OREANDA-NEWS. Fitch Ratings has affirmed gold producer Nordgold N.V.'s (Nordgold) Long-term Issuer Default Rating (IDR) at 'BB-'. The Outlook is Stable. A full list of rating actions is available at the end of this commentary.

The ratings reflect Nordgold's smaller-than-average reserve base and a limited operating track record, as well 2014 operational results moderately exceeding our expectations and progress in cost reduction.

Over the period to 2017 Nordgold will commission two new projects (Bouly and Gross), which will enhance the company's operational diversification and cost profile. The Outlook may be revised to Positive closer to the commissioning of these projects.

KEY RATING DRIVERS

Below-Average Reserve Base
The company has increased its proved and probable reserves marginally (3%) since 2012 to 13moz. With annual production of 985koz in 2014 this implies close to a 13-year lifespan of its operations. This is somewhat below the average for Fitch-rated peers, which suggests that its reserve base would benefit from more active exploration work. The average ore grade of Nordgold's reserves is 1g/t, which is in line with the average for Fitch-rated gold mining companies. It should be noted that most of Nordgold's reserves are easy to process with fairly high recovery rates compared with the large refractory ore reserves of Polyus Gold (BBB-/Negative) or Polymetal.

Progress in Production Costs Decline
Nordgold reported total cash costs (TCC) of USD675/oz in 2014, a 20% yoy decline due to higher processing volumes and better recovery. To a great extent the cash cost reduction was also driven by local currency devaluation in Russia and in Burkina Faso. First quarter 2015 results show TCC declining further by 25% YoY to USD539/oz. All-in sustaining costs declined 23% YoY to USD680/oz. Fitch acknowledges the company's efforts at cost optimisation, but at the same time would like to see further confirmation that such cost reduction is sustainable and not driven by macro-economic factors.

Operating Environment
The company has operations in Burkina Faso (37% of total production in 2014), Guinea (21%), Russia (35%) and Kazakhstan (8%). Fitch considers these countries as jurisdictions where the law is not supportive of creditor rights and where there is significant volatility in the application of law and legal enforceability, resulting in uncertain recovery prospects.

Recent social unrest in Burkina Faso has brought some uncertainty to business activity in the country in that mining companies may face delays with licence approvals and mining permit grants from authorities.

Further Track Record Needed
The company successfully commissioned the Bissa project in 2013. It was on time and on budget. Fitch would like to see further evidence of Nordgold bringing new projects into operation to confirm its ability to grow organically. Therefore successful realisation of the company's two new development projects, Bouly in Burkina Faso and Gross in Russia may be positive for the ratings.

Manageable Capex Programme
Over 2015-2018 Nordgold expects to increase capital spending, driven by Bouly in Burkina Faso and Gross in Russia. Nordgold will have some flexibility in delaying the realisation of Gross project should the company need to protect its financial profile in a lower gold price environment. Fitch expects the company to have sufficient operating cash flow to finance the bulk of its investment programme.

Average Corporate Governance
Fitch assesses Nordgold's corporate governance as average compared with other Russian corporates in this industry and applies a two-notch rating discount. The company announced its intention to seek a premium listing on the LSE, which would require Nordgold to be compliant with UK corporate governance code.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Fitch gold price deck assumes USD1,200/oz during the forecast period (2015-2018);
- Improvement in EBITDA in 2015 will be partly driven by a currency devaluation at Russian operations. This effect will be offset by higher inflation in 2015-2018.
- We expect commissioning of the Bouly project in 2016, with ramp-up in 2017.
- Commissioning of the Gross project is expected in 2017, with ramp-up in 2018.

RATING SENSITIVITIES

Positive: Future developments that could, individually or collectively, lead to positive rating actions include:
- Strengthening of the company's operational profile through successful commissioning of the Bouly and Gross projects or through funds from operations (FFO)-adjusted gross leverage being sustained below 1.5x (2014: 2.14x) and FFO fixed charge cover above 8x (2014: 8.18x)
- Positive free cash flow (FCF) on a sustained basis
- EBITDA margin above 30% on a sustained basis (2014: 41.9%)

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- EBITDA margin below 20% on a sustained basis
- Failure to deleverage in line with Fitch's expectations, resulting in FFO leverage above 3.0x on a sustained basis

LIQUIDITY AND DEBT STRUCTURE

Nordgold's liquidity position is strong with USD423m of cash and short-term deposits compared with only USD12m of short-term borrowings at end-1Q15. The company's repayment schedule is comfortable with its first repayment of USD42m starting in summer 2016 and amounting to USD125m until end of 2016.

Despite a challenging market environment Nordgold's profitability remained robust in 2014, with a 41.9% EBITDA margin (Fitch-calculated), versus 29.3% in 2013. More conservative capital spending in 2014 versus previous years resulted in positive FCF of USD140.5m (Fitch- calculated), compared with negative USD4.3m in 2013. FCF should remain positive in 2015 at an expected USD42m, before returning to negative territory in 2016-2018 when investment projects are realised.

FFO adjusted gross leverage decreased to 2.14x in 2014 from 2.5x in 2013. Fitch expects leverage to further decrease to 2.05x in 2015 and remain at this level during 2016-2017.

FULL LIST OF RATINGS

Long-term foreign currency IDR: affirmed at 'BB-'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B';
Foreign currency senior unsecured rating: affirmed at 'BB-'
Long-term local currency IDR: affirmed at 'BB-'; Outlook Stable.