Eldorado Gold: Growth And Value

Eldorado Gold (EGO) is a rapidly growing mid-tier (market cap $6.3 billion) developer and producer of gold, silver, copper, porphyry, lead, zinc and iron. It has seven operating mines, two sites being constructed at Olympias and Skouries in Greece, and four projects under development. It is geographically diversified with operations in Brazil (mainly iron ore), Greece, Turkey, Romania and China, where it has three operating mines and a development project, Eastern Dragon in Manchuria. Its main 2012 production was in gold (656k oz), iron ore (614k tons) and lead/zinc concentrate (51k tons). It has a low operating cost of $483/oz Au and a total cash cost of $554/oz, which puts it in the lowest quartile of gold producers in this metric.

Eldorado's growth in 2009-11 was strong and steady. It leveled out in 2012 when it expanded its construction projects and acquired European Goldfields with the two Greek sites noted above and Certej in Romania, 80% owned by EGO. Certej has 1.5 million measured and inferred gold oz expected to grow to 4-5 million oz in a rich gold-silver-copper belt. Eldorado's main gold producing site is at Kisladag in Turkey and after that, the site at Skouries, which also has 284k tons measured and indicated copper reserves. Olympias and Skouries are each owned 95% by EGO, and have a 21-year and 27-year life of mine minimally expected. The measured and inferred reserves in these sites should drive growth for two decades or more and add to Eldorado's profitability. While EGO's 2012 revenues increased only marginally and its profit slightly declined, its total assets doubled to $7.928 billion or twelve times its long-term liabilities. Since 2010, it has tripled its dividend to .15/share for a 1.75% annual yield. Operating, construction and development projects should allow management to fulfill its commitment to grow the dividend, which is paid twice/year. Their first quarter 2013 results may be viewed here.

EGO's significant iron ore production comes from its mine at Vila Nova in Northeastern Brazil near the mouth of the Amazon. Damage at Santana Port in nearby Amapa on April 2 offers us an epitome of market unreason and how the volatility that results can cause under-valuation of a sound company. The repairs and short-term delay in shipping caused a flurry of derisive chatter that ignored the company's existing assets, contracts and the limited nature of the impairment. It also helped create a buying opportunity.

As noted at the outset of this article, EGO is diversified across the commodity space and its overall growth is well-balanced between operating mines, construction and development projects. Its 52-week range is $7.91-16.20, with the low being made recently during the first week of April, "panic week" for precious metals, which happened to coincide with the damage to the Anglo Ferrous port facility in Amapa. Upon the release of this news, EGO sold down 19%. It was not the worst performance among the sector that week, but it was one of the more egregious examples of panic selling that ignored valuation, production and existing and developing assets. This has made EGO an exceptional value. During the latest PM sell-off its decline, affected partly by the port repairs was similar to the Gold Miners ETF (GDX), down 3.91%, respected streaming Company Silver Wheaton (SLW), down 5.16%, and another mid-tier dividend payer with abundant reserves, Kinross Gold (KGC), down 3.31%. There are many value buys in this shunned sector, and in my view, EGO is a stand-out. It is a top-ten holding in premier PM funds like Gabelli Gold (GOLDX) and Tocqueville Gold (TGLDX).

Eldorado Gold is rated a strong buy with an average target price of $16, twice its current level ($8.07 at April 10 close). Its properties are impressive and its integration with neighboring communities include extensive, hands-on development of agricultural works, school and medical programs, ambulances, job re-training, building roads, solar lighting and English language skills. Its sustainability report can be read here. Its growing projects and production in China are matched by involvement with local communities, low job turnover rates and a customer, China, that buys its output. Despite headlines about East-West frictions, trade between China, America and Europe remains robust and essential to these economies. For example, China just purchased 1 million metric tons of American wheat. Collegial relations with PM producers and employers who contribute to local medical and agricultural efforts are and will be welcomed. Integration of the RMB and USD via a new world reserve system would further enhance productive trade, boost Precious Metals and steady markets that rest on increasing fiat liquidity.

Study of the vital but unloved PM sector indicates that like underpriced streamer Silver Wheaton, Kinross Gold and low-cost Yamana (AUY), Eldorado Gold offers great value below $12/share and outperformance growth prospects even before the current panic-level sentiment dissipates.