Russian gold miner Petropavlovsk (LSE:POG) is one of the London market’s biggest casualties of the Russia-Ukraine war. Shares in the company have collapsed 90% this year as sanctions have gutted its business model. Worth more than £1bn a year ago, the enterprise is worth just £99m today.
It does not look as if the situation is going to get any better. Earlier this week, the firm was hit with a demand for $288m in cash from its main creditor, Gazprombank, which is demanding the immediate repayment of a $201m loan. The lender is also demanding that Petropavlovsk repays another $87m credit facility next week.
Sanctions block Petropavlovsk’s ability to continue as a going concern
Petropavlovsk’s business model effectively collapsed after the UK imposed sanctions on Gazprombank, one of Russia’s largest lenders, following the invasion of Ukraine. Not only is the lender one of the miner’s largest creditors, but it also buys and then sells all of Petropavlovsk’s gold production.
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Last year, the bank dealt with 450,000 ounces of gold for the producer. Sanctions mean that Petropavlovsk cannot sell its gold to the bank, or pay the interest due on its loans and credit facilities.
As well as its debts with Gazprombank, the producer also has a $304m convertible bond due in November.
The value of these bonds has fallen to 12 cents on the dollar, down from par at the beginning of the year, which really says more than I ever could about the company’s financial situation.
The market expects Petropavlovsk to default, and even in the best-case scenario, bond investors, who have a higher level of security over the company’s assets compared to ordinary stock holders, don’t expect to get more than $0.12 back for every $1 the group owes to creditors.
Even if a buyer is found, the value of the business is uncertain
Management has said that they are trying to find a buyer for Petropavlovsk’s mining assets, (the company’s equity was worth $721m (£554m) at the end of June) but with no operations outside Russia, even if a buyer is found it seems unlikely they will want to pay full price. What’s more, bond holders and other creditors, such as Gazprombank, will come ahead of shareholders in any bankruptcy reorganisation or liquidation.
Unfortunately, it looks as if this is the end of the road for the company. Even if it can somehow scrap together the cash to meet upcoming liabilities, there are plenty of other risks on the horizon.
Russia has a poor record of respecting shareholder and property rights, meaning there’s always going to be a risk of nationalisation. Then there’s the country’s human rights record – one of Petropavlovsk’s co-founders has been held in a Russian prison for more than a year without being charged.
So, while the stock might look cheap compared to the value of its assets after recent declines, with the company’s future hanging by a thread, investors should stay away.
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