As Western economies continue to struggle, investors are increasingly looking towards emerging markets in search for golden business opportunities. This is quite literally the case with Nordgold, a Russian company that describes itself as “an emerging markets gold producer.”

Ever since its inception in 2007, as a unit of steelmaker Severstal, Nordgold has been expanding its operations all the way from its home country's Siberian tundra to the Guinean tropics in west Africa. However, the company has eschewed opportunities in developed countries with more established mining environments.


Nikolai Zelenski, Nordgold’s CEO, says that this choice of markets does not stem from a particular affinity towards the developing world; it is more a matter of good business sense. “We focus on emerging markets because we believe that there is less competition there, we can find better returns on investments, and we can acquire assets more cheaply than in North America or Australia,” he says.

The search for locations with fewer competitors has become crucial mining start-ups such as Nordgold. “Buying assets and operating them became exceptionally expensive in saturated markets, hence looking for the less obvious locations,” says Seth Rosenfeld, vice-president of European metals and mining equity research at Jefferies, a global securities and investment banking group.

Acquisition strategy

Mr Rosenfeld, who closely follows Nordgold, says that another characteristic of the company's operations is its preference for taking over distressed operations, rather than investing in greenfield projects. “Thus far, the company has been expanding its production by acquisitions, not through organic growth,” says Mr Rosenfeld. To that end, Nordgold’s 'shopping spree' (the company has bought eight mines in Russia, Kazakhstan, Guinea and Burkina Faso) has been a success, given that all the mines have improved their performance since Nordgold took them over.

“We [are strong when it comes to prioritising] tasks and we are able to provide the capital necessary to buy equipment, which generates significant improvements,” says Mr Zelenski.

While this strategy may sound simple, the reality is often anything but. In 2010 the company purchased the Lefa gold mine in northern Guinea, which now delivers 22% of Nordgold’s earnings and constitutes 36% of its total reserves. However, in the first few months of 2012, Nordgold experienced a number of operating problems at Lefa, which forced the company to close its processing plant for a month. Mr Rosenfeld, after a recent trip to Nordgold’s Guinea operations, talks of many improvements introduced by the company, but adds that the turnaround of Lefa will be crucial to Nordgold, as it will show how the company copes in a challenging brownfield environment.

Coping with adversity

Such issues are crucial to creditors, who may need reassurance on this matter before Nordgold progresses onto greenfield ventures, further acquisitions or setting up operations in new markets.

In 2013 Nordgold is planning to open two new mines in Burkina Faso and Russia, but company executives are eager to expand the scope of Nordgold’s geographical activity. “We are certainly looking around, especially in countries neighbouring the ones in which we are already present,” says Mr Zelenski.

Furthermore, Nordgold’s CEO does not exclude setting up operations in different regions as well. “It all depends on the quality of resources; if it is sufficiently good, we might consider going to places such as South Africa or Indonesia. But to make such a large step, we would need a strong reason”.

Further expansion

Another push for expansion may come from the fact that from the beginning of 2012, Nordgold has been operating separately from parent company Severstal and was listed at London Stock Exchange. “The newly gained independence is an advantage [when it comes to] the company’s growth. With its initial public listing, Nordgold now has a currency [in the form of its] shares with which it can acquire new assets for growth, whereas before it could only do that using means provided by Severstal,” says Robert Mantse, a Moscow-based director of metal and mining equity research at Otkritie Financial Corporation, an international asset management firm. However, only 11% of the company shares are in a free float and 89% belong to one person – Alexy Mordashov (who owns also approximately 82% of Severstal).

Overcoming such challenges is in company’s DNA, given that it looks for investment opportunities in places that are not well known for business friendliness or political stability. “[Today], most of the mining activity takes place in [regions] with unstable political and economic climates. That is the reality of the commodity business,” says Mr Zelenski.

That does not, of course, mean that Nordgold does not look for ways to minimise its risk exposure. Through its activity in various markets and the broadening of its portfolio of operations, Nordgold has managed to achieve this. Both Mr Rosenfeld and Mr Mantse forecast that about 45% of the company’s gold production comes from Russia, 11% from Kazakhstan and the rest from Africa, which they consider to be the basis of a strong business strategy able to withstand the temporary closure of some operations due to external factors.

Traditionally, the quest for gold is hazardous and costly, particularly in countries with unpredictable political landscapes. Yet, given Nordgold’s rapid growth in the past five years, it seems that the company is well positioned to cope with such hurdles and come out shining.