Eldorado re-emphasizes 
internal growth, exploration

VANCOUVER — Eldorado Gold (TSX: ELD; NYSE: EGO) will likely have $1 billion in total liquidity on its balance sheet at year-end thanks to the proposed sale its Chinese gold mines, but management shows little interest in pursuing high-profile mergers and acquisitions. In fact, the company has underlined its focus on internal growth, and is gearing up for work at four new exploration projects.

When the deal finally closes in the coming weeks, the capital influx will largely fund Eldorado’s aggressive mine development plans, which could boost its gold production 110% over the next three years to 400,000 oz. gold. The company will spend between US$420 million and US$480 million next year on development work including on mine expansion and the building of two new mines.

Employees work underground equipment at the Efemcukuru gold mine in Izmir Province, Turkey. Credit: Eldorado Gold.

Taking into account the sale of the Chinese assets, Eldorado’s 2016 consolidated production is slated to be 495,000 oz. gold at all-in sustaining costs of US$915 per oz. gold. The adjustment assumes a timely deal close and implies that the company’s Kisladag and Efemcukuru mines in Turkey would produce 100,000 oz. in the fourth quarter.

During the third quarter, Eldorado produced 117,782 oz. gold at all-in sustaining costs of US$890 per oz., which compares to 183,226 oz. during the same period last year. The company reported total quarterly revenue of US$156 million, but generated negative free cash flows of $46 million before changes in working capital, with cash flows at its Turkish operations offset by US$65 million in development capital expenses on its Greek asset portfolio.

Grading and flotation facilities at the Skouries development project located in the Halkidiki Peninsula in northern Greece. Credit: Eldorado Gold.

“We expect the final stage of our China transactions with Yintai on schedule,” president and CEO Paul Wright said during a third-quarter conference call. “This leads to the question of where we’re going to spend these funds. We’ve been open with our plans recently in terms of our internal pipeline, and our emphasis remains on these [projects].

“Our [exploration] activity has increased through the quarter, and we are engaged in drilling programs in Brazil, Greece, Romania and Serbia,” he added.

Eldorado’s biggest near-term investment is the two-stage development of its Skouries gold-copper porphyry deposit in Greece, which is earmarked for between US$240 million and US$260 million in capital expenses next year.

Employees pour gold at the Kisladag gold mine in Usak Province, Turkey. Credit: Eldorado Gold.

An initial US$710-million construction phase will set the stage for open-pit and underground mining, which would produce 1.4 million oz. gold and 620 million lb. copper over a nine-year mine life. The second phase would only involve underground operations and require US$460 million in development costs. The mine could begin production in 2019.

Eldorado is also targeting initial production from a second phase at its Olympias operation in Greece during the first quarter of 2017. The 1,200-tonne-per-day facilities would produce 72,000 oz. gold annually over a five-year mine life, though the best upside lies in a subsequent underground expansion that would increase annual payable gold production to 170,000 oz. starting in 2022.

Meanwhile, the company will spend US$63 million at Kisladag via an expansion that will increase throughput at the crusher from 12.5 million tonnes to 20 million tonnes per year. Eldorado expects between 310,000 and 320,000 oz. gold annually through 2020 from the operation, at average cash costs of US$490 per oz. gold.

The company hopes to hit initial production at Tocantinzinho in Brazil by 2019, after next year’s US$464-million construction phase. The mine could produce 170,000 oz. annually at US$535 per oz. cash costs.

Earlier in the quarter Eldorado unveiled four exploration projects in South America and eastern Europe. The company was awarded the Bolcana project by the Romanian National Agency for Mineral Resources, which “comprises a central copper-gold porphyry system, flanked by vein-hosted and disseminated epithermal gold deposits and occurrences.” Within the first year, Eldorado is obligated to complete a work program that includes 24,000 metres of drilling.

In July, Eldorado signed definitive agreements with Votorantim Metais for the option to acquire up to 70% ownership in the Borborema and Nazareno licence areas, located in Brazil’s Pernambuco and Minas Gerais states. The company can earn 51% in either project by spending US$2 million in the first year and US$1 million every subsequent year on exploration, and generating a “compliant resource” of at least 500,000 oz. gold, or by spending $10 million over five years.

Eldorado picked up the KMC project in Serbia, which hosts a large magmatic-hydrothermal system with multiple gold-copper-base metal mineralization zones. Prograde and retrograde skarn is present within regionally extensive limestones, generally close to Tertiary dikes and plugs, while epithermal-style alteration and mineralization overprints skarn leads to an overlying volcanic package.

“Drill work in Romania at the Bolcana area [has begun], and we’ll test regionally for along-strike extensions of historically mined veins,” Wright added. “In Brazil, we drilled late in the quarter on licences at the Vulture showing in Pernambuco state … we’ll also continue at our KMC skarn project, with four drill rigs active.”

Scotiabank analyst Tanya Jakusconek says Eldorado offers a strong risk and reward trade-offs. She added that the liquidity boost from China’s asset sales is reportedly earmarked for the company’s development pipeline. Scotiabank has a “sector outperform” rating on Eldorado, along with a $4.45-per-share, one-year price target.

The company shares have traded in a 52-week range of $2.67 to $6.71 per share, and closed at $4.23 at press time. Eldorado has 717 million shares outstanding for a $3-billion market capitalization.