be built.

Turning to Chart 2, we see that the stock price eventually started to come out of the base many years later. It took Petropavlovsk nearly four years before it would eventually come onto traders’ radars, and anyone holding in that period suffered a large opportunity cost. As Jesse Livermore says in one of my favourite books Reminiscences of a Stock Operator: “The chap who is compelled to lug a corpse a year or two always loses more than the original cost of the deceased; he is sure to find himself tied up when some really good things come his way”.

Looking at the early months, we can see the moving averages begin to turn upwards, indicating a potential new trend. The stock built a base from January to June, with both volatility and volume remaining low. When a stock acts in this way, we often see a surging move once the stock breaks out of the narrow range. That was the case in mid-June, and the stock built another base before breaking out in December 2019.

Petropavlovsk badly messed up its hedging in 2019, but the rising share price may be explained by the fact that in 2020 the company is now fully exposed to spot gold prices, which itself is in a rising trend and much higher than its hedged price. That, plus the rising production increases to 620k ounces (oz) to 720k oz from 519k oz in 2019, have seen both traders and investors jump on the trend.

Petropavlovsk so far has not announced any disruptions to its production due to Covid-19, and if this remains the case I see no reason why the trend can’t continue. The stock is volatile, as we can see in Chart 2, with the price being shaken all over. Therefore, it is prudent to look at the average range of the stock and take this into account when position sizing. While we do not want to overexpose ourselves, we also don’t want to be stopped out by placing our stop too tight.

To trade Petropavlovsk, I want to see a breakout of the recent high at 29.5p. The trend is in our favour, and the fundamentals are strengthening. Should all factors stay the same, there is no reason why the stock can’t go higher. There is a reason why people say the trend is your friend – as those who bought the original breakout in Chart 2 at around 8.5p pence are finding.

 

You can contact Michael and get your free copy of Ten Habits of Highly Profitable Traders from www.shiftingshares.com

Twitter: @shiftingshares

 

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