Income from an emerging market pure-play gold producer
Each week we screen thousands of corporate bond listings to find what we believe is the best corporate bond for investors needing or seeking higher yields with as minimal risk as possible relative to its projected return. Our unblemished record of acquiring higher yielding bonds that steer clear of default is understandably far more difficult and time consuming to preserve than it would be to merely find and recommend a bond fund or two that other advisor or brokers might deem “suitable” for addressing both a return of principal concern and the higher yields or cash flow needs that our clients seem to have and want. However, we constantly tackle this more difficult task because we are convinced that holding a small, but well chosen, basket of individual bonds with a maturity certain date potentially offers significant advantages to bond funds that (1) may carry the risk of being subjected to forced redemptions and devaluation should the sentiment of other investors turn in mass against them, and (2) typically do not have fixed rate payouts, and (3) typically do not have maturity certain dates at which investors can anticipate achieving both a return of principal and its stated yield. Our research effort this week has resulted in finding 8.4% annual yields from these 57 month US dollar (Yankee) bonds, rated Ba3, from NordGold (NGOLY.PK), an emerging market pure-play gold producer, for addition to our Foreign and World Fixed Income holdings.
NordGold, Russia’s third-largest gold miner, was formed in 2007 when the Russian steelmaker OAO Severstal (SVJTL.PK) diversified into gold mining by acquiring mines in Kazakhstan and Russia. Nordgold quickly became a global player through a series of acquisitions that transformed the company from a 21 Koz gold producer in 2007 to a 754 Koz producer in 2011. Since its creation, Nordgold has tripled its measured and indicated resource base to over 34 Moz, with it’s proven and probable reserves of gold totaling about 12.7 Moz. In January 2012, Nordgold [NORD:LI] commenced trading as an independent public company via a listing of GDRs on the London Stock Exchange representing approximately 10.6% of the company’s share capital. The Company employs over 10,000 and has nine active mines in Africa and Siberia, one development project, five advanced exploration projects, and a diverse portfolio of early exploration projects and licenses.
Gold production for the twelve months ending Dec. 31, 2012 was 716k ounces, a decrease of about 5% from 2011, while revenues were up slightly (about 1%) to about $1.2 billion, primarily due to stronger average gold prices. Year over year earnings (EBITDA) decreased to $493 million from $574.5 million previously, while total cash costs for 2012 averaged $844/oz compared to $718/oz in 2011. Capex for 2012, which was $474.4 million, focused on Bissa construction, which was finally commissioned in January of 2013. Earlier projections had estimated 2013’s capital expenditures to be around $300 million, primarily focused on the development of the Gross project. However, lower gold prices the first half of 2013 have resulted in a lowering of this year’s Capex estimates by about $40-50 million.
Gold production for the first half of 2013 was about 416koz, and NordGord has reiterated its 2013 full year production forecast of 770-850koz. Revenues for the first half were $616.3 million, while the average realized gold price per ounces sold had declined to $1,376 in the second quarter. While profits have been negatively impacted by lower gold prices and higher costs at certain mines, Bissa operated significantly ahead of expectations with production of 112.5koz, exceeding the full year production guidance of 100koz that had been given to it previously. A mining license for the Gross project, an all season open-pit leach operation, was awarded in Q2 3013 and it remains on track and on budget with trial treatment of ore expected at the end of this year. Net debt at June 30, 2013 was approximately $800 million, reflecting the equity dividend of $44.6 paid to shareholders at the end of June.
At 1 January 2013, the company had control of 12.6 Million oz of gold reserves with an average mine life of approximately 18 years based on output of 717koz of gold in 2012. While this may seem quite modest compared to the nearly 140Moz proven and probable gold reserves of top ranked Barrick Gold (ABX) ranked Goldcorp (GG) or the over 64Moz reserves of the low cost producer Goldcorp (GG), it does place NordGold as a small-to medium sized mining company in global terms. While Nord Gold does not have an excessive exposure to any of the four countries in which it operates (Russia, Burkina Faso, Guinea and Kazakhstan), each of these jurisdictions is viewed by Fitch as having higher country risk relative to mining operations, and has rated these bonds at BB- with a Stable Outlook. NordGold bonds carry a Moody’s credit rating of Ba3.
The default risk is Nord Gold’s ability to perform. Considering the company’s change of focus from acquisitive growth to an organic growth strategy, its well diversified asset base, its high 35% margins and its sound earnings record, we see is as having adequate resources to service its short to medium term debt.
The Company’s performance is highly dependent on the price of gold as it directly affects the Company’s profitability and cash flow. The price of gold is subject to volatile price movements during short periods of time and is affected by numerous factors, such as the strength of the US dollar, global economic conditions, supply and demand, interest rates, and inflation rates, all of which are beyond the Company’s control. Slow global growth is expected to continue into 2013 and reflects the compounding effect of a number of factors, most notably increasing fiscal belt-tightening in many advanced nations, prior credit restraint in some key developing countries, and the cascading effect on international trade, credit, and financial conditions associated with the euro zone’s lingering sovereign debt crisis. In this environment, precious metals are likely to represent an attractive investment alternative.
The company also has execution and market risks as a relatively young and very fast growth junior mining company, as companies often encounter unforeseen issues. This is a common risk associated with younger, fast growing companies.
We believe that this NordGold US dollar denominated debt has similarities to other Yankee bonds we have previously reviewed, including those from Bio-Pappel, Georgian Railways and Brigus Gold (BRD), several of which have already achieved significant capital gains since our initial recommendation.
We like NordGold’s business and growth strategy, and think its track record of success and limited exposure in the equity markets leave plenty of room for additional equity capital should it be needed in the near term. While it would not surprise us to see Gold prices soften further as money continues to flow from traditional precious metal safe havens into the equity markets, we believe this relatively small issue as offers excellent returns from a company that has good management, reasonable cash flow and interest coverage, and excellent growth potential. Therefore, the 8.4% yields that its bonds appear to be offering represent one of the more intelligent opportunities for a high return and good cash flow, and it is why we have targeted NordGold’s 2018 Yankee bonds for addition to our Foreign and World Fixed Income holdings.
Yield to Maturity: ~8.4%
Disclosure: Some Durig Capital clients may currently own NordGold 2018 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
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