Petropavlovsk PLC (LON: POG) – Boosted up the Gold production to remain intact with FY20 guidance

Petropavlovsk PLC (LON: POG) is a FTSE 250 listed Company, which is engaged in the mining of precious and non-precious metals. It is a leading vertically integrated Russian Gold Miner, which has a premium listing on the Main Market of the London Stock Exchange (LSE). It has been operating continuously in the Far East of Russia for over 25 years, from where it has produced over 7.8 million ounces (Moz) of Gold to date. It has a robust track record of mine development, expansion, and asset optimisation. POG has three active Gold mines: Albyn, Pioneer, and Malomir. The Gold licenses cover an area of more than 3,200 square kilometres (Km2) in Russia. The mines are a mix of the underground and open-pit, with approximately 15 million tonnes per annum (Mtpa) ore processing capacity and 500 kilotonnes per annum (Ktpa) potential of the Pressure Oxidation (POX) Hub. The key area of focus is the Amur region, where it has been operating since 1994. 


(Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

The Gold prices broke the London Bullion Market Association’s (LBMA) all-time record at US$2,067/oz on 6 August 2020. However, the Russian President Vladimir Putin announced on Tuesday (11 August 2020) that Russia had become the first country to register a Covid-19 vaccine. Gold prices fell sharply last Tuesday and posted steepest daily dollar plunge in over seven years as US Treasury yield and global stocks rose on optimism over signs of a slowdown in the new Covid-19 cases and prospects for a vaccine.

Meanwhile, as per the report by Fitch Solutions Country Risk & Industry Research, Russia is expected to surpass China in becoming the world’s top Gold producer by 2029, with a projected annual growth rate of ~3.7% year-on-year between 2020 and 2029. It is supported by the fact that one of the largest Gold producing mine, Polyus Gold’s Olympiada mine in the Krasnoyarsk region of eastern Siberia, have remained virus-free and operational so far.

According to the World Gold Council (WGC), the onset of the Covid-19 pandemic has made Gold’s relevance as a hedging tool even more prominent, which accelerated the price performance. The Gold prices increased by ~17% during the H1 2020 and soared by an additional ~10% in July. Meanwhile, the Gold-backed ETFs and similar products (Gold ETFs) reported the eighth consecutive month of positive flows. The Covid-19 pandemic may bring structural shifts to asset allocation, and there are strong fundamentals to support the Gold investment in the longer term. The Gold price has significantly outperformed all major assets, which is driven by persistently low-interest rates, market volatility and positive price momentum. According to the global demand trends report from WGC, the Gold demand in H1 2020 declined by 6% against last year comparatives. The jewellery demand plunged 46% (year on year) in H1 2020 as consumers were deterred by the high price and with a reduction in the disposable income. Similarly, the bar and coin investment declined sharply in Q2 2020 due to Covid-19 led lockdown. However, the increased investment by Central banks and robust inflows into Gold ETFs amid the pandemic zoomed the Gold prices. Overall, the fundamentals for Gold bull market is intact. However, as Gold has moved sharply higher in the past month, the price may experience some consolidation in the near term.

The chart below shows the performance of LBMA Gold Price over the past 3 years, which closed at US$1944.75/oz on 14 August 2020, reflecting around 50 percent growth over the last 3 years.


 (Source: World Gold Council)

Growth Prospects and Risk Assessment

Petropavlovsk PLC is one of the largest Gold Mining Companies in Russia, in terms of production and reserves. Moreover, it is one of the largest contributors to the sustainable development of the local economy. It has recently entered a new era of growth with the start-up of flagship asset, the Pressure Oxidation (POX) Hub at Pokrovskiy, which allows the processing of the abundant refractory reserves and resources. Moreover, it has an exploitable long-life mineral resource base of 20.5 Moz with the potential of additional expansion (2,600km2 licence area). During Covid-19 pandemic in the H1 FY20, the operations have shown resilience and registered a remarkable level of Gold production and sales, which generated substantial cash to reduce the net debt level. Moreover, the construction of a new flotation facility at Pioneer remained on schedule, and the plant is expected to be fully operational by Q4 FY20, which would double the Company's refractory ore processing capacity from 3.6 Mtpa to 7.2 Mtpa. Similarly, the ongoing exploration at the Elginskoye license area is expected to contribute around 300 koz to the project resources. 


(Source: Presentation, Company Website)

However, the Company is also exposed to various risk and uncertainties. The Global Covid-19 pandemic could result in the suspension of operations and increase the labour absenteeism, and thus, the operation costs. The operation can also be impacted by the extreme climate conditions in the Russian Far East region. Moreover, the POX HUB is a complex metallurgical facility, and inflationary conditions can have a detrimental impact on the operating and financial condition. Furthermore, the financial performance is highly dependent on the Gold price, and the Gold market is cyclical and sensitive to the economic changes and numerous factors, which are beyond the Company’s control. Similarly, fluctuations in exchange rates (Russian Rouble against the US Dollar) can impact the collected revenues and operating costs.

Segment Analysis

The Company aligns the reportable segments with operating locations or mines. The mines included Pioneer, Malomir and Albyn in FY19, which were responsible for Gold and silver production as well as field exploration and mine development. The Company ceased to report Pokrovskiy as a reporting segment since 2018, the site of Pokrovskiy transformed into a key component of the POX Hub. The facilities of POX Hub are allocated between Pioneer and Malomir reportable segments, based on expected use by each segment.


(Source: Presentation, Company Website)

Synopsis of Recent Developments

17 August 2020: The Board of POG has appointed Maksim Meshcheriakov as Interim Chief Executive Officer with immediate effect. Also, James W. Cameron Jr, who was an existing Independent Non-Executive Director, has been appointed as Chairman.

5 August 2020: POG agreed to issue 225,185,183 new ordinary shares to trading on the LSE, the admission of these shares commenced on 6 August 2020. Following the admission, the total issued share capital increased to 3,899,492,481 ordinary shares.

25 June 2020: The Company’s shares were admitted to Moscow Exchange (“MoEx”) for a secondary listing. It will help to broaden the shareholder’s base and result in improved marketability and additional liquidity support.

24 June 2020: The S&P Global Ratings had upgraded the long-term issuer credit and issue ratings on POG’s senior unsecured bonds to ‘B’ from ‘B-’ with a Stable Outlook.

Measuring Non-Financial Key Performance Indicators

In FY19, the Company demonstrated growth against all operational KPIs. The Company continues to develop a high-quality refractory and non-refractory resource pipeline to expand the Gold production. Meanwhile, it was able to curtail the All-in sustaining cash costs (AISC) with improvement in underlying EBITDA.


(Source: Annual Report, Company Website)

Top Shareholders Statistics

Trading & Production Update for the Period from 1 January 2020 to 30 June 2020 (H1 2020)

As on 23 July 2020, the Company released an update for H1 FY20 and recorded a 42% increase in total Gold production during the period to 320.6 kilo ounces (koz) (H1 FY19: 225.0 koz). It was driven by the processing of own and third-party refractory Gold concentrates at the POX Hub. Subsequently, there was a whopping 39% increase in total Gold sales as well to 312.4 koz in H1 FY20 (H1 FY19: 225.0 koz). The average realised Gold prices were US$1,640/oz in H1 FY20, as compared to US$1,286/oz in H1 FY19.


(Source: Company Website)

Meanwhile, it has also reduced the net debt significantly to around US$538.0 million as of 30 June 2020, which was US$561.3 million at the end of FY19. It was primarily resulted by an increase in cash. During the period, the Company had a positive cash effect of US$0.9 million from FX hedges, while 10.5 koz of zero cost collars expired with zero cash settlement. During the H1 FY20, there was no fatal accident amongst employees or the contractors. Further, there was 13% improvement in the Lost Time Injury Frequency Rates (LTIFR), while energy consumption was reduced by 13% during the period against H1 FY19. In response to Covid-19, it took swift and timely actions, due to which logistics and operations remained uninterrupted.

Financial Highlights (for the year ended 31 December 2019)

Operationally, the performance at mining operations was in line with the management expectations. Albyn mine had proven as the standout performer with around 13% increase in production against FY18, due to consistently high recoveries at the RIP plant coupled with the volume of higher-grade ore. The total production in FY19 soared almost 23% to 517.3 koz (including production from third-party concentrates).

Financially, the total revenue increased to US$741.6 million (FY18: US$499.8 million), representing a growth by 48% in FY19 vs FY18, due to higher Gold sales volumes and improved average realised Gold price. The total cash costs were 10% higher due to additional costs associated with the ramp-up of the POX Hub. However, there was a 5% decline in AISC to US$1,020/oz. The total cash costs were primarily affected by inflation of certain Rouble denominated costs required for POX Hub and Malomir flotation. Nevertheless, the underlying EBITDA reported a 45% increase in FY19 to US$264.8 million (FY18: US$182.7 million), due to an increase in physical ounces of Gold sold. Overall, profit for FY19 remained nearly flat at around $25.69 million against FY18 ($25.92 million) despite cost inflation and currency fluctuations.


(Source: Company Website)

Financial Ratios


(Source: Refinitiv, Thomson Reuters)

The Gross Margin and EBITDA margin for the financial year 2019 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. On the liquidity front, POG’s current ratio is at par with the industry median of 1.81. However, the Company has sufficient liquidity to meet the short-term obligations. On leverage front, the debt-equity ratio was 1.00x, which was higher as compared to the industry median of 0.41x, reflecting that the Company is more levered as compared to the industry. However, the Company has substantially reduced the debt in H1 FY20 to strengthen the balance sheet. With the ramp up of commissioned POX Hub, the Company shall yield increased cash flows to manage the high debt position.

Share Price Performance Analysis


Daily Chart as on 17 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 17 August 2020, at the time of writing (before the market close, at 8.40 AM GMT+1), Petropavlovsk PLC shares were trading at GBX 32.55, up by 3.17 percent against the previous day closing price. Stock 52 week High and Low were GBX 41.60 and GBX 9.09, respectively.

Bullish Technical Indicators

From the technical standpoint, the shares were trading well above the short-term support level of 50-day, and 100-day simple moving average prices, which reflects an upward trend in the stock. Moreover, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Petropavlovsk PLC Vs FTSE Mid 250 Index (1 Year)


(Source: Refinitiv, Thomson Reuters)

In the last one year, Petropavlovsk PLC share price has delivered 223.50% return as compared to the negative 7.47% return of FTSE Mid 250 index, which shows that the stock has significantly outperformed the index during the last one year.

Valuation Methodology



To compare Petropavlovsk PLC with peers, Price/Earnings multiple has been used. The peers are Kaz Minerals PLC (Price/NTM Earnings was 7.49x), AK Alrosa PAO (Price/NTM Earnings was 5.02x), Antofagasta PLC (Price/NTM Earnings was 27.00x), GMK Noril'skiy nikel' PAO (Price/NTM Earnings was 8.05) and Serabi Gold PLC (EV/NTM Earnings was 4.90). The Peers of Price/Earnings (NTM) of the Company’s peers was 10.49x (approx.).

Business Outlook

The Gold production outlook remains on track to meet the FY20 target of 620 koz to 720 koz (including third-party concentrate processing). Similarly, the Gold production target for FY20 from the Company's own ore remains on track to produce 430 koz to 460 koz. Adjacently, the POX Hub continues to demonstrate the ability to process multiple streams of complex ores simultaneously. Moreover, with the completion of Pioneer flotation plant in Q4 FY20, utilisation of the POX Hub will increase from the Company’s own concentrates. Subsequently, it will have a direct bearing on free cash flow generated by the Company. Overall, the Company has world-class asset with the incremental capacity to generate sustainable and significant shareholder value.


 (Source: Presentation, Company Website)

Meanwhile, the increasing wealth in the East and increasing adoption of Gold within the investment portfolio have substantially changed the perceptions of Gold. It can act as a genuine diversifier tool in an investment portfolio for long-term due to the attributes pertinent to scarcity, highly liquid and uncorrelated asset nature. Hence, Gold has been proven over time that beyond merely a safe-haven asset during the high-risk time, it can also be an asset to outperform and generate positive returns too. Such dynamic is likely to persist amidst high political and economic uncertainty, battered stock and bond markets, and historically low-interest rates scenario.

Overall, the Gold industry landscape is going through an unparalleled wave of change, which is arising from various aspects, such as demand patterns, regulatory changes, innovation, and the entrance of new participants. Moreover, the resurgence of coronavirus cases denting equity market sentiments with speculations regarding another round of lockdown, which would eventually attract investors towards the Gold, as a safe-haven investment. Currently, the Gold prices are trading close to their all-time highs, and any correction from hereon can have a negative impact on the Gold stocks in the near term. However, we believe that the fundamentals of the Gold bull market are still intact from a long-term perspective. The Gold futures price was trading at US$1,961.70/oz on 17 August 2020 (before the market close at 8.56 AM GMT+1), which was up by 0.61% against the previous day closing price. The Gold futures price recently touched 52-week high on 6 August 2020 at US$2,089.20/oz.

Over the past three years (FY16 - FY19), the company’s net income surged from $540.68 million in FY16 to $741.59 million in FY19. Compounded annual growth rate (CAGR) stood at 11.11 percent.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation on Petropavlovsk at the current price of GBX 31.20 (as on 17 August 2020, before the market close at 8.13 AM GMT+1), with lower-double digit upside potential based on 10.49x Price/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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