Eldorado hits the brakes on expansion, shares rises 23%

VANCOUVER — Eldorado Gold (TSX: ELD; NYSE: EGO; US-OTC: ELDXF) has joined a growing list of miners opting to cut back on exploration and development expenditures in the face of struggling commodities markets. The company announced on July 16 that it was slashing a number of capital programs and focusing on brownfield sites to preserve cash and boost profits, at a time when gold prices were around US$1,250 per oz.

From its Vancouver base, Eldorado operates seven gold mines across Asia, Europe and South America. The company is a low-cost producer, with first-quarter production totalling 164,000 oz. at cash-operating costs of US$505 per oz. However, falling gold prices cut into Eldorado’s bottom line. The company sold 189,300 oz. gold during the first quarter at an average US$1,622 per oz., which translates to a US$85 per oz. drop in year-on-year quarterly realized prices.

While gold prices have rallied at press time above US$1,340 per oz., prices are still volatile. And so Eldorado has lowered its scheduled exploration spending 48% from US$98.5 million to US$51 million, or 48%, while annual capital expenditures have dropped from US$670 million to US$430 million, or 36%.

“With [our] strong balance sheet and low production costs [Eldorado] remains well equipped to grow its high-quality business, albeit at a slower pace than previously envisaged,” CEO Paul Wright says, noting that the company’s strong second-quarter production allowed it to maintain its annual guidance of 745,000 oz. gold at cash costs of US$520 per oz. 

He says that the company’s mines “continue to deliver in accordance with plan in terms of production and costs, underpinning Eldorado’s ability to progress its development projects.”

As a result of the capital cutbacks, it appears a number of Eldorado’s development and expansion plans will be deferred by at least a year.

A US$354-million expansion initiative at the company’s Kisladag gold mine in western Turkey — which produced 70,250 oz. at total cash costs of US$359 per oz. in the first quarter — has been shelved pending an “improvement in metal prices.” 

Eldorado will, however, replace its mining fleet there with larger loading and haulage equipment through 2014.

On the development side, the company has pushed back start-up dates at a trio of projects in Greece and Romania.

Eldorado’s Skouries copper-gold porphyry property in Greece, which hosts 138 million proven and probable tonnes grading 0.8 gram gold per tonne and 0.5% copper, has had its start-up date revised from 2015 to 2016. Similarly, the Perama Hill gold project outside of Thrace has been delayed by a year through 2016, while the company’s Certej brownfield gold asset in western Romania could be pushed back as far as 2017.

A major advantage Eldorado enjoys is a conservative gold price cut-off on its proven and probable reserves. Where some miners may have to re-evaluate resource statements constrained by US$1,300 per oz. gold or greater, Eldorado has used a US$1,250 per oz. cut-off. 

The company’s global reserves total 705 million tonnes grading 1.14 grams gold for 25.6 million contained oz.

The company also intends to review its dividend policy at its quarterly board meeting. 

Eldorado paid a 7¢ dividend during the first quarter, and a total of US$92 million in dividends in 2012.

The company’s cost-saving moves seem to be a hit amongst analysts, with BMO Capital Markets analyst David Haughton maintaining his “outperform” rating and a $10 price target on the stock.

“The revisions appear prudent and preserve balance sheet flexibility. More gold companies are expected to follow this trend, given the low metal prices. The valuation and growth remain attractive,” he writes in a research note.

And markets seemed to agree, as Eldorado jumped 6.5%, or 44¢ the day of its budget announcement, rising to $8.35 at press time, up 23% since the announcement.

The company has traded within a 52-week range of $5.82 and $15.78, and has 715 million shares outstanding for a $5.2-billion market capitalization. 

Eldorado reported US$669 million in working capital after generating US$140 million in cash flows during the first quarter.