Petropavlovsk Shares Slump 12% on Profits Fall

LONDON -- It's never easy being a gold miner, as investors in Petropavlovsk (LSE: POG.L  ) will attest. Despite an enviable expansion record -- its gold production is likely to rise to 700,000 ounces this year, having been just 70,000 ounces 10 years ago -- the shares were whacked today after it reported a steep drop in profits from $108 million to just $11 million for the first six months of 2012.

A variety of cost increases were the cause, namely a combination of higher depreciation, interest costs and unfavorable exchange rates. This more than offset a 27% rise in production levels over last year, plus a 13% increase in the price of gold sold.

Gold production came to 279,000 ounces in the last six months, but Petropavlovsk is sticking with its full-year target of 700,000 ounces, which should result in over $1.1 billion of revenue for the full year. Production is traditionally weighted to the second half of the year, due to the harsh Russian winter.

The interim dividend was held at 5 pence, although net debt has increased markedly to $1.1 billion due to Petropavlovsk's heavy capital expenditure program. The company's level of debt is expected to rise further over the remainder of 2012.

While Peter Hambro, Petropavlovsk's chairman, was disappointed by the fall in profits, he remains upbeat about the group's longer-term prospects:

The Group's exploration program continues to bring positive results, with an increase in the Group's resource base of 3%, notwithstanding the depletion of by mining activities. New resources at Elginskoye, a deposit located in close proximity to Albyn which is included in our Resource statement for the first time, are especially important as they confirm the possibility of a significant increase in gold output from this mine in the future.

I am pleased to advise that we expect all our mines will achieve the full year target of minimum 700,000 ounces in production. Interest costs and depreciation are expected to remain broadly in line, while our capital expenditure requirements are covered by our existing debt facilities.

Looking further ahead, we continue to focus on the sustainable growth of our business. The commissioning of our pressure oxidation hub at Pokrovskiy remains on track and, once commissioned, is expected to provide us with unique opportunities for growth in Russia.

Despite this, the shares fell 12% this morning to 410 pence. They are now down 40% over the last year and some 75% off their peak, which was achieved way back in 2006. One interesting comparison is the fact that Petropavlovsk is currently valued at 765 million pounds, a mere fraction of Randgold Resources' 5.8 billion pounds, despite the fact that the company's production levels are currently quite similar. Randgold, however, does have clearer expansion plans and net cash on its balance sheet.

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