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Petropavlovsk PLC: THE INVESTMENT CASE

Petropavlovsk whittles away debt

The gold miner's renaissance continues with two game-changing deals, while it said it is in advanced discussions with its lenders about new terms for its lending facilities
Gold pour
INVESTMENT OVERVIEW: POG The Big Picture
Suddenly, the future looks a whole lot brighter for Petropavlovsk

Big things are afoot at Russia-focused gold miner Petropavlovsk PLC (LON:POG), which has announced an acquisition and a joint venture.

The acquisition will see the company acquire a new strategic investor on the share register while the joint venture will revive construction work on the company's pressure oxidation hub project, which was suspended when the gold price collapsed in 2013.

The gold miner has entered into an agreement with Russia's Alliance Mining Group and Lexor Group to acquire Amur Zoloto, an established gold company that has production and development assets in the Khabarovsk region in the far east area of Russia.

The agreement will see Petropavlovsk issue 1,434mln shares at an assumed price of 6.89p per share to Alliance Mining and Lexor Group as consideration for the acquisition.

The newly issued shares will represent around 30.3% of the UK company's enlarged share capital, and at current exchange rates are valued at US$144mln.

Petropavlovsk will also take on Amur Zoloto's debt, which currently stands at around US$16mln.

Petropavlovsk said the acquisition of Amur Zoloto (AZ) would add significant scale to its reserve and resource base in the far east of Russia.

AZ had non-refractory reserves of 1.55mln ounces and resources (including reserves) of 2.16mln ounces as at the end of 2015.

The average feed grade at AZ's processing plants is 6.49 grams per tonne (g/t) and at the heap leach stage is 1.1 g/t.

AZ is currently expected to produce around 38,000 ounces of gold this year, but the plan is to ramp this up from 70,000 ounces to 127,000 ounces between 2017 and 2020, at an average cash cost of around US$640 per ounce of gold.

AZ is currently operating the Yubileiny processing plant at a capacity of 100,000 tonnes per annum (tpa) and expects this to increase to 200,000 tpa in 2019.

"This transaction has significant strategic value for us and brings an attractive portfolio of assets into the Petropavlovsk Group,” said Peter Hambro, chairman of Petropavlovsk.

“I am also very pleased to be entering into this strategic partnership and our shared belief in the growth potential of Petropavlovsk is reflected in the equity stake that our new partners are taking,” Hambro added.

It is envisaged that a representative of Alliance Mining Group and Lexor Group, both of which are ultimately controlled by Musa Bazhaev and his associates, will be appointed to the board of Petropavlovsk PLC.

"Both Petropavlovsk and AZ are strong teams with robust assets and great growth potential,” said Bazhaev..

“Considering the many synergies between us, I believe the deal will truly elevate both companies. For me personally, it is a strategic investment and I am confident that together we will unlock our full potential in the interests of all stakeholders," he added.

As for the joint venture, this will be between Petropavlovsk and GMD Gold to finance the completion of the construction and commissioning of Petropavlovsk's pressure oxidation (POX) hub project at the Pokrovskiy mine in the Amur region of the Russian Federation.

The POX hub will be capable of processing refractory gold concentrates sourced from the company's Malomir and Pioneer mines and concentrates produced at GMD Gold affiliates' operations, as well as third parties' gold bearing concentrates.  

Petropavlovsk commenced development of the POX hub in 2011 but the collapse in the gold price put the kibosh on it, and development was suspended at a time when the project was more than half-complete.

The joint venture (JV) agreement provides the group with an opportunity to complete the POX hub and to earn money from the group's refractory gold reserves and increase Petropavlovsk's total gold production.  

In return for a 49% stake in the JV, Petropavlovsk will contribute POX hub in its current state of construction while GMD Gold will contribute US$120mln, which is the estimated cost required to bring the project to completion and commissioning. 

Commissioning of the POX hub will enable the start of processing of the group's refractory ores and the commencement of gold production from refractory reserves starting in 2018.

Each party will have the right to half of the POX hub's capacity and profits, with treatment of concentrates to be carried out on a tolling basis with a margin of up to 5%.

Hambro described the JV as a “game changer” for Petropavlovsk because it helps to unlock the considerable value in its refractory ores, and could potential boost its gold production two years down the lines, with little or no financial outlay on the part of the UK company,

“To understand the importance of this transaction, one must remember that almost half of the group's mineral reserve and resource base is in refractory ores, located mainly at our active Malomir and Pioneer mines. Whilst using existing facilities Pioneer still has great long-term production potential, the Malomir mine is approaching the end of its oxide life. We have always known that processing its vast mineral resource base requires autoclave treatment and only the sudden fall in the gold price in 2013 prevented us from completing the project,” Hambro said.

Not content with that barrage of news for shareholders to digest, the company issued its results for 2015 and a production update for the first quarter of 2016.

Group revenue from continuing operations in 2015 declined to US$599.9mln from US$865.0mln the year before.

The loss before tax widened to US$141.6mln from US$14.3mln in 2014.

Underlying earnings (EBITDA) EBITDA eased to US$172.8mln from 2014's US$251.8mln, reflecting lower sales of 599.9k ounces versus 865.0k ounces in 2014 and weaker realised gold prices (US$1,160/oz v US$1,266/oz).

Net debt at the end of the year stood at US$610mln, down from US$696mln at the end of 2014, and had reduced further, to US$596mln at the end of the first quarter.

“Having successfully reduced debt during 2015 by some US$300 million to US$610 million, the group's main debt providers are supportive of our plans, which are being carried out in close consultation with them. As part of this, we are in advanced discussions with Sberbank and VTB to agree on new terms of the debt maturities and relaxation of financial covenants,” Peter Hambro said.

Gold production in the first quarter clocked in at 92,100 ounces, while gold sales totalled 101,000 ounces at an average price of US$1,164 per ounce.

Mining specialist SP Angel gave the thumbs-up to the slew of announcements.

“We see a strategical update involving a redevelopment of the POX project and an addition of non-refractory ounces to the Petropavlovsk portfolio (AZ acquisition) as positive benefiting the sustainability of gold production and cash generation of the group,” the broker said.

Shares in Petropavlovsk rose 4.5% to 8.2p in the morning session.

---ADDS RESULTS, PRODUCTION UPDATE AND BROKER COMMENT---

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