Petropavlovsk PLC

Petropavlovsk PLC (LON: POG) is a FTSE 250 listed company engaged in mining precious and non-precious metals. It has been operating continuously in the Far East of Russia for over 25 years.

Investment Rationale – SPECULATIVE BUY at GBX 22.84

• On 1 June 2021, POG announced the launch of the Pioneer flotation plant, which shall provide the full advantage of substantial refractory ore reserves for the POX (Pressure Oxidation) Hub. The plant is expected to produce around 60 kilo tonnes of concentrate in FY21.
• The average realized gold prices were 14% higher in Q1 FY21 versus Q1 FY20.
• POG has a long-life mineral resource base with high expansion potential. Moreover, it is an established explorer, developer, and miner of Gold, with distinctive technological expertise and R&D capabilities over peers.
• As per valuation metrics, Price/Earnings, EV/EBITDA, and Price/Book multiples of the Petropavlovsk PLC are currently lower as compared to the corresponding multiples of the Basic Materials industry.
• From a technical standpoint, 14-day RSI (28.13) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.

Risk Assessments

• Regarding the risk factors, the Company’s performance is subject to various kinds of risk, such as inflation cost associated with the ramping up of POX Hub, operational risk arising from the potential supply chain disruption due to Covid-19, and lack of funding to pursue the growth opportunities.
• Moreover, it is also exposed to financial risk with fluctuations in the gold price and exchange rates.

Recent News

Tender Offer: On 13 July 2021, POG launched 8.125% Guaranteed Notes due 2022 for an aggregate principal amount of up to US$200 million.

Production Update (for the period from 1 January 2021 to 31 March 2021, as on 20 April 2021)

(Source: Company Website)

• In Q1 FY21, POG reported a decrease of 49% in total gold production, compared to Q1 FY20.
• Similarly, lower volumes of concentrate decreased the third-party concentrate gold production.
• During Q1 FY21, gold sales were 95.6 koz (kilo-ounces) (Q1 FY20: 162.5 koz).
• In FY21, the Company expects gold production to be in the range of 430 – 470 koz.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

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

Conclusion

Petropavlovsk has world-class asset with the scalable capacity to deliver incremental value. During FY20, the Company reported a significant growth in revenues with a 30% increase in average realised gold prices. During Q1 FY21, the Group’s supply chain remained operational and there was no material disruption through Covid-19 outbreaks. Overall, the Company has enhanced operational governance and shall capitalize on the POX hub to create sustainable value for its shareholders. The stock made a 52-week high and low of GBX 41.60 and GBX 22.65, respectively.

Based on the solid financial performance, production guidance, reduce reliance on lower-margin third-party material, supported by the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Petropavlovsk PLC at the closing market price of GBX 22.84 (as on 13 July 2021), with lower double-digit upside potential based on 20.16x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Pan African Resources PLC

Pan African Resources PLC (LON: PAF) is a FTSE AIM UK 50 Index listed producer of Gold, which owns and operates projects in South Africa.

On 15 September 2021, PAF expects to publish its FY21 results for the year ended 30 June 2021.

Investment Rationale – SPECULATIVE BUY at GBX 16.88

• The Group’s net senior debt has declined by 45.5% to US$33.8 million, as on 30 June 2020. It will reduce the finance cost for better profitability margins.
• The Company’s has improved its safety performance in FY21, while generating substantial cash flows to manage its capital requirements.
• In FY22, PAF expects to sustain its production of around 195,000 oz.
• From a technical standpoint, the stock price is nearly at the lower standard deviation of the Bolling Bands, while the RSI (39.69) confirms the oversold position.
• As per valuation metrics, Price/Earnings, EV/Sales, EV/EBITDA, and Price/Cash Flow multiples of the PAF are currently lower as compared to the corresponding multiples of the Basic Materials industry.

Key Risks

• PAF is exposed to operational risks pertinent to the Covid-19 pandemic, which can impact its estimation of mineralisation, resources, and reserves.
• The volatility is gold prices and inflationary market scenario can also impact the Company’s financial condition.
• The resurgence of Covid-19 cases can halt operations, and thus, it can affect the production guidance.

Recent News

Renewal of Rights: PAF’s Barberton Mining Rights has been renewed by the South African Department of Mineral Resources and Energy, for a period of 30 years.

Operational Highlights (for the year ended 30 June 2021, as on 13 July 2021)

(Source: Company Website)

• PAF delivered a solid operational performance in FY21, following a 12.3% surge in gold production to 201,608 oz (ounce).
• The gold production was even 3.4% higher than the previously provided revised guidance.
• The community project also shown excellent progress, as Cathyville Clinic is now fully operational.

One Year Share Price Chart

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

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

Conclusion

PAF has delivered an encouraging operational result and surpassed its revised guidance despite the continuing challenges presented by the Covid-19. The Group sustained industry leading safety performance despite the increased number of crews. It has reduced leverage on its balance sheet and current debt level are manageable. The stock is trading close to its 52-week low with favourable technical stance; therefore, it is giving an attractive opportunity before the financial results due in September 2021. The stock made a 52-week High and Low of GBX 28.15 and GBX 15.21, respectively.

Based on the stronger financial position, upbeat production, operational excellence, with support from the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on Pan African Resources PLC at the closing price of GBX 16.88 (as on 13 July 2021), with lower double-digit upside potential based on 10.80x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

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

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

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

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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