Petropavlovsk’s Iron Ore Prospects

By: Miles_Banner

We last wrote about Petropavlovsk back in December 09. Back then we noted the unusual selling of shares from Peter Hambro and Pavel Maslovsky, the two directors. Last week one of our readers drew our attention to the fact we’ve not spoken about them for a while. Fear not, they have been on our radar and as of last week fresh news caught our interest.

Firstly Chief Executive Pavel Maslovsky told Reuters last week that the company is considering a Hong Kong IPO and long term bank loans for it’s iron ore projects. And secondly the Chief Financial Officer has sold just under half his shares in the company (53, 846 shares at just over £10 per share).

Aricom – and the iron ore prospect

Aricom was the demerged sister of Peter Hambro Mining (the former trading name of Petropavlovsk). A producer of iron ore, Aricom was attracting the attention of investors because of the geological position of it’s operations – close to the Russian border with China.

Currently China is the biggest purchaser of iron ore in the world. The World Steel Association (WSA) predicts China’s steel product demand will increase by 19 percent to 526 million tons this year. In 2009 they accounted for production of 47 percent of the world total crude steel (according to the WSA).

What’s more the demand for iron ore looks set to rise – Deng Qilin, the chairman of the China Iron and Steel Association, warned of a large rise in bulk prices for iron ore this year… Similarly last week, Zhang Xiaogang, chairman of China’s Angang Steel, (the largest steel group listed in Hong Kong), told journalists at China’s yearly parliamentary meeting in Beijing he believed prices would rise further than expected –

"Iron ore negotiations are under way. I personally am very pessimistic about the results… China’s steel mills originally expected a 20pc price increase, but they will not get that."

A price hike looks imminent. [read about iron ore prices further here]

Most of China’s iron ore is bought from BHP Billiton, Rio Tinto and Vale. The problem with this is the associated shipping costs. By setting up operations much nearer to the steel mills of Northern China Aricom attempted to resolve the problem. This made them an attractive proposition for investors, especially when you took into account they had $257m in cash reserves.

Then in 2009 the renamed Petropavlosk acquired Aricom for £294.5m ($442.9m). Since then news of POGs iron ore arm has been relatively muted, until now.

Liquidity – in current economic times

Peter Hambro summed up the continuing pains of a company operating in today’s climate. In this video he describes the perils of illiquidity and the need for cash.

The company needs liquidity to invest in it’s iron ore venture and it needs liquidity because of the turbulent market conditions. The recent statement by Chief Executive Pavel Maslovsky reiterates Peter Hambro’s interview. In the news feature Mr Maslovsky told Reuters the company would need $500 million in the next year or two to finance its iron ore projects. They went on to note that a decision on funding would be reached in the first half of 2010.

Together with the rising cost of iron ore this is now a timely moment to be raising funds for/from its iron ore part of the business.

With the cost of iron ore heading higher the attraction of Petropavlovsk’s iron ore business is getting bigger. Certainly if they do decide to sell there will be plenty of willing buyers. And the sale would provide the company with that much needed liquidity. Underwriters, Investec analysts, valued POGs iron ore assets at $550m – 173p per Petropavlovsk share.

POG Chief Financial Officer sells shares before full years figures released

On a very different note Petropavlovsk will publish their full year results on the 25 th March. In this the group is suppose to be reporting, for the first time, an estimate of its gold reserves. Follow Gold Price Today for that week’s issue.

Taking into consideration the nearing full year results it is significant to see, last week, the Chief Financial Officer, Brian Egan, selling just under half his shares in Petropavlovsk. Brian Egan sold 53, 846 shares at just over £10 per share, through the SG Hambros Trust Company Ltd. With just under 3 weeks before the full year results it is a notable decision that begs the question why. This follows the recent decisions to sell shares from the two directors, which we noted in December. Together they are cautious signs for investors. Unfortunately we don’t know what to make of these actions, there’s no further indication of motives. So we’ll closely read the results when they are out and see if this gives us any hints.

In summary the shift in attention to the iron ore part of the business is certainly being played out as the international demand for iron ore rises. It’s geological position next to China makes this part of the business an attractive proposition for investors if POG do decide to sell or raise cash. As Peter Hambro mentioned in the video they’ve learnt that in the current climate you cannot afford to be without liquidity. With the added conundrum of the CFO’s share sale this promises to be an intriguing few weeks/months ahead for Petropavlovsk.

Keep reading Gold Price Today and stay tuned for next week.

Regards,

Digger Gold Price Today

P.S Digger writes a weekly email analysing the gold price and the gold industry. Visit Digger at Gold Price Today (http://goldpricetoday.co.uk).

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