Petropavlovsk PLC – Enhancement of production capacity to 9.0 Mtpa (million tonnes per annum) by Q1 FY22.

Petropavlovsk PLC (LON: POG) is an FTSE 250 listed Company, which is focused on the mining of precious and non-precious metals. It has operated continuously in the Far East of Russia since 1994 and produced over 8.2 million ounces (Moz) of Gold to date. Moreover, the Company has three primary operating mines - Pioneer, Malomir and Albyn. The Company is also listed on the Moscow Exchange.

(Source: Company Presentation)

Growth Prospects and Risk Assessment

POG had managed to show decent growth in FY20 gold production despite all three operating mines demonstrated a sharp decline. The growth was driven by the third party concentrate gold production, particularly from Pressure Oxidation (POX) Hub at Pokrovskiy. Moreover, POG had enabled its abundant refractory reserves and resources through the successful commissioning of POX Hub. Looking forward, POG would continue to maintain its position as one of the biggest players towards sustainable development of an economy.

However, there are certain risk and uncertainties to business growth like inflation cost associated with the ramping up of POX Hub, Covid-19 related supply chain disruption, liquidity risk and the unavailability of adequate working capital. POG is also exposed to a potential risk of delay in commissioning and development of projects arising from Covid-19 led restrictions. Moreover, the fluctuation in Gold price and exchange rates can adversely impact the Group’s profitability.

Industry Outlook Dynamics

Global gold ETFs had demonstrated a net inflow of 13.8 tonnes during January 2021. Moreover, it had shown substantial outflow during the last two months of November 2020 and December 2020 of approximately 148.80 tonnes. Meanwhile, the trading volume stood at US$186 billion per day during January 2021, higher than the 2020 average of US$183 billion per day. Overall, the commodity had shown robust performance during 2020. Gold remained one of the best performing commodities during 2020, driven by several factors such as high-risk appetite, low-interest rates, and positive price momentum during summer and late spring.

Overall, the Gold industry may witness recovery in the mine production during 2021 after demonstrating a decline during 2020. Furthermore, the resurgence of coronavirus cases had dented the investor sentiments regarding global equity markets, which would eventually attract investors towards the Gold, as a safe-haven investment. However, as the gold prices and uncertainty have an inverse correlation, there is a risk that lower uncertainty with lockdown easing might cause gold prices to consolidate, ranging from US$1,800 per ounce to US$2,000 per ounce.

The chart below shows the performance of Gold Future Prices over the past three years, which was trading at US$1,750.75 per ounce on 01 March 2021, depicting around 33.02% growth over the last three years.

 (Source: Refinitiv, chart created by Kalkine Group)

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Petropavlovsk Plc.

Recent Developments

On 29 January 2021: The Company stated that IRC Limited announced the fourth quarter trading update for the three months ended 31 December 2020. In this update, K&S production increased by 3.2% QoQ to 686,842 tonnes of iron ore concentrate, while its sales decreased by 16.5% QoQ to 544,403 tonnes of iron ore, mainly driven by railway logistic issues at the Suifenhe border crossing. Moreover, in FY20, K&S increased its production by 6.7% YoY and sales by 4.6% YoY. K&S production rate surged by 3% QoQ to 87% capacity in Q4 2020, while the current production rate was approximately 85% capacity. In K&S, the successful diversion of sales to Russian customers eased temporary logistic issues at the Sino-Russian border and to new Chinese customers through new seaborne routes. In Corporate & Industry, the platts 65% Fe index rose by 67% YoY in FY20 to USD 174 per tonne, while the russian rouble depreciated by around 16% in FY20. At the year-end, Corporate & Industry cash balance surged to USD 20.4 million, which was after payments of USD 8.6 million to Gazprombank (loan principal repayment) and interest and USD 5 million to Petropavlovsk (guarantee fee).

Q4 FY20 and FY20 Sales & Production Update (as on 26 January 2021)

(Source: Company Website)

• FY20 gold production increased by 6% YoY, with own mined gold production of 385.6koz and third-party concentrate gold production surged to 162.5koz. However, FY20 gold production was marginally below the guidance range, driven by lower than expected production from both third-party concentrate and own mined gold ore.
• FY20 gold sales increased to 546.5koz as compared with the previous year (FY19: 514.0koz), with an increase in average realised gold prices and zero gains or losses from hedging.
• On 31 December 2020, the unaudited cash was USD 35.4 million, with debt principal outstanding of USD 538 million and continues to settle the interest-bearing gold prepays of around USD 63.8 million.
• During the full-year, there was a reduction of 7% in LTIFR, while LTIFR, including contractors, was 1.23.
• The Company has reported zero environmental incidents in FY20, with no fatal accidents occurred.
• POG also became a constituent of the FTSE4Good Index Series in December 2020, with supply chains stay fully functional.
• It stated that the commissioning of the Pioneer flotation plant is expected to schedule from the second quarter of 2021 and it will double POG's capacity to process refractory gold (when Pioneer flotation plant operational).
• In the Malomir flotation plant, the construction of a third line is underway. Therefore, it will increase the Group total capacity to 9.0Mtpa.
• After receiving Conversion Notices, the Company has added new ordinary shares of around 644.4 millon.

Financial and Operation Highlights (for the period ended 30 June 2020 (H1 FY20), as on 30 October 2020)

(Source: Company Website)

• The Company delivered double-digit growth in the first half of 2020, with an increase in revenue of 71% year-on-year and underlying EBITDA of 96% year-on-year. This growth was driven by the higher production volumes and a higher average gold sales price.
• Led by the increase in gold production, the total gold sales surged by 39% year-on-year to 312.4koz (H1 FY19: 225.0koz).
• All-in Sustaining Costs (AISC) was up by 19% year-on-year, mainly due to higher TCC (total cash costs) as well as an increase in capitalised stripping expenditure at both Malomir and Pioneer.
• The Company witnessed a strong balance sheet, with a reduction in net debt of US$23.3 million, due to an increase in cash.
• POG continues to prioritise settlement of the interest-bearing gold prepays, which was approximately US$121 million as at 30 June 2020, a net decline of US$66.4 million over the period.
• During the period, the Company is benefitting from higher gold prices and increased production, with some excellent assets and substantial opportunities.

Financial Ratios

Share Price Performance Analysis

On 01 March 2021 (before the market close, at 9:40 AM GMT), Petropavlovsk’s shares were trading at GBX 26.65, down by 2.74% against the previous day closing price. Stock 52-week High was GBX 41.60 and Low of GBX 14.43, respectively.

From a technical standpoint, 14-day RSI (44.78) supports the upside potential.

In the last two years, Petropavlovsk PLC share price has delivered a tremendous return of around 250.50% as compared to around 7.79% return of FTSE 250 index and nearly 5.25% return of FTSE All-Share Industrial Metals index, which shows that the stock has outperformed the benchmark index and the benchmark sector.

Valuation Methodology: EV/EBITDA Approach (NTM) (Illustrative)

Business Outlook Scenario

POG had managed to deliver approximately 6% growth in gold production during 2020 despite facing several operational headwinds. Also, the Company had accelerated the progress on various development projects like Malomir expansion and Pioneer floatation plant, which would aim to enhance the production capabilities of POG. Moreover, the Pioneer floatation plant commissioning would be expected to complete during Q2 FY21. Subsequently, it would enhance the production capacity and reach almost double of already existing capacity. The production capacity will reach 7.2Mtpa once Pioneer floatation plant becomes operational. Furthermore, POG’s production capacity will reach 9.0 Mtpa by Q1 FY22 after the completion of Malomir flotation plant. POG is yet to announce FY21 capex and production outlook. Overall, the Company has the world-class asset with the incremental capacity to generate sustainable and significant shareholder value.

(Source: Company Presentation) 

Considering a notable 6% year-on-year increase in gold production, operational conditions improving towards normal levels, robust financial & liquidity position, solid progress on the development projects, sustainable business model, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Petropavlovsk Plc at the current price of GBX 26.65 (as on 1 March 2021, before the market close at 9:40 AM GMT), with lower-double digit upside potential based on 4.96x EV/NTM EBITDA (approx.) on FY21E EBITDA (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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