US Edition Petropavlovsk
750p +10
Questor says BUY
Sentiment has been against the company after it missed its production guidance last year. This was compounded by a stubborn rumour of a cash-call to fund development of its mines.
Talk of a rights issue was rubbished this week by Peter Hambro, the group's chairman. Since January, the company has entered into new loan agreements totalling $270m (£167m). This is in addition to the cash in hand of $96m and the undrawn facilities in place of $70m. "This means that all capital programmes are fully funded," the company said.
Petropavlovsk also said gold sales had soared by 64pc in the first five months of the year. This means the group is on track to meet its 2011 production target of 600,000 ounces.
Costs in the whole industry are rising – which is one explanation for the under-performance of gold shares this year as the bullion price soared to record levels.
"The strong gold price for the year to date, less the associated increase in royalty payments, more than makes up for industry-wide inflationary pressures and foreign-exchange effects on operating costs," Petropavlovsk said.
The company also said it was re-evaluating its long-term production forecasts for 2012 to 2015. Further details will be provided on August 25, when full-year numbers are released.
Petropavlovsk also held an analyst workshop yesterday, at which it showed a method called "pressure oxidation" was the best option to process its ore.
The shares have fallen so much that they are now trading on a December 2011 earnings multiple of just 8.7, falling to 7.8 next year. This appears to be pricing in the worst possible scenarios – and many City observers agree. The prospective yield is 1.3pc, not spectacular, but the tip is a growth story, not a yield play.
Citibank noted that caution was warranted following last year's missed guidance, but thinks "the 35pc fall since the start of the year is probably an overreaction".
Charles Kernot at Evolution concurs. He reckons Petropavlovsk "is the most undervalued of the larger gold companies which we cover".
HSBC said: "Petropavlovsk stands out as the largest investment opportunity. We believe disappointments in 2010 have made investors fickle towards the shares, spurring a sell-off aggravated by a series of events."
So far we have not considered the group's iron ore business. The company has spun off its iron ore operations – formerly known as Aricom – in Hong Kong. The unit, now called IRC, is 65.5pc owned by Petropavlovsk.
IRC is valued at HK$5.75bn (£458m). This means that Petropavlovsk's stake is worth about £300m – about a fifth of the group's current market value.
The shares have been tipped as a buy by Questor as high as £12.62, so the current level marks a significant fall. However, they do look very cheap.
The shares were first recommended at 626.2p on July 21 2009, and they are up 20pc from then, compared with a FTSE 100 index up 29pc.