Nord Gold: Positive Long-Term Valuation Implications

Montagne d’Or earn-in
Nord gold (NORD.L) signed an agreement with Columbus Gold (TSX: CGT) whereby it could earn a 50.01% interest in the Paul Isnard gold project in French Guiana by spending US$30m over the next three years. The project, which currently has 4.2Moz in NI 43-101 resource grading 2.2g/t and is expected to be brought through the BFS by the end of 2016, could be viewed as a relatively inexpensive long-term opportunity to add low-cost production capacity in the promising and low-risk mining jurisdiction.

A 50% earn-in provides optionality
The Montagne d’Or deposit is based in French Guiana, an overseas department of France and part of the EU. The project currently has 4.2Moz at 2.22g/t in NI 43-101 compliant inferred resource. The agreement provides Nordgold with an option to spend not less than US$30m on exploration and evaluation, earning in a 50.01% interest in the project. To this end, the company plans to bring the project through the BFS by the end of 2016, with a particular focus on infill drilling and metallurgical tests. Based on the early-stage testing, metallurgical recovery above 85% was achieved using the gravity, flotation and CIP processing. The BFS will form the basis of the investment decision, with each partner contributing its share of the development cost or being diluted.

Relatively underexplored but promising region
Paul Isnard lies within the Guiana gold belt believed to be an extension of the Birimian shield of West Africa, which contains a number of high-quality gold deposits and is a core region for NORD. While relatively underexplored, the Guiana shield hosts several advanced development projects (Newmont’s Merian with a proposed 350-400koz pa mine, Iamgold’s Camp Cayman with a planned 125koz pa operation) as well as producing mines (eg Iamgold’s Rosebel in Suriname). Well-understood and relatively simple geology and processing allow for low opex (eg Rosebel’s ex-royalty cash cost of US$576/oz in 2012), while the existence of power (grid) and road infrastructure also points to a reasonable capital intensity of the potential development.

Positive long-term valuation implications
While the deal has no immediate impact on the valuation, longer term it offers an opportunity to add a low-cost production capacity, which, given Nordgold’s relatively high cash cost positioning and the uncertain gold price outlook, should be one of the key priorities for the company. The overall quality of the asset, as well as French Guiana’s low investment risk, underpins the attractiveness of the deal for NORD. At 2013e EV/EBITDA of 3.1x, the shares continue to offer healthy upside.

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