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a real shame the accounting adjustment re the conversion is so large and takes the shine off the results. I really hope when the real nature of this item sinks in or made clearer that the sp will recover. One hopes we can get rid of all bonds soon and since the P`s are gone, not go down that road again. The russian banks are good old fashioned banks who lend for industry , unlike ours who exist to lend for house buying and other asset buying in our great rentier economy.
no longer much need to debate old versus new anymore. It seems obvious now that Pavel M was no hero nor his buddy mr peter arbuthnot bondholder. Seems strange what seems a simple operation in one area requires so many subsidiaries and the company relies on them handing over money they control. would be interesting to know what arrangements the dying Pavel locked in. People use to accuse them of nepotism re IRC but we had no idea of the extent of this disease. Hope they can sort them out quick; never heard in the UK of employees preventing their bosses from entering the company`s offices.
I'm scratching my head about the adjustment to the P&L, to be honest. I can see that the value of the convertible bonds had increased. I just don't see how the liability increased.
I think the recent bond convertibles were just at the end of this financial period, As the convertibles paid 13p to get a share currently worth 27p ( as we know it was about 36p at time of conversion ) the company is issuing a share asset at a discount, (paper) loss to current value , which not only affects the balance sheet , but the loss adjustment in this case has to be accounted for on the profit and loss account , so its best to just look at the Operating profit, and that is a more cheery view. If for some reason POG assets need revaluing upwards - i have to admit that is unlikely at present, then the profit and loss account would have a positive paper profit added due to revaluation. Im not an accountant, but I think thats how it works. This share should be good by February, up in the 50s hopefully on next results, ( with average gold above $1890 ) but please can we have an independant director appointment ot two , soon soon to calm the market . GLA
brand its all well and good saying the banks will lend, but we converted to the bonds because we were at the behest of them and they controlled the finances. And Gazprombank are charging interest on the forward gold purchases so they are not doing it for free.
So are they saying the difference between 13p and say 33p Has to be witten off as a loss ? Has this always been the case ? Very confusing
If the sharecapital is a credit on the balance sheet, the debit has to go somewhere. Nowdays the bottom of the P&L. Pity this item affects Non-Underlying EPS.
I dont think this comes back to the P&L at a later date. But it is technical, not operational.
"I think the recent bond convertibles were just at the end of this financial period,"
That is not true Copper3, the bonds were converted between Jul 22nd and the 15th Oct, so they were converted in Q3, not in the 2020 H1 accounting period.
"US$(122.2) million fair value non-cash loss from re-measurement of the conversion option of the convertible bonds, reflecting the increase in the underlying share price of the Company;"
Like others on this board I am struggling to understand how you can declare a loss of $122m on bonds that have a nominal value of $125m! This is not about the already converted bonds, as the loss was declared before that. The loss is presumably on the bond's potential cash conversion value. However, as already seen, they are likely to be exchanged for shares not cash. As I see it, the company has made no loss on these bonds, and nor is it likely to. The only losers are the shareholders whose share holding has been diluted by the already executed bond conversions, and future ones.
This looks to me, like an artificially manufactured loss to reduce taxes.
Kenj & others concerned about "struggling to understand how you can declare a loss of $122m on bonds that have a nominal value of $125m! " ... please let me explain.
Without going back to get the exact figures I'm going to use round figures from memory ... this will impact the calculation by =/- 10% but not make my statement materially wrong.
The Convertibles included options over around 900mm shares at around 10p ... so when the shares had a value of 25p on 30th June the "intrinsic value" of those options was 900mm x (25p - 10p) = 135mm ... now a bit of this value had already been reported in the 2019 full year accounts (when the sp was around 10p ... and the options would have had some "time" value) but the bulk needed to be reported as a "gain" to the option holders and a loss to the option seller (POG).
We should be thankful that the sp fell from 30.95p to 25.3p on the last day of June otherwise this loss would have been almost $50m higher. With a good chunk of the options now converted the 'loss' that will need to be booked in H2 is going to be lower but since much of the conversion took place when sp was >35p we can probably still expect another loss in the $50-100m range.
This was a large part of my reasoning (incorrect as it turned out) that the sp wouldn't rise significantly above the option price. I couldn't see the market cap increasing from 200m to 1bn (as it has) when 250m of that had to be attributed to the Convertible holders not the regular share-holders ... but I was wrong !
RetiredBanker,
I fully understand that the value of the CB's would be around twice the issue value when POG's share price was in the 20p to 25p range. That is why I have frequently argued with posters who suggested that we might simply buy them back.
I also see that the bond holders could easily double their money by converting into shares and then selling them at market value. What I don't understand is how POG loses money on this.
After the CB holders elected for conversion into shares, POG had the right to insist on a cash settlement, rather than issue shares This would have been at the current share price, not at the issue price. Had we elected to do this then we may well have paid $122m more than the $84.8m value of the bonds already converted. The remainder of the bonds are likely to also be converted into shares. This means that we will have borrowed $125m and paid back zero dollars.
We will of course have issued over 900m new shares, but this is at zero cost. As I said previously the shareholders lose out through dilution, it costs the company nothing.
I accept that there is a notional loss if the company was considering paying the cash alternative, instead of issuing shares. But we all know that this is all it is - notional. POG would struggle to buy the bonds back at the $125m issue price. There is no way they could afford to buy them back once their price doubled, and later trebled.
Unlike you I do not have a banking or financial background. I worked in engineering, ie: with real not abstract things. And there is absolutely nothing real about POG losing $122m on these CB's.
Kenj,
I agree with you, this accounting entry is incorrect. The final position is that the company needs to eliminate 125m of debt and create 125m of share capital(assuming full conversion).
They already have a 125m liability for the debt.
Therefore it is a simple dr 125m - debt and cr 125m - share capital (assuming full conversion). No p&l is involved. Having had a little time to think about it, it doesn't make sense. I now believe this is incorrect.
Kenj - you yourself say that if POG had opted to cash settle the exercise of these options they would have had to pay over the $122m more than the $84.8m value of the bonds already converted in 'real cash' which would obviously have come from the POG bank account as real money and thus a real expense.
If you were correct in believing that stock and options could be accounted for as zero cost to the company then you would have found the pot of gold at the end of the rainbow for every company on the planet ... just pay all your employees in stock / options and you have no payroll expense .... yippee !!!
I will however admit that it did take the Accountancy Profession about 20yrs from the creation of the Black Scholes Option pricing model in 1973 ... and a number of accounting scandals in the 1980's ... until the mid 1990's to themselves figure out that options were a real expense
RB,
if this is a notional "what-if they settle in cash charge , in the future" then it needs to come back to the P&L as a positive at the year end because they didn’t settle in cash. I find it odd that they would take such a hit, because in fact they already know the future. They didnt buy these shares back at a market rate they issued them.
Actually maybe this is a provision for the unconverted element at an average price of 34p per share.
RetiredBanker,
In Sep 2019 the company decided to raise $125m by issuing Convertible Bonds to that value.
Alternatively they could have offered a Placing of new shares to institutional investors.
Had they done this they would have added $125m to the balance sheet that they would not have had to repay. Shareholders though would have suffered dilution.
Instead they issued $125m worth of Convertible Bonds. Due to the sharply rising share price it is a near certainty that those bond holders who haven't already, will convert these bonds for shares, before they terminate; at which point they simply get their initial $125m back.
So POG have added $125m to the balance sheet that they will not have to pay back.
Would POG have declared a $122m loss a year or so after the Placing, had they gone down that route? I don't think so!
These smart Alec number crunchers can call it what they like, but POG have made no financial loss on these bonds. On the contrary, it could be argued that they will make a $125m gain, as they will end up repaying nothing.
Perhaps the intention is to make next years figures look really good by trashing last years!
Just on the theme of these convertable options. When they decided to go down this route the share price was below the conversion price.
This is aimed primarily at Retired Banker and Kenj, any others who think they know the answer please advise.
Correct me if I am wrong but did the company not buy options for these ?? How do these work.
Sorry Rusty, I have no idea if POG purchased any options on the CB's.
Kenj - you seem to be missing the point that the convertible option has value over and above the intrinsic value of the bond.
POG would not be able to redeem these bonds at par ... they would have to pay the current market price for them which is currently around 250 .... put "XS1843433555 price" into your browser !
$84m have been redeemed, $38m remain outstanding ... but they're now worth $95m.
This is the true value of the liability POG has not the $38m notional value of the bonds
... only way they can reflect this through the accounts is to go Debit P&L (Loss) $57m ; Credit Liabilities $57m
This still has to be recognised through the H2 2020 accounts ... and if POG sp rises from 25p to 30p or 40p before y/e then this "loss" will be greater.
Rusty - as for your question didn't the Company 'buy' options for these ... I think the answer must clearly be No - otherwise they would have a hedge in place to mitigate them having to recognise this loss on the increased value of the options. You would also be correct in thinking that if they had bought 5yr options on POG sp at 10.5p (or whatever is the exact conversion price) back in Sept last year when the sp was at 9.5p then the option premium they would have had to pay on 900mm such options would have been considerably less than the $200m odd that these options are costing them now
"Kenj - you seem to be missing the point that the convertible option has value over and above the intrinsic value of the bond."
Yes RetiredBanker, value for the bondholders, not for POG.
I am sure that we both know how these bonds work, but I'll clarify it for anyone else reading this board who may not.
1. The bonds expire in Jul 2024, and if not already cashed in POG will return the £125m par issue value to the bondholders.
2. The bondholders can, before Jul 2024, elect to convert their bonds into a predetermined number of shares.
3. At that point POG has the option to pay the bondholders the Cash Option - the current value of these shares, rather than issue the shares.
4. The Cash Option is purely at the choice of the company. The bondholders cannot demand this.
The choice of converting to shares represents a substantial gain for the bondholders. But the most that POG can be forced to pay the bondholders is $125m. As they issued them at $125m and repaid them at $125m they have lost no money.
The fact that these new shares are worth two or three times more than the issue value represent a very healthy profit for the bondholders, but I do not see this as a loss for POG.
We all bought shares in the RI for 5p, which are now worth 25p. A handsome profit for us, but should this not be recorded as a loss for POG using your logic?
The only way that POG could make an actual loss on this, is if they were to pay the bond holders the full current market value of the shares that they elected to convert. And we all know that this is never going to happen - so why does this pantomime scenario need to be recorded as a financial loss in the accounts?
POG shareholders really need to thank Stukarov/others for converting, because if conversion had not taken place that technical FV adjustment would have been -$406m. We now really need the last 30% to convert.