Seeking Alpha
Long only, value, contrarian, gold & precious metals
Profile| Send Message|
( followers)  

Summary

  • Eldorado's fourth quarter core costs were up year-over-year and from its FY2013 averages, but they remain one of the lowest in the industry.
  • The company expects all costs to rise in FY2014, but they should remain a low cost producer.
  • Political risks abound at the majority of the company's mines, not a reason to sell, but something for investors to remember.

Introduction

In our complete Q3FY13 cost analysis, we went over a number of the industry's all-in costs to mine an ounce of gold in Q3FY13 and discussed one of the most important metrics to analyze the gold industry, the actual cost of mining an ounce of gold, which can help an investor figure out whether it is time to buy GLD (NYSEARCA:GLD) and/or the gold miners. In that analysis, we used the Q3FY13 financials to calculate the combined results of publicly-traded gold companies and came up with a true all-in industry average cost of production to mine each ounce of gold.

In this analysis, we will calculate the true costs of production of Eldorado Gold (NYSE:EGO), a gold producer that owns operating mines in China, Turkey, and Greece. In addition, Eldorado owns two base metal mines located in Brazil (an iron-ore mine) and Greece (a base metal mine). Eldorado also owns a few development projects located in China, Greece, Turkey, and Romania.

How to Use Our All-in Costs Analysis with Your Investments

In the previously mentioned article, we gave a thorough overview of the current way that mining companies report their costs of production and why it is inaccurate and significantly underestimates total costs. Then we presented a more accurate methodology for investors to use to calculate the true costs of mining gold or silver. Please refer to that article for the details explaining this methodology, which is an important concept for all precious metals investors to understand.

The best way to use this analysis for individual companies is to compare the different production cost metrics with the company's profits to look for any anomalies (e.g. large net profits but high costs). Also, we provide historic data to allow investors to check out any trends in regards to costs or production totals that may be an early warning to future successes or failures for the company. Ultimately, this analysis is best used as a first step to further investigative work, and that is our purpose with releasing this series.

Explanation of Our Metrics

For a detailed explanation of the metrics and each metric's strengths and weaknesses, please check out our previous full quarterly all-in costs gold report where we discuss them in detail.

All Costs per Gold-Equivalent Ounce - These are the total costs incurred for every payable gold-equivalent ounce, which includes everything. This is the broadest measure of costs, and since it includes write-downs, it is essentially the "accounting cost" of producing gold-equivalent ounces.

Costs Per Gold-Equivalent Ounce Excluding Write-downs and S&R - This is the cost to produce each gold-equivalent ounce when subtracting write-downs and smelting and refining costs, but including everything else.

Costs Per Gold-Equivalent Ounce Excluding Write-downs - This is similar to the above-mentioned "Costs per Gold-Equivalent Ounce Excluding Write-downs and S&R" but includes smelting and refining costs. That makes this measure one of the best ways to estimate the true costs to produce each ounce of gold, since it has everything (including taxes) except for write-downs.

Costs per Gold-Equivalent Ounce Excluding Write-downs & Taxes - This measure includes all costs related to gold-equivalent production excluding all write-downs and taxes. Essentially, this is the bottom dollar costs of production with an artificial 0% tax rate (obviously unsustainable) which works well, because it removes any estimates of taxation due to write-downs or seasonal fluctuations in tax rates, which can be significant. The negative to this particular measure is that since it does not include taxes, it will underestimate the true costs of production.

True Costs of Production for Eldorado Gold

Let us use this methodology to take a look at Newmont's (NYSE:NEM) results and come up with the true cost figures for each ounce of production. When applying our methodology, we standardized the equivalent ounce conversion to use the average LBMA price for FY2013, which results in an iron-to-gold ratio of 12.85:1 iron tonnes to ounces of gold. Since our conversions change with metal prices, this may influence the total equivalent ounces produced for past quarters, which will make current-to-past quarter comparisons much more relevant.

Additionally, Eldorado Gold mines a concentrate mix of lead and zinc at its Stratoni mine in Greece, and we converted this mix to gold at a 1.5:1 ratio of tonnes of concentrate to ounces of gold, which was based on the average quarterly price for each sold tonne of concentrate (each tonne sold in FY2013 at an average of $850). We like to be precise, but minor changes in these ratios have little impact on the total average price; investors can use whatever ratios they feel most appropriately represent the by-product conversion.

(click to enlarge)

Observations for Investors

Eldorado Gold's Q4FY13 true all-in costs (costs excluding write-downs) actually fell on a year-over-year basis from $1084 in Q4FY12 to $551 in Q4FY13, but the vast majority of this was related to a $90 million dollar tax credit versus a $29 million dollar tax charge, which will obviously throw this number way off. Thus for companies that experience large annual or quarterly impairments, we prefer to use the core non-tax costs (removing taxes and write-downs), which will give us a good idea of the comparative change in costs (i.e. are they rising or falling). But it will also understate costs, since it removes declared income taxes from the cost figure, so the true costs of production will be somewhere in between these numbers.

For the fourth quarter, Eldorado's core non-tax costs rose from $946 per ounce in Q4FY12 to $1015 in Q4FY13, which is a relatively average rise in costs that we've been seeing across the industry. On an annual basis, core non-tax costs rose from $918 in FY2012 to $983 in FY2013, this is (again) what we've been seeing across the industry.

Since almost all the intermediate to large miners experienced large write-downs, which affects our all-in true costs calculations, we think it is more relevant to compare their core costs. For this quarter, Eldorado's fourth quarter core costs of $1015 compare very well with its competitors as follows: Goldcorp (NYSE:GG) (core costs below $1100), Barrick Gold (NYSE:ABX) (core costs above $1300), Newmont Gold (core costs around $1250), Alamos Gold (NYSE:AGI) (core costs above $1150), Yamana Gold (NYSE:AUY) (core costs close to $1100), and Agnico-Eagle (NYSE:AEM) (core costs below $1100).

Conclusion for Investors

As investors can see, Eldorado had a very good quarter, as core costs are below almost all the other companies we cover despite a slow fourth quarter where gold production dropped.

In terms of the company outlook, Eldorado expects the following:

(click to enlarge)

It seems that the company is expecting costs to rise around 10% from FY2013 levels (not surprising, as other miners expect 5-10% rises in FY2014), and we thus project that core costs will be a little bit higher than our Q4FY13 costs of $1015. Even though rises in costs are never pleasing for investors, this should still mean that Eldorado remains one of the lowest producers in the industry - a positive for Eldorado investors. However, we do note that the majority of the company's mines are in China, Turkey, and Greece - all countries that have major political risks for miners. This wouldn't be a reason for us not to invest in Eldorado, but it would be something to take into consideration in case the political situation in one or more of these countries deteriorates.

Source: Eldorado Gold's 4th Quarter And Full Year All-In Mining Costs