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Petropavlovsk narrows 2015 loss, unveils US$144M acquisition, deal to complete processing hub


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Petropavlovsk narrows 2015 loss, unveils US$144M acquisition, deal to complete processing hub

Russian gold producer PetropavlovskPLC booked a net loss attributable to equity holders of US$241.9 millionin 2015, narrowing from a loss of US$318.1 million reported in 2014, on the backof slightly lower costs stemming from the devaluation of the Russian ruble, accordingto an April 28 release.

The results came as the group also unveiled a US$144 millionall-scrip acquisition of Russian gold producer Amur Zoloto LLC, and announced ajoint venture with GMD Gold to complete Petropavlovsk's pressure oxidization hubin the Amur region, a project that was suspended in 2013 following the sharp fallin the price of gold.

Completion of the facility will enable the London-listed minerto process its 9.31 million ounces resource of refractory gold ore, as well as stockpiledconcentrate.

The deal to buy out the shareholders of Amur Zoloto, a gold minerfocused on the Khabarovsk region of the Russian Far East, will also add approximately38,000 ounces of gold output to Petropavlovsk, and deliver scope for growth up to127,000 ounces by 2020.

Petropavlovsk's shares surged 8.36% on the London Stock Exchangefollowing the three news announcements, before retreating back slightly, as investorsfocused on the news that the joint venture deal with GMD Gold could open up a pathfor Petropavlovsk to process an additional 200,000 to 300,000 ounces of gold perannum through the hub once it is completed, which is expected in 2018. The costof processing through the hub is expected at about US$65 to US$70 per tonne, accordingto the company.

Under the deal, the output of the hub will be evenly split betweenPetropavlovsk and GMD Gold, with the latter expected to contribute US$120 millionto complete the hub.

Petropavlovsk started to build the facility in 2011 because itwas unable to process the refractory ore in its existing facilities. The deal tofinance the Amur hub has been viewed by the market as creating value.

The company also acquired Amur Zoloto without any increase indebt, Petropavlovsk Chairman Peter Hambro pointed out in comments published in theannouncement.

Amur Zoloto operates the Yubileiny complex, which includes severalunderground mines and the 100,000-tonnes-per-annum-capacity Yubileiny processingplant. The company is aiming to double this capacity to 200,000 tonnes per annumby 2019.

The deal is subject to regulatory and shareholder approval inthe U.K., as well as certain other Russian approvals.

Meanwhile, Petropavlovsk said it has started discussions withmajor lenders about revising maturities on debts and gaining waivers for some bankingcovenants, Petropavlovsk said, adding that the main banks were "supportive"of the company's new strategy.

Gold production in 2015 was 504,100 ounces, compared with 624,500ounces in 2014, while average cash costs for the hard-rock mines fell to US$749per ounce, from US$860 per ounce the previous year, as the group took advantageof the fall in the value of the ruble.

Underlying EBITDA fell to US$172.80 million, from US$251.8 millionin 2014, and net debt totaled US$610.0 million at the end of December 2015, downfrom US$929.7 million a year earlier.

Petropavlovsk completed a restructuring and dilutive rights issue last year, and pledgedto use the raised funds to cut its debt pile. The company ran up huge debts duringthe bull market for gold, but was unable to keep up with interest payments whenthe value of the yellow metal slumped in 2013.

Other measures announced included a plan to commence undergroundmining at the flagship Pioneermine this year, which should contribute between 130,000 ounces and 180,000 ouncesof "high-margin" production annually.

And while Petropavlovsk said it anticipates stagnant or slightlyless gold production for 2016, it is expecting gold output growth of 10% to 20%per annum between 2017 and 2020, as the Amur Zoloto acquisition, the joint ventureover the pressure oxidization hub and the start of underground mining at Pioneertake effect.

Total cash costs for 2016 are expected at US$700 per ounce.

Despite the positive market reaction in London, not all punditswere impressed.

"The bottom line was highly negative … due to non-operatinglosses and higher than expected costs … 1Q16 production came in also weak at just92 k oz — 19% decline q/q," wrote Oleg Petropavlovskiy, a mining analyst withbrokers BCS Global Markets in Moscow.

He questioned the value of the acquisition of Amur Zoloto, especiallythe apparent US$144 million price tag, given that the asset also came with US$16million in debt.

"The valuation is very high, and we see the deal as negativefor Petropavlovsk's minorities."

He also questioned the joint venture over the pressure oxidationhub with GMD Gold, writing that the deal would likely not yield benefits until 2019.

"To us, it looks like the company sold 50% of its own refractoryreserves (total 4.9mn oz) for just US$120 million, with an unclear future of profits."