By Thomas Biesheuvel
Bloomberg News
Thursday, August 7, 2014
http://www.bloomberg.com/news/2014-08-07/hamb...ussian-gold-...
LONDON -- Peter Hambro dared to go where few others would, in search of gold in 1990s Russia. Investors who followed him reaped tenfold returns over eight years through 2010.
A repeat of that rich success now looks far away as Petropavlovsk Plc (POG), the company Hambro co-founded, confronts a mountain of debt.
The company was on the cusp of a place among the blue-ribbon names on London's stock exchange until it borrowed more than $1 billion to expand production at its mines in far-eastern Siberia, six time zones from Moscow. The strategy unraveled when a dozen years of gains for bullion prices ended abruptly in 2013.
"The worst position you ever want to be in a falling commodity environment is having a half-built mine," said Cailey Barker, an analyst at Numis Securities Ltd. in London. "It's very hard to turn the Titanic around. It may be difficult to come back from here."
In 2010, Petropavlovsk's market value exceeded $3 billion and it was mentioned as a future member of the benchmark FTSE 100 Index. That's shrunk to $111 million, dwarfed by about $819 million owed to banks that the company says now effectively control cash flow from its mines.
In April, Petropavlovsk said it won't be able to meet the terms of bank loans by the end of this year and will struggle to repay bonds due in early 2015. Hambro, the company's chairman, said the lenders have agreed in principle to relax covenants on the debt and he's seeking to negotiate new terms.
"The banks have been extremely helpful," Hambro, 69, said in an interview Aug. 4. "We have a plan, we've been working on it a long time, it hasn't been easy. I think the tide has turned a little bit."
The company dates to a meeting in the garden of his home north of London 20 years ago. Hambro, a member of a trading and banking dynasty, agreed to invest $5 million in a Siberian mine near the Chinese border. The business proposal became Peter Hambro Mining Plc, which was renamed Petropavlovsk in 2009.
The mine's cash flow is now controlled by Moscow-based lenders OAO Sberbank, VTB Group and OAO Alfa Bank. The banks want to be sure Petropavlovsk has a viable future before they agree to relax the conditions attached to its debt, according to a July 27 company presentation
Sanctions against Russian banks intended to get President Vladimir Putin to back down in Ukraine are an added obstacle to Hambro's funding needs.
European Union governments agreed last week to bar Russian state-owned banks from selling shares or bonds in Europe, cutting the money available for them to lend. Hambro says that while there has been no direct impact on his company, the sanctions are likely to have a collateral effect on the banks.
The concern extends beyond the banks, shareholders and Petropavlovsk employees. "The people who live and work in the Amur region who are suppliers -- the butchers, bakers and candlestick makers -- are all stakeholders in this huge business we run," Hambro said. "All those interests are part of my responsibility."
From his desk in London's Mayfair neighborhood, Hambro can take in views of the gardens behind Buckingham Palace. It's an outlook that fits well with Hambro's background.
Educated at Eton College, whose former students include 19 British prime ministers, princes William and Harry and author George Orwell, Hambro started work as an accountant in 1964. He spent a year at Hambros Bank, which was then still controlled by his family, and later traded bullion at Marc Rich Group and Mocatta & Goldsmid Ltd.
Far East
Hambro isn't the only family member associated with mining. His son Evy runs BlackRock Inc.'s $8.1 billion World Mining Fund. BlackRock cut its holding in Petropavlovsk below 5 percent in July 2013, according to a regulatory filing. Another son, Jay, is chairman of iron-ore producer IRC Ltd., 40 percent owned by Petropavlovsk.
Petropavlovsk operates four gold mines in Russia's Amur region. The company, which mined 741,200 ounces of gold last year, making it the country's third-biggest producer, has slashed costs, fired staff and halted development projects in an attempt to cut debt.
"They are under-investing in their assets," said Oleg Petropavlovskiy, an analyst at BCS Financial Group in Moscow. "If you do this, your company life is very short. The best case is for lenders to ease covenants, to give them new money to invest in operations going forward."
Petropavlovsk's total net debt of $948 million includes about $311 million in convertible bonds. Hambro said the company is in contact with bondholders that own $280 million of that debt as it seeks to resolve the position in what he calls an "orderly fashion."
Net debt peaked at $1.1 billion last year, and the company expects to reduce that to $850 million by the end of the year.
Petropavlovskiy said that if the company went bankrupt, the lenders would struggle to sell the assets. Their only option might be to keep the company afloat, even if there is no guarantee of getting their money back. "At current gold prices, the company cannot repay its debt in the next 10 years," Petropavlovskiy said.
Gold prices have declined 32 percent from an all-time high of $1,921.17 an ounce in September 2011. Last year, the precious metal plunged 28 percent, ending a 12 year rally.
This isn't Hambro's first encounter with adversity at Petropavlovsk. During the 2008 financial crisis, Hambro and business partner Pavel Maslovskiy loaned the company $19.3 million to help refinance debt after its regular bankers weren't able to help. The stakes are higher this time around.
"That was an easy fix," said Numis' Barker. "It required tens of millions rather then hundreds. This is a far worse situation."
Hambro says that once the debt is renegotiated, brighter times are ahead. Petropavlovsk estimates the cost of mining each ounce of gold will fall to about $750 next year from as much as $950 in 2014. That may provide some breathing space as it repays debt.
"This is a company which, aside from being very unpopular in the market, in my view unjustifiably, has the potential to turn around," said Hambro. "Once we have it back on solid footing I see a great future."
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