Eldorado Gold: A Cost-Effective Way to Move into Gold

This morning traders on the NYSE were greeting with the executives from the Eldorado Gold Corporation (EGO) starting the session with the opening bell. It marked EGO’s move from the AMEX listing to the NYSE.

The stock is up just slightly over interest generated from this move Thursday, even as gold moves .5% lower to $1059. Does this move also symbolize EGO’s desire to play with the big boys of gold production: Barrick Gold (ABX) Kinross Gold (KGC) and GoldCorp (GG)? Not quite.

The move does give them access to cheaper capital that they can use to buy out their competitors. With gold prices over $1000 per ounce, everyone wants to be a gold miner right now.

But gold prices could take a sudden dive. What happens to all of those miners that need gold over $800 to make a profit? It’s simple: it’s called bankruptcy or acquisition from well-funded gold miners.

Here’s why Eldorado Gold deserves a close look from gold bugs and gold haters alike, and why, even if the price of gold were cut in half, this company would still be building a real city of gold profits.

Gold Mining Mergers and Acquisitions

Based out of Toronto, Eldorado Gold is a medium-sized leader in global gold exploration and production. They pride themselves on having the lowest costs and no hedge positions, including energy.

That’s important because energy costs are the largest single cost for any gold mining company and many companies hedge their costs and prices.

Eldorado chooses to let the value of its exploration and production speak for itself. While hedge plays might be prudent in a falling market. In a rising price environment – like the one gold is in right now – it’s the most profitable way to go.

One of the key developments in this company has been its growth from recent acquisitions. Mergers and acquisitions in the gold sector have been on fire as larger producers divest non-core assets and scoop up junior miners.

Making matters more interesting is that the price of gold is high enough that gold projects with questionable profit margins are in play. But that’s not the way EGO plays.

Earlier this month Australian authorities gave Eldorado Gold the go ahead to proceed with its buyout of Sino Gold Mining Ltd. The move will double the company's gold production in China and puts a substantial amount of production in between two gold loving cultures of China and India.

EGO hasn’t stopped there with expanding production.

Its newest properties in Turkey and Greece should come on line within the next few years to increase production even more. Eldorado produces under 400,000 ounces of gold annually and plans to grow that to 800,000 by 2013.

But they might reach that goal much faster, maybe even by 2011.

The Price of Gold – Selling High

The most interesting thing about Eldorado Gold is its margins and average operating cost to produce a single ounce of gold.

It costs EGO $300 to produce one ounce of gold.

That’s over $700 an ounce of pure profit at today’s gold price. As of last quarter, their average realized price was $927 per ounce. As the cost of gold continues to rise, you cannot help but see where the bottom line will be positively affected.

Based off their most recent reported gold resources, including measured and indicated ounces, they sit on almost 12 million ounces of gold. At the current margin of $700 an ounce, that’s over $8 billion in potential profit.

The company’s own management mentioned that they could easily see gold moving to $1200 an ounce over the next few months. That could potentially add another $2 billion to the value of their assets.

It’s also why gold producers may still be undervalued, even after their recent run-up. When most of the latest earnings calculations and analyst reports were produced, gold hadn’t made the jump over $1000 an ounce.

This means that most analysts could be grossly underestimating the potential for the margins of Eldorado Gold and many of their industry companions. We should start finding out soon.

Earnings for the third quarter should be released October 30, and based off the rising prices of gold we expect them to be higher.

At a Price to Earnings (P/E) ratio of 27.34, Eldorado Gold isn’t cheap. However, when you compare that to larger producers, like Barrick that has a P/E ratio of 55, it doesn’t look that out of line.

For it’s large proven reserves, it’s low cost of production, it’s growth and the growing cost of gold, Eldorado Gold looks to be a cost effective way to add gold in you portfolio.

Disclosure: No positions in any security mentioned above

Comments

[twitee:]

Why not buy all of the major mine players through GDX to better control the risk?

Oct 22 06:21 PM

[Slvrizgold:]

I much prefer Jaguar, which is growing from 160,000 to 650,000 oz in the same time frame as EGO goes from 400,000 to 800,000. Jaguar also operates exclusively in very safe Brazil, while EGO is operating in Turkey and China. Compare valuations! There is slightly higher cost than EGO, but fewer shares and much lower priced. Jaguar is also an easy takeover mark for Yamana, who would like to dominate South America. Jaguar's growth profile would be VERY accretive to any major.

I disagree with the author's statement that EGO has $700 margin of "pure profit." This is not true. This guy doesn't understand mining I can tell. There are many costs above direct "cash costs": depreciation, depletion,amortization, capex, administrative, etc. You can add on several items before you get an actual net income. Mining is not easy and very capex intensive!

Why do these author's bother to write puff pieces with no positions?!?! C'mon GIVE ME A BREAK. Put your money where your mouth is dude. Anyone can write a bullish article. I could write one on a company I don't even like if I wanted to!

Oct 22 08:06 PM

[Golden Oxen:]

You have it correct, but you are to hard on him. What do you think of JAG's latest financing?


On Oct 22 08:06 PM Slvrizgold wrote:

> I much prefer Jaguar, which is growing from 160,000 to 650,000 oz
> in the same time frame as EGO goes from 400,000 to 800,000. Jaguar
> also operates exclusively in very safe Brazil, while EGO is operating
> in Turkey and China. Compare valuations! There is slightly higher
> cost than EGO, but fewer shares and much lower priced. Jaguar is
> also an easy takeover mark for Yamana, who would like to dominate
> South America. Jaguar's growth profile would be VERY accretive to
> any major.
>
> I disagree with the author's statement that EGO has $700 margin of
> "pure profit." This is not true. This guy doesn't understand mining
> I can tell. There are many costs above direct "cash costs": depreciation,
> depletion,amortization, capex, administrative, etc. You can add
> on several items before you get an actual net income. Mining is
> not easy and very capex intensive!
>
> Why do these author's bother to write puff pieces with no positions?!?!
> C'mon GIVE ME A BREAK. Put your money where your mouth is dude.
> Anyone can write a bullish article. I could write one on a company
> I don't even like if I wanted to!

Oct 22 09:40 PM

[Beach Bubba:]

In gold mines, always take profit when it is there...there is always ample opportunity to buy back in at a lower price or in another "new" producer. I repeat....sell when you have made some bucks and start looking, greed and anticipation will buy you heartache or worse in miners. It is not an easy ride and it is still a swindlers playground....big time swindlers.

Oct 22 10:08 PM

[Endo:]

Beach Bubba is right. Remember Bre-X? I followed it in The Northern Miner all the way up to over one hundred, and then all the way down to zero after their geologist, Michael de Guzman, jumped to his death from a helocopter flying him and Freeport McMoRan geologists to the site. Nova Gold is now involved in a class action lawsuit for misrepresenting cost estimates. News of the heigher estimates cut its price in half, and it has since been halved again (only after rising from a penny stock after the general crash). Things can take a 180 very quickly.

Oct 22 11:59 PM

[ronkr:]

Why do you want to diss this author? This company moved to the NYSE and rang the opening bell. I for one, wanted to know more about this company and Mr. Wissel supplied wnat I wanted to know.
This article was well rounded and to the point. He compared the stats and the objectives with other majors in the field.
I dont care if he is a current owner of the stock, he is an investigator and reporter.
Thank you Mr. Wissel.

Oct 23 10:39 AM

[Joe Bruin:]

Turkey and China are not bad mining jurisdictions.

Jaguars cost of producing gold is $451 per ounce. That is not comparable to El Dorado's cost.

Empirical data does not lie.


On Oct 22 08:06 PM Slvrizgold wrote:

> I much prefer Jaguar, which is growing from 160,000 to 650,000 oz
> in the same time frame as EGO goes from 400,000 to 800,000. Jaguar
> also operates exclusively in very safe Brazil, while EGO is operating
> in Turkey and China. Compare valuations! There is slightly higher
> cost than EGO, but fewer shares and much lower priced. Jaguar is
> also an easy takeover mark for Yamana, who would like to dominate
> South America. Jaguar's growth profile would be VERY accretive to
> any major.
>
> I disagree with the author's statement that EGO has $700 margin of
> "pure profit." This is not true. This guy doesn't understand mining
> I can tell. There are many costs above direct "cash costs": depreciation,
> depletion,amortization, capex, administrative, etc. You can add
> on several items before you get an actual net income. Mining is
> not easy and very capex intensive!
>
> Why do these author's bother to write puff pieces with no positions?!?!
> C'mon GIVE ME A BREAK. Put your money where your mouth is dude.
> Anyone can write a bullish article. I could write one on a company
> I don't even like if I wanted to!

Oct 23 01:04 PM

[The Recusant:]

Investing in PM miners is indeed a risky business because of the fraud that can occur. Additionally, many of the mines are located in risky countries as well. Whereas if a company merely trades with a risky country, one might lose profit. But if the entire venture is located in a risky country, you lose it all. With the current upheavals and transitions from communistic to capitalistic economies and vice versa, it is my opinion that I'd rather place my bets on time-proven politically and economically secure countries that have PM mines. Canada and Australia, both big PM producers, are perfect matches in both their political security and economic policies. You can play in China, Turkey, African countries, but why increase the risks involved in an already risky investment?

Oct 23 02:55 PM

[West Coast ...:]

To Slvrizgold: Don't worry (?) about a potential acquisition of JAG by AUY. Yamana buys ONLY WORTHLESS TRASH (Northern Orion and their Agua "Rica" deposit) AT GROSSLY INFLATED VALUES (at or near market peaks). As a long-punished shareholder I can attest to that. Sometimes I just want to yell their stock market symbol: auy!

Jaguar is a different cat indeed - a great growth stock with costs under control and WAY TO RUN. Fortunately I loaded up on them only a month ago and the reward is already bigger (at >30%) than Yamana has provided culmulatively over three years! Buyers beware (of AUY) - stick with the cat (JAG) :-)

Oct 23 08:32 PM

[Tom Szabo:]

The production profile is impressive but with a $4 billion market cap (over $6 billion after Sino Gold acquisition), EGO does not offer compelling value among the mid-tier gold producers according to our comparative valuation model. Our database has about 50 mid-tier gold producers (basically all of them) and considers a number of factors including production rate and growth, cash mining cost, resource size, capital costs, etc. Better positioned rivals include Jaguar Mining and Gammon Gold on NYSE plus New Gold and Great Basin Gold on AMEX. Indeed, only Randgold rates lower than EGO on most metrics. There are also quite a few more attractively mid-tier producers on the TSX and ASX.

Oct 24 05:21 AM

[ibejack:]

If you guys are obsessed with cash cost you check out Gold Resource Corp. This is what extreme high grade gold/silver can do for you. Will be in production this quarter with projected cash cost at 0 dollars, and in years 2 and 3 at negative. Here's how the do it:

Here's the latest metal prices:

Gold = $1,048
Silver = $17.67
Copper = $2.82
Lead = $1.01
Zinc = $0.92 (up sharply just recently)

3 meter mining width metal content for La Arista and Baja veins:

Gold = 6.45g/tonne
Silver = 578g/tonne
Copper = 0.54% = 11.90 lbs/tonne
Lead = 1.79% = 39.45 lbs/tonne
Zinc = 6.67% = 147.01 lbs/tonne

Amount of recoverable metal:

Gold = 6.45g X 0.94 = 6.06g/tonne
Silver = 578g X 0.90 = 520g/tonne
Copper = 11.90 lbs X 0.90 = 10.71 lbs.
Lead = 39.45 lbs X 0.90 = 35.50 lbs.
Zinc = 147.01 lbs. X 0.90 = 132.31 lbs.

Dollar value per tonne of recoverable metal at today's spot price:

Gold = 6.06 / 31.1 X $1,048 = $204.20
Silver = 520 / 31.1 X $17.67 = $295.45
Copper = 10.71 X $2.82 = $30.20
lead = 35.50 X $1.01 = $35.86
Zinc = 132.31 X $0.92 = $121.73

Total value of recoverable metal = $687.44 / tonne

Percent of total represented by precious metals = 72.7%

Notice that we have $121.73 of recoverable value in zinc per tonne. Since this metal is in the form of a concentrate, the refiner is likely to pay GRC about 90% of spot price, so let's reduce this further by 10%. So, on average, we wind up with $121.73 X 0.90 = $109.56 worth of zinc for every tonne of La Arista ore that's processed.

Jason, in the latest company presentation, states that it will cost GRC $98 to mine and mill a tonne of underground ore (this seems high to me, but I'll use it). Notice that $98 is well less than the $109.56 that GRC is going to receive for the zinc alone! This means that GRC will produce not only the gold and silver at zero cost, but the copper and lead too! I calculate this will add about $26.7 million a year in profit on just the base metals alone.

The total value of the recoverable precious metal content would be $204.20 + $295.45 = $499.65 per tonne of La Arista ore.

Total annual value of precious metal content = $499.65 X 1,150t/d X 328 = $188,467,980 (this is pure profit because the zinc has paid the cost of processing)

Adding in the profit on the base metals, the total would be $188,467,980 + $26,700,000 = $215,167,980

Assuming 50 million shares (fully diluted) that's about $4.30 per share in free cash flow.

Earnings would be about 2/3 of $4.30 = $2.87 per share.

Dividend would be 1/3 of $4.30 = $1.43 per share

Assuming a PE ratio of 20 (I actually think 20 is conservative) the share price would be $2.87 X 20 = $57 a share

Oct 25 02:01 PM

[Tom Szabo:]

Those GORO numbers are all internal projections without the benefit of a detailed, independent mine feasibility study and the company could be in serious violation of SEC regulations for disseminating them to the public. That is probably why they won't think about getting listed on an exchange until after they have been in production for a year -- by that time the internal projections will prove to be either farcical or prescient so there will be no consequence in having to withdraw all of the inappropriate management projections.

Oct 25 05:26 PM

[ibejack:]

What you are trying to say is that the numbers are non-43-101 compliant. That is true. But all the drill results are verified by an independent 3rd party. In Goro's case it's ALchemix (Canada) who has contracts with plenty of well known miners. The Reids use a polgonal estimate which is a method employed by many of the big modern companies.

It's also been validated by Tocqueville's multi-million dollar invest in GORO as well as Hochschild Mining ltd. Both companies had their own team of geologists look at the numbers and property and subsequently bought big. I think Tocqueville owns 13% of GORO and Hochschild owns 24%. Not bad validation for a company that you implied as having SEC problems lol. Numerous other funds hold large stakes in the company as well but I have no proof that they had their geologists on site and checked the numbers.

If a start up mining company wants to go the 43-101 route then it's going to cost you about 8 years and 100 million shares and plenty of warrents to our banking friends :). Most start ups are forced to go this route because it's impossible to raise the money. The Reids however are very well known in mining circles as they operated US GOLD for some 30 years and are known in the mining circles. They were able to raise the money privately. So they will drill up the resource as they go and they are quite confident in the deposit. I believe the immense scope of the project is allready known but legally we cannot speculate until it's all proven. I believe it's going to be the most impressive junior miner seen in the last 10-15 years. Their last drill return was 904 grams gold over 2.5 meters. More of that and GORO will not be GORO much longer..a likely buyout.

So in conclusion I'll take Tocqueville, Hochschild, and the Reids 30 plus years on the mining scene over some blogger...your opinion may vary

Oct 29 10:59 PM