Peter Hambro’s troubled Russian gold mining firm, Petropavlovsk (LSE: POG), published its interim results today.
Naturally, the firm focused on promising headline figures, such as production growth (up 5%), and a modest reduction in net debt, which fell by 3% from $948m to $924m.
Despite this, Petropavlovsk’s share price has edged lower following the results, and I think I know why.
1. Cash flow crisis
During the first six months of this year, Petropavlovsk generated $136.9m of cash from its operations. Of this, $36.7m (27%) was spent on interest payments, while 14% went on income tax.
That left $80m, which was not even enough to cover the firm’s $121m of capital expenditure, let alone reduce Petropavlovsk’s net debt, which was largely managed by a $106m repayment from the firm’s cash balance.
If we discount the firm’s $57.8m of expenditure on discontinued operations, free cash flow was $16m — mere pocket change compared to the firm’s $924m net debt.
2. Falling gold sale price
Petropavlovsk’s average gold sale price was $1,386/oz. during the first half, thanks to forward sale contracts, which added an average of $93 to every ounce sold.
Unfortunately, these contracts are rapidly expiring, and pushing down the firm’s average gold sales price.
As of today, Petropavlovsk has forward contracts to sell 163,134oz of gold at an average price of $1,314/oz. — just $25 above the current gold spot price. Unless the price of gold rises sharply, these contracts are likely to have been used by the end of this year, leaving the firm’s gold sales price at a new low.
3. $300m due date
Petropavlovsk has $300m of debt due for repayment in the next twelve months, and has cut capital expenditure by 58% this year, to free up additional cash to service its debt mountain.
Refinancing is under way, but the reality is that the banks and bondholders have total control over Petropavlovsk, as they could pull the plug on the firm at any moment.
What this means for shareholders is that every cent of disposable cash will be used to service Petropavlovsk’s debts, for the foreseeable future. There will be no money for dividends, buybacks or major new projects.
In effect, Petropavlovsk’s 36p share price is an option on the firm’s survival: if I’m wrong, the shares should be worth a lot more, but if I’m right, they could fall to zero.