Petropavlovsk PLC

Petropavlovsk PLC (LON: POG) is an FTSE 250 listed Company, which is focused on the mining of precious and non-precious metals.

Investment Rationale – HOLD at GBX 24.13

• Increase in Own Mined Gold Production: POG had achieved higher production levels across all three mines as its own mined gold production rose by around 17% to 101.6 koz (“kilo ounces”) during Q3 FY21, while it was 86.5 koz for Q3 FY20.
• Decent Industry Outlook: The long-term prospect of gold price remained bright as it can be used as a hedging instrument against inflation.
• Robust Profitability: On the profitability front, the operating margin and net margin remained significantly ahead of the respective industry median of 6.3% and 5.0% during H1 FY21.
• Technical Indicator: From a technical standpoint, the 20-days exponential moving average of GBX 23.52 indicates an upside potential in the stock price.

Risk Assessments

• Macroeconomic Uncertainties: Rising bond yield and US Dollar can dampen the price of gold. Moreover, the slowdown in US GDP during Q3 FY21 could adversely impact the gold price.
• The Decline in 3^rd Party Concentrate: The 3rd-party concentrate gold production had shown around 64% decline during Q3 FY21.
• Failure to Discover Substantial Reserves: The failure in discovering substantial reserves could adversely affect the POG’s future performance as exploration and development are capital-intensive activities.
  

Q3 FY21 Production & Sales Highlights (for the three months ended 30 September 2021, as of 25 October 2021)

 (Source: LSE Website)

• Marginal Decline in Gold Production: The total gold production displayed a marginal decline of around 2% during Q3 FY21 when compared with Q3 FY20 levels.
• Increased Throughput at POX Hub: The POX (“Pokrovskiy Pressure Oxidation”) Hub processed 88% own-mined gold concentrates during Q3 FY21 compared to an average of 69% in the first two quarters of the year.
• Decent Cash Balance: POG’s cash balance stood at USD 34.50 million as of 30 September 2021, while it was USD 36.5 million as of 30 June 2021.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

Conclusion

The Company had reiterated FY21 gold production guidance ranging from 430 koz to 470 koz, driven by improved production levels at Malomir and the launch of the Pioneer flotation plant. Moreover, the Company had also witnessed a positive turnaround in bottom-line profitability during H1 FY21. However, the gold price may remain under pressure due to the slowdown in US GDP growth during Q3 FY21 and rising expectations of an interest rate hike. Overall, the Company has a world-class asset to generate sustainable returns for the shareholders. The stock made a 52 week High and Low of GBX 34.45 and GBX 17.76, respectively.

Based on the promising gold price environment, robust profitability, and support from the valuation conducted above, we have given a “HOLD” recommendation on Petropavlovsk PLC at the current market price of GBX 24.13 (as on 29 October 2021 at 08:15 AM GMT+1).

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

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

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