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Gold Review: Petropavlovsk PLC Soars On Refinancing News

goldAfter rising to a high of $1,324 per ounce on Friday, gold has largely given up last week’s gains, and on Tuesday morning was hovering just above $1,300/oz. once more, at $1,306/oz.

As a result, the share prices of exchange-traded gold funds are almost unchanged over the last week: the $34bn SPDR Gold Trust (NYSE: GLD.US) ETF, is up by around 0.5% on last Monday’s open, at $126.34, leaving it up by 7.1% on the year to date.

Similarly, a London-listed alternative, Gold Bullion Securities (LSE: GBS), has climbed by 0.5% to $125.38 over the last week, leaving it up by around 8% so far in 2014.

Petropavlovsk announces ‘likely’ debt deal

Shares in debt-laden Russian gold miner Petropavlovsk (LSE: POG) rose by as much as 13% to 40p in early trading this morning, after the firm made a statement saying that it believed “a refinancing of our Convertible Bonds is likely to be negotiable”.

Petropavlovsk has $310m of convertible bonds which reach maturity next year, and the company said that it has had ‘constructive’ meetings with bondholders representing $280m worth of these bonds, and is now working on a refinancing plan for the business.

Petropavlovsk also provided a first-half trading update, confirming that 2014 total cash costs should remain within the guidance range of $900-$950 per ounce, and highlighting the ongoing benefit of the firm’s hedging arrangements, which have lifted the firm’s average realised gold price by $93 per ounce so far this year.

That’s the good news.

The potentially bad news is that Petropavlovsk’s hedging contracts expire this year, and are unlikely to be repeatable on such generous terms, meaning that the firm’s average realised gold price may fall sharply at some point late this year, or early in 2015.

Similarly, continued Petropavlovsk’s use of the total cash cost measure of production, and its omission of any information about its all-in sustaining costs — which will be higher — suggests to me that the company may remain unable to trade profitably without substantial debt restructuring, which could involve shareholder dilution and, in my view, is unlikely to enable the company to pay a meaningful dividend.

Investing in distressed companies ahead of debt restructuring is a high-risk activity. A surer way to find above-average returns is to focus on well-funded and profitable growth stocks, ahead of key 'inflection points' in their development.

"The Motley Fool's Top Growth Share For 2014" is one such company -- small-cap expert Maynard Paton believes a sharp upturn in profitability is due, which could deliver 'double-digit total returns' to shareholders.

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Roland Head has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.