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Norvik Research 31.08.2016

31/08/2016 14:43

Global developments

The weak Euro area data reignited expectations of further stimulus ahead of next week's ECB meeting. Today's weaker-than-expected inflation and unemployment readings for August follower yesterday's disappointing business survey for the area indicating a likely delayed reaction to the Brexit vote. The dollar index is flat after yesterday’s 0.3% increase. 10-year US Treasury yields are 1 bp higher today at 1.58%. S&P futures are 0.1% lower today after a 0.2% drop yesterday; Euro Stoxx 600 is up 0.3%; Nikkei 225 is 1% higher while Chinese CSI 300 is up 0.5%. Bloomberg commodity index is down 0.4%.

Oil prices are sliding following evidence of further expansion of inventories. API reported yesterday that crude oil inventories in the US increased 0.9 mn bbl in the previous week. Brent prices are 0.7% lower today at $48.0/bbl after falling 1.8% yesterday.

Russia and CIS area developments and market colour

Ukraine’s current account deficit widened in July. Last month, deficit totaled $354 mn, compared to $37mn in July 2015. Imports values rose 1.4% YoY in USD value terms, after a 2.4% YoY decline in June. Export values declined 10.1% YoY after a 8.3% YoY drop in June (a relatively modest deterioration in view of the weak performance of industry in recent months). Imports of energy products declined by 28% YoY, while imports of non-energy products increased by 11% YoY, including machinery by 32% and industrial goods by 17%, a sign of a recovery in domestic demand. On the 12-month rolling basis, the c/a deficit widened to $64 mn in July, from $25mn in March and $9mn in January.

Ukraine’s financial account surplus was $447 mn (July 2015: $359 mn), including $291 mn of FDI (directed mainly to a capital increase of local banks). Overall balance of payments was in surplus of $101 mn (July 2015: $438 mn). The stock of FX reserves reached $14.1 bn covering 3.6 months of imports.

The rouble is 0.3% stronger today at 65.2 against the dollar. OFZ yields closed 1-5 bps tighter yesterday despite lower oil prices. Yields on Russia’s and Kazakhstan’s longer-term Eurobonds were 2-3 bps tighter yesterday and were broadly unchanged today in the morning. Azerbaijan 24 and Armenia 25 yields were both 1 bps wider today, Belarus 18 is 3 bp wider.

Corporate news

Nordgold has reduced production guidance for 2016, leverage continued to rise. Q2 financial results were largely disappointing due to a downward revision of guidance for 2016, by 8% to 880-930 Koz from 950-1,010 Koz previously. This was attributed to lower than planned output in H1 2016 at Bissa and Berezitovy mines (expected to continue in H2), and anticipated suspension of production at Aprelkovo mine in H2 2016. Revenue in Q2 was $270 mn (down 7% YoY) due to lower output (average gold price was 5% higher). EBITDA at $109 mn was 25% lower YoY mainly as a result of higher costs: all-in sustaining costs increased to $930/oz compared to $769/oz in Q2 2015; strengthening local currencies also made a negative contribution to profitability. EBITDA margin declined to 41% from 47% in Q1 2016 and 51% in Q2 2015.

The company continued to invest heavily in production assets, including Gross mine in Russia. Q2 capex was $78 mn, or 6% higher YoY, while free cash flow was just $2 mn. Notwithstanding the weak FCF, Nordgold was able to reduce net debt by $39 mn, which was financed by proceeds from the disposal of long- term financial investments (shares of Detour Gold Corporation) for $57 mn. Net debt/EBITDA increased slightly to 1.5x (Q1 2016: 1.4x) despite lower net debt, however the company retains strong liquidity and credit profile and is well positioned to repay/refinance its Eurobond due 2018.

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