Business Overview
Petropavlovsk Plc is a London-registered, Russian gold mining company with operations in the Far East of Russia, and in terms of production, reserves and resources, it is one of the major gold mining companies in Russia.

Recent News
On 23^rd January 2020, the company announced its Q4 and FY2019 sales and production report.

Q4 and FY2019 Sales and Production Statement (Ended on 31^st December 2019)

(Source: Interim Report, Company Website)

In the financial year 2019, the company’s gold sales increased by 39 per cent to 514,000 oz as compared to 369,800 oz in the fiscal year 2018 due to the processing of refractory concentrates in the first year of operations at the POX Hub. 471,600 oz of the total FY 2019 sales amount represented gold sold from the company's own mined production, an increase of 28 per cent on FY 2018 and in line with the company's guidance of 450 - 500koz. The average realised gold price was US$1,395/oz in Q4 FY2019 against US$1,244/oz in Q4 FY2018 and US$1,346/oz for the fiscal year 2019 versus US$1,263/oz in fiscal year 2018. In Q4 FY2019, the company’s gold sales increased to 162,600 oz as compared to 85,400 oz in Q4 FY2018.

Share Price Performance

Daily Chart as on 31^stJanuary 2020, before the market closed (Source: Thomson Reuters)

On January 31^st, 2020, Petropavlovsk Plc shares were trading at GBX 18.18 at the time of writing before the market close (at 1:05 PM GMT), down by 1.8 per cent against the last day closing price. Stock's 52 weeks High and Low are GBX 19.06/GBX 7.58. The stock price has given126.40 per cent returns during the previous year. In the last one month, it has given42.70 per cent returns. And now, some correction in stock price is expected.

Valuation Methodology

*Peers: Pan African Resources Plc, Trans-Siberian Gold Plc, Atalaya Mining Plc, Serabi Gold Plc and Kaz Minerals Plc

Conclusion
The company has a high level of fixed costs at the POX plant which could affect the growth of the business. For reducing the cost effect, the Group must increase its production to a new level so that it could counter the effect of high fixed cost. However, that looks little tough in the current scenario in coming years. The company faces some health and safety issues which would not be good for its reputation. There are some principal risks and uncertainties which could impact the overall business of the company. Operational risks arise due to weather conditions, failure in delivery of equipment, etc. could affect the operations of the company. Financial risks such as lack of funding and liquidity could affect the operations of the Group. Fluctuations in gold price and foreign exchange rate could affect the profitability and revenue of the company. Health, safety and environment risks are associated with the company’s business and failure in these could hamper its operations and could cause government intervention which could damage its reputation. The Group requires various licences and permits in order to operate, any violation in these could affect the overall business of the Petropavlovsk.

The company hasoverstretched valuations as its EV/Sales multiple is considerably higher than the industry EV/Sales multiple.

Based on the headwinds and the valuation methodology as done above, we have given a “Sell” recommendation at the current price of GBX 18.48 (as on 31st January 2020 before the market close at 10:00 AM GMT), based on 5.54x NTM P/E multiple (approx.) on FY20E earning per share (approx.).
 
*All forecasted figures and information have been taken from Thomson Reuters.
*Currency exchange rate taken for 1 US Dollar = 0.76 GBP.

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