Eldorado Gold Corp: Permitting Concerns Remain an Overhang

Eldorado Gold Corp. (NYSE:EGO), the Vancouver, Canada-based gold producer, trades at relatively low multiples, as its higher political risk profile currently trumps a low cost structure, strong balance sheet, and healthy growth pipeline. However, further confidence on the company’s growth projects’ timelines and permits could be key catalysts, which could begin to de-risk the story.

The company reported adjusted fourth-quarter 2013 earnings per share of  1 cent, missing consensus estimates of 5 cents by 4 cents. Higher-than-expected taxes and below-the-line expenses largely drove the miss. The company produced 169,000 ounces in fourth-quarter 2013 at cash operating costs of $526 per ounce and total cash costs of $577 per ounce. For 2013, EGO produced 721,000 ounces at cash operating costs of $494 per ounce and total cash costs of $551 per ounce.

Going forward, based on the midpoints of guidance, EGO is expecting gold production growth of ~6 percent, while total cash costs are expected to climb 13 percent. Although costs are expected to increase, it is important to note that even at the higher level, EGO remains one of the lowest-cost producers among its peers. Going forward, particularly in 2014, the main focus remains around permitting at Perama Hill, Kisladag, and Eastern Dragon.

The company continues to maintain strong liquidity of about $1 billion, including $624 million year-end cash plus $375 million undrawn credit facility. However, as EGO invests in growth projects in riskier jurisdictions, the company’s financial position is deteriorating (fiscal year 2013 total cash flow of -$228 million). The permitting problems in Greece (Perama Hill) and China (Eastern Dragon) continue to create uncertainty around the timeline for the company’s growth profile.

Following Greek and European Union elections in mid-2014, the company expects to report positive news on the permitting front at Perama Hill (the project has been stalled awaiting EIA approval).With the filing of a technical study, details on plans for the Certej project should also be available in late March. The Kisladagexpansion EIA, deferred in 2013, should be in hand in 2014. Each of these events should help to de-risk Eldorado’s portfolio. As permits are received, along with additional details and clarity, Eldorado could begin to see its risk discount shrink and multiples expand.

Sale of 20 percent stake in Eastern Dragon

Eldorado recently announced that it is selling its 20 percent interest in the Eastern Dragon (ED) project in Heilongjiang Province, northern China, to CDH Investments, a private equity firm in China, for a cash consideration of $40 million. The deal is expected to be completed by March 25. After the closure of the transaction, EGO will end up with 75 percent ownership of the project, with CDH investments holding 20 percent and Daxinganling Jihua Mining Development Co. Ltd. holding the remaining 5 percent.

Eldorado is still awaiting the final permitting approvals for ED, and the project remains on care and maintenance. The company expects to spend a further $45 million to complete development. It is important to note here that there was no update on the expected timetable for commissioning and first production. Analysts expect ED to be commissioned in mid-2016. EGO estimates ED to produce 70,000 ounces of gold for 11 years.

According to Barclays estimates, the NAV on ED is ~$310 million and it seems like EGO has sold the 20 percent stake for less than its value. However, the sale represents more of a strategic partnership for EGO, as the company has had problems receiving permits for the project.

Over the past few years, the responsibility for granting permits has moved back and forth from the Provincial Development and Reform Commission (PDRC) to the National Development and Reform Commission (NDRC), and as a result EGO has had issues getting the project permitted. As mentioned earlier, ED is currently on care and maintenance and the company continues to work toward getting permits from the NRDC in China. As quoted in the press release, “It is anticipated that the participation of CDH in Eastern Dragon will assist in the completion of development and advancement to full production.”

Conclusion

EGO is a consistent operator that is well-positioned to weather a lower gold price environment with a strong balance sheet, projects with flexible capex, and lower-than-average all-in costs. However, the permitting problems in Greece, Turkey, and China continue to create uncertainty around the timeline for the company’s growth profile; hence, we prefer to remain on the sidelines until there is more certainty.

Eldorado is also expected to generate negative cash flow in fiscal year 2014 to fiscal year 2016 as it enters a capital expenditure cycle to grow the company’s production. The company has a track record of navigating through regions that have been historically been considered risky or challenging for foreign investment, particularly for the mining industry. This should provide investors some comfort in its push into Greece. However, the company’s above average political risk more than offsets its track record and low operating costs.

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