Gold producer Petropavlovsk blocked from bond payment as UK sanctions bite

Petropavlovsk has been thrown into fresh turmoil after the Russian-focused gold producer was blocked from making a payment on one of its bonds when the UK targeted its main lender with sanctions.

The London-listed miner said it was prohibited from making a $560,000 interest payment due on Friday after the UK froze the assets of its main lender Gazprombank.

“The company is urgently considering with its advisers the implications for the group’s activities and financing arrangements resulting from Gazprombank being designated for the purposes of an asset freeze,” the company said in a statement.

Petropavlovsk, which mines gold in Russia’s far east and has its headquarters in Moscow, has borrowings and gold sale agreements with the banking arm of the Russian gas giant.

These include a $200mn loan and an $86.7mn credit line. In addition, Gazprombank also buys and sells all of its gold production, which last year topped more than 500,000 ounces, worth more than $1bn at current prices.

Petropavlovsk said the sanctions prohibited the sale of gold to Gazprombank, adding that the “restrictions on purchasing and selling gold in Russia may make it challenging to find an alternative purchaser”.

Peel Hunt analyst Peter Mallin-Jones said the Gazprombank asset freeze had effectively stopped Petropavlovsk from being “able to service its outstanding debt” and made it “considerably” harder to sell its gold.

“Petropavlovsk has just seen its operations get substantially more complex. This interrupts its ability to sell its gold as well as raising material risks around the ability to refinance its November 2022 bond,” he said.

There is just over $300mn of principal outstanding on the bond and analysts reckon the company will be forced to refinance with Russian banks. But with Russian interest rates at 20 per cent this will be expensive and a drain on cash resources.

“With the Russian Central Bank having recently announced it is willing to act as a buyer of Russian mined gold, it may be that this ends up being the buyer of last resort for Petropavlovsk’s gold,” said Mallin-Jones.

Shares in Petropavlovsk have plunged almost 90 per cent since Russia’s February 24 invasion of Ukraine, leaving the group with a market value of £70mn. They were down 17 per cent to 1.41p on Friday. At the end of June, the company’s net debt stood at more than $530mn.

The company has also been ejected from the FTSE 250 index and is set to be deleted from all FTSE indices after many brokers refused to trade shares in companies with significant Russian assets.

Petropavlovsk’s biggest shareholder UGC, a Russian gold company, dumped its holding earlier this month. It was picked up by a Russian billionaire who part owns Credit Bank of Moscow, another sanctioned lender.

Petropavlovsk was founded in 1994 by Pavel Maslovskiy and Peter Hambro, a scion of the London banking dynasty.

It has been become best known for a succession of bitter shareholder spats involving Russian and Kazakh billionaires.

In the most recent episode, the company’s co-founder Pavel Maslovskiy and several other directors were ousted from the board after UGC, which is owned by Russian businessman Konstantin Strukov, voted against them.

The boardroom coup saw a new management team parachuted in to run the business. It is led by Denis Alexandrov, former head of Highland Gold, a Russian miner in which Roman Abramovich once had a large stake.

Petropavlovsk’s most valuable asset is a state of the art pressure oxidation plant, one of just two in Russia. Commissioned in late 2018, the so-called pox hub allows it to produce gold from refractory ore, which is difficult to process but abundant in Russia.