Petropavlovsk’s promising production pick-up

For the uninitiated, here’s the introduction. The company joined Aim in 2002, and moved up to the main market in 2009. But since it was founded 25 years ago, Petropavlovsk has focused on the Amur region of Russia, where it has four operational mines: Malomir, Pioneer, Albyn and the ageing Pokrovskiy, now the site of the long-awaited pressure oxidation (POX) plant.

It hasn’t always been a happy story. Aggressive expansion, a lack of hedges, and an ill-conceived convertible bond collided horribly with the $600-an-ounce drop in gold prices between 2012 and 2014, and resulted in shareholder wipeout in a 2015 rights issue.

Since then, Petropavlovsk has been treading water, amid a protracted game of boardroom musical chairs. But now, with co-founder Pavel Maslovskiy back at the helm, and a supportive c-suite re-established, shareholders such as Kazakh oligarch Kenges Rakishev finally have tangible reasons to expect a depressed valuation could soon lift.

First off, production is set to climb by up to 18 per cent this year, after hitting 422,000 ounces (oz) in 2018. Reaching the upper end of this year’s 450,000-500,000 oz forecast requires further ramp-up at the POX hub, which allows the company to turn its refractory ore into gold. So far, the plant has delivered. After almost a decade of planning and stalled construction, first gold was poured on 21 December, and reached design capacity in record time. A rise in concentrate produced at the Malomir mine and processed at the POX hub was the chief reason why 2018 output comfortably beat original guidance of 400,000-410,000 oz.

In a trading update issued on 23 January, Petropavlovsk said the next stage will be to expand the plant’s spare processing capacity by up to 250,000 tonnes of concentrate, which will be filled by output from third parties. Additional gold output should come once expansion of Malomir’s flotation plant is completed, and the Pioneer flotation plant is in production.

Because much of these works were completed last year, Petropavlovsk’s capital expenditure budget is expected to more than halve to between $45m and $50m in 2019. That’s reassuring, because last we heard, group-wide all-in sustaining costs were forecast to come in between $1,050 and $1,100 an ounce in 2018. That number is declining, but is still much higher than fellow Russian precious metals groups Highland Gold (HGM) and Polymetal International (POLY). However, Petropavlovsk can point to two sources of top-line support: a contract to sell Gazprombank just under half of 2019 output at an average price of $1,252 an ounce, and (for the remaining output), a recent surge in the dollar-denominated gold price to $1,308 an ounce.

Of course, there’s little point celebrating a rising top line if the balance sheet is still overburdened. Fortunately, Petropavlovsk has restructured its onerous guarantee to troubled Chinese iron ore group IRC with a $240m loan from Gazprombank, and expects to be repaid $63m once the restructuring is signed off by shareholders this month.