Non-cash adjustment takes shine off Petropavlovsk earnings

Petropavlovsk reported a 42% improvement in total gold production in its first half on Friday, to 320.6 koz, which included 178.0 koz from the processing of its own and third-party refractory gold concentrates at the POX Hub.

The FTSE 250 company said total gold sales increased 39% to 312.4 koz, which was driven by the increase in gold production.

Its average realised gold price for the six months ended 30 June was ahead 28% at $1,640 per ounce, driven by higher gold prices and a “zero impact” from the company's hedging arrangements, which compared to a hedging loss of $26 per ounce in the first half of 2019.

Total cash costs increased 27% to $983 per ounce, which the board said was primarily due to higher costs associated with third-party gold concentrate.

Total cash costs from own material marginally increased by 3% to $800 per ounce, due to lower grades of non-refractory ore at Albyn and Malomir, lower resin-in-pulp recoveries at Malomir, the inflation of certain rouble-denominated costs, and an increase in mining tax rates from 1.2% to 6.0% at LLC Malomirskiy Rudnik.

The increase was partially offset by higher grades and recoveries of non-refractory ore processed at Pioneer, higher grades and recoveries of refractory ore processed at Malomir and rouble depreciation, the board said.

All-in sustaining costs increased 19% to $1,220 per ounce, which the firm said was mainly due to higher total cash costs, as well as an increase in capitalised stripping expenditure at both Pioneer and Malomir.

Group revenue, including non-precious operations, increased 71% to $522.7m, reflecting the higher production volumes and a higher average gold sales price.

Underlying EBITDA was 96% higher year-on-year at $192.6m, due to the higher revenues, partially offset by higher total cash costs.

Petropavlovsk reported a headline loss for the period of $22m, compares to a gain in the first half of 2019 of $3.9m, which it said was caused by a negative non-cash adjustment of $122.2m related to a fair value loss on its conversion option, reflecting the increase in the company's share price.

Capital expenditure was up 32% at $59.6m, with expenditure focussed on the construction of the Pioneer and Malomir flotation plants, Elginskoye mine development and development work to support underground mining at Pioneer.

Cash generated from operations rose 213% to $172.8m, which the firm said was driven by higher gold sales, higher gold prices and rouble weakness, partially offset by an increase in costs associated with the purchase of third-party concentrates and higher mining taxes.

Net debt narrowed to $538m as at 30 June from $561.3m at the end of December, which was primarily put down to an increase in cash.

The company said it was continuing to prioritise the settlement of the interest-bearing gold prepays, which stood at $121.0m as at 30 June, down from $187.4m on 31 December, making for a net decrease of $66.4m over the period.

“EBITDA almost doubled from the first half of 2019 to US$193m, benefiting from higher gold prices and increased production,” said chairman James Cameron.

“Petropavlovsk has some excellent assets with substantial opportunities. Our guiding focus is to deliver greater value for all shareholders.

“This will involve reducing costs, improving controls and raising standards of governance across the company.”

Cameron noted that, as it had previously announced, over the past few months the board and interim chief executive officer had encountered “a lack of cooperation” from certain employees and received legal actions, which he said had “no legal merit”, led by Sergey Ermolenko and Alexey Maslovskiy.

“The board is finalising the selection of a forensic investigator to examine all transactions in the past few years which may have involved 'connected parties', as requested by shareholders at the requisitioned general meeting on 10 August.”

At 0938 GMT, shares in Petropavlovsk were down 4.55% at 26.2p.