Nordgold CEO orchestrates ‘compelling performance’

Moscow-headquartered Nordgold (LSE: NORD) 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 payouts should be possible next year as well,” Nikolai Zelenski, the company’s 42-year-old CEO, 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.”

Nordgold is also one of a handful of companies in the industry that is buying back shares, and has spent  US$29 million on the exercise so far this year. “Our shares are undervalued, 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 shown a 31% compound annual growth rate in six of the seven years since it 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 and 985,000 oz. gold, at AISC of US$750 to US$800 per oz.

“It’s a compelling performance — we have met or exceeded 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 100,000 oz. guidance. Total cash costs were US$468 per oz., well below Nordgold’s US$700 per oz. forecast.

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 rest of its mines — Berezitovy, Buryatzoloto (the Zun-Holba and Irokinda mines), Neryungri and Aprelkovo — are spread across Russia.

Looking 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 build (Gross in Russia), one in feasibility (Columbus Gold’s (TSXV: CGT; US-OTC: CBGDF) 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 (TSXV: NQ; US-OTC: NOTQF) wholly owned Pistol Bay project in Nunavut. (Nordgold has a 52.3% stake in Northquest.)

“Our new Bouly mine in Burkina Faso will be launched in the second half of 2016, and will add 120,000 oz. 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 Montagne 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 build high-quality mines in the next ten years.”

Zelenski — who has a PhD in molecular genetics, and an MBA — started his career in 2001 at McKinsey & Co.’s offices in New Jersey, working for the consulting firm’s pharmaceutical clients.

But it wasn’t long before he was drawn back to his homeland. “There were a lot of exciting things happening in Russia, so I moved to the Moscow office of McKinsey,” he says. “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.

In April 2007 Severstal diversified 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 kept its costs down with high-quality assets, finding efficiencies and macroeconomic factors, such as the depreciation of the Russian ruble and lower oil prices.

“If these were bad orebodies we wouldn’t have such low costs,” he explains, “and secondly, we have focused in the last several years 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 chief operating officer (COO) of Alacer Gold (TSX: ASR; US-OTC: ALIAF) and held various roles at Gold Fields (NYSE: GFI), while the company’s director of mining Michael Monaghan has 30 years of experience, with stints as COO of Akara Resources and general and mining manager at AngloGold Ashanti (NYSE: AU). Oleg Pelevin, head of strategy, worked in strategy at Severstal’s mining division; Howard Golden, Nordgold’s geology director, previously worked for Rio Tinto (NYSE: RIO) and Kinross Gold (TSX: K; NYSE: KGC), and Phillip Engelbrecht, director of metallurgy, was previously vice-president and head of metallurgy at Gold Fields.

“The team should be of high quality an
d motivated,” Zelenski says. “I have spent a lot of time making sure our team is focused.”

Other ingredients of his success, he says, are “the ability to learn from your own mistakes and not repeat them in the future,” and stay “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 … while many other companies just save cash.”

Nordgold has 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, saying that “he is super young and super smart, and he’s not afraid of taking risks.”

When Nordgold looks for assets, its criteria is that the projects are in mining friendly jurisdictions, have gold as the primary metal, a minimum 2 million oz. reserve potential and 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 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 year-end, Nordgold will have spent $25 million on the project, and the feasibility study could be done in the fourth quarter of 2016, four to five months ahead of schedule.

Robert Giustra, Columbus Gold’s chairman and CEO, counts himself as a 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.”