What You Were Buying Last Week: Petropavlovsk PLC

One of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful” – or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments.

So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been buying in the past week or so, and what might have made them decide to do so.

Ballooning debt

The share price of Russia’s second-largest gold producer Petropavlovsk (LSE: POG) has plunged over 80% so far in 2013, and a colossal 94% since its five year high of April 2010. Once a prospective FTSE 100 company, it suffered the ignominy of being  demoted from the 250 Index in the FTSE reshuffle last month. Looking back over the past decade — during which the price of gold has tripled — Petropavlovsk is down 75%.  

Mind you, anyone investing over most of the first half of that period — from 2003 to late 2007 — would have enjoyed a gain of over 450%. So what went wrong after that?  And why might anyone think it worth buying shares in the company now? Because that’s what customers of The Motley Fool ShareDealing Service were doing last week, and it put Petropavlovsk in the number three spot in the latest “Top Ten Buys” list*.

Well, one problem at Petropavlovsk has been the ballooning debt.  At the end of 2007 the company’s debt stood at about £70m. Today it’s more than ten times that amount. Or, to put it in more context, Petropavlovsk’s net debt is now more than five times its market cap.  Whilst any mining and exploration company can expect to incur big debts ahead of anticipated revenues, that level of debt is excessive by any standards.

It also doesn’t help that Petropavlovsk has all its operations in Russia. Considered  in terms of overall “ease of doing business”, Russia is 112th out of 185 countries on the World Bank’s latest “Doing Business” rankings, and is an even worse 117th when it comes to “protecting investors”.  But it’s probably just coincidence that the company has lost most of its value since it changed its name from Peter Hambro Mining to Petropavlovsk in 2009.

Something’s got to give

Looking at the numbers, Petropavlovsk is currently on a forward P/E of around 3, and a forecast yield of over 11%. Something’s got to give, and recent buyers will be hoping it does so in the right way, with an increase in share price, driving the P/E up and the yield down to more realistic levels.

In order to keep costs down, the company has lately adopted a strategy of focussing its exploration activities on areas near to its current processing facilities. As a result, earlier this month it sold some of its interests in the JSC Verkhnetisskaya Ore Mining Company, which were regarded as non-core assets under the new strategy. Whilst Petropavlovsk will retain a 49% interest in Verkhnetisskaya, the company will no longer be a subsidiary, and the sale will free up some useful cash for working capital.

In another cost-saving exercise — and, presumably, in order to pacify shareholders disillusioned by executives profiting even when a company is in decline — Petropavlovsk has already scrapped bonuses for its senior leadership, including  executive chairman Peter Hambro.  If things do pick up, however, the bonuses could be reinstated, and they could still be in line for awards worth up to 150% of their salaries — so last week’s buyers will obviously be hoping that provides enough incentive for them to really turn things round.

But of course, no matter what other people were doing last week, only you can decide if Petropavlovsk really is a ‘buy’ right now.

A high-quality growth share

If you’re looking for a high-quality share with great potential, you’ll definitely want to know which company The Fool’s expert analysts have picked to feature in The Motley Fool’s Top Growth Share For 2013 report.

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> Jon doesn’t own shares in Petropavlovsk.

* based on aggregate data from The Motley Fool ShareDealing Service.