Petropavlovsk Finally Dies Under Sanctions Weight – What Next For The Shares?

Petropavlovsk (LON: POG) shares have been suspended as the company asks to be put into administration. POG has, effectively, died as a result of the sanctions on Russian entities, even though Petropavlovsk itself was not subject to sanctions, nor was its business, that of gold mining. The real lesson we should perhaps take from this is that the authorities here are not going to intervene into any seemingly unfair outcome of the sanctions regime. Them's the rules and that's the way it's gonna stay – even at the expense of what seems like an entirely unfair outcome as here.

We've long been pointing out that Petropavlovsk has this sanctions problem. Gold mining inside Russia is not sanctioned. Petropavlovsk as a company is and was not, none of the directors or major shareholders were. But the company's bank, Gazprombank, was. This is the heart of the entire problem. For Petropavlovsk financed working capital requirements – in an entirely usual manner – by borrowing, forward sales of the gold then mined being the security. Gazprombank lends the money to do the mining, the gold mined must be delivered to Gazprombank as and when it is ready.

The problem that POG then faced was that under the sanctions it could not deliver gold – as per contract – to Gazprombank. It also couldn't refinance elsewhere, even if it could, so as to pay off Gazprombank. So, it's clearly in breach of that banking arrangement. Gazprombank has asked for its money as they've every right to do. Petropavlovsk cannot pay so that's that, into administration.

Also read: Five Best Gold Stocks To Buy Right Now (2022).

So, as the company says, into administration it goes: “The Board will seek a hearing of the administration application”.

The shares are suspended, as is the bond quotation. The next question becomes, well, will there be any recovery for shareholders? Petropavlovsk has been warning that if administration did come then quite possibly not. A way to test this is to look at the bond price:

Secured creditors must be paid before unsecured, both must be paid in full before there's anything left for equity. If the secured bonds are trading at 35% of par and the like then the market most certainly doesn't think they'll get paid in full. That's not good for unsecured creditors and of course it's a disaster for equity.

It would appear that it will be most, most, unlikely that there will be a return to equity here.

There's an importance beyond Petropavlovsk shares here. Which is that this shows that even if the results of sanctions are possibly unfair – POG itself wasn't doing anything wrong, it's western shareholders who are losing out – those rules are not going to be changed. This has possible implications for Eurasia Mining, Polymetal and so on. There is no get out clause, no “But that's not what we meant” in these regulations. Petropavlovsk has made entirely clear over the months what might happen to it if there was not a variance – and no variance came. The risk on all Russia related shares just rose.