Hambro’s Dream of Russian Gold Runs Into Mountain of Debt

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.

“At current gold prices, the company cannot repay its debt in the next 10 years,” Petropavlovskiy said.

Hambro’s Dream of Russian Gold Runs Into Mountain of Debt