Upside if Petropavlovsk seals bond deal

There was rare excitement at gold-miner Petropavlovsk on Tuesday as investors seized on rising gold production and steps to renegotiate expensive convertible bonds.

Gold production rose 4% to 306,400 ounces (oz) during the first half of 2014 and sales grew 5% to 310,700oz at an average price of $1,386/oz. Production at the beginning of July was ahead of expectations and management still expects full-year output will hit 625,000oz of gold.

But for Petropavlovsk the needle-mover is debt reduction, part of which includes the refinancing of its 4% convertible bonds due 2015 of which there is still $310.5 million (£181.89 million) outstanding. And there has, at least, been progress here.

Net debt has fallen by $24 million over the past six months to $924 million and by $230 million year-on-year. Crucially, total cash costs are falling, due largely to better efficiency, a drop in expensive alluvial production and a sharp decline in the value of the Russian rouble. They're expected to be down as much as 11% this year at $900-$950/oz, and just $750/oz within five years as waste volumes decline. Remember, too, that capital expenditure will tumble by up to $45 million over the next few years and by a further $10 million after that.

Talks with bondholders are also going well, we're told. "These meetings were constructive and a range of views were expressed across the bondholder group," said chairman Peter Hambro. "The group is actively working on a holistic refinancing plan" and a refinancing of the convertible bonds "is likely to be negotiable."

That's certainly what the market wants to hear. "If the company can clear this hurdle, then there is a lot of upside to the stock," reckons Westhouse Securities analyst Rob Broke. "However, with no firm plan still to be outlined, we retain our neutral recommendation."

For the record, Deutsche Bank blames recent gold selling on short positioning by near-term operators. The broker still thinks the metal should not to be treated as bearish while it moves above $1,290. "Only a failure there would indicate broader selling interest and the risk of a decline to $1,276/$1,278," it says.

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