Petropavlovsk PLC

Petropavlovsk PLC (LON: POG) is a FTSE 250 listed entity engaged in mining precious and non-precious metals.

Investment Rationale – SPECULATIVE BUY at GBX 18.60

• Gold Prices: As Covid-19 cases are resurging globally, investors are turning to the safe-haven asset, and therefore, the Gold was trading above the $1,800 level.
• Guidance: POG reaffirmed its full-year gold production guidance of 430 - 470koz, supported by the production from the new Pioneer flotation plant and increased 3rd-party concentrate.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, Price/Earnings, EV/EBITDA, and Price/Book multiples of the Petropavlovsk PLC are currently lower as compared to the median of the Basic Materials industry.
• Positive Technical Stance: From a technical standpoint, 14-day RSI (~32.57) is around the oversold territory, while the stock price is trading close to the lower standard deviation of the Bollinger Bands.

Recent News

• Disposal: On 3 December 2021, POG completed the disposal of its 31.1% stake in IRC Limited for a consideration of US$10 million, which has enhanced the Company’s liquidity.

Risk Assessments

• Gold Price Volatility: The interest rate hikes, and rising US Treasury Yield can cap the gains of gold prices.
• Macroeconomic Uncertainties: Weak industrial data, global shortage of semiconductors, supply constraints, tightening of monetary policy can hamper the business prospects.

Q3 2021 Production and Sales Report (for the quarter ending 30 September 2021, as on 25 October 2021)

 (Source: Company Website)

• Production: During Q3 FY21, production reduced by 2% year-on-year, due to lower gold production from 3rd party concentrates.
• Sales: The Gold sales totalled 120.1 koz (kilo-ounce) in Q3 FY21 (Q3 FY20: 121.1koz).
• Liquidity: As on 30 September 2021, POG reported US$34.5 million of cash and debt principal outstanding of US$592 million.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

Petropavlovsk is a major integrated Russian gold producer that has improved margins and expected to trade strongly in Q4 FY21. POG has enhanced operational governance and shall capitalize on the POX hub to create sustainable value for its shareholders. It has reaffirmed its FY21 gold production and total costs guidance. The stock made a 52-week high and low of GBX 34.45 and GBX 17.76, respectively.

Based on the reiterated production guidance, robust cash position, no material Covid-19 outbreak at sides, supported by the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Petropavlovsk PLC at the current market price of GBX 18.60 (as on 4 January 2022, at 8:15 AM GMT), with lower double-digit upside potential based on 14.83x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Hochschild Mining PLC

Hochschild Mining PLC (LON: HOC) is a FTSE 250 index quoted Mining Company, which focuses on gold and silver deposits.

Upcoming Event: On 19 January 2022, HOC expects to release production results for Q4 FY21.

Rationale for Valuation – SPECULATIVE BUY at GBX 129.60

• Acquisition: On 30 November 2021, HOC agreed to acquire the outstanding stake in Amarillo at a price of C$0.40 per share in cash, which shall enhance the Company’s portfolio.
• Solid Fundamentals: HOC also displayed a favorable turnaround in profitability during H1 FY21. Moreover, the Company has substantial cash reserves to pursue value-accretive acquisition opportunities.
• Positive Technical Stance: From a technical standpoint, 14-day RSI (~44.44) is around the oversold territory, while the stock price is trading close to the lower standard deviation of the Bollinger Bands.
• Undervalued Multiples: On a forward 12-month basis, valuation metrics – EV/Sales, EV/EBITDA, Price/Cash Flow, and Price/Book are quite undervalued against the Basic Materials industry.

Key Risks

• Gold Price Volatility: The sluggishness in gold prices due to US dollar strengthening and uncertain demand outlook can impact the Company’s financial condition.
• Surge in UK Inflation: The UK inflation reached a 10-years high as it surged by around 4.2% for the 12 months ended October 2021. It may cause a sooner-than-expected interest hike.

Recent Developments 

Clarification from Peruvian Government: HOC unveiled based on its discussion with senior members of the Cabinet and representatives from the mining industry that, Inmaculada and Pallancata mines would continue to operate without uncertainty. 

Q3 FY21 Production Highlights (for the three months ended 30 September 2021, as on 26 October 2021)

 (Source: Company Results)

• Strongest Quarter: The Company had managed to deliver the strongest quarterly performance during Q3 FY21.
• Robust Guidance: Moreover, HOC remained-on track to meet annual FY21 production ranging from 360,000 to 372,000 gold equivalent ounces, equivalent to 31-32 million silver equivalent ounces.
• Decent Net Cash: The Company had net cash of around USD 64 million as of 30 September 2021.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion 

The top-line revenue had demonstrated solid growth, while the net cash position witnessed a tremendous improvement during H1 FY21. On the production front, the gold production witnessed a year-on-year rise of around 49%, and the silver production had shown a year-on-year increase of about 21% during Q3 FY21. Furthermore, HOC has a considerable brownfield programme scheduled for FY21 and attractive optionality in Greenfield to generate substantial shareholder return. The stock made a 52-week High and Low of GBX 274.20 and GBX 68.25, respectively. 

Considering the resilient financial performance, operational recovery, healthy balance sheet, reiterated guidance, and support from the valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation on Hochschild Mining PLC at the current market price of GBX 129.60 (as on 4 January 2022, at 9:20 AM GMT), with lower double-digit upside potential based on 11.87x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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