Nordgold (NORD-LSE) counts itself as one of the best performing, lowest-cost gold producers in the industry today, and yet, curiously, few North Americans know anything about it.
Russian billionaire Alexey Mordashov, owns a 90.5% stake in the company, whose nine mines—five in Russia, one in Kazakhstan, and three in Africa—produced gold in the first half of this year at all-in-sustaining costs (AISC) of US$722 per oz., down 20% year-on-year, and generated US$141.2 million in consolidated free cash flow.
The company consistently pays 30% of its net profits to shareholders in the form of dividends. Last year those dividends rang in at US$39 million, and already in the first three quarters of this year, have reached US$52.6 million.
“Hopefully we’ll have something more to add to dividends in the fourth quarter, and based on our internal assessments, I think those types of dividend pay-outs should be possible next year as well,” Nikolai Zelenski, the company’s 42-year-old chief executive, says in an interview. “We are comfortable doing this because we generate substantial cash flow, and are able not only to give back to shareholders, but also drive our growth program as well.”
Nordgold is also one of a handful of companies in the industry that is buying back shares, and has spent about US$29 million on the exercise, so far this year. “Our shares are very under-valued and they represent accretive acquisition for us,” Zelenski explains. “The buyback is also a good way to provide liquidity for some shareholders who want to sell their shares. So there’s a kind of dual purpose for this buyback program and it’s been successful.”
In terms of production, the company has demonstrated a compound annual growth rate of 31% in six of the seven years since it was set up as the gold division of Russian steel giant Severstal. (Nordgold was spun off in 2012.) Gold production has risen from 193,000 oz. in 2008 to 985,000 oz. in 2014, and this year Zelenski forecasts production will be between 925,000 oz. gold and 985,000 oz. gold at AISC of US$750-US$800 per oz.
“In my mind it’s a compelling performance—we have been meeting or exceeding our guidance for three years in a row,” he says, adding that the company put its newest mine, Bissa, into production in January 2013, three months ahead of schedule. The mine, in Burkina Faso, produced 254,000 oz. gold in 2013, exceeding the company’s guidance of 100,000 oz., and at total cash costs of US$468 per oz., well below Nordgold’s original forecast of US$700 per oz.
Bissa brings Nordgold’s mines in the West African nation to two, and the company also owns the Lefa mine in nearby Guinea. In Kazakhstan, it owns the Suzdal mine, and the remainder of its mines—Berezitovy, Buryatzoloto (the Zun-Holba and Irokinda mines), Neryungri and Aprelkovo—are spread across Russia.
Looking ahead to future growth, Zelenski describes the company’s project pipeline as “probably one of the best in the industry,” with one mine under construction (Bouly in Burkina Faso), one ready to construct (Gross in Russia), one in feasibility (Columbus Gold’s (CGT-T) Montagne d’Or in French Guiana, in which it is earning a 50.01% stake), and seven in the early stage of exploration, including Northquest’s (NQ-V) 100%-owned Pistol Bay project in Nunavut. (Nordgold has a 52.3% stake in Northquest.)
“Our new mine, Bouly, in Burkina Faso, will be launched in the second half of 2016 and will add 120,000 oz. of production and we have all the permits for the Gross project in Russia’s Far East, and that is going to add 230,000 to 250,000 oz. gold,” Zelenski says. “Then we have Montaigne d’Or in French Guiana in the feasibility stage, and that looks like an exciting project too. Further, we have early stage projects like Pistol Bay that we’re quite excited about, so with this type of pipeline we are fortunate to be building high-quality mines in the next ten years.”
Zelenski, who has a PhD in molecular genetics, and an MBA, started his career in 2001at McKinsey & Co.’s offices in New Jersey, initially working for the consulting firm’s pharmaceutical clients. But it wasn’t long before he was drawn back to his homeland. “I saw there were a lot of exciting things happening in Russia so I moved to the Moscow office of McKinsey,” he explains. “Most of their clients in Moscow were industrial commodity producers and that’s how I got exposed to heavy industry and commodities.”
In Moscow, Zelenski worked at McKinsey’s mining industry practice, before making the jump in 2004 to one of his clients, steel giant Severstal. Zelenski was head of strategy at Severstal’s mining division, which held a suite of coal and iron ore assets. Then, in April 2007, Severstal decided to diversify into gold, and Zelenski was appointed director of the company's gold division.
“In 2007 and 2008 we acquired several mines: Aprelkovo and Neryungri in the Far East of Russia, and Suzdal in Kazakhstan,” he says. “Later we took advantage of the financial crisis and acquired High River Gold, getting exposure to Africa, then we built it further, by acquiring the Lefa mine in Guinea. That’s how our initial portfolio has developed. Once we optimized and integrated these assets in one business model, we spun off and became Nordgold, which was listed in 2012.”
Zelenski says the company has been able to keep its costs down by a combination of having high-quality assets, finding efficiencies, and macro-economic factors such as the depreciation of the Russian ruble and lower oil prices. “If these were bad ore bodies we wouldn’t have such low costs,” he explains, “and secondly, we have focused in the last several years very consistently on our efficiencies, improving all types of processes throughout the value chain and that’s generating results: We have less dilution, a little better stripping ratios and higher recoveries...all these things add up.”
But he is the first to add that the world's wobbly economics haven't hurt. The Russian ruble has depreciated more than any other currency, he notes, and 40% of Nordgold’s production is in Russia, while lower oil prices have kept costs lower.
Another factor behind Nordgold’s success, he says, is having a good team. Louw Smith, Nordgold’s chief operating officer, joined the company in 2013 and has over 20 years of experience in the mining industry. Previously he was COO of Alacer Gold (ASR-T) and held various roles at Goldfields (GFI-NY), while the company’s director of mining, Michael Monaghan, has 30 years of experience with stints at COO of Akara Resources and general and mining manager at AngloGold Ashanti (AU-NY). Oleg Pelevin, head of strategy, worked in strategy at Severstal’s mining division; Howard Golden, Nordgold’s geology director, previously worked for Rio Tinto (RTP-NY) and Kinross Gold (K-T), and Phillip Engelbrecht, director of metallurgy was previously VP and head of metallurgy at Goldfields. “The team should be of high quality and motivated,” Zelenski says. “I have spent a lot of time making sure our team is focused and not distracted by other things.”
Other ingredients of his success, he says, are “the ability to learn from your own mistakes and not repeat them in the future,” and to be “consistent and focused" on cost management. "We continue to do that, regardless of where the gold price is, and that helps us deliver results," he says, adding that operational efficiencies are also key.
“It’s critical to have your processes efficient, because when you are positioned in the right place on the cost curve, you are able to execute your strategy regardless of the point in the cycle,” he explains. “It’s always a big dilemma, or a mystery, for some people, how to manage the cycle properly—how to invest at the bottom of the cycle and reap the benefits at the top of the cycle. Many companies do it the other way around. When there is a high point of the cycle, you should wait on the sidelines and generate free cash flow. Nordgold continues to invest in the future right now, while many other companies are just saving cash.”
Currently, Nordgold has about US$370 million in cash, and total debt of US$950 million, most of which matures in 2018.
Alka Singh, an analyst and mining consultant in Toronto, describes Zelenski’s track record at Nordgold as one of the best in the industry. “He is super young and super smart and he’s not afraid of taking risks.”
When Nordgold looks for new assets, its criteria is that the projects are in mining friendly jurisdictions, have gold as the primary metal, a minimum reserve potential of 2 million ounces, and potential annual production at or above 150,000 oz. gold. The ore must be non-refractory and the project must have a low- to medium strip ratio.
One project that seems to fit that bill, Zelenski says, is Columbus Gold’s Montagne d’Or deposit, part of the junior’s Paul Isnard project in French Guiana, which is currently at the feasibility stage. In March 2014, Nordgold agreed to spend US$30 million on the project and complete a bankable feasibility study to earn a 50.01% stake. By the end of this year, Nordgold will have spent about $25 million on the project, and the feasibility study is expected to be completed in the fourth quarter of 2016, four to five months ahead of schedule.
Robert Guistra, Columbus Gold’s chairman and chief executive officer, counts himself as a big Zelenski fan. “Just look at Nordgold’s performance relative to its peers—clearly he’s an exceptional CEO, and he has a knack for identifying and surrounding himself with equally talented lieutenants. What stands out for me, however, is that in an industry fraught with questionable personalities, Nikolai does what he says he’s going to do, no costly lawyers needed…if Nikolai shakes hands...it’s done.” |
