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How was it possible for one miner to produce more gold at a higher price and yet report a 90% dilution of profit? That must have been the question in every Petropavlovsk plc’s (LSE:POG) shareholder’s mind right now after reading the half year results released today.
All 286,074 ounces of gold sold at a price of US$1,639 per ounce was not able to compensate the charges the Russian gold miner had to deduct from its operating profit, resulting in a 38% decline to US$93.8 million for the period between January and June 2012.
A staggering 132% rise in depreciation charge amounting to US$106.9 million coupled with foreign exchange losses hit the bottom line, despite record-breaking revenue and production volume.
The result can be told as a financial demonstration of how a tonne of ore could only give a few grams of the yellow metal – net profit diluted to just 10% of the previous year’s US$108.2 million to just US$11 million for the first six months of the 2012.
What’s probably worse is what the company stated of the second half of the year:
“Total depreciation charges in the second half of the year are expected to be broadly consistent with H1 2012… and total interest costs are expected to be slightly higher in the second half of the year, in line with the Group’s overall increase in net debt.”
Debt for the period of six months was more than what the company had for the whole of 2011 financial year, at US$1.32o billion, resulting in more than twice the interest expense it had during the H1 2011, at US$34.6 million.
Depreciation was necessary – one can’t sold its gold bars and still have them. That’s why the exploration programme of the company resulted in increased capital expenditure to compensate the depletion of about 320,00 ounces of gold to a net of 3% rise in reserves.
But Peter Hambro, Chairman of Petropavlovsk, appealed to its shareholders, soothing them with the fact that “this headline disappointment should be viewed against the background that it was caused mainly by non-cash items”.
Unfortunately for the London-listed miner, the market was punitive of its response, knowing that they only have US$0.08 earnings per share, compared with US$0.57 they had during the same period a year ago.
A few hours after the half year results are released, the FTSE 250 constituent led the reds on the main market. Stocks followed the same trend as Petropavlovsk’s balance sheet, losing 18.1% of their price to £3.842 a share, shedding 84.70 pence by 1:45 PM GMT.
Company Spotlight
Petropavlovsk plc has four operating mines all located in the Amur Region in the Russian Far East. The company produced over 630,000 ounces of gold in 2011, making it one of the largest gold producers in the country.
Shares of the gold miner are listed on the London Stock Exchange main market and American Depository Receipts are with the Bank of New York under the ticker “POGNY”.
