Eldorado Gold Corp.: I Don't See An Opportunity Here

| About: Eldorado Gold (EGO)
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Eldorado Gold Corporation has a strategy of discovering, acquiring and developing high-quality assets in prospective regions.

A summary of past Financial results of the company are presented.

A comment about Analysts’opinions and estimates.

On the basis of my point of view Eldorado Gold Corporation is overvalued at the moment by the market.

VANCOUVER, Jan. 25, 2016 /CNW/ - Eldorado Gold Corporation, ("Eldorado" or "the Company") is pleased to report the Company's 2015 operating results and preliminary cash costs, and to provide production and cash cost guidance for 2016.


  1. Gold production of 723,532 ounces (including production from tailings retreatment at Olympias), exceeding 2015 guidance of 640,000-700,000 ounces of gold.
  2. 2015 all-in sustaining cash costs averaged $841 per ounce; cash operating costs averaged $552 per ounce; lower than original 2015 guidance of $570-615 per ounce.
  3. Closed the year with total liquidity of approximately $665 million, including $290 million in cash, cash equivalents and term deposits, and $375 million in undrawn lines of credit.
  4. 2016 forecast gold production estimated to be 565,000-630,000 ounces of gold at an average cash cost ranging between $585-620 per ounce, and an all-in sustaining cash cost between $940-980 per ounce. (here).

Eldorado Gold Corp Eldorado Gold Corporation (NYSE:EGO) owns and operates mines around the world. The company's activities involve various facets of the mining industry, including exploration, development, production and reclamation. Its operating gold mines include Kisladag in Turkey (100%), Efemcukuru in Turkey (100%), Tanjianshan in China (90%), White Mountain in China (95%) and Jinfeng in China (82%). Its gold projects include Perama Hill in Greece (100%), Olympias in Greece (95%), Skouries in Greece (95%),

Eldorado Gold (EGO -10.7%) will write down the value of its assets by as much as US$1.6B, primarily because of its troubled mining operations in Greece.

Certej in Romania (81%), Eastern Dragon in China (75%) and Tocantinzinho in Brazil (100%). Its other operating mines include Stratoni Lead and Zinc Concentrates in Greece (95%) and Vila Nova Iron Ore in Brazil (100%). The Company has completed an exploration program in Romania at the Bocsa, Magura, Muncel, Brad and Deva projects, which are situated in the Apuseni district near the Certej deposit (here).

Four key attributes on which Eldorado Gold Corp. stays focused:

  1. technical expertise,
  2. prudent financial management,
  3. environmental track record,
  4. and commitment to adding value to the communities where the company operates.

The company has a strategy of discovering, acquiring and developing high-quality assets in prospective regions.

Eldorado Gold Corporation's past financial results:

Building our Future

With high-quality, low-cost assets located around the word, a management team that combines technical expertise with a commitment to responsible growth, robust margins and a strong balance sheet, Eldorado Gold is well-positioned to continue to grow. (Source).

Q3, 2015 results:

"For the third quarter ended September 30, 2015, Eldorado Gold Corporation, ("Eldorado" or "the Company") reports gold production of 183,226 ounces (Q3 2014 - 192,578 per ounce) with average cash costs of $552 per ounce (Q3 2014 - $488 per ounce). Adjusted net loss for the quarter was $4.0 million ($0.01 loss per share) compared to a $36.1 million profit ($0.05 per share) in Q3 2014."(here).

Table below shows a summary of quarterly results:

Analysts' opinions and estimates

Recently the shares of Eldorado Gold Corp (NYSE:USA) had been given positive outlook from sell-side analysts. A total of 9 sell side firms estimates were taken into account to get the market consensus through poll conducted by Zacks.

"The one-year price target set the brokerage firms is $4.37 for shares of Eldorado Gold Corp . The high side price target estimate was found to be $6, whereas, the lowest price target was set at $2.57."(already quoted).

I focus on the mean target price for Eldorado Gold Corporation and I assume that analysts' target prices on this gold stock is not based on valuation heuristics but based on present value valuation models (such as DDM), I then derive a value of cost of equity capital for the company.

The decision to use a DDM is explained in this article.

The equation of the discount cash flow model is:

Where P0 is the current stock price, g is the constant growth rate in perpetuity expected for the dividends; r is the constant cost of equity capital for that company. D is the value of dividends; Pn is the terminal value.

Analysts' estimate of growth earnings. Next 5 years growth is -2.77% for Eldorado Gold Corporation (see picture below).

I can go beyond the limit of a negative growth estimate rate operating as follows:

The growth rate, g.

I have calculated the cost of capital for Eldorado Gold Corp. (WACCEgo), that essentially is 'the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners and other providers of capital or they will invest elsewhere' (Fernandes, Nuno. FINANCE FOR EXECUTIVES: A practical guide for managers. NPVPublishing, 2014, p.17). All I can do is calculate the growth rate of the dividend for both gold mining stocks.

If the discount rate can be seen as a function of the dividend yield and the growth rate, by rearranging the simplified form of the dividend capitalization model, we can think of the growth rate of the dividend as a function of the retention rate and the return on equity.

ROEEldorado = 1.28% (5 Yr. avg. here).

Now I can estimate the growth rate, g, for Eldorado Gold Corp.

gEldorado = ROEEldorado x RREldorado = 1.28% x 85.7% x 100 = 1.10%.

The cost of equity capital for Eldorado Gold Corp.:

For Eldorado Gold Corporation I will use the beta (risk measure) estimated with a 2- factor model (S&P 500; Gold price) over a period of almost 13 years, from Feb. 3, 2003 to Dec. 13, 2015.

The Beta gold is 1.63 which represents the exposure of Eldorado Gold Corp. returns to changes in gold price (COMEX); the Betamkt is 0.59 which represents the exposure of Eldorado Gold Corp. returns to changes in the S&P 500. Both coefficients are statistically significant (see t-Stat values in the summary output below):

I also checked for auto-correlation using the Durbin Watson statistic. See picture below for the results of the test:

Below you can find arithmetic and geometric average of monthly and annual returns on S&P 500 and gold price:

REldorado = Betamkt*Mkt + Betacomex*Comex

REgo = (0.59 * 7.21% + 1.63*10.58%) x 100 = 21.50%.

Eldorado's wacc = 0.90 * 21.50% + 0.10 * 4.9% * (1-0.53) = 0.1958 x 100 = 19.58%.

The dividend of NYSE:EGO is $0.016.

EGO's terminal value: $0.016 x 1.0110 / (0.1958 - 0.0110) = $0.08.

EGO's EV = (0.016/1.1958)^1 + (0.08/(1.1958)^1) = $0.08 against a mean target price of $4.37 per share.

Eldorado Gold Corporation's share price is now trading around $2.08.

You can think at the mean target price as the terminal value of Eldorado Gold Corporation. Or since the mean target price is $4.37, you can think at the current share price of $2.08 (as of January 25, 2016, 21:48, time in Rome), as the present value, Pn, of the stock in 1 year time, assuming that the current market price reflects the real value of the stock.

Definition of consensus price target extrapolated from the internet: the Consensus Price Target of a period 'is the average of individual price target estimates submitted by covering sell-side analysts' (here). Normally it is a 12-month period.

$2.08 = $0.016/(1+0.1958)^1 + Pn/(1 + 0.1958)^1

Pn = $2.47 which is less than the low target price.


But the question is: can we rely on the current market prices?

The stock tumbled 62.96% in 1 year, 86.87% in 5 years and 81.58% in 10 years and during bull market in the gold price.

On the basis of this assessment Eldorado Gold Corporation is overvalued at the moment by the market.

My article does not constitute any investment recommendations or professional advice.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.