Eldorado Gold Is Selling Its Entire Chinese Gold Assets

| About: Eldorado Gold (EGO)
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Summary

EGO sold its four Chinese mines for a total of $900 million. First in April 27, 2016, the Jinfeng mine and today the three remaining properties, including one project.

I am questioning if it is really a "good deal" when we look at the long-term. Late 2014, EGO was seeking $1.5 billion for these assets.

This is a positive at first glance, but it is too early in the process to be certain, and shareholders will need more information from the company.

Image: Skouries mine.

Eldorado Gold Corporation (NYSE:EGO)

This article follows my preceding article on Eldorado Gold published on May 14, 2016, about the first-quarter results.

Today, Eldorado Gold announced the following:

In addition to the April 26, 2016 announcement that Eldorado Gold Corporation (the "Company" or "Eldorado") has reached an agreement to sell its interest in the Jinfeng mine, Eldorado is pleased to announce it has reached an agreement to sell its respective interest in the White Mountain and Tanjianshan mines and the Eastern Dragon development project to an affiliate of Yintai Resources Co. Ltd. (SHSZ:000975) ("Yintai") for US$600 million in cash, subject to certain closing adjustments. The agreement provides for an RMB equivalent US$30 million deposit to be paid by the purchaser and forfeited under certain circumstances and a reverse break-fee of the same amount payable by Eldorado to the purchaser under certain circumstances.

A little history:

On April 27, 2016, Eldorado Gold announced the following:

It has reached an agreement to sell its 82 percent interest in the Company's Jinfeng mine to a wholly-owned subsidiary of China National Gold Group ("China National Gold") for US$300 million in cash, subject to certain closing adjustments.

The transaction is expected to close in the third quarter 2016 and is subject to obtaining various regulatory and other approvals and other customary closing conditions.

A little bit about the Jinfeng mine:

In 2016, Jinfeng is expected to process 930,000 tons of ore at a grade of 3.89 grams per ton of gold. The ore will be strictly sourced from the underground operations and a small amount of stockpile, as the open pit operations were successfully completed in April 2015. As underground development opens additional working faces, underground ore mining will increase to an eventual target of 1.2 million tons of ore per year, bringing production back above 130,000 ounces of gold per year. Sustaining capital costs for 2016 are estimated at $15 million.

Production of Gold per mine (China):

Country Mine

1Q'16

Oz

4Q'15

Oz

3Q'15

Oz

2Q'15

Oz

1Q'15

Oz

China Tanjianshan 14,053 16,808 29,055 25,074 26,626
Jinfeng Mine 25,935 36,707 38,028 38,234 36,686
White Mountain 18,335 22,231 16,359 18,683 20,883

Eastern Dragon was not a producing mine in 2015. However, the Eastern Dragon Project Permit Approval was received from the National Development and Reform Commission.

With this new announcement, the entire Chinese assets have been sold now, for a total of $900 million. The amount may vary a little under "certain circumstances".

Eldorado Gold total production was 140,989 Oz in the first-quarter 2016.

Production of Gold per mine per Quarter (6):

Country Mine

1Q'16

Oz

4Q'15

Oz

3Q'15

Oz

2Q'15

Oz

1Q'15

Oz

4Q'14

Oz

Turkey Kisladag 52,376 64,574 69,672 67,778 79,256 -
Efemcukuru 27,516 24,434 27,123 27,705 21,220 -
China Tanjianshan 14,053 16,808 29,055 25,074 26,626 -
Jinfeng Mine 25,935 36,707 38,028 38,234 36,686 -
White mountain 18,335 22,231 16,359 18,683 20,883 -
Greece Olympias 2,774 4,978 2,989 3,686 4,743 -
TOTAL 140,989 169,732 183,226 181,160 181,215 199,572

As we can see in the graph above, Eldorado Gold is selling its Chinese assets when production was rather low and it probably explains the low price sold, today. A little over a year ago EGO was seeking "as much as $1.5 billion" for the same assets.

On November 5, 2014, Bloomberg indicated the following:

Eldorado Gold Corp., the largest foreign producer of the precious metal in China, is seeking a buyer for its mines in the country as part of a dual-track sale process, people with knowledge of the matter said.

The miner is seeking as much as $1.5 billion for its four Chinese projects, the people said, asking not to be identified as the matter is private. The assets have drawn interest from companies including China National Gold Group Corp., the nation's biggest producer of the commodity, as well as Zhaojin Mining Industry Co., Zijin Mining Group Co., and Jiangxi Copper Co., they said.

The market seems to welcome this news, and the stock is rallying today. However, I am questioning if it is really a "good deal" when we look at the long-term. It is not very simple and I am going to explain why.

Selling now with a low production implied a large discount. From $1.5 billion expected in 2014, to $900 million sold today for the four properties, it is a huge difference. Who was dreaming? What happened to the assets in a little over one year?

We have to question, again, why the company is not waiting patiently to get a better deal later this year? I do not see any urgency on the horizon that demands such a seemingly precipitate decision and gold is quite bullish.

EGO production will now be reduced essentially to the two mines in Turkey, which represented 56.7% of the company's gold production - see table above.

Because the production will be reduced significantly, thereby, revenue will be also reduced significantly.

Cash is not always king, depending on the future use of the cash. The company may be weakening significantly later, depending on the financial strategy adopted.

The company will be able to retire the debt (part of the entire amount?) and eventually finance the capital expenditure for the next couple of years without any new financing. This is a positive at first glance, but it is too early in the process to be certain, and shareholders will need more information from the company.

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.

Additional disclosure: I trade EGO