Eldorado Gold: Skouries, What The Management Should Do But Won't
Summary
- Eldorado gold has obtained all permits to develop their Skouries mine.
- The company suggested on the latest conference call that they will likely seek a joint venture partner for the project.
- The company should develop the project without a partner as the mine is so profitable.
- I take a look at the valuation of the company.
Eldorado gold (EGO) released its first quarter results and conference call on the 29th April. The results were well reviewed by fun trading (link) and this article does not further expand on that analysis.
All information in this article comes from the company website, the first quarter results and the conference call.
The company presently has 4 operational mines with a midpoint guidance for 2021 of 445K ounces of gold. It is free cash flow positive (first quarter FCF of $24.6m) and has cash of $533.81m and debt of $491.54m. The company also has a credit facility that has $99.6m unused. Available cash is therefore $633.41m.
The focus of this article is the options that the company has to develop the Skouries project in Greece and the under valuation of the company if they decide to develop the project without a partner.
The Skouries project
The details of the Skouries project are below. The highlights are
1. Life of mine (LOM) is 23 years. This is based on a gold price of $1300/ounce and a copper price of $2.75 per tonne. As the gold price is presently trading at around $1850 and the copper price is around $4.50 the life of mine is likely much longer.
2. The average production is 140,000 ounces of gold and 66.9 Mlbs of copper per year.
3. All in sustaining costs (AISC explanation) of $215/ounce.
| Life of Mine (23 years)* | |
|---|---|
| Tonnes milled | 156.7 Mt |
| Average annual gold production | 140,000 oz |
| Average annual copper production | 66.9 Mlbs |
| Average total cash cost | $(70)/oz |
| Average AISC | $215/oz |
| Gold recovery | 82.5% |
| Copper recovery | 88.2% |
| Au grade | 0.74 g/t Au |
| Cu grade | 0.49% Cu |
| Total development capex (US $) | $689.2 M |
| Total sustaining capex (US $) | $758.0 M |
| Gold price | $1,300/oz |
| Copper price assumption used in financial analysis | $2.75 |
| NPV-5% (after tax) | $925 M |
| IRR (after tax) | 21.2% |
| Payback period |
Why finance the project without a partner
I have been analyzing gold miners for over 20 years. I have never seen a project with such a long life of mine and such low AISC. This project, once built, will provide free cash flow of,
annual gold production 140,000
Gold price assumption $1850
AISC $215/ounce
FCF =140,000 x (1850-215) = $228,900,000
A project that has a build cost of $689.2m will have a free cash flow of $229m per year. It will have paid for itself in less than 3 years.
It seems ludicrous to this analyst, that any company would share a project with such outstanding financial metrics with a partner, if it can afford to finance it on its own.
Can Eldorado gold afford to finance the project without a partner?
Let's look at the cash position of the company over the next few years if the company decides to go it alone.
Start of project
The company is due to release an updated feasibility study towards the end of the year. They do not intend to restart construction at Skouries until 2022. At the start of 2022, the company will have the following cash available to develop the project. As any company cannot put itself in a precarious financial position I have allocated $100m as unusable cash so that it always has a cash buffer for general operations.
| Present cash | 533.81 |
| credit facility | 99.6 |
| Cash flow from 2021 (first quarter run rate of $24.6m) 3 x 24.6 | 73.8 |
| Less general cash buffer for general operations | (100) |
| Cash available to finance the project | 607.21 |
So at the start of the project the company will have $607.21m available to finance the project. Let's now look at the following years.
End of Year 1 of the project
| Start of project | 607.1 |
| Cash flow from present operations (4 x 24.6) | 98.4 |
| Spend during the year (see note below) | (275.68) |
| Cash at the end of year 1 | $429.82m |
The project is due to take 2 and 1/2 years to complete. Annual cost run rate is therefore 689.2/2.5 or $275.68m
End of year 2
| Cash at the start of year 2 | 429.82 |
| Cash flow from present operations (4 x 24.6) | 98.4 |
| Spend during the year | (275.68) |
| Cash at the end of year 2 | $252.54m |
End of the project
The project now only has 6 months to completion and the first pour of gold.
|
252.54 | |
| Cash flow from present operations (2 x 24.6) | 49.2 | |
| Spend during the 6 months | (126.27) | |
| Cash position at the end of the development phase | $175.47m |
It would appear that the company can finance the project without a partner. At no time does the cash position of the company become precarious, as there is always more than £250m of cash available.
Risks to financing the project alone
1.The company has $300m of notes due in June 2024. The company would not have the money to redeem these bonds, so would need to extend the maturity before the start of the project.
2. The gold price may fall restricting the FCF and therefore the cash position of the company. This may mean that the finance for the project was no longer available.
3. There would be no cash available for the other 4 projects, if needed, and in the event of problems at those operations, no cash would be available to resolve the issues.
4. The project may run over budget and not be completed in the projected timescale.
Conclusion
The Skouries project is an outstanding development, with financial metrics that are unavailable at any other project that I have seen. It is undoubtedly true that the company would be taking considerable risks to its long term future, if it develops the project alone. However the financial gain if the project was completed successfully are immense ($229m FCF per year for 23 years).
Share Valuation
At a share price of $11.56 (USD) the company trades at 56% of its book value. The average price to book of mid range gold miners is 120%. If the company were to successfully develop the Skouries mine, without a partner, it is not unreasonable to suggest that it would be valued at the sector average price to book. This would imply a price of $24.77. The shares therefore look compelling value to anyone who thinks that the gold price will not decline. If the gold price moves higher it would just be the icing on the cake. The project is due to take 2 1/2 years to complete, so the company is only for investors with a long term horizon.
Analyst's Disclosure: I am/we are long EGO.
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.
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