Petropavlovsk firms up cash call

Petropavlovsk shares plunged to an all-time low Monday after the debt-ridden gold miner confirmed a deeply discounted rights issue as part of a larger refinancing. It's got the backing of both co-founders and, crucially, most of its bondholders, but will it secure the future of the group? 

A cash call became inevitable in September when the company set out plans for a new convertible bond. Petropavlovsk admitted that falling gold prices and war in Ukraine would make it impossible to achieve full repayment of its existing 4% convertible bonds due 18 February 2015 for cash at par value upon maturity. It wants to issue new convertible bonds plus some cash to holders of the existing bonds.

Now, bondholders representing about 62% of the outstanding $310.5 million (£198.8 million) 2015 convertible bonds have agreed to support a refinancing plan. That will include a new five-year 9% convertible bond with a target size of $100 million, plus a rights issue at 5p to raise $235 million, $30 million of which will be underwritten by directors and co-founders Peter Hambro and Pavel Maslovskiy.

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Of course, the deal still needs the thumbs-up from bondholders, senior banks and shareholders. But there really is little choice here, and Petropavlovsk only needs 50% acceptances from bondholders. Its lenders, meanwhile, "welcome the progress towards a complete refinancing solution." Expected to complete before the existing bonds mature in February, the deal will slash net debt, but only to $700 million.

"I believe that this agreement and the refinancing of our convertible bonds to which it relates will, when implemented, secure the future of the group, and give Petropavlovsk the opportunity to take full advantage of the significant operating margin and the substantial reserves and resources that it now enjoys," said chairman Hambro.

Petropavlovsk has, at least increased its production target for 2015 to 680,000-700,000 ounces from 600,000 ounces previously, mostly due to recent exploration success. That's why Numis Securities now expects the company to generate some earnings next year - 3 cents, up from an anticipated loss of 12 cents in 2014.

Says Numis:

We see potential for positive free cash flow generation to reduce [net debt] further but not enough to make a meaningful impact to support this distressed stock. We maintain our REDUCE recommendation but reduce our target price to 10p, from 20p, assuming the financing will proceed as planned.

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