International watchers have failed to note the recent Russian interest, possibly because Russian reports of the interaction by Medvedev failed to identify that the company was a British listed miner. Nor did they identify the host for the visit as Petropavlovsk’s CEO Pavel Maslovskiy which could also have triggered recognition. When last Saturday Medvedev arrived in Blagoveshchensk, the Amur Region capital which faces China across the broad Amur River, he headed straight to Petropavlovsk’s Pioneer gold mine from the airport. From there he went to the company’s newly-commissioned iron-ore mine Kuranakh, which is close to the village of Olekma and then to Petropavlovsk’s metallurgical test plant in Blagoveshchensk. He later cruised the Amur River before flying to Vladivostok for that city’s 150 anniversary celebrations.
Petropavlovsk’s plans “fully coincide with the President’s concept for the region’s economic development”
Russian state media reported the object of the visit to the three locations of Petropavlovsk was “to see with his own eyes the use of both conventional and advanced methods of ore concentration”.
The Russian president was briefed on the company’s plans by Petropavlovsk’s CEO Dr. Pavel Maslovskiy. Kremlin press officers briefed Russian state media that Petropavlovsk’s plans “fully coincide with the President’s concept for the region’s economic development” as unveiled earlier in Khabarovsk.
Petropavlovsk started life as Peter Hambro Mining in 1994 when it was founded by Dr. Maslovskiy and old-Etonion scion of the Hambros banking dynasty, Peter Hambro. After 14 years in a city merchant bank Hambro joined gold trader Mocatta & Goldsmid in 1983. This eventually led to him being introduced through the Russian Ministry of Mines, to Maslovskiy. A Moscow University professor of plasticity, an advanced form of metallurgy, Maslovskiy had childhood contacts in Amur and access to a potential gold deposit. He also knew some highly skilled mining engineers and geologists in the Amur who could work on the project.
"I went out there to have a look," Hambro told an interviewer for The Independent newspaper. "It was quite obvious it was something way out of the ordinary and he (Maslovskiy) had put together a fantastic management team."
"Petropavlovsk is creating new jobs and contributing very heavily to the development of the region’s transport and energy infrastructure"
The resulting partnership has flourished even during the bleak years at the beginning when everything had to be invested in exploration and development until the Pokrovskiy mine entered into production in 1999, just after the Russian default. Underlining the vast distances involved in Russia, the mine is seven hours drive from Blagoveshchensk or an 18-hour ride on the Trans Siberian Railway from Khabarovsk to the nearest station, 10 kms from the mine..
Reporting on the presidential visit, Voice of Russia, the state radio station that broadcasts to 160 countries in 38 languages, said that “the Petropavlovsk company is creating new jobs and contributing very heavily to the development of the region’s transport and energy infrastructure. The company is also working closely with consumers in Asia and the Pacific, which is also very consistent with the President’s call for wider economic cooperation with the region’s foreign neighbors to bring the economically laggard Russian Far East up to par with the rest of the country.”
Petropavlovsk’s network of laboratories was supplemented last year with the state-of-the-art metallurgical test plant in Blagoveshchensk. It is claimed to be unique in the Russian Far East and gives the company the flexibility to test any type of gold recovery process under conditions approximating to real production.
According to the company’s 2009 annual report such test work means that it will be possible to introduce the most cost-efficient, productive and innovative processes at the Group’s mining projects in the Russian Far East. The capacity of the test plant is 0.5 tonnes per hour.
The Petropavlosk Group currently produces gold from its own mines and from a number of joint ventures. In 2009, the Group produced 486,800 oz of gold, making it the third largest gold producer in Russia.
On 22 April 2009, the Group completed its acquisition of the mining and exploration company Aricom plc, inheriting its iron ore assets. Aricom grew out of Peter Hambro Mining in 2003 with assets in two areas of Far East. Petropavlovsk’s principal gold and iron ore mining assets are located in the Amur Region in the Russian Far East and is also active, either on its own or through joint ventures in other areas of Russia including the Evreyskaya Avtonomnaya Oblast (EAO) and the Yamal, Buryatia, Magadan, Chita, Irkutsk and Sakha regions. The Group's current gold production is focused on its Pokrovskiy and Pioneer mines while it is using the cashflow to develop the other projects.
Chinese in deals for equity and debt financing
Its primary iron ore assets are Kuranakh and Garinskoye in the Amur Region and the Kimkanskoye and Sutarskoye (known as “K&S”) iron ore deposits in the EAO. Kuranakh, is the first of the non-precious metals mines to start production in May this year.
The issue of socioeconomic development of the vast region and introduction of innovation technologies dominated the agenda of the recent Presidential visit to the Far East. Integration with the Asia-Pacific region countries was urged by the President as offering great potential for developing the economy of the Far East and Russia in general. “Such integration should be supplemented with relocation of goods, works and services from one part of the country to another while promoting closer cooperation within the Asia-Pacific region to the benefit of the eastern areas of Russia”, the President said accordig to a transcript on the Kremlin web site.
An equity deal and debt financing agreement for the non precious metals division of Petropavlovsk are already well advanced with the Chinese.
In June the company agreed terms for a US$60 m equity investment into its non-precious metals division by a Hong Kong based investor consortium. The investment values the division at US$860m which hitherto has not been reflected in the company's share price.The consortium comprises Asia Resources Fund managed by General Enterprises Management Services (International) Ltd and CEF Holdings Ltd, part of Cheung Kong (Holdings) Limited and 50% owned by Canadian Imperial Bank of Commerce. The investment will be channeled into a new holding company (“NPMHoldCo”) for the non-precious metals division of Petropavlovsk.
Hong Kong Listing under consideration
In March, Petropavlovsk signed in the presence of Chinese Vice President Xi Jinping and Russian Deputy Premier Aleksandr Zhukov an agreement jointly with China National Electric Equipment Corporation (“CNEEC”) and ICBC for CNEEC to act as engineering, procurement and construction (“EPC”) contractors and ICBC to act as finance providers, for the development of the K&S and Garinskoye iron mining projects which are due to come on-stream in 2013. ICBC will finance 85% of the total cost of the EPC contract, currently estimated at US$400m. Sinosure, the Chinese state export credit agency will guarantee 95% of ICBC's loan.
A possible listing of NPMHoldCo’s shares on the Hong Kong stock exchange is one of a number of strategic options for the non-precious metals division which the Group continues to explore.
Peter Hambro, Executive Chairman, said: “We are extremely pleased to have GEMS and CEF committing capital to our non-precious metals business, and their participation in our growth story is testimony to the underlying confidence in the opportunities in the iron ore market in China.
“Our potentially world-class iron ore business is focussed on the nearby Chinese market with considerable economic advantages in both geography and transport costs over most other major iron ore suppliers to the Chinese market - we are c.19,000 kilometres closer to China than our Brazilian competitors.
“We believe that these developments are significant steps in delivering the value of the non-gold assets of Petropavlovsk.”
In 2009 Petropavlovsk produced 486,800oz of gold. Extraction costs were among the lowest in the world at US$ 309 per oz.
EBITDA grew 65% to US$225 m, and Group Revenue up 24%
Petropavlovsk said JORC-compliant proven and probable gold reserves jumped 103 pct to 6.7 million ounces while measured and indicated gold resources rose 86 pct to 8.2 million ounces on a Joint Ore Reserves Committee (JORC) basis.
The company decided to move to the internationally recognised JORC standard from the Russian classification in response to market expectation.
Reuters quoted Chief Executive Pavel Maslovskiy as saying about 80 percent of the increase was due to a reclassification and about 20 percent is the result of exploration work carried out during the year.
It was almost a sweet revenge on the market which in 2008 saw its share price halved in just six weeks fueled by an HSBC analyst’s research note casting doubts on the company’s reserves. That arose from the analyst’s misunderstanding of the differences between Russian Reporting standards and JORC.
The increase in reserves came alongside record production and higher metal prices Underlying EBITDA grew 65% to US$225 m, and Group Revenue was up 24%).
"Overall, the good increases in the financial position and performance over 2008 should impress investors today, as well as the increase in the JORC resource and reserve estimate," said Arbuthnot Securities in a note after the 2009 results were announced in March this year. The shares rose 3.0 percent to 1184 pence, valuing the miner at GBP 2.2 billion (US$3.3 billion) and moving it closer towards potential entry into the FTSE 100 index.
Many analysts say the company’s stock is heavily discounted.
On the 10th. June this year, complying with Financial Services Authority Disclosure and Transparency Rules, Peter Hambro revealed he had purchased another 8,000 shares of the company for his pension fund, and bringing the total interest of Hambro and his associates in the company to 10,621,009 Ordinary Shares, representing 5.65% of the Company’s issued share capital.
Even at GBP12 a share today, the Petropavlovsk company should be a bargain.
Petropavlovsk CEO Dr. Pavel Maslovskiy outlines company's plans to Russian President Dmitry Medvedev
Kremlin Press Office