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Eldorado Gold Plans to Increase Production by 60%

GuruFocus.com

- By Alberto Abaterusso

Eldorado Gold Corp. (EGO) gained 67% in one year and was outperformed by the VanEck Vectors Gold Miners ETF (GDX) by 8%. The Canadian gold stock outperformed the SPDR Gold Trust (ETF)(GLD) by 58% over the same period of time.


The VanEck Vectors Gold Miners and the SPDR Gold Trust are two of the most important indexes through which investors gain exposure to changes in the gold price.

When compared to other mid-tier gold producers such as Iamgold Corp. (IAG) and Yamana Gold Inc. (AUY), the performance of Eldorado was much lower on the New York Stock Exchange. Iamgold increased by 247% and Yamana Gold increased 115% over the last 12 trading months.

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In the past year, two factors influenced Eldorado's performance on the stock market:

  • The attempted military coup in Turkey in July. Turkey is where the miner derives almost all of its gold production. The stock fell almost 45% from July 15, 2016 to Nov. 30, 2016, when gold retraced to its lowest level of 2016.

  • The sale of its Chinese assets, which were not favored by the market.



For the first reason, there is no remedy.

The sale of the Chinese assets was part of Eldorado's strategy to replace high-cost mines with more efficient ones where the miner will extract the precious metal at a lower operating cost. The enhanced quality of its asset base will allow the company to increase gold production by 60% and lower the all-in sustaining cost (AISC) by 30% in three years.

According to the company's presentation, Eldorado will bring the gold production from 380 thousand ounces at cash operating costs of $578 per ounce of gold and AISC of $915 per ounce in 2016 to production of about 600 thousand ounces at cash operating costs of $350 per ounce and an AISC between $600 and $700 per ounce produced.

The Canadian miner will fill the 60% increase in production with the production from Olympias, Kisladag and Efemcukuru.

The company aims to increase the free cash flow by more than 230%, from $100 to $125 million in 2017 to $350 to $400 million in 2020.

The company had cash on hand of approximately $880 million as of Dec. 31, 2016. It plans to generate cash of about $1.08 billion from its operations over the next four years. The miner also has a $250 million line of credit for a total liquidity of $1.1 billion.

In the meantime, Eldorado plans to reinstate its dividend payment of two cents (Canadian) at a gold price per troy ounce ranging between $1,250 and $1,399 and to reach a level of operating efficiency and financial flexibility that will allow the company to grow organically beyond 2020.

Currently, Eldorado Gold is trading around $3.52 per share, up eight cents or 2.17% from the previous close.

The majority of analysts suggest to buy shares of Eldorado Gold as of today.

The gold stock is trading at 0.72 times the book value and at 9.39 times the Ebitda.

Disclosure: I have no positions in Eldorado Gold Corp.

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This article first appeared on GuruFocus.