Gold Review: Petropavlovsk PLC Sees Violent Swings As Investors Speculate On Firm’s Survival

goldAfter rising to a peak of around $1,330 per ounce last week, gold has given up its gains and is broadly flat on its June closing price, at $1,315 per ounce.

The main routes by which investors gain exposure to gold are exchange-traded gold funds such as the $33bn SPDR Gold Trust (NYSE: GLD.US) ETF, which opened today broadly flat on last Monday’s open, at $126.54, leaving it up by 9.0% so far this year. Similarly, a London-listed alternative, Gold Bullion Securities (LSE: GBS), has fallen just 0.4%to $126.12 over the last week, leaving it up by 9.0% so far in 2014.

Petropavlovsk update

The share price of Russia-based gold miner Petropavlovsk (LSE: POG) fell to a 52-week low of 31p last week, but a midday RNS announcement today has ignited the share price, which has rocketed 24% higher to 41p, on very high volumes. The cause of last week’s decline is unclear, and it’s not clear to me why investors have been so easily reassured today, either.

Although Petropavlovsk trades on less than 0.2 times its book value and offers a 4% prospective yield, it has three big problems.

1. Net debt of $948m is threatening to overwhelm the firm, which paid $85m in interest costs last year.

2. Last year’s sales were supported by well-timed hedging contracts, which added $146/oz to Petropavlovsk’s average selling price. However, these contracts end this year, and the firm’s attributable production is expected to fall from 741,000 ounces in 2013 to just 625,000 ounces in 2014.

3. Petropavlovsk’s total cash costs per gold ounce mined were $1,016 in 2013. Although this is lower than the current price of gold, interest expenses added a further $115 per ounce to these costs. The Total Cash Costs measure is also something of a survival metric — it does not allow for reinvestment in the development of new assets. Analysts expect Petropavlovsk to report another loss this year and a marginal profit in 2015, but it’s easy to see how a slight fall in the price of gold could derail the firm’s finely balanced survival plans.

Petropavlovsk's lack of profitability and 110% net gearing make it too high risk for me, and highlight the dangers debt can pose to an otherwise healthy business.

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> Roland does not own shares in any of the companies mentioned in this article.