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Eldorado Gold (NYSE:EGO)

Q4 2011 Earnings Call

February 24, 2012 11:30 am ET

Executives

Nancy E. Woo - Vice President of Investor Relations

Paul N. Wright - Chief Executive Officer, President and Director

Norm Pitcher - Chief Operating Officer

Fabiana Chubbs - Chief Financial Officer, Treasurer and Risk Manager

Analysts

Patrick Chidley - HSBC, Research Division

Brian Christie - Desjardins Securities Inc., Research Division

Andrew Schopick - Nutmeg Securities Ltd., Research Division

Operator

Good morning, ladies and gentlemen. Welcome to the Eldorado Gold Year-end Financial and Operating Results Conference Call. This conference call is being recorded and is available on the Eldorado website at www.eldoradogold.com or on www.earnings.com.

I would now like to turn the meeting over to Ms. Nancy Woo. Please go ahead.

Nancy E. Woo

Thank you, operator. This presentation includes statements that may constitute forward-looking statements or information. Any forward-looking statements made or information provided reflect our current plans, estimates and views. Forward-looking statements or information, which include all statements that are not historical fact, are based on certain material factors and assumptions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in or suggested by the forward-looking statements or information.

Consequently, undue reliance should not be placed on these forward-looking statements and information. The information contained in our Annual Information Form and in our annual quarterly Management's Discussion and Analysis available on our website and on SEDAR identifies factors and assumptions upon which the forward-looking statements or information are based on and the risks, uncertainties and other factors that could cause actual results to differ.

All forward-looking statements and information made or provided during this presentation are expressed qualified in their entirety by this cautionary statements and the cautionary statements contained in our press release dated February 24, 2012.

I will now turn the call over to Paul Wright, President and CEO of Eldorado Gold.

Paul N. Wright

Well, thank you, Nancy, and good morning, ladies and gentlemen. And as Nancy said, welcome to Eldorado Gold's Year-end Financial and Operating Results Conference Call. Joining me this morning in Vancouver are Norm Pitcher, our Chief Operating Officer; Fabiana Chubbs, our Chief Financial Officer; and Nancy Woo, our Vice President of Investor Relations.

I will follow the usual format with Norm and Fabi taking you through the operating and financial performance of the company, respectively, and providing some commentary in regards to our outlook for 2012. We'll then open up for questions.

As we previously disclosed, our operating results for 2011 and our guidance for 2012, my comments on these topics will be fairly brief. 2011 was another very strong year for Eldorado. Gold production increased, gold revenues increased, earnings per share increased, dividends increased to a level where dividends attributable to 2011 production as a percentage of 2011 earnings is in excess of 25%, one of the highest payouts in the sector.

Modest increases were made in our reserves and resources, and importantly, production commenced at our second mine in Turkey, Efemçukuru. Looking to 2012, we see further growth in production to approximately 750,000 ounces whilst maintaining some of the lowest cost in the industry in the mid-$400 range.

Turning to the European Goldfields transaction. This transaction closed today following overwhelming shareholder support from both companies. We are tremendously excited with the opportunity that this transaction provides for Eldorado. We're adding sizable, high-quality, long-life assets with robust resource base. We are increasing Eldorado's gold reserves by 53% to an excess of 29 million ounces. We are expanding future production growth whilst maintaining low cash costs. We are strengthening our regional presence in the extremely prospective area, and we are utilizing the strength of our balance sheet and executing on the expanded growth plan.

As previously described, we will, in April, update the market on the details of our plans for the development of these assets within Eldorado. And beyond my next few comments, questions regarding time frame, capital, operating cost estimates, production levels will have to wait until April.

Following the approval of the EIS for both Olympias and Skouries by EGU, activities have begun. The Olympias mill is presently being furbished and will be commissioned in Q2 of this year with first production planned for Q3. Underground rehabilitation and refurbishment is underway. At Skouries, we expect earthworks to commence on-site in the second quarter of this year.

In Romania, very good progress is being made on the permitting front, and we expect Certej to be through its major permitting by midyear.

We're extremely impressed with the quality of the management teams in both Greece and Romania that are coming on board, and we look forward to working with them to bring these assets to account.

With that, I'll hand it over to Norm.

Norm Pitcher

Thanks, Paul, and good morning, everyone. I think that with the growth of the company over the last few years, I'll change things up a little bit in terms of the way I present. I don't intend to go through all of the numbers for all of the operations. And I think what I'll do instead is refer you to the press release and the MD&A for details of things like tonnes grade and the associated cash cost.

Because it is year end, I would like to make sure that we thank our teams throughout the world, both in the operations, development and exploration. They have certainly been the reason for our success in 2011.

So let's go onto operations and development, and we'll start in Turkey, at Kisladag, which had a stellar year and continues to be the cornerstone operation of the company. At Kisladag, this year, in 2011, we received the permit to increase ore throughput to 12.5 million tons per annum and produce at that level in 2011. We also completed a study to further increase production to 33 million tonnes per annum, which is 25 million through the crusher and 8 million run-of-mine, starting the latter half of 2014. We expect the amendment of the EIA to increase that production to be submitted midyear this year and expect an approximately 6-month approval process for that.

At Efemçukuru, we began commissioning in June 2011 and declared commercial production in December. Year end, we had shipped approximately 20,000 ounces in concentrate to the treatment plant at Kisladag. The underground crushing and paste fill systems will be commissioned in April, allowing for more efficient underground operations. And the treatment, the concentrate treatment plant at Kisladag is currently being fine-tuned and production is ramping up.

Onto China. Jinfeng had a good year, met budget on both ounces and cost. Land acquisition continues there for last phase of the open pit cutback. But by doing a small redesign of the access into the pit, we have started -- we started mining there in late 2011.

At White Mountain, had a very good year. We increased production there by 31% over 2010 due to increased grade, throughput and recovery. And we remain very excited about the potential of the deep higher-grade down-plunge zone which will be drilled this year from underground drill stations.

Tanjianshan, not a lot to say there, just another very solid year from Tanjianshan. We did this year add the 323 Zone into reserves, ahead of several targets for this year's exploration program.

At Eastern Dragon, we are making progress on the permitting and are currently planning on restarting construction on April.

Onto Brazil. Vila Nova Iron Ore, we had budgeted 10 shipments in 2011, actually made 11. We're looking at increasing that a little bit for this current year. And we're right now drilling the along strike and downdip extensions of the main ore zone.

Tocantinzinho. Besides ongoing exploration, we expect the feasibility study to be completed by year end, as well as the receipt of the Environmental Impact Assessment.

In Greece, at Perama, now that we have the PEIA approved, we'll be submitting the EIA this quarter and also starting exploration there.

Onto exploration, it was a very busy year, 2011. We drilled 120,000 meters in total at 22 projects around the world. In Turkey, it was almost 28,000 meters, mostly in Efemçukuru and Kisladag and a few exploration projects. We'll continue drilling at both of those projects in 2012, increasing to 4 to 5 drills on-site at Efemçukuru in March.

In Brazil, last year, we drilled over 20,000 meters, all of it in Tocantinzinho. And in China, almost 70,000 meters at various projects, including Jinfeng, White Mountain, Tanjianshan and some exploration ones.

Current activity in terms of exploration, we're drilling at 10 projects right now, including 4 of our mine sites. We completed 9,400 meters of drilling in January, and we are starting programs in Greece, both at Perama Hill and Piavitsa. Just a little bit on that, Piavitsa is part of the ground that we got through the EGU transaction. It appears to be a similar in mineralogy and ore type to the Olympias deposit, although it's a long strike with Stratoni. There've been some nice drill intersections in there in the past, and 2 drills going there now, which we'll be increasing to 4 shortly. In addition to that, in that whole area, there are additional copper, gold porphyry targets that we will start assessing this year. So I think that's part of -- part of what we'll be updating in April will also be the exploration potential of what's coming with this whole transaction.

With that, I will turn it over to Fabi.

Fabiana Chubbs

Thank you, Norm. Good morning. I will go through the financial statements, highlighting changes in significant accounts. Commencing with the balance sheet, we ended the year with a cash and cash equivalent balance of $394 million compared to $314 million at the end of 2010. The $80 million increase in cash balance is the result of cash generation from operations, net of the uses of cash for debt repayment, capital program and dividend payment.

The increase in inventory is mainly related to materials and supplies as a result of increase of operational needs requirements. Inventories include a $6 million balance related to the Efemçukuru flotation concentrate. This concentrate will be processed at the Kisladag plant.

On the liabilities side, we paid $92 million of the outstanding debt, which brings the debt balance to $81 million as of the end of December 2011. This debt is with Chinese bank and is to be replaced from cash generated from our Chinese operations.

Moving on to the income statement, revenues for the year of $1 billion are $300 million from a year ago due to a 29% increase in the average realized price of gold and a 3% increase in gold sales volumes. In addition, in 2011, 2011 reflects the full year of production at Vila Nova.

On the income tax expense for the year was $166 million compared to $87 million in 2010, representing an increase in the effective tax rate from 27% to 32%. This increase is the result of withholding taxes paid on dividends from our Turkish subsidiary and the impact of the weakening of the Turkish lira on the core and on deferred income taxes. The withholding tax rate on dividends from Turkey is 10%.

On the statement of cash flows, we generated cash flow from operating activities before changes in nonworking capital of $502 million compared to $360 million in 2010. This increase is a direct result for the increase in operating profits. The 3 main uses of cash relate to our capital program, $293 million; debt repayment of $92 million; and dividend payment of $61 million.

Those are my comments on the financial statements. I will turn the call back to Paul.

Paul N. Wright

Well, thanks, Fabi. Thanks, Norm. Operator, we'll open up for questions now, please.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Patrick Chidley with HSBC.

Patrick Chidley - HSBC, Research Division

Just wanted to ask if you could maybe, now that the deal is closed, begin to outline some of the synergies that might be available between, obviously, EGU assets and your current assets. For example, maybe other synergies with Perama Hill and the Greece asset sale?

Paul N. Wright

Well, as you know, Patrick, I mean realizing synergies in mining is pretty tough unless you've got mines that are immediately adjacent. I mean, the synergies are really come from, obviously, having a sort of commanding position in Greece as it relates to the size of our investments in this sector. I think we're -- that manifests itself in terms of the relationships that you need in jurisdictions such as Greece to be successful. And that comes with a transaction. I mean, Perama is about 4-hour drive away from the mines and projects in Halkidiki. Clearly, in terms of -- not dissimilar to what we did in China, with the number of projects and mines we have, we can better organize ourselves in terms of the type of infrastructure that we have in-country to support technical, financial, legal. This type of thing enhances our ability to be efficient in the country, and that comes with the transactions.

Patrick Chidley - HSBC, Research Division

Right. And just quickly, any comments on how you might approach the EGU assets differently than, say, in the European Goldfields had discussed?

Paul N. Wright

There are no comments at this time on that one, Patrick. You'll have to wait till April in terms of we -- when we lay out plans. And then if there are any differences, you'll see them. But generally speaking, we're very comfortable with the work that's being done.

Operator

[Operator Instructions] The next question is from Brian Christie with Desjardins Securities.

Brian Christie - Desjardins Securities Inc., Research Division

Just wondering, should we expect the effective tax rate to remain at 32% on a go-forward basis?

Fabiana Chubbs

In the long term, we've always averaged around 30%, but you will expect between 30% and 32%. Somewhere in there what the operation will be.

Operator

The next question is from Andy Schopick.

Andrew Schopick - Nutmeg Securities Ltd., Research Division

I have a couple of financial questions. I just want to be sure, now on the capitalization of the company, should we assume about 710 million fully diluted shares outstanding for this current year?

Fabiana Chubbs

Yes, that is all right.

Paul N. Wright

Yes. Approximately, yes.

Andrew Schopick - Nutmeg Securities Ltd., Research Division

And can you tell me, approximately how much goodwill will be put on to the balance sheet in connection with the European Goldfields deal?

Paul N. Wright

We can't really provide you that number at this point.

Fabiana Chubbs

No. You're going to have some guidance on the pro forma that was provided on the filing of the circular. But as you know, numbers will change when we have the final information for the year end and the final closing price.

Operator

[Operator Instructions] I have no further questions registered at this time. I'd now like to turn the meeting back over to Mr. Wright.

Paul N. Wright

Right. Thank you, operator, and thank you for those who attended, and we look forward to speaking with you in April.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.

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