Petropavlovsk PLC (POG) is a Russian gold mining company with operations in the Far East of Russia. In terms of both production and Reserves and Resources, it is one of the major gold mining companies in Russia. The group has operated since 1994, and its key area of focus is the Amur region. In the Far East of Russia, it is amongst the most experienced and the most established vertically integrated gold producers, and focuses on exploration, mining and production of a stable output of low-cost gold. The Amur region benefits from a strong mining tradition, access to hydroelectric power and well-developed infrastructure.


Source: Company Website

Regis, which is headquartered in Blagoveshensk, is the specialised exploration company of the group, which enables Petropavlovsk to conduct all geological exploration in-house - from grass root early-stage prospecting to detailed exploration. The exploration team of over 850 highly skilled specialists is supported by two fully accredited assay laboratories and uses effective exploration technologies. To support mine development and provide test working, the group has a range of technological services, which includes a network of laboratories, equipped with high-quality equipment and supplemented with a metallurgical test plant in Blagoveschensk, which is a first of its kind in the Russian Far East. The engineering division at Petropavlovsk operates its own powerful project engineering body, which develops new technological solutions, undertakes the full body of scientific research work in areas of metallurgy, ore concentration and output, and performs work on the geoeconomic estimation of ore bodies. The group’s operations also include mine construction, which is undertaken through Kapstroi, which has enabled the group to expand its mines within competitive timeframes.

Key Statistics



Management

Sir Roderic Lyne has been the Non-Executive Chairman of the group since 29 June 2018. Dr Pavel Maslovskiy is the Chief Executive Officer after he was re-appointed for the second time on 29 June 2018. He co-founded the company with former Chairman Peter Hambro. The CEO is supported by Dr Alya Samokhvalova, who is the Deputy Chief Executive Officer, and Mr Alexey Dubynin, who holds the position of Chief Financial Officer.

Segments

The operations of the group are differentiated based on its four hard rock gold mines, namely Pioneer, Pokrovskiy, Malomir and Albyn. These are engaged in mine development and field exploration as well as gold and silver production. With the most significant exploration potential, Pioneer remains the flagship asset of the group. Albyn is the largest producing mine of the group and has a 100% non-refractory Resource base, while Malomir is the largest asset by Reserves and Resources and has around 90% refractory ore Reserves.

Top Shareholders

 
(Source: Thomson Reuters)

Trading Update

In the first half of the year, at an average realised gold price of US$1,286/oz (H1 2018: US$1,285/oz), the company reported a 12% increase in total gold sales to 225.1koz (H1 2018: 201.4koz). Processing of refractory gold concentrate at the Pokrovskiy Pressure Oxidation (POX) hub contributed 61.3koz. Outlook for gold sales of around 450 - 500koz remained unchanged, given a seasonally stronger H2 and forward gold sales contracts totalling 130koz at an average price of US$1,281/oz remained outstanding as at 30 June 2019.

Financial Highlights (FY 2018, in $m)

 
(Source: Company Filings)

As the physical volume of gold sold from hard rock mines declined by 16% from 439,834oz in 2017 to 369,611oz in 2018, revenue from hard rock mines during the period was reported at $470.7 million, which was 15% lower than the $556.2 million achieved in 2017. This resulted in a 15% decline in group revenue from $587.4 million achieved in 2017 to $499.8 million in the current period. Compared to 65,503oz in 2017 at an average price of $17/oz, hard rock mines sold 54,746oz of silver in 2018 at an average price of $15/oz, both representing a decline. Reflecting the suboptimal organisation of mining works in the first half, higher volumes of stripping and effect of inflation of certain Rouble denominated costs, Total Cash Costs for hard rock mines increased from $741/oz in 2017 to $786/oz in 2018. This reflected in the underlying EBITDA from hard rock mines, which was $177.0 million compared to $229.1 million in 2017, while group’s underlying EBITDA declined by 27% to $143 million. Reflecting the impairment of non-refractory ore stockpile at Albyn, capital expenditures related to the existing mining operations ad growth in Total Cash Costs, All-in Sustaining Costs increased from $963/oz in 2017 to $1,117/oz in 2018. Moreover, All-in Costs rose to $1,332/oz in 2018 from $1,065/oz in 2017. Due to a $101.7m reversal of impairment, profit before tax increased by 69% to $82.4m (2017: $48.9m). However, profit for the period declined by 30% to $25.9 million from $37.1 million reported in 2017, which corresponded to basic profit per share for 2018 of $0.01 (2017: basic profit per share was $0.01). The group invested a total of $134.4 million in 2018 as compared to $88.1 million in 2017, and net cash from operating activities rose by 75% to $217.2 million from $124 million in 2017. Net debt declined marginally to $568 million.

Key Performance Indicators

Mineral Resources (Moz),which is the quantity of solid material of interest available for eventual economic extraction, measures the size of mining and exploration assets and indicates medium to long term production growth potential. Despite the depletion of 0.79Moz by mining and disposals, the group maintained the total Mineral Resource at 20.52Moz, helped by successful exploration campaign in 2018. Ore Reserves (Moz) is the economically mineable part of a Measured or Indicated Mineral Resource and measures the size and quality of the mining assets and the ability of the group to ensure the life of operating mines at profitable levels. As new open-pit Reserves were established at Albyn, Malomir and Pioneer, total group reserves rose by around 7% or 0.6Moz. Total Attributable Gold Production (koz) is the total of the gold produced from the hard rock mines, and as the majority of group revenue is attributable to the sale of the gold, it underpins the financial performance of the group. The group produced 422.3koz of gold, which was within the outlook of the management.

Financial Ratios


(Source: Thomson Reuters)

Ratios Commentary
The company has consistently reported a higher gross, EBITDA and operating margin than the industry median. However, the net margin and ROE declined in FY 2018 and were below the industry number. The liquidity position of the group declined during the year and was below than the industry. Although debt/equity was lower at the end of the year, it was still more than the industry. The asset turnover was lower than the industry, suggesting a room for improvement with better optimisation of assets.

Valuation Methodology
Method 1:Price/Cash Flow Multiple Approach (NTM)  

To compare POG with its peers, Price/Cash Flow multiple has been used. The peers are Kaz Minerals PLC(NTM Price/Cash Flow was 3.36), Anglo American PLC(NTM Price/Cash Flow was 3.49), Antofagasta PLC(NTM Price/Cash Flow was 5.31),and Acacia Mining PLC(NTM Price/Cash Flow was 6.32). The median of Price/Cash Flow (NTM) of the company’s peers was 4.40x (approx.).

Method 2: EV/EBITDA Multiple Approach (NTM)


To compare POG with its peers, EV/EBITDA multiple has been used. The peers are Centamin PLC(NTM EV/EBITDA was 0.75), Highland Gold Mining Ltd(NTM EV/EBITDA was 1.71), Polyus PAO(NTM EV/EBITDA was 2.73),and Polymetal International PLC(NTM EV/EBITDA was 5.38). The median of EV/EBITDA (NTM) of the company’s peers was 6.99x (approx.).

Share Price Commentary


Daily Chart as at 21-August-19, before the market close (Source: Thomson Reuters)

On 21 August 2019, at the time of writing (before the market close, at 11:15 am GMT), POG shares were trading at GBX 10.02, up by 0.30 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 10.44/GBX 5.15. Stock’s average traded volume for 5 days was 3,145,616.00; 30 days – 3,483,756.40 and 90 days – 3,816,303.60. The average traded volume for 5 days was down by 9.71 per cent as compared to 30 days average traded volume. The company’s stock beta was 0.54, reflecting less volatility of the stock as compared with the benchmark index. The outstanding market capitalisation was around £329.52 million.

Risks Assessment and Growth Prospects

The prices of various commodities which the company markets can be subject to significant fluctuations, and as the prices are affected by global supply and demand, the company does not have any influence on the market prices, which can lead to a significant impact on the financials and affect the business assumptions. Delivery of essential goods and supplies, and exploration and extraction activity can be affected by severe weather conditions, such as cold temperatures in winter and torrential rain. An appreciation of the Russian Rouble against the US Dollar can result in an increase in the costs as significant costs are incurred in or influenced by the local currencies, while the company reports its results in US Dollars.

However, the POX Hub allows Petropavlovsk to consider processing third party concentrate from anywhere in Russia, addition to processing its own refractory Resources, enabling the group to process up to 500Ktpa of refractory concentrate annually. Aimed at comprehensive cost control and increasing throughput and recovery rates, the group seeks operational improvements, which could result in the operational efficiencies and cost optimisations. Moreover, due to recent tensions in the geopolitical arena and the risk of a downturn in the global economy, demand for gold has increased considerably due to the perception of it being a safe haven asset. This augurs well for the company as the realised price of gold increases, which directly increases revenue. Also, the company successfully placed new 5-year $125m convertible bonds after redeeming $100m convertible bonds due in 2020. The sale of bonds was in high demand from international blue-chip institutional investors and carried a lower coupon of 8.25%, and the extra funds would be used to fund construction of a new flotation facility at Pioneer.

Conclusion

The company has an extensive portfolio of exploration and development projects, and across the gold industry in Russia, POX Hub is the largest autoclave complex in terms of production capacity, representing the next phase of development growth. Based on the decent growth prospects, and supported by valuation undertaken using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 9.99 (as on 20 August 2019) with high single digit upside potential based on 4.40x NTM Price/Cash Flow (approx.) on FY19E Cash Flow per share and 6.99x NTM EV/EBITDA (approx.) on FY19E EBITDA.
 
*The buy recommendation is also valid for the current price as covered in the report (as on 21-August-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.