Petropavlovsk Battles Gold Volatility

August 30, 2013 at 08:51


Petropavlovsk lost a fifth of its stock market value in London after the Russia-focused gold miner suspended its dividend and revealed a $742m first-half loss.

The miner, chaired by Peter Hambro, became the latest gold producer to take a substantial asset writedown after the price of the precious metal fell sharply in the first half of the year.

Petropavlovsk is wrestling with the challenge of reducing more than $1.1bn of net debt, amid a fall this year in the price of gold and production difficulties including floods. The miner revealed a sharp rise in production costs, although it said these would sink in the second half of the year.

“What we have to do is retrench,” said Mr Hambro, saying cutting debt was his “highest priority”.

The first-half loss included almost $600m of losses related to impairments and writedowns that stem mainly from a lower gold price.

Petropavlovsk highlighted the benefits from its hedging as it said it was working to cut costs and debt. The group has been the most prominent gold miner in hedging its output, which Mr Hambro said had brought in $25m in extra revenues above the prevailing market price.

“So long as uncertainty and high volatility remain we may continue to use this sales method,” he said.

Gold has recovered from lows of below $1,200 a troy ounce to above $1,400. Petropavlovsk said it struck deals since July 1 to sell some gold at $1,313 this year and $1,412 next year.
Revenues rose 9 per cent to $597m while earnings before interest, tax, depreciation and amortisation halved to $102m.

Net debt was $1.15bn at the end of June, having peaked in March, and should fall to below $1bn by the end of the year, Mr Hambro said. “I am sure that our target of reducing net debt to below $1bn can be achieved by a satisfactory margin. In the meantime we have sufficient cash and undrawn facilities with which to run the business.”

Part of the debt is a $380m convertible bond due in 2015, for which Mr Hambro said “extremely good progress” was being made in refinancing.

Analysts at Liberum said: “The biggest concern for the company remains its net debt . . . However, the absolute level of net debt is going in the right direction along with the rising gold price and falling rouble.”

Capital expenditure in the period of $149m was 43 per cent lower year-on-year and after deferring some spending the total for 2013 would be about $220m, Petropavlovsk said.
Analysts at Citi said Petropavlovsk had “been doing a reasonable job” of responding to lower gold prices.

“Its hedges have given it ‘breathing space’ but it is a gold group that we believe will remain structurally challenged at gold prices below $1,300/oz, and we expect gold to return to levels below $1,300/oz once the Syrian effect on the price has worn off,” Citi said.

JPMorgan said: “We do not consider newly announced hedging to be sufficiently attractive to stem balance sheet fears, nor do we consider [second half] cash cost falls sustainable. At or around current gold prices we continue to forecast a covenant breach and funding gap for [the convertible bond].”