Eldorado Gold: Digging Into The Updated Reserve Estimate

Summary

• Eldorado Gold released its updated Reserves & Resources statement, and recently announced an inferred resource at Ormaque in Quebec.
• Based on strictly operating assets, Eldorado Gold has an industry-leading mine life of more than 14 years, and managed to increase its reserves year-over-year.
• While Lamaque's mine life is below 10 years, the company's large resource base at Lamaque combined with Ormaque should easily push this mine life out further.
• Currently, I see better value in the sector with Eldorado Gold at more than 12x FY2021 earnings estimates, but the wild card continues to be Skouries, which would be a game-changer for the company.

It's been a busy month for earnings for the Gold Miners Index (GDX), and at the same time, several producers are busy reporting their updated Reserves & Resources for FY2020. One of the first names to report its mineral statement is Eldorado Gold (NYSE:EGO), an intermediate producer that just came off an exceptional year with production up 34% year-over-year. Based on strictly operating assets, Eldorado Gold has an industry-leading mine life of more than 14 years and managed to increase reserves year-over-year.

Meanwhile, the maiden resource at Ormaque should help push Lamaque's mine life into the 2030s, assuming positive conversion. At 12x FY2021 earnings estimates, Eldorado is reasonably valued, but I see better value elsewhere in the sector.

(Source: Company Presentation)

Eldorado Gold was one of the first companies to release its updated Reserves & Resources for FY2020, with the company reporting mineral reserves of ~17.73 million ounces, up 1% year-over-year. This reserve base is made up of a more than 16-year mine life at Eldorado's cornerstone Kisladag asset and a more than 20-year mine life at Olympias, assuming a production rate of ~80,000 ounces per year (FY2024 run rate).

Combined with Lamaque's 7.5-year mine life based on current reserves, this forms a solid base for more than 10 years of gold production at above ~400,000 ounces per year. Even though Lamaque doesn't have a 10-year mine life currently, Eldorado should easily be able to add mineable material with a maiden resource at Ormaque and a significant land package locked up next door to Lamaque with the QMX Gold acquisition. Let's take a closer look at the Reserves & Resources update below:

(Source: Company News Release)

As shown in the table above, Eldorado Gold has its reserves spread across eight assets, with four of those assets currently in production (Efemcukuru, Kisladag, Lamaque, and Olympias). This reserve base is relatively large compared to its peers, as is clear from the chart below. If we look below, we can see that Eldorado Gold has a larger gold reserve base than peers like Yamana Gold (AUY) and B2Gold (BTG), despite these companies having much larger production profiles than Eldorado Gold (0.53 million ounces per annum) at ~1.05 million ounces per annum, and ~1.0 million ounces per annum, respectively. However, it's important to note that only ~8.53 million ounces of Eldorado's ~17.73 million-ounce reserve base resides at assets currently in operation.

(Source: Company Filings, Author's Chart)

If we look at the reserve update progression over the past three years, we can see that reserves have climbed each year since 2018, up from 16.94 million ounces to 17.73 million ounces. However, grades are down slightly in the same period, with grades on the reserve base dipping from ~1.35 grams per tonne gold to ~1.15 grams per tonne gold. It's also worth noting that Eldorado Gold has increased its gold price assumption used to calculate reserves by $50/oz each year, with a $1,300/oz gold price used in FY2020.

So, while reserves have increased on a consolidated basis, the higher gold price assumption has certainly helped. Unlike Eldorado Gold, Barrick Gold (GOLD) and Newmont (NEM) both chose to maintain their conservative $1,200/oz gold price assumptions, despite the gold price rise last year.

(Source: Company Filings, Author's Chart)

Digging into the reserve update a little closer, we can see that three assets added significantly to reserves on a year-over-year basis. These three assets were Kisladag, Lamaque, and Perama. In Kisladag's case, the 14% increase in reserves was due to higher than expected leach recovery rates following metallurgical work completed last year. However, the gold price also helped with this reserve boost, with the gold price used to calculate reserves up from $1,250/oz in 2019 to $1,300/oz. At Lamaque, the added reserves pushed the total reserve base up to ~1.09 million ounces thanks to successful resource conversion, which translates to a ~7.5-year mine life, assuming a production rate of 145,000 ounces per year.

(Source: Company Filings, Author's Chart)

(Source: Company News Release)

In terms of decreases in reserves, Efemcukuru could not fully replace last year's mining depletion and is down to a reserve base of just 613,000 ounces. This translates to only a ~6.7-year mine life based on FY2021 guidance of 90,000 to 95,000 ounces and is the one asset where Eldorado will need to build on its reserves. Meanwhile, Olympias saw a 23% decrease in reserves due to a change in cut-off values, reflecting more conservative mining assumptions.

These assumptions were higher mining dilution and decreased mining recovery, which changed the mine's cut-off from $133.00/tonne to $187.50/tonne on drift & fill mining. On long-hole stopping, the cut-off increased from $116.00/tonne to $166.40/tonne. Fortunately, while Olympias saw a sharp decrease in reserves, this still translates to a long mine life based on ~2.25 million ounces of reserves and a production profile below ~100,000 ounces per year.

(Source: Company Presentation)

It's worth noting that while Lamaque has a relatively low mine life at just over 7 years, Eldorado Gold reported a maiden resource estimate from Ormaque last month, which is less than 3 kilometers from Lamaque, and barely 1 kilometer from the Sigma Mill. The maiden resource estimate contained ~2.6 million tonnes at 9.53 grams per tonne gold, translating to an 803,000-ounce resource that could eventually see conversion into reserves. It's worth noting that this resource is more than 30% above the current reserve grade of 6.76 grams per tonne gold at Lamaque, and therefore, a very impressive addition to the project.

So, how's the valuation look?

Based on Eldorado's 175 million shares outstanding, the company has a market cap of ~$2.0 billion at $11.40 per share. If we divide this by total reserves, the company is trading at a valuation of just ~$112.80/oz. However, the more relevant figure is its reserves at operating assets, which currently stands at ~8.53 million ounces. Using this figure, Eldorado Gold is valued at $234.46/oz, which is not cheap compared to other Tier-2 jurisdiction producers. Having said that, if the ultra-low-cost Skouries is cleared for production and fully-permitted, this would be a game-changer for the company. This is because Skouries has been projected to produce ~140,000 ounces of gold per year at all-in sustaining costs of $215/oz, representing 80% plus margins at the current gold price.

(Source: Company Presentation)

If we look at Eldorado Gold's valuation relative to annual earnings per share [EPS], we can see that the stock is trading at roughly 16x trailing earnings of $0.77 and barely 12x FY201 annual EPS estimates of $0.92. This is a reasonable valuation, though I believe there is better value out there, with names like Newmont also trading at roughly 12x FY2021 earnings estimates while paying a 3.90% dividend yield. On average, Newmont operates out of much safer jurisdictions than Eldorado Gold, has similar costs, and has a higher proportion of its production coming from Tier-1 jurisdictions (57% vs. 30%).

(Source: YCharts.com, Author's Chart)

In summary, Eldorado Gold had a solid Reserves & Resources update, but it's important to note that the year-over-year growth was helped by a higher gold price used to calculate reserves. While the $1,300/oz figure is not that much above the industry average of $1,250/oz currently used to calculate reserves, it does suggest that Eldorado's reserve growth was less impressive than it looked on the surface.

Eldorado Gold is reasonably valued at current levels, but I think there are safer bets in the sector. However, for those willing to gamble on Skouries getting fully permitted, Eldorado has significant upside, partially offsetting the safety and high yield that established producers like Newmont are providing investors.

Analyst’s Disclosure: I am/we are long GLD, NEM. 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.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Comments

[xtamg]

FYI,
www.protothema.gr/...

[xtamg]

Greek Parliament 17/03/2021
+180 votes
-119 votes
The agreement is approved by Greek Parliament

[mango 10]

www.eldoradogold.com/...

[bob79]

The bill was accepted by a majority, with ND voting in favor of it in principle and all opposition parties voting against it, except for KINAL, which reserved its position during its debate, tomorrow in plenary.

Parliament: The agreement between the State and Greek Gold is accepted by a majority - It will be voted tomorrow in the Plenary

[Mike12369]

This is because Skouries has been projected to produce ~140,000 ounces of gold per year at all-in sustaining costs of $215/oz, representing 80% plus margins at the current gold price...isnt this 140K oz of GOLD AND 67 million pounds of copper?

[spidersensetingling]

@Mike12369 yeah Mike .... Skouries copper production is huge and copper was well above $4 last I checked while Eldorado uses $2 or 2.50 in their economics. Huge value in that copper production at today's prices.

[v.c]

@Taylor Dart If EGO got skouries mines what do you think is fair value?

[Diottica]

Good detailed analysis on the reserves position, thank you. Not currently holding but positive developments on Skouries will likely bring this name from my watch list to holding list.

[bob79]

Taylor, you mentioned for those willing to gamble on Skouries getting fully permitted?

the draft agreement was signed by the Greek Energy Minister Kostas Skrekas. They have the majority in Parliament.

It will be submitted to a parliament committee tomorrow, and Burns expect ratification no later then end of March.

I would not call it gamble.

[Taylor Dart]

Gamble:

"Take risky action in the hope of a desired result".

Nothing is guaranteed in markets. If I'm going to speculate I prefer other names at better valuations paying yields, but a positive outcome would help the investment thesis.

[Commodities-Bull]

@bob79

I’m long EGO but there is still the issue of funding the project and the two years it will take to build it. At the earliest construction will start next year because the company is putting out a new economic study of the project later in the year.

Skouries is a 2024-2025 story, and being so far out it does carry risks. That said, Lamaque shows lots of potential, and a project like Perama Hill could be a stop gap if they decide to push Skouries further back.

[edinvest123]

@Taylor Dart
www.hellenicparliament.gr/...

second half is in English, Page: 679

the Parliament will Vote soon on Skouries

[Jeremy Robson]

One of my long term holds due to it's discount to asset value. If Skouries can be built out of present cash and future cash flow the company will trade at the mid tier industry average of 1.2 times book. Still lots of upside here for the patient investor.

[v.c]

Nice article with good information though as a shareholder I would like a bullish one :)
@Jeremy Robson as per EGO tangible book value is $20. Can you explain how you got 1.2 P/BV. One of the reasons I am staying in EGO is its book value which may include skouries

[Jeremy Robson]

@v.c The average price to book for mid tier miners is 1.2 so using that metric EGO would be at market value for mid tiers at that level. I think that it may be a 1.5-2 year wait but it ought to be a reasonable target.

[v.c]

@Jeremy Robson got it. I thought you are saying current P/B is 1.2. I got it wrong.
EGO is tricky. Their P/B is around 0.6 which is undervalued (compared to any one) but Foward P/E is 12 (where KGC is 6 and other miners less than 10). I am hoping the market is pricing skouries and assuming P/E will shot.