TIDMPOG
RNS Number : 8624Q
Petropavlovsk PLC
11 June 2018
11 June 2018
Petropavlovsk PLC (the "Company")
Open Letter to Shareholders from Sothic Capital Management UK
LLP
Petropavlovsk PLC notes the open letter issued this morning to
the Company's shareholders from Sothic Capital Management UK LLP,
Petropavlovsk's second largest shareholder with a beneficial
ownership of 10.9% of the issued share capital. The contents of
this letter, which are the views of Sothic Capital Management UK
LLP, are copied below.
SOTHIC CAPITAL MANAGEMENT LLP
1 Knightsbridge Green
London SW1X 7QA
United Kingdom
11 June 2018
Dear fellow shareholder,
Re: open letter to shareholders of Petropavlovsk PLC
Sothic Capital, the second largest shareholder of Petropavlovsk
with 10.9%, has been an investor in the company since 2013 and is
strongly against replacing the current Board as requested by CABS
and Slevin (and seemingly supported by Mr Rakishev) ahead of the
Annual General Meeting ("AGM") on 29 June 2018. Sothic considers
the so-called activist attempt by CABS and Slevin as being contrary
to good corporate governance and one which could jeopardise the
significant value potential of Petropavlovsk.
As explained in more detail below, Sothic's view is that the
proposal advanced by CABS and Slevin is lacking transparency (both
in terms of those making the proposal and the motivation behind it)
and is directly contrary to the successful corporate strategy
currently in place. Ultimately, Sothic considers there is a real
risk that adoption of the proposal would squander Petropavlovsk's
turnaround potential and create the possibility for the Company to
be sold at a discount to a minority of shareholders who may be
working in concert.
Sothic believes that the successful completion of the POX Hub,
removal of the IRC debt obligation and continued progress with
underground mining will allow all shareholders to benefit from the
eventual re-rating of the shares.
Our stance on CABS and Slevin's proposal is based on the
following key facts:
Mr Kenges Rakishev's position is confused
Having been a shareholder for less than six months, Mr
Rakishev's strategic vision for Petropavlovsk has changed
completely from pursuing mergers and acquisitions ("M&A"),
which we believe would be a poor strategy based on the company's
current balance sheet and share price, to a strategy that seems to
be aligned with the current Board's strategy (a "finish POX first"
approach, as outlined in Mr Rakishev's recent profile interview in
Russia Today).
If Mr Rakishev did hold different views, he certainly had the
opportunity to make his position clear through his representative
on the Board. For whatever reason, he did not do so. Nor did he
consult with the Board or other major shareholders like Sothic
before going public with his ill-advised strategy of bringing back
Pavel Maslovskiy as CEO and pursuing M&A.
The current Board's strategy of harnessing cash flows from the
existing asset portfolio, completing the transformational
development of the POX Hub and disposing of the IRC guarantee
whilst optimising the value of its equity holding in this business,
is certainly the best way to take this company to the next stage of
its development. Yet Mr Rakishev now wants the old Board back - his
changing views are hard to reconcile and, at best, have been highly
inconsistent.
CABS and Slevin refuse to reveal the identity of their
controlling shareholder(s)
We are deeply concerned as the second-largest shareholder of
Petropavlovsk that we do not know the true identity or business
interests of the controlling shareholder(s) of both CABS and
Slevin, which are registered in Cyprus and Tortola, BVI,
respectively, where transparent disclosure of ownership is not
required.
Despite the recent publication of documents naming five
individuals supposedly behind the business interests of CABS, we
understand that the relevant details of the ultimate owners remain
unknown. In the circumstance where proposals are being made by CABS
and Slevin to reverse the successful changes that have been
implemented at Petropavlovsk over the past 11 months, it is of
material concern to us that we understand who is ultimately driving
those proposals and why-and what, if any, links those underlying
shareholders have to existing Petropavlovsk shareholders, former
Petropavlovsk management or Petropavlovsk counterparties.
That position, which remains entirely unclear, raises several
follow-on concerns. For example, if CABS and Slevin are acting in
concert with other shareholders and, as a group, control more than
30% (for example, if they are acting in concert with Mr Rakishev),
that may trigger a mandatory takeover bid for the Company. We note
in the press commentary that Mr Rakishev now appears to be acting
as spokesperson for the unidentified controllers of CABS and Slevin
whilst still claiming not to know them and not to be working in
concert with them. Without further transparency around those
relationships, we are understandably concerned that this could be
part of a strategy to takeover Petropavlovsk by stealth means at a
discount. Such processes commonly start with the removal of the
independent directors from a Board, replacing them with individuals
chosen by unidentified controllers. It can also result in
shareholders not receiving a proper price for their interests.
Plainly, these are all factors that are of critical importance to
Petropavlovsk's future, and therefore the details of such
relationships should be explained transparently to all shareholders
before the AGM. We understand that the Company has asked UK
regulators to look into this matter.
Lessons from the past are being ignored
In our view the old Board under the chairmanship of Peter Hambro
made a number of key strategic errors that, as a major shareholder,
we do not want repeated. It is therefore of considerable concern
that the Directors being proposed by CABS and Slevin were the key
decision-makers in the original flawed strategic direction of
Petropavlovsk.
There are three historic examples that highlight why we are
concerned:
1. In 2012, Petropavlovsk embarked on an investment program of
$500 million to build a Pressurized Oxidation Plant (POX) but
failed to hedge itself against a fall in the gold price. When the
gold price dropped from $1,900 to $1,200 per ounce, this failure to
hedge brought the company to the edge of bankruptcy. Sir Roderic
Lyne was a member of this board when the disastrous decision not to
hedge was made. In addition, Sir Roderic Lyne retired voluntarily
in June 2016, a year after the highly dilutive debt restructuring.
We believe that Sir Roderic Lyne should not return to the
board.
2. In December 2010 Petropavlovsk agreed to be the sole
guarantor of all of IRC's bank debt, despite owning only 65% of the
equity of IRC at the time (now diluted to 31%). Petropavlovsk
currently receives no compensation for this guarantee, as it is not
able to collect on the below-market guarantee fee being accrued.
Due to this guarantee, Petropavlovsk's own financing costs are
higher than they should be. It is also worth noting that IRC's
Chairman is Jay Hambro (the son of Peter Hambro) and its CEO is the
stepson of Pavel Maslovskiy. From a corporate governance
standpoint, we regard those arrangements as unacceptable.
3. In January 2014 Robert Jenkins acted as a consultant to the
Board, subsequently becoming a Non-Executive Director (NED) in
April 2015, during a period that saw the Company suffer from a
dramatic collapse in shareholder value, triggering financial
restructurings, including the poorly conceived guarantee of the IRC
debt position. In addition, Mr Jenkins presided over
Petropavlovsk's decision to acquire Amur Zoloto for 30% of the
share capital. That decision was subsequently challenged by the
majority of shareholders who opposed what is regarded as a plainly
dilutive transaction. As a result, the terms of the proposed deal
changed to 20% dilution of the share capital. Our view (both then,
and now) is that the substantial alteration of the deal underlined
that the Board at that time did not give due consideration to
shareholder value. We consider it would not be in the interests of
all shareholders for Robert Jenkins to return to the Board. We are
also concerned that Mr Rakishev's "M&A" agenda may include
re-imposing the dilutive Amur Zoloto deal on Petropavlovsk's
shareholders.
Additional points regarding this proposal
The current Board did not remove Pavel Maslovskiy and in fact
was very public in wanting him to stay. However, a new long-term
CEO with considerable mining experience, Roman Deniskin, was
appointed following Mr Maslovskiy's sudden resignation in July
2017. From a stability and continuity perspective (particularly
regarding the completion of the construction and commissioning of
the POX Hub), we would not support reversing that decision.
Nevertheless, we would not be opposed to Mr Maslovskiy joining the
current board as NED to assist in this process.
In short, whilst we believe that all shareholders will benefit
from the current strategy aimed at (a) completing the POX Hub, (b)
removing the IRC debt obligation, and (c) continuing to progress
all of the Petropavlovsk operations, the proposals put forward by
CABS and Slevin (and the lack of transparency surrounding them)
risk a reversal of that successful strategy and, in turn, material
harm to the proper governance and value of the Company.
Yours sincerely
SOTHIC CAPITAL MANAGEMENT LLP
1 Knightsbridge Green
London SW1X 7QA
United Kingdom
Enquiries
For more information:
Petropavlovsk PLC Camarco
Alya Samokhvalova Billy Clegg
Grace Hanratty Jane Glover
+44 (0) 20 7201 8900 Nick Hennis
TeamIR@petropavlovsk.net +44 (0)20 3757 4980
POG@camarco.co.uk
About Petropavlovsk
Petropavlovsk is one of Russia's leading gold mining companies.
As at 31 March 2018, the Company had
produced approximately 6.9Moz of gold.
At this time, Petropavlovsk is in the construction phase of a
state of the art pressure oxidation facility to process the
Company's substantial refractory resource base. The Company's
combined 3,430km(2) license holding has untapped resource
potential. The Company is a leading employer and contributor to the
development of the local economy in the Amur region, Russian Far
East, where it has operated since 1994.
Petropavlovsk is a shareholder (31.1%) of IRC Limited and is the
guarantor of the US$340 million project finance facility (US$234
million principal outstanding as at 31 March 2018). IRC is a
vertically integrated iron ore producer and developer in the
Russian Far East and North-eastern China. IRC is listed on the Hong
Kong Stock Exchange (ticker: 1029.HK).
Petropavlovsk is listed on the Main Market of the London Stock
Exchange (ticker POG:LN).
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END
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