Western countries have not imposed sanctions on the Petropavlovsk plc gold mining company, but this can only expedite the inevitable – the deprivation of its real assets. In the new geopolitical conditions, the yellow metal is needed for state interests and may become the main material link in the chain of commodity exchanges with the rest of the world.
On the verge of collapse
On March 25, representatives of Petropavlovsk plc delivered a bombshell, announcing that they had severed “multilateral commercial and financial ties with Gazprombank (GPB) and all of its branches. Almost all of these ties boil down to a set of Petropavlovsk's obligations to the bank. Petropavlovsk owes GPB $200 million and has a revolving line of credit worth about $86.7 million, used by Russian enterprises of the British corporation. In addition, under the terms of the loans and as collateral, GPB had the right to purchase 100% of the gold produced by Petropavlovsk enterprises.”
However, that is a thing of the past. Now Petropavlovsk plc does not owe anything to the Russian Gazprombank on the grounds that the latter is on the UK sanctions list and its assets are frozen. But there is another danger now. According to Petropavlovsk representatives, “restrictions on the purchase and sale of gold in Russia may make it difficult to find an alternative buyer of gold.” The Central Bank of Russia may act in this role, but it has stated its intention to buy gold from the largest banks hit by the sanctions in the first place. In other words, just Gazprombank and similar institutions. Moreover, the Central Bank intends to make purchases at fixed (at least 3 months) prices for the metal, in addition, significantly below market prices. Thus, under any scenario, the financial structure of Petropavlovsk, which is already very weak, is stretched very much.
Petropavlovsk does not announce what will happen to loans from GPB. Meanwhile, in addition to bank loans, the company has obligations to a wider range of borrowers. The company has about $300 mln worth of bonds in the market circulation. In May the company will pay the coupon, and in November it will repay the loan in full.
If London is likely to be sympathetic to the non-payment of loans to a sanctioned bank, one should not expect it to forgive the bonds. The initially high interest rate, exceeding 8% per annum, could attract the widest range of investors to these securities, who will inevitably wonder where their money, invested in the gold business, went at a record-breaking price for the yellow metal.
The sanctions, of course, opened the door to a new world of opportunities without loans and obligations, but in this world there are different levels of equality before the law. Thus, Petropavlovsk's bond default will not be forgiven. And yet, market participants are betting on just such a scenario. The effective yield on the bonds mentioned currently exceeds 88% per annum in U.S. dollars. Such figures usually characterize financial pyramids, but not companies of the real sector. Moreover, the business model and history of this strange company do not inspire much confidence in its future.
Apostles of the Yellow Devil
The statement about freeing Petropavlovsk from the “tangle of connections” with Gazprombank followed not only the imposition of sanctions, but also after it became known in early March that the owner of 29.18% of Petropavlovsk shares, Yuzhuralzoloto, sold this stake to Region Group, which in the financial market is usually associated with the all-powerful Rosneft owned by Igor Sechin. The sellers admitted that they were disappointed in the company's prospects after becoming acquainted with corporate governance practices, which, in their opinion, caused the drop in production results.
The fact that Konstantin Strukov, who controls Yuzhuralzoloto, intends to get rid of his stake was discussed back in September 2021. However, the fact that the deal coincides with the time of the old business model's complete collapse can hardly be considered a coincidence. The more interesting the sum of the deal looks. If we take the price of Petropavlovsk shares on the London Stock Exchange (LSE) as an entry point, at the moment of purchase Strukov gained $28 million for his stake, although two years ago, in February 2020, he bought from Roman Trotsenko a 22.37% stake (as well as bonds that could be converted into another 5.97% stake) for $170 million.
In principle, one could suspect in these price dynamics the presence of some diabolical conspiracy but in recent years, the entire history of Petropavlovsk is a real soap opera with a diabolical plot.
The Company of the Yellow Devil
Since 2017, Petropavlovsk has been the object of close attention from various and very influential investors. Strictly speaking, it is not known for certain where the “first million” came from. All we know is that the first money was raised by Pavel Maslovsky by selling his shares in the Tokur Gold company to the masses who received a license to mine gold in the Amur Region. As a result of the whole operation the license and the shareholders who splashed money to buy it ended up in absolutely different and quite predictable places: the license in the pockets of the founders, and the shares for a long paper memory of the “roaring” 1990s. But the license was not enough, so at the beginning of the 2000s the shareholders had some other investors whose names remained unknown. Apparently, there were good reasons for this.
As long as Petropavlovsk plc had excellent financial results, no one cared about this story. However, in 2014, the company got serious problems that external forces tried to solve. The first attempt was made by the Sapinda investment fund, led by German Lars Windhorst and Rob Hersow of South Africa.
Sapinda claimed to represent the interests of 10.7% of the shareholders, but proposed a very global financial plan for the complete restructuring of Petropavlovsk.
In spite of its European luster and rather high-profile name, Sapinda was backed by entirely Russian interests, as evidenced by the fact that the debt restructuring and new share issue negotiations were led by Artem Volynets, who used to work in the structures of Victor Vekselberg's SUAL. But he gained fame as an ideologist in 2007 of Rusal, SUAL and Glencore's alumina assets. It is unclear what Volynets wanted to consolidate and why, but, according to a participant of the negotiations at the time, Sapinda's representatives behaved quite confidently declaring strong political support of their initiative.
In April 2014, ACG AMUR CAPITAL GROUP LIMITED was registered in Cyprus, and Artem Volynets became its CEO.
It was supposed to be the center of consolidation of the gold mining sector on the territory of the entire CIS, similar to Rusal. However, Sapinda's plans were rejected by Petropavlovsk shareholders despite all political instructions.
It is even more interesting that in April 2016, Petropavlovsk decided to sell 30.3% of its shares in favor of Musa Bazhaev's businesses that were issued specifically for this transaction.
In fact, this shareholding then began to pass through the hands of various oligarchs. At different times, it was owned by Musa Bazhaev, Viktor Vekselberg, Kenes Rakishev, Toman Trotsenko, Konstantin Strukov and the current, so far “unnamed” Region. However, it is difficult to imagine now that a London corporation could own Russian gold mining enterprises with impunity. So, it is most likely that the investors of Petropavlovsk should get ready to say goodbye to the gold. As with a past dream.