Eldorado Gold: A Beat And Raise For This Mid-Tier Producer – Seeking Alpha
The Q4 Earnings Season for the Gold Miners (GDX) is just around the corner, and one of the first companies to report its preliminary results was Eldorado Gold (EGO). Overall, the company achieved a solid Q4 performance, with a record quarter from its Lamaque Mine in Quebec. This helped Eldorado beat the mid-point of its upwardly revised guidance, and with two key projects completed, we’ve seen an upgrade in 2022 guidance. Based on Eldorado’s solid organic growth profile, coupled with the potential for significant margin expansion if Skouries is green-lighted, I expect pullbacks below $8.70 to provide low-risk buying opportunities.
Eldorado Gold released its Q4 and FY2021 results earlier this month, reporting quarterly production of ~122,600 ounces, representing a more than 3% increase from pre-COVID-19 levels (~118,900 ounces). This helped push annual production to ~476,000 ounces, beating Eldorado’s upwardly revised guidance mid-point of 470,000 ounces and trouncing its initial guidance of 450,000 ounces. The solid performance was helped by a record quarter from Lamaque (~51,400 ounces) and a strong finish to the year from Olympias, which produced ~15,500 ounces, its best quarter since Q2 2020 (~17,900 ounces). Let’s take a closer look below:
At first glance, Eldorado’s Q4 production might appear disappointing, with a sequential decline of ~2% vs. Q3 2021 levels and a year-over-year decline of 11% from Q4 2020. However, Eldorado was up against insurmountable year-over-year comps, with Kisladag having a very strong year in FY2020 and producing ~226,500 ounces. With increased waste stripping and the commissioning of the high-pressure grinding rolls circuit that was expected in late 2021, the company guided for production of just ~145,000 ounces at the mid-point last year. However, as I pointed out in Q2 2021, both Lamaque and Kisladag were on track to beat guidance, with higher grades in H2 from Lamaque and a better start than expected at Kisladag.
Looking closer at the chart above, we can see that this was the case, with Lamaque putting up a record quarter and year, producing ~153,200 ounces, a more than 6% increase year-over-year. Meanwhile, Kisladag trounced its initial FY2021 guidance of 145,000 ounces, producing ~174,400 ounces. To summarize, while the year-over-year results may be down, Eldorado’s assets outperformed expectations, with its two largest contributors (Lamaque and Kisladag) beating guidance by a wide margin.
Digging into Lamaque’s production above, the record production in Q4 was helped by higher than expected grades in the C4 Zone. Notably, this growth is expected to continue at this key asset, with annual production expected to increase to ~185,000 ounces in FY2023 and ~210,000 ounces in FY2024. The other major news at Lamaque was completing the decline that connects the Sigma Mill with the Triangle underground mine both on schedule and budget.
This decline (shown in yellow) will provide major benefits to operations and exploration, given that it will eliminate surface re-handling and haulage of ore from Triangle to Sigma, amounting to a near 50-minute round trip. This reduces fuel costs and carbon emissions and takes haulage traffic off public roads. Meanwhile, it allows for lower-cost exploration between Triangle and the Sigma/Lamaque mines (underground drill platforms), with Ormaque, Plug 4, and Parallel being key focus areas. With Ormaque having a much higher grade than existing reserves (9.5 grams per tonne gold), the improved access is great news, and the company could look at an increase in mill throughput to accommodate feed from additional deposits.
Elsewhere, in Turkey, the high-pressure grinding rolls (HPGR) circuit was commissioned in December, which is expected to boost gold recovery rates by 400 basis points to 56%. With both of these projects completed before year-end, the even better news than the guidance beat is the raise to the 5-year outlook. As shown below, Eldorado’s updated 2022 outlook calls for ~475,000 ounces of gold production, which is 7% above the previous mid-point, with FY2023 production expected to come in at ~515,000 ounces, 4% above the previous 5-year outlook.
Finally, as discussed in a previous article, there is a material upside to this production profile from Skouries if Eldorado gives the project the green light this year. As shown below, Skouries is expected to produce more than 300,000 gold-equivalent ounces per annum, at negative all-in sustaining costs after by-product credits. With this project already partially constructed, capex is manageable at $845 million, but it’s possible that Eldorado could look at partnering on the project to reduce risk. Assuming Eldorado goes it alone, annual production would increase to more than 800,000 GEOs per annum, while its consolidated all-in sustaining costs would plummet from ~$1,125/oz to less than $750/oz.
So, while the production growth itself is impressive, the differentiator is that the mine will simultaneously make Eldorado one of the lowest-cost producers sector-wide. Of course, this assumes that the mine performs as expected and that the company maintains 100% ownership of Skouries. However, even in a scenario where the company partners on the project and retains 50%, Eldorado should still grow to nearly ~675,000 gold-equivalent ounces per annum in 2025, with costs below $900/oz.
If we compare this to the likely FY2025 industry average costs of ~$1,100/oz, Eldorado will transform from a high-cost mid-tier producer into a low-cost intermediate producer. Investors should get more clarity on the path forward for Skouries later this year. The company has noted that it is open to multiple financing options, including a joint-venture partner, a gold stream, or project/debt financing. Let’s take a look at the valuation below:
Valuation & Technical Picture
If we look at the chart below, we can see that Eldorado Gold has historically traded at ~6.8x operating cash flow since the takeover of Integra Gold, which improved its jurisdictional profile, adding a low-cost asset in a Tier-1 jurisdiction (Lamaque). Currently, the stock trades at less than 4.9x FY2022 cash flow estimates and a deep discount to this historical multiple. Even if we assume a more conservative multiple of ~6.5x operating cash flow, this would translate to a fair value closer to $12.50.
Moving over to Eldorado’s valuation from a P/NAV basis, the stock trades at a deep discount to its peer group, with most mid-tier and intermediate producers trading above 0.70x P/NAV. Based on Eldorado’s current portfolio, I don’t see any reason that it would trade in line with names like SSR Mining (SSRM) or B2Gold (BTG) at more than 0.80x P/NAV. This is because SSR Mining has a more attractive jurisdictional profile, while B2Gold has better margins and a much larger production profile. However, if we get a definitive date to begin construction at Skouries, I would not be surprised to see Eldorado’s multiple steadily increase as we approach production, given that it will be a much larger producer with industry-leading margins among its peers.
Finally, if we look at Eldorado from a technical standpoint, the stock is now up more than 25% from its Q3 lows, which has pushed it just outside of a low-risk buy zone. This is based on the stock having a reward/risk ratio of 1.85 to 1.0 from support at $7.90 and resistance at $11.75. Generally, I prefer at least a 4 to 1 reward/risk ratio for an attractive entry point in small-cap/mid-cap stocks, and this would require a dip below $8.70. This is because, from the $8.70 level, EGO would have less than $0.80 in downside to support and more than $3.05 in upside to resistance. So, while EGO’s valuation remains very attractive, the ideal entry point lies just below $8.70.
During a difficult year for the sector, Eldorado Gold was one of only a handful of companies to beat initial guidance and its revised guidance mid-point. Meanwhile, its five-year outlook has seen an upgrade, and this outlook has significant upside if Eldorado ends up green-lighting Skouries. So, while Eldorado deserves to trade at a discount to net asset value currently, being a higher-cost intermediate producer, a significant re-rating if the company can bring Skouries into production. Given Eldorado’s solid organic growth profile, coupled with the potential for significant margin expansion, I would view any pullbacks below $8.70 as low-risk buying opportunities.
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Disclosure: I/we have a beneficial long position in the shares of GLD either through stock ownership, options, or other derivatives. 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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