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

|
 |  Includes: ABX, EGO, GG, KGC
by: Alexander Wissel

This morning traders on the NYSE were greeting with the executives from the Eldorado Gold Corporation (NYSE: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 (NYSE:ABX) Kinross Gold (NYSE:KGC) and GoldCorp (NYSE: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