Im looking to buy POG at £3.90 as the £732m Russian miner is set to reduce its net debt (currently around $1.3bn) by $300m before the end of the year, according to broker ‘Westhouse’, through the sale of a stake in its iron ore subsidiary (IRC) to a Chinese group, with the investment worth $238m. The group is a collective of “General Nice” one of the biggest importers of the metal, and partner “Minmetals Cheerglory” who boast state-ownership. The investment will be through a placing by IRC, where General Nice will invest a value of $103m in march. Providing all is successful, Minmetals Cheerglory will then purchase shares to the tune of $175m, which has been pencilled for Q3 2013. The pair of placings will dilute POG’s investment from a 63.1% stake to a 40.4% position. Of course if this falls through, the share price may well tank.
Dilution can be annoying for investors already with positions, however for POG it reduces the value of the borrowings available to IRC, that POG must cover. After the Chinese investment, it will be liable to cover 57% of the $350m facility, rather than 100%, giving the business room to manoeuvre. Benefits to IRC include cash flow security and hopefully sales volume increases, steering the subsidiary towards profit. Benefits to Petropavlovsk include reducing financial requirements, whilst it is still exposed to the upside potential of the investment.
IRC made a loss of $14m in 2012, with assets recorded at $918m as at 30/06/2012.
Of course this important deal could fall through if any party feels it is no longer in their best interest. Even if this does occur, the business has other interests, which it is hoping to ramp up further throughout the course of 2013. Its gold operations, up 13% in 2012 from 2011, are set to increase a further 9% to a guideline of 780,000 oz produced in 2013. The average sale price realised in 2012 was itself up 3% to $1,670/oz, with the average cost per ounce knocking around $700.
Like many gold miners, it has no less than 10 exploration projects littered throughout the Russian Far East. Across all of its portfolio, total proven resources and reserves stands at a minimum of 23.1 million ounces; enough to sustain the business for just under 29 years of production at current levels, with a value of $38.5bn, at a gold price of $1,670.
As a result, brokers are bullish on the stock, with 7 out of 8 posting “BUY” or “ADD” recommendations in 2013, with an average target price of £5.10 (30.7% increase from current SP of £3.90). As of June 2013, the business held £120m cash, equivalent to 17.2% of the SP. It is set to record £91m profit 2012, with a view to increase this to £134m in 2013. As a result, the P/E currently stands at 5.4 for 2013; undervalued for a gold miner, where the average P/E for african juniors is 6.3.
In light of this, alongside annual dividends of approximately 12p (3% yield) I too am a buyer. I will post my views once more when the 2012 annual report is published late February and again when the first tranch of investment by the Chinese is complete in march.