Hambro’s Dream of Russian Gold Runs Into Mountain of Debt – by Thomas Biesheuvel (Bloomberg News – August 8, 2014)


Peter Hambro dared to go where few others would, in search of gold in 1990s Russia. Investors who followed him reaped tenfold returns over eight years through 2010.

A repeat of that rich success now looks far away as Petropavlovsk Plc (POG), the company Hambro co-founded, confronts a mountain of debt.

The company was on the cusp of a place among the blue-ribbon names on London’s stock exchange until it borrowed more than $1 billion to expand production at its mines in far-eastern Siberia, six time zones from Moscow. The strategy unraveled when a dozen years of gains for bullion prices ended abruptly in 2013.

“The worst position you ever want to be in a falling commodity environment is having a half-built mine,” said Cailey Barker, an analyst at Numis Securities Ltd. in London. “It’s very hard to turn the Titanic around. It may be difficult to come back from here.”

In 2010, Petropavlovsk’s market value exceeded $3 billion and it was mentioned as a future member of the benchmark FTSE 100 Index. That’s shrunk to $111 million, dwarfed by about $819 million owed to banks that the company says now effectively control cash flow from its mines.

In April, Petropavlovsk said it won’t be able to meet the terms of bank loans by the end of this year and will struggle to repay bonds due in early 2015. Hambro, the company’s chairman, said the lenders have agreed in principle to relax covenants on the debt and he’s seeking to negotiate new terms.

‘Helpful’ Banks

“The banks have been extremely helpful,” Hambro, 69, said in an interview Aug. 4. “We have a plan, we’ve been working on it a long time, it hasn’t been easy. I think the tide has turned a little bit.”

The company dates to a meeting in the garden of his home north of London 20 years ago. Hambro, a member of a trading and banking dynasty, agreed to invest $5 million in a Siberian mine near the Chinese border. The business proposal became Peter Hambro Mining Plc, which was renamed Petropavlovsk in 2009.

The mines’ cash flow is now controlled by Moscow-based lenders OAO Sberbank, VTB Group and OAO Alfa Bank. The banks want to be sure Petropavlovsk has a viable future before they agree to relax the conditions attached to its debt, according to a July 27 company presentation

Sanctions against Russian banks intended to get President Vladimir Putin to back down in Ukraine are an added obstacle to Hambro’s funding needs.

Butchers, Bakers

European Union governments agreed last week to bar Russian state-owned banks from selling shares or bonds in Europe, cutting the money available for them to lend. Hambro says that while there has been no direct impact on his company, the sanctions are likely to have a collateral effect on the banks.

The concern extends beyond the banks, shareholders and Petropavlovsk employees.

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