Is Petropavlovsk PLC A Better Buy Than Randgold Resources Limited?

A Fool explains why debt-laden Petropavlovsk PLC (LON:POG) could outperform Randgold Resources Limited (LON:RRS) and deliver a 100% gain for shareholders.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

More than a year ago, I warned Motley Fool readers that shareholders in Russian gold miner Petropavlovsk (LSE: POG) “could be left with nothing”.

The firm’s shares fell by 85% following my warning, but Petropavlovsk founder Peter Hambro did manage to pull off a rescue refinancing.

Although this was heavily dilutive for shareholders who chose not to take part, it has repaired the company’s finances and enabled the firm to start paying down its mountain of debt.

Indeed, Petropavlovsk’s trading update this morning was impressive enough for me to question whether the shares are now a buy.

An impressive performance

At the end of last year, Petropavlovsk’s net debt was $930m. Earnings had collapsed and the dividend was a distant memory. That’s now changing.

During the first nine months of 2015, the miner has repaid $255m of debt, reducing its net debt from $930m to $675m. The firm confirmed today that it expects net debt to fall to around $600m by the end of the year.

A change in strategy to focus on the most profitable production has seen gold production fall by 25% to 343,500oz so far this year, but has provided a serious boost to cash generation.

Cash costs per ounce have fallen from $865/oz. in 2014 to an expected level of $600/oz. for 2015. Although the firm’s cost-cutting has been helped by the devaluation of the Russian rouble, that’s still an impressive performance.

A potential double bagger?

I believe Petropavlovsk’s success so far has created an investment opportunity. If the group can continue to repay debt at the current rate, Petropavlovsk could be free of debt in 2-3 years.

This doesn’t depend on a recovery in the gold market, it just needs the price of gold to remain at current levels.

The firm’s shares currently trade at just 0.5 times their book value, but as net debt falls, I’d expect this discount to narrow. The shares book value may also rise, due to the reduction in liabilities.

On this basis, I think Petropavlovsk shares could double in value over the next few years, assuming the price of gold remains stable.

A better buy than Randgold

I’ve previously tipped African miner Randgold Resources (LSE: RRS) as a gold recovery buy. In my view it remains the top London-listed gold miner in terms of quality.

The problem is that Randgold shares have already risen by 26% from a 52-week low of 3,546p to around 4,500p. I believe Randgold’s quality is already reflected in its share price.

Randgold shares currently trade on a P/E of 33 times 2015 forecast earnings and offer a dividend yield of just 0.9%. Despite the firm’s 28% operating margin, that’s a demanding valuation.

I can’t see too much upside for Randgold stock unless the price of gold starts to rise.

For that reason, I believe the potential profits from a new investment in Petropavlovsk could be bigger than those from a purchase of Randgold stock.

However, it’s worth noting that Petropavlovsk’s recovery could still be derailed. A recovery in the strength of the rouble would hit costs. Too much production without adding new reserves would be likely to hit the company’s asset value.

I believe any investment in Petropavlovsk should be cautiously sized as part of a diversified portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »