Questor share tip: Petropavlovsk ups its reserves

There was some positive news yesterday form Russian-focused gold miner Petropavlovsk, formerly Peter Hambro Mining. Questor says buy.

Petropavlovsk
£10.46 +31p
Questor says BUY

The group unveiled an unscheduled update of its gold resources which led to a material uplift. Petropavlovsk said that its proven and probable ore reserves had increased by 36pc to 9.1m ounces at a grade of 1.17 grams per tonne of gold.

Much of the improvement is put down to successful exploration at the Malomir and Pioneer sites in Eastern Russia, as well as evaluation of proven and probable ore reserves for Petropavlovskoye in Yamal, Northern Russia.

Pavel Maslovskiy, chief executive said: "This significant uplift in ore reserves and mineral resources underlines the effectiveness of the group's strategy of delivering low-cost organic growth through extensive exploration work based on a deep knowledge of the regional geology."

Questor has no doubts over Petropavlovsk's long-term value, but there was a setback last year which has hit the shares hard. Management were over-optimistic about production and had to cut its guidance twice because of teething problems.

However, the company has learned form this and its 2011 guidance, issued in January, looks fairly conservative.

Petropavlovsk expects total 2011 production to rise 18pc to 600,000 ounces. This would be a major achievement, as FTSE 100 gold behemoth Randgold Resources produced only 440,100 ounces last year, yet its market capitalisation is £4bn compared with just £1.9bn for Petropavlovsk. Last year, Petropavlovsk produced 506,800 ounces.

The shares have been tipped as a buy by Questor as high as £12.62, but gains were derailed by last year's production problems so the shares are below this level. They were first recommended at 626.2p on July 21, 2009, and they are up 67pc from then, compared with a FTSE 100 up 28pc.

The shares are trading on a December 2011 earnings multiple of 11.5, falling to 9.3 next year. The prospective dividend yield is just 0.2pc.

The shares look undervalued compared with peers and are a buy.