Flash Fixed Income Report /
Global

Gold producer Nordgold's initial price talk makes POGLN and GEOPRO attractive

    Kiti Pantskhava
    Kiti Pantskhava

    Senior Credit Analyst

    Tellimer Research
    2 October 2019
    Published by

    Nordgold, an international gold producer with assets located in Africa (55% of output) and Russia (40%), is returning to the debt capital market. According to Bloomberg, the initial price talk (IPT) of a five-year note is 4.25-4.375%. 

    The pricing of the new deal looks tight, but it does not come without a reason. Low issuance out of Russia, upbeat momentum in gold prices, positioning in the middle of the global cost curve and strong shareholders could explain why the new deal benchmarked against its sister company Severstal (CHMFRU 24s – 3.23% YTM) and a much bigger and more cost-efficient gold producer Polyus (PGILLN 24s – 3.41%YTM). The bonds of a smaller gold producer – Petropavlovsk (POGLN 22s – 8.43% YTM) and GeoProMining (GEOPRO 24s – 7.17% YTM) offer massive premia over the expected Nordgold deal and could see their credit spreads tighten on the back of it. We have a Buy recommendation on the POGLN 22s.

    • Nordgold is a mid-sized gold producer with a geographically diversified asset base and a competitive position in the middle of the global cost curve, with all-in sustaining costs (AISC) of US$1,081/oz in the 12 months to end-H1, moderate leverage of 2x and implied shareholder support. The company is controlled by the family of Alexei Mordashov, the majority shareholder of Russia’s leading steel producer Severstal (Baa2/BBB-/BBB, US$11.7bn market cap, net leverage 0.5x).
    • Petropavlovsk, a small gold producer with all assets located in Russia, has been successfully rebuilding its operating and financial credibility over since mid-2018. Successful commissioning of the state-of-the-art pressure oxidation facility, debt refinancing and increasing gold prices paved the way for production growth and deleveraging. In the 12 months to end-H1, Petropavlovsk produced 446Koz of gold at an AISC of US$1,063/oz, according to management reports.
    • GeoProMining is a small diversified metals and mining company that generates 77% of revenues from assets based in Armenia. Total production came to 243Koz of gold equivalent in FY 18, with gold representing c60% of its product mix. The company has relatively rich gold reserves with an estimated life of 16-21 years across three assets, and benefits from relatively low costs, adequately high profitability and moderate net leverage of 1.7x by the industry standard. GeoProMining is a private company beneficially owned by a founding shareholder Siman Povarenkin (50.3%) and Roman Trotsenko (48.2%), whose other business interests include Petropavlovsk.

    Table: Nordgold and its peers 

     US$mn
    NordgoldPolyusPetropavlovskGeoProMining

    Market cap

    n/a

    15.3

    0.4

    n/a

     

    Rating (M/S/F)

    Ba2/-/BB

    Ba1/BB/BB

    -/B-/B-

    -/B+/B+

     

    Production

    929

    2,616

    446

    243

     

    Share of gold

    100%

    100%

    100%

    61%

     

    Asset/revenue exposure

    Russia (39%),

    Burkina Faso (35%), Guinea (20%), Kazakhstan (6%)

    Russia (100%)

    Russia (100%)

    Armenia (77%), Russia (23%)

     

    Revenue

    1,175

    3,254

    535

    318

     

    EBITDA

    484

    2,113

    165

    146

     

    Income tax

    -41

    -193

    -21

    -29

     

    Interest

    -54

    -263

    -66

    -26

     

    Capex

    -481

    -751

    -112

    -49

     

    Free cash flow

    -92

    906

    -35

    43

     

    Dividends

    -34

    -571

    0

    0

     

    FCF after div.

    -126

    335

    -35

    43

     

    Cash

    127

    1,249

    39

    54

     

    Debt

    1,054

    4,888

    597

    308

     

    Net debt

    927

    3,639

    558

    254

     

    EBITDA margin

    41%

    65%

    31%

    46%

     

    Debt/EBITDA

    2.2

    2.3

    3.6

    2.1

     

    Net debt/EBITDA

    1.9

    1.7

    3.4

    1.7

     

    TCC




    561

     

    AICS

    1,081

    589

    1,063


     










    Source:  Company data, Tellimer Research