Resource Investor
BUY FIRST TRANCHE—Eldorado Gold is a prime turn-around story. The company first came up on our radar in 2009 after it took over Sino Gold—a China-focused gold producer and a past pick of ours. That created the largest foreign gold producer in China, the world's No. 1 gold-producing nation. It also brought geographical diversification to Sino. The new company’s growth prospects looked strong, so we added it to our portfolio. Unfortunately, Eldorado fell prey to political insanity in Greece.
Back in 2015, the largest contributors to Eldorado’s near-term growth were three mines entering production that year: Eastern Dragon in China, and Olympias and Skouries in Greece. The gold and copper Skouries mine was meant to become Eldorado’s new flagship property, driving production growth for years to come. Instead it became the government’s whipping boy. The project faced permitting delays, cancelations, and revocation of its final construction permit. The company had some success in court, but with a hostile government and local opposition, it was a question whether Skouries would ever get built. So we sold.
The rule of law eventually triumphed in Greece last November, when Eldorado finally got permission to build a plant at the Skouries mine late last year. Decisions can, of course, be reversed. So it was reassuring that this came about after a cabinet reshuffle. George Stathakis, a Syriza moderate, took charge of the environment ministry. No more delays and confrontations. Construction is underway and remains on track.
That’s great, but Eldorado was still losing money. That’s now changed, and gold is taking a breather, so we think it’s time to get back into this strong growth story.
To explain why, let’s take it by the 9 Ps…
People
Eldorado’s long-time CEO and President Paul Wright was replaced by George Burns just last month. Burns has an impressive resume with more than three decades of experience in the industry. This includes time in the big leagues: He was chief operating officer (COO) at Goldcorp, and before that he was COO of Centerra Gold. Wright remains with the company as chairman. Wright brought the company through difficult years, so keeping his 30 years of experience on hand makes sense. We’ve met with Eldorado’s top people in the past, and our impressions were positive.
Property
As above, Skouries could be a real game changer for Eldorado. But it came with challenges (to put it mildly) and a hefty price tag. So, the company sold its Chinese assets last year, exiting that country.
This included its 82% stake in the Jinfeng mine, for US$300 million, as well as the White Mountain, Tanjianshan, and Eastern Dragon operations for US$600 million. Result: a stronger balance sheet and better focus on core projects in Turkey and Greece.
Eldorado presently holds proven and probable reserves of 19.3 million ounces of gold, 84 million ounces of silver, 776 thousand tonnes of copper, 704 thousand tonnes of lead, and 938 tonnes of zinc.
The company is producing gold mainly from two mines in Turkey:
Kilada. This open pit, heap-leach mine produced 211,161 ounces of gold last year. In 2017, Kilada is expected to produce between 230,000–245,000 ounces of gold at projected cash costs of US$500–550 per ounce.
Efemcukuru. This high-grade underground mine produced 98,364 ounces of gold last year. In 2017, Efemcukuru is expected to produce between 95,000–105,000 ounces of gold with operating costs between US$525– 575 per ounce.
Overall, production is expected to be about 21% lower than in 2016, due to the sale of the Chinese mines. That would be a concern if it were not already priced in Eldorado’s stock. More important is that it pays for the company’s growth without drowning the company in debt.
A better reason to worry would be the net losses reported in 2016. But the company did turn a profit in the first quarter of 2017. Both concerns kept us on the sidelines in 2016. The company has now turned things around.
There’s good reason to believe Eldorado will remain profitable. At $791 per ounce in the first quarter (Q1) of 2017, Eldorado’s all-in sustaining costs (AISC) are among the lowest in the industry. Better yet, Eldorado’s costs have been on the downtrend for the past year, as the chart on the next page shows.
Even without the sale of non-core assets in China, it’s clear that the company made structural changes to achieve these results. Eldorado’s new projects are relatively low in cost. That should also help it to keep costs down and margins up. In fact, Eldorado expects its AISC to fall 30% from about US$860 per ounce in 2017 to US$620 per ounce in 2020.
One of the major drivers here is increasing production. Eldorado sees its output rising 110% from 2017 to 2020.
These production and cost improvements depend on the success of Eldorado’s major projects in Greece:
Skouries. This is a high-grade open pit and underground operation. The mine is slated to produce 3.1 million ounces of gold and 1.5 billion pounds of copper over its 25-year life. The copper byproduct during the first nine years is expected to result in negative cash costs. The company plans to spend up to US$200 million on Skouries this year. Production should start in 2019.
Olympias. This is a high-grade underground gold, silver, lead, and zinc mine. Commissioning of the refurbished mill began last quarter. Commercial production is expected in Q3 2017. Output should reach an equivalent of about 172,000 ounces of gold. A Phase III ramp-up could take that to around 300,000 ounces of gold equivalent per year in 2025.
These projects could put Eldorado’s costs among the lowest in its peer universe. This and the growth on tap should deliver a lot of added value for shareholders.
Promotion
Eldorado is well-known in the gold space. It’s covered by 15 analysts. Promotion is not a problem.
Politics
Eldorado Gold's problems in Greece seem to be over. The country, which just agreed to new bailout terms, certainly needs the jobs and tax revenue. That said, the Greek government has already shown its willingness to pull the rug from under miners. This makes Eldorado a higher-risk play than normal for this letter.
Then there’s Turkey, where the failed coup in 2016 raised the risk of doing business there. It’s true that if anything goes wrong in Turkey, this stock could take a severe knock. On the other hand, the country is one of the most pro-mining jurisdictions in the world. Their tax rates and royalties compare favorably to other countries in the region. We also know that Eldorado has excellent relationships with both the government and the local community due to its long presence in the country.
The higher level of political risk in this play is not for everyone. We understand. But when prices get low enough, price trumps risk.
Phinancing
Eldorado’s funding needs through 2020 stand at US$1.7 billion. Growth costs money. But the company is not borrowing money nor issuing more shares to pay for it. Funding for all development and exploration comes from cash flow. That, and US$874 million in cash on hand (excluding marketable securities), should cover development through 2020. With a 62% margin at today’s gold price, the company can avoid the high debt and dilution that has hurt other producers.
Eldorado does have US$592 million in debt, but the company remains “net debt zero,” as cash exceeds debt. The table below offers a quick look at how Eldorado’s debt metrics compare to its peers’. The red numbers denote those that are worse than the mean.
Only Eldorado’s total debt to trailing-12-months EBITDA ratio is worse than its peers’. This is a result of the sale of the Chinese assets in 2016.
Overall, Eldorado is in much better shape than most of its peers. Eldorado also has US$250 million available on its undrawn credit facility and no hedges. In sum: Eldorado is well-financed, and it has easy access to capital and healthy operating cash flow on tap. All good.
Paper
With about 5.5 million shares changing hands per day, liquidity is not a problem. Better yet, there are no warrants, and with around 30 million options well out of the money, dilution risk is minor. Being a major, the company will almost definitely issue debt, not equity, if pressed for cash. No red flags here.
Push
Push for Eldorado largely comes from:
Keeping costs down. If AISC can be kept below 2017 guidance as they were in Q1, it should light a fire under the stock.
Hitting 2017 production guidance.
Keeping Skouries on track for its 2019 startup.
Overall, Eldorado is in much better shape than most of its peers. Eldorado also has US$250 million available on its undrawn credit facility and no hedges. In sum: Eldorado is well-financed, and it has easy access to capital and healthy operating cash flow on tap. All good.
Paper
With about 5.5 million shares changing hands per day, liquidity is not a problem. Better yet, there are no warrants, and with around 30 million options well out of the money, dilution risk is minor. Being a major, the company will almost definitely issue debt, not equity, if pressed for cash. No red flags here.
Achieving 2020 milestones of 110% higher gold equivalent production, 30% lower AISC, and 215% growth in operating cash flow.
Pitfalls
The biggest potential pitfall here is political risk, which we’ve already covered. There’s also technical risk, but these are proven mine-builders and operators, so we’re not worried on that front. Apart from the politics of Greece and Turkey, this is a relatively safe gold play.
Price (What’s It Worth?)
Below is a quick look at how Eldorado compares to its peers.
The stock trades at a higher enterprise-value-to- EBITDA (EV/EBITDA) valuation compared to peers. This makes sense, given the lower EBITDA resulting from the asset sales in China. This will change. At 62.6%, Eldorado also has the highest projected EBITDA growth for the next twelve months among its peers.
Consensus estimates put the company’s earnings per share (EPS) growth at US$0.10 versus the EPS of –US$0.47 for the last 12 months. Eldorado also boasts one of the highest EBITDA margins. That’s an important metric that speaks to the quality of operations.
In sum, this is a turnaround story. We like it. And we’re bullish on gold. This all makes the current share price a good entry point.
Formal Recommendation: Buy First Tranche.
Also in This Edition
For investing for profit, we see Eldorado as having the right stuff to beat its 2011 highs and go higher still. That implies a 500% gain, or better. That’s the sort of thing we usually shoot for in our sister publication, International Speculator, which you can find out more about here. We also like our other picks in this area, as you can see in our updated guidance on each this month.