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The Times: Russian threat takes shine off PHM’s gold prospects

September 25, 2007
Nick Hasell: Tempus

Shares in Peter Hambro Mining (PHM) can usually be relied on to keep pace with the price of gold. That they have not done so over the past 12 months – spot bullion prices have risen around 26 per cent, PHM’s shares a more modest 11 per cent – can largely be pinned on Oleg Mitvol.

Late last year, the deputy head of Russia’s state environmental watchdog caused consternation in London by threatening to revoke five of PHM’s licences, claiming that the company had either violated environmental rules or done nothing to develop the sites in northeastern Russia. Given that Mr Mitvol was instrumental in the dilution of Shell’s stake in its $20 billion Sakhalin II project, it was hard for shareholders not to take notice.

While that spat appears to have abated – the two sides have since met and the threat has been quietly dropped, for now – it is worth keeping in mind by investors who might otherwise be dazzled by yesterday’s first-half results. With production at PHM’s flagship Pokrovskiy mine up 24 per cent year-on-year and the company able to sell its output at $652 an ounce, against $573 last time, operating profits rose 75 per cent to $35.3 million. That outcome was helped by the mining of higher grades and increased productivity from better processing techniques.

Yet the most impressive figure to emerge from yesterday’s numbers is that PHM has been able to reduce its operating costs against a backdrop of 8 per cent inflation in Russia and massive pressure on wage, equipment and maintenance costs across the mining sector worldwide. In total, cash operating costs fell 14 per cent – a sharp contrast to Highland Gold, a smaller London-listed play on Russia, which, also hurt by operational difficulties, yesterday reported a 45 per cent increase in costs.

The other advance is that Pioneer, PHM’s second big mine, was commissioned on schedule this month. On most forecasts, Pioneer is expected to be producing 250,000 ounces a year, putting PHM firmly on track to meet its one million forecast.

Quite when it does is a moot point, however. With Malomir, which is due to come on stream in 2009, still at a relatively early stage of development, it is increasingly likely that PHM will have to push back its target of one million ounces by that date. However, in valuing the shares at £12.17, or eight times forecast 2009 earnings, the stock market already appears to have priced in delays.

Political risk in Russia may have increased over the past 12 months but in its 13 years of operation in the country, PHM – which boasts a wholly Russian workforce and a large base of Russian shareholders, including Pavel Maslovsky, its influential deputy chairman – has proved adept at finding a way through the thicket. That skill, its operational efficiency and strong underlying demand for gold make it worth holding on to.

http://business.timesonline.co.uk/tol/business/markets/article2525804.ece

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