Questor share tip: Gold miner Petropavlovsk in danger of losing its shine

Petropavlovsk

903½p -35½

Questor says HOLD

The best way to do this is to under promise and over deliver. Petropavlovsk, formerly Peter Hambro Mining, appears to have done the opposite.

Yet again, the company has cut its production forecast for the current year – blaming the weather and a delay in the delivery of equipment.

"The delay in the delivery of major mining equipment, in combination with the extremely harsh weather and the challenges of handling a significant increase in mining operations at the Pioneer mine, caused a 30pc decrease in mining works during the first nine months of the year compared with the mining plan," the company said.

"The group did not have sufficient contingency in its mining plan for 2010 and a combination of several unforeseen external factors during the first nine months led to a deferral in the production schedule," it added.

As a result, 2010 full-year gold production will now be in the region of 510,000 to 530,000 ounces. The company said in August that it may miss its 670,000-ounce target by as much as 5pc, then, on October 7, that the group was "striving" to hit its full-year guidance.

Peter Hambro, the group's chairman, yesterday accepted Questor's strident criticism of the company's handling of this issue with humility. He said that Petropavlovsk had endured an "annus horribilis" but argued that the shortfall was caused by things outside the company's control.

The delay in the delivery of an important piece of mining equipment from a major supplier has caused a shortfall on the mining side, with a knock-on effect in its processing operations. He also said that new senior management at the Pioneer mine would be put in place and that the company had learnt a lot from the disappointments over the past few months.

However, it was not all negative. Third-quarter gold production of 138,300 ounces was 37pc higher than in the previous quarter. Gold production for the first nine months was 346,200 ounces, which means the group needs to produce about 174,000 ounces in the final three months of the year to meet the revised full-year target. The company will next give an update on production at the end of January.

Of course, the gold in the company's mine is still in the ground. It will be mined and sold – eventually. However, Questor liked the company because of the low multiple on which it was trading. It was argued that, as production and results improved, the shares would then be re-rated and trade on a higher multiple. Unfortunately, the production problems – and the handling of the issue – have put paid to this for now.

The City can be very unforgiving after something like this, so Petropavlovsk cannot put a foot wrong next year and must prove itself to the market once again.

Questor had recommended buying the shares as high as £12.62 in June, before the production issue started to unravel, so investors who bought in at that level will be sitting on substantial losses. However, investors holding the shares can be reassured by the fact that these problems can be rectified with time and management effort.

The shares are trading on a December 2010 earnings multiple of 16, falling to 9.5 next year. However, it is likely the forecast will be trimmed and these multiples will move higher. The prospective yield is 0.2pc.

The shares were first tipped as a buy on July 21 last year at 626.2p and are up 44pc compared with a FTSE 100 up 28pc. The rating on the shares remains hold.