The Petropavlovsk (LSE: POG) share price fell by more than 20% in early trading on Thursday after the Russian gold miner warned it might be forced to sell its mines “as soon as practically possible”.
Petropavlovsk’s board says it’s “not currently clear” whether such a sale would generate any return for shareholders. In finance-speak, that’s a serious warning that the shares could go to zero.
A Catch-22 situation
Western sanctions have been designed to stop trade between Russia and the outside world. This is causing serious problems for Petropavlovsk, which is based in the West but makes all of its money in Russia.
One big problem is that Russian bank Gazprombank (GPB) is on the UK and EU sanctions list. POG has nearly $300m of loan facilities with Gazprombank, but it’s unable to service these debts. The gold miner says it has not paid $10.6m which was due to GPB in March.
It gets worse. As part of its loan agreement, Petropavlovsk is contracted to sell all of its gold to GPB. This is also illegal under the sanctions, so the company isn’t able to sell product at the moment.
Petropavlovsk could sell its gold to the Russian Central Bank instead, if GPB agreed. But it still couldn’t make payments to GPB without breaching Western sanctions.
The final straw?
POG doesn’t just owe money in Russia. The company still owes more than $300m to Western investors on a $500m bond issued in 2016. This debt needs to be repaid or refinanced by November. Management says this is likely to be “very challenging”.
There’s one more complication too. According to Petropavlovsk, Russia is considering plans that would make it illegal for Russian companies to refuse to deal with sanctioned businesses. In other words, Petropavlovsk’s Russian mines might be forced to start paying GPB, or face criminal proceedings.
Unfortunately, this would mean that the UK parent company was breaching Western sanctions and could be prosecuted here.
Why the POG share price could hit zero
It looks to me as though Petropavlovsk is likely to default on its debt repayments both in Russia and with Western lenders.
I think the most likely result is that Petropavlovsk’s mines will be sold to a Russian buyer. They would then be able to operate normally within Russia, selling gold to Gazprombank and making loan repayments.
Western lenders might then struggle to get their cash back from such a sale, but they might find a way eventually.
In my view, the most likely losers are UK shareholders. Debt repayments always come before equity. In a distressed sale like this, I don’t think there’s likely to be any cash left for shareholders. That could see POG shares go to zero.
Of course, I might be wrong. At 3p, the Petropavlovsk share price is around 80% below the stock’s book value of 13p per share. If Petropavlovsk can find a solution that will allow the UK holding company to continue owning its Russian assets, the stock might be a bargain.
It’s possible, but I think it’s very unlikely. Buying POG shares today is a gamble, not an investment, in my view. For this reason, I’ll be staying away.
