Gamble of the week: A glittering Russian gold miner

published 13 September 2012

Russia recently joined the World Trade Organisation. This is significant as the Kremlin now has to lower import and export duties and grant more freedom to its foreign trading partners. Corporate governance should also improve, pushing up domestic asset prices as the country becomes more accessible and perceived as being less of a wild west' frontier.

This is good news for Petropavlovsk, a gold miner in the Russian far east. Output at its four producing assets was 630,000 oz last year, and this is set to rise 13% to 700,000 oz in 2012. Yet in August its shares fell sharply after the group's first-half earnings were hammered by higher costs as new facilities came on stream. Worse still, net borrowing ticked up to $1.12bn to fund expansion.

However, this bad news is more than factored into the depressed price. Assuming the gold price doesn't drop significantly, gearing should drop to around twice earnings before interest, tax, depreciation and amortisation (EBITDA)by December. Encouragingly, average selling prices rose 13% to $1,639/oz, compared to a 6% jump in underlying production costs to $697/oz a better result than most of its peers and partly down to a weaker rouble.

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Chairman Peter Hambro defended the group's decision to take on more debt and said its borrowings would peak next year and fall in 2014 as cash flow generated by higher gold production enabled loans to be repaid. He argues that, at a time when the cost of money is cheap and the price of gold is high, miners should be investing. Consequently, a fair chunk of planned spending has been brought forward.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.