Petropavlovsk Shares, POG, Up 40% On Sanctions News – Should They Be?

Petropavlovsk (LON: POG) shares have taken a horrible beating over the Russia and Ukraine events. The problem is the impact of sanctions upon the gold miner. Today’s announcement seems to indicate that at least some part of those problems can be solved. But is this really worth a 40% jump in the POG share price?

We have asked just how bust is Petropavlovsk? Because the company itself – and none of its management etc, nor the business line or sector – is not subject to sanctions. But its bank, Gazprombank, is. The problem then becomes a fairly normal form of working capital financing. Gazprombank provides that working capital within Russia. In return, it gains the gold produced to then export and or sell internally. The flow of gold becomes, in a way, the security for the working capital loans.

The problem POG has with sanctions is that given Gazprombank is sanctioned it cannot sell gold to it. This means it cannot conform to the contractual terms for the working capital loans. But also, it cannot refinance elsewhere because that would mean paying off – dealing with – the sanctioned Gazprombank. So, despite not being sanctioned in any way it’s possible that Petropavlovsk could go bust from the sanctions. For, don’t pay off the loans, don’t deliver the gold, and the Russian operating subsidiaries could be put into bankruptcy.

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Now, there’s a ban inside Russia on corporate bankruptcies at present. So that at least delays that part of the problem – but it’s still necessary to be able to sell gold to pay the operating costs.

Today’s announcement is that there’s at least partial light at the end of that tunnel: “GPB has issued waivers of its offtaker rights such that Petropavlovsk has been able to sell gold to third parties”. So, POG can sell gold to others, it has done so, and it can continue operating. This will, as a logical assumption, continue for as long as Gazprombank – or anyone else – isn’t able to force bankruptcy on the Russian subsidiaries for not living up to that original contract. For there’s no point in GPB not waiving those rights if it can’t then seize the mines themselves. Might as well give in gracefully that is.

This does remove some of the immediate problems that Petropavlovsk faces in Russia. But it’s probably best to see this as an armed truce rather than a settlement that is going to last. This does stave off immediate bankruptcy problems but doesn’t stand as a long-term solution.

If POG could refinance and so be free of GPB then the problem would be over. POG would then trade as does Polymetal (LON: POLY), that is well down for obvious reasons but not at fractions above zero.

Any trading position in Petropavlovsk is essentially a speculation on how well it can continue to navigate these sanctions problems.