Overview

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 started its operations 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.

The current Non-Executive Chairman is Sir Roderic Lyne and was appointed in 2018 as Chairman. Dr Alya Samokhvalova holds the responsibilities of the Deputy Chief Executive Officer and joined the group in 2002. Mr Alexey Dubynin holds the responsibilities of Chief Financial officer.

Key Statistics



Top Shareholders

 
(Source: TR)

Recent News

On 10^th September 2019, Petropavlovsk announced its interim results ending June 30^th, 2019.

Contribution to Russia’s Gold Mining Industry



The Petropavlovsk is amongst the major mining companies in the Russian region and having assets located in the Russian Far East Amur region. The company held 6 per cent of the total gold production in Russia in 2018. The company’s total JORC (Joint Ore Reserves Committee) resources are 20.5Moz with including Reserves of 8.2Moz. The company, with its 4 production sites, had produced 422 Thousand Ounces of gold with revenue and EBITDA of USD 500 million and USD 143 million, respectively.

Segments

The company’s operations are divided as per the operating locations which include Albynand, Malomir and Pioneer. These are engaged in the 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. All the activities related to construction and engineering expertise, engineering and scientific operations, in-house geological exploration, corporate administrationand other supportingfunctionswhich don’t meet the criteriaof the reportable segment is part of Corporate and Other. The company’s revenue from Malomir and Albyn segments has increased in the H1 FY2019. In the first half of the financial year 2019, the company’s operating expenses from Pioneer and Albyn segments has declined as against last year data. The company’s operating profit from Malomir and Albyn business divisions has increased in the first half of the financial year 2019 whereas the company has posted an operating loss from Pioneers segment in H1 FY2019 versus an operating profit in H1 FY2018.

Financial Highlights – H1 Financial Year 2019 ($, million)

(Source: Interim Report, Company Website)
 
In the first half of the financial year 2019, the company’s physical volume of gold sold from hard rock mines increased by 12 per cent to 225.1 thousand oz  from 201.4 thousand oz in H1 FY2018, revenue from hard rock mines during the period was reported at $290 million, which was 12 per cent higher than the $259.3 million achieved in the first half of financial year 2018. This resulted in a 13 per cent increase in group revenue from $270.5 million achieved in H1 FY 2018 to $305.3 million in the current period. Compared to 37,385 oz in H1 FY2018 at an average price of $16/oz, hard rock mines sold 42,976 oz of silver in H1 FY2019 at an average price of $15/oz, both representing an upside. With the achievement of higher recoveries at Malomir and Albyn and higher grades of ore processed along with the effect of Rouble depreciation, Total Cash Costs for hard rock mines declined from $899/oz in H1 FY2018 to $841/oz in H1 FY2019. This reflected in the underlying EBITDA from hard rock mines, which was $100.1 million compared to $77.6 million in H1 FY2018, while group’s underlying EBITDA surged by 37.23 per cent to $83.3 million. Reflecting the lower impairment on non-refractory ore stockpile and decrease in Total Cash Costs, All-in Sustaining Costs declined by 10 per cent from $1,138/oz in H1 FY2018 to $1,029/oz in H1 FY2019. Moreover, All-in Costs declined to $1,091/oz in H1 FY2019 from $1,353/oz in H1 FY2018. The company’s operating profit stood at $2.5 million in H1 FY2019 versus an operating loss of $23.7 million in H1 FY2018. The company’s PBT (Profit before tax) stood at $16.8 million in H1 FY2019 versus an LBT (loss before tax) of $33.1 million in H1 FY2018. In H1 FY2019, Profit for the period stood at $13.5 million as against a loss for the period of $39.9 million in H1 FY2018. In H1 FY2019, Profit for the period (attributable to shareholders) stood at $14.3 million as against a loss for the period (attributable to shareholders) of $40.3 million in H1 FY2018. The company’s basic earnings per share stood at NIL in H1 FY2019 versus a basic loss per share of $0.01 in H1 FY2018.
Key Performance Indicators


Mineral Resources (Moz)

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) 

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 0.6 Moz at 8.21 Moz. 


Total Attributable Gold Production (koz)

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
 
 
 
The reported gross margin in FY2018 declined by 2.5 per cent to 66.5 per cent against 69 per cent reported last year for the same period. The reported EBITDA margin of 27.1 per cent for the FY2018 stood higher than the industry median of 16.5 per cent. The reported operating margin in FY2018 increased by 7.6 per cent to 24.7 per cent from 17.1 per cent reported last year for the same period. Net margin reported was 5.2 per cent for the financial year 2018, reflecting a decrease of 1.1 per cent when comparedwith last year data for the same period. Return on equity for the Financial year 2018 stood at 4.3 per cent, which was lower than the industry median of 9.3 per cent. On the liquidity front, Petropavlovsk Plc’s current ratio was lower than the industry median of 1.80, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Petropavlovsk Plc’s was 1.01x, which was higher as compared to the industry median of 0.40x, reflecting that the company is more leveraged as compared to its peers.  
 
Share Price Performance


Daily Chart as at September-18-19, before the market close (Source: Thomson Reuters)

On September 18, 2019, at the time of writing (before the market close, at 12:45 PM GMT), Petropavlovsk Plc shares were trading at GBX 9.79, down by 1.11 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 10.46/GBX 5.15. Stock’s average traded volume for 5 days was 3,902,125.60; 30 days – 3,100,822.70 and 90 days – 3,639,222.54. The average traded volume for 5 days was up by 25.84 per cent as compared to 30 days average traded volume. The company’s stock beta was 0.25, reflecting significantly lower volatility as compared to the benchmark index. The outstanding market capitalisation was around £327.71 million.

Valuation Methodology
Method 1: Enterprise Value to Sales (NTM)
 

To compare Petropavlovsk Plcwithits peers, EV/Sales multiple has been used. The peers are Trans-Siberian Gold Plc(NTM EV/Sales was 2.22), Altyn Plc(NTM EV/Sales was 1.75), Petra Diamonds Ltd(NTM EV/Sales was 1.43), Caledonia Mining Corporation Plc(NTM EV/Sales was 1.34) and Hummingbird Resources Plc(NTM EV/Sales was 1.26). The average of EV/Sales (NTM) of the company’s peers was 1.60x (approx.)

Method 2: Price to Cash Flow Approach (NTM)
 


To compare PetropavlovskPlc withits peers, Price/Cash Flow multiple has been used. The peers are Shanta Gold Ltd(NTM Price/Cash Flow was 2.05), Highland Gold Mining Ltd(NTM Price/Cash Flow was 6.26), Ariana Resources Plc(NTM Price/Cash Flow was 5.93), Pan African Resources Plc(NTM Price/Cash Flow was 4.31) and Petra Diamond Ltd(NTM Price/Cash Flow was 3.77). The Median of Price/Cash Flow (NTM) of the company’s peers was 4.31x (approx.)

Growth and Risk Assessments

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. 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.

Conclusion

The company had shown decent financial performance with both Top-line and Bottom-line performance increased for the first half of the financial year 2019. The company had been able to reduce its costs which resulted in an improved operational and financial performance for the period.

The POX Hub allows Petropavlovsk to consider processing third party concentrate from anywhere in Russia, addition to processing its own refractory Resources and enabling the group to process up to 500Ktpa of refractory concentrate annually.

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.

An appreciation of the Russian Rouble against the US Dollar can result in an increase in the costs as high costs are incurred in or influenced by the local currencies, while the company reports its results in US Dollars.

Over the course of 4 years (FY14 - FY18), the company’s operating income surged from $51.70 million in FY14 to £123.40 million in FY18. Compound annual growth rate (CAGR) stood at 24.30 per cent.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 9.79 (as on 18^th September 2019) with high single-digit upside potential based on 1.60x NTM Enterprise Value/Sales (approx.) on FY19E sales (approx.) and 4.31x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.80262 GBP.

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