Mining for gold is no longer an easy business, and no company is more aware of this than Petropavlovsk (LSE: POG).
Over the past three years, the price of gold has steadily declined and now sits around 40% below its all-time high of $1,910 per ounce reached in 2011. However, while the price of gold has been falling over the past three years, the cost of producing the yellow metal, has, on average, only increased.
Petropavlovsk has suffered more than most. Now the company, which was at one point a candidate for entry into the FTSE 100 is asking shareholders for cash in order to remain solvent.
Petropavlovsk is currently asking for shareholders to support the company’s refinancing plans. Petropavlovsk has launched a package to refinance $310.5m, approximately £206.5m of its debt but requires shareholders to vote in favour of the deal. The plan is to raise £155.1m through a rights issue and issue a new $100m convertible bond.
And to push this refinancing through, Petropavlovsk’s management needs the support of shareholders. A shareholder meeting on the matter is scheduled for 26 February, at which the company needs the approval of 75% of shareholders eligible to vote. The majority of bondholders have already voted in favour of the deal.
Unfortunately, shareholders are stuck between a rock and a hard place. If the refinancing is voted through, shareholders face a deeply discounted, 157 for 10 rights issue rights issue at 5p per share. However, if the refinancing is not approved, Petropavlovsk will be at the mercy of its bondholders, who are likely to push the company out of business.
Turnaround in progress
Petropavlovsk’s troubles began back in 2011. The company took on too much debt just as the price of gold was peaking and ever since the group has struggled to repay its debts.
Net debt currently stands at $900m, compared to the company’s current market capitalisation of only £27m. But the refinancing should reduce this debt burden down to $700m once completed.
Additionally, figures suggest that after the refinancing, Petropavlovsk should have all the tools at its disposal to initiate a recovery. In particular, the company expects to produce 680,000 to 700,000 oz of gold during 2015 at a cost of less than $700/oz. At time of writing, gold is trading at $1,230/oz.
Capital spending and interest costs will also fall. So conditions in the market are favourable. Costs are falling, and it seems that the price of gold has stabilized.
Overall, Petropavlovsk’s deeply discounted rights issue gives the group some much-needed cash to try and turn things around.
Still, if you are thinking about buying into Petropavlovsk's turnaround, you need to be prepared for volatility -- this is a high-risk/high-reward company, not suitable for widows and orphans.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.