Nordgold: Production Ahead Of Expectations

Nordgold reported Q4 and FY12 production results ahead of our expectations. The overall quarterly gold sales grew 4% q-o-q to 202koz, while the full-year output came in at 717koz, a 5% y-o-y reduction. Solid operational performance, which was driven by the improving grades and recoveries at almost all the mines, supported top line, with Q412 revenue rising 8% q-o-q to US$347m. The FY13 production guidance of 770-850koz is somewhat discouraging, but according to the management, is reasonably conservative and is likely to be met at the higher end of the range.

Strong set of Q412 production numbers
Nordgold reported Q412 gold production of 202koz, up 4.1% q-o-q, with improving recoveries (81.2%, up 3.3pp) and grades (1.86 g/t, up 9%) across the board offsetting the lower ore throughput (down 16% q-o-q). FY12 production came in at 717koz, a 5% y-o-y drop, and was broadly in line with the company’s recent guidance. Both quarterly and full-year results were ahead of our expectations, supporting our view that Nordgold is past the operational and financial trough. At the mine level, Taparko delivered robust performance with gold production rising 29% q-o-q to 36koz on the back of a 20% increase in grade to 3.4 g/t; recovery was marginally down at 82%. At Lefa, both grade and recovery were up, boosting gold sales by 18% q-o-q to 48koz. Finally, the Buryatzoloto’s performance continued to deteriorate as lower grade and throughput coupled with a virtually flat recovery brought gold sales down by 10% q-o-q to 22koz. The company continues to work towards the replacement of the depleting resource and accessing the higher grade zones at the project.

Cautious FY13 guidance
The FY13 production guidance of 770-850koz (13-4% below our current forecast) is somewhat disappointing as the company has taken a cautious view on Buryatzoloto. It seems that the company has learnt from the 2012 lesson where the overly aggressive guidance was missed by a wide margin and punished by the market. This time, we understand that the production target could be met at the higher end of the range.

Valuation: Looking for a strong year
The reported production and guidance suggest that our 2012 earnings forecast is too conservative (our model yields c US$500m in EBITDA, if we use the actuals), while the risk to 2013 earnings lies on the downside. We nevertheless believe it is premature to review our forecasts as the company seems to be overly conservative in its outlook. We therefore maintain our DCF-derived target price of $6.8/GDR. Apart from the uncertainty surrounding the Buryatzoloto performance, low liquidity remains the major constraint for the stock, which trades at a considerable discount to peers.

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