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Petropavlovsk's Hambro just can't figure out gold's fall -- or so he says

Section: Daily Dispatches

Peter Hambro's Nightmare When His Russian Gold Miner Nearly Went Out of Business

By Andrew Critchlow
The Telegraph, London
Saturday, July 4, 2015

From his Mayfair office overlooking the gardens of Buckingham Palace, Peter Hambro, the scion of the storied City banking dynasty, is in reminiscent mood.

Earlier this year he nearly lost control of Petropavlovsk -- the Russian gold mining company he helped to create over 20 years ago with his friend Pavel Maslovskiy.

A collapse in the prices of precious metals nearly forced it out of business but the company was saved at the eleventh hour when shareholders approved a rights issue.

... Dispatch continues below ...


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Gold is in Mr Hambro's blood and, to illustrate his belief in its enduring value despite its fluctuating price, he pulls out of his pocket a money clip. Fashioned from two American gold coins, the clip once belonged to his late father who had established the family name in merchant banking circles following the Second World War.

According to Mr Hambro, his father who had once banked Sheikh Shakbut bin Sultan al-Nahyan,the ruler of oil-rich Abu Dhabi in the 1960s, carried the precious clip everywhere he travelled following the war. His reasoning was that, no matter what the circumstances, the value of the gold in the clip would always outweigh the currency it held and, therefore, be enough to buy him safe passage back to Britain from anywhere in the world.

"If I was in Athens now and I had a few gold sovereigns I would be feeling a hell of a lot happier than if I was relying on my euros in a bank, or my ability to get it out of a cash machine," said Mr Hambro.

However, his deep-rooted belief in gold was also the reason for his near undoing. Petropavlovsk -- which up until 2009 was known as Peter Hambro Mining -- has been one of the biggest victims of the collapse in the price of gold from a peak above $1,900 per ounce to its current levels around $1,200 per ounce.

The company, which is listed on the London market, had borrowed hundreds of millions of pounds and invested heavily in the development of a Malomir deposit in Siberia.

The mine has an abundance of refractory ore, which is relatively cheap to extract but expensive to process, requiring the use of pressure oxidation plants to transform it into gold.

"We were certain that the gold price was going up, which it did. We wanted to increase our production. We spent a lot of money increasing capacity. One of the things we saw was that the world was running out of easy-to-process ore," he said.

Mr Hambro sold the idea to investors on the basis of the gold price continuing its upward trajectory, and when it went into reverse the company had to perform an about-turn on its plans.

"Nothing that we did was illogical," he said. "We thought it through, but we got it wrong. The gold price just crashed. I had told the world that gold was going to $2,000 per ounce and I wasn't far wrong, but when it came down it went thumping down. The momentum of it got away from us. We didn't pack up, we carried on and turned things around from refractory to non-refractory and basically did our best to make it work and eventually we had to put our own money in to do that."

The financial costs of the mistake have been crippling for both the company and Mr Hambro, who puts his own losses from the debacle in the region of "hundreds of millions." Shareholders have also suffered. Petropavlovsk's shares are down almost 50 percent so far this year at around 7 1/2 pence. At its 2010 height, the miner's share price nudged L13.50.

"What I have said to equity holders is that this has been effectively 21 years of my life. For the first eight years I worked for free and I put my own money into it with Pavel [Maslovskiy]. I was 50 when I started this and I'm now 70. What I built got destroyed," he said.

According to Mr Hambro -- who originally ventured beyond the Iron Curtain in the Cold War era to broker gold deals with the former Soviet Union -- at its peak Petropavlovsk had an enterprise value of around $4 billion (L2.5 billion) and net debt of around $500 million.

Now the company's enterprise value stands at around $1 billion and debts of $700 million, a far more worrying ratio for investors to absorb, especially when gold prices show little sign of returning to their previous highs.

"It was just a black hole. Everything was disappearing and there was nothing we could do to stop it until the very last minute when we said, 'OK, we will do a debt-for-equity swap with the bondholders,' and Pavel, myself, and our other partner put our hands in our pockets and after that we were safe again," said Mr Hambro.

Adding to his problems caused by the plummeting gold price, economic sanctions imposed on Russia by the West have complicated the company's dealing with its bankers.

"They have had collateral effects rather than a direct impact. It's very difficult to get an American investor or a Canadian investor interested. Not that bad for equity but very bad for debt. In terms of our relationship with the banks, they have problems with interbank lending, which makes things difficult," said Mr Hambro.

Despite nearly losing control of the company in an episode, which Mr Hambro admits left him genuinely "scared," he has lost none of his enthusiasm for Petropavlovsk and turning the company around.

The company is producing around 680,000 ounces of gold per year and its guidance for the next five years is for output to remain at around 600,000 ounces, which will generate significant cash flow.

"I couldn't walk away. I'm captain of the ship and I would have to go down with it. I'm just that kind of guy. I come from a long line of people who have behaved well. My father, mother, grandparents, great grandparents would not have been happy if I had done anything else," said Mr Hambro.

Based on gold remaining within its current range, Mr Hambro is confident of maintaining a margin of $500 on every ounce that the company can produce, which is equivalent to around $300m of cash flow. "Our inherent strength is that we are in an area with a fantastic amount of gold," he said.

Provided that there isn't another major dip in gold prices, this should mean that Petropavlovsk could be debt free by 2019. Restoring the enterprise value of the business, he says, is his "number one" priority.

"It's equity shareholders who have taken the beating. What we have got to do now is pay off that debt because we have spent all the money on new plant and equipment and our capital costs going forward are very low," he said.

Given the growing economic uncertainty in Europe and the recent crash of the Chinese stock markets, the likelihood is growing of gold prices rising again as investors search for safe-haven assets.

However, Mr Hambro questions just how much gold is actually in circulation, making it hard to predict prices of the precious metal.

"For some reason I don't understand why gold has reacted the way you would think it would react. Gold has gone back into the hands of governments, particularly in China and Russia. China has encouraged people to go out and buy gold.

"The Shanghai exchange has shipped an incredible amount of gold to the Chinese people but where that has come from I don’t know. The fact it takes five years for the German central bank to get its gold back from the Federal Reserve is very strange. If it's really there, it should be possible to deliver much more quickly than that," he said.

Immaculately dressed as he sits in his oak-panelled office with walls adorned by his own watercolour paintings of the English coastline, Mr Hambro, who has spent a lifetime working in and around the City, shakes his head at some of the financial scandals that have rocked the public's confidence in business. He is also aghast at the bonus culture, which continues to dominate how business is done in the Square Mile.

"I grew up in a City family. The City was a small village when I started where everyone knew everyone and in my view it was very well regulated. There were no rules, but people understood that they had to behave properly and they did. I didn’t get a bonus for most of my City career. It wasn't something you relied on.

"You lived on your salary and people lived really, really well," he said.

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