The celebrated club of midtier gold producers has a brand-new leader, and its name is Eldorado Gold (NYSE: EGO ) .
The star of Fortune Magazine's list of fastest-growing companies in 2010 has done it again, maintaining a glorious growth profile through a $2.4 billion friendly bid for European Goldfields (OTC: EGFDF). From 650,000 ounces of gold production expected for 2011, pro forma Eldorado will now target 1.4 million ounces by 2014 (a 115% volume expansion within three years!). With the addition of European Goldfields' quality stash of 9.2 million ounces of gold reserves located in Greece and Romania, Eldorado's resulting reserve base of 27.4 million ounces (proven and probable gold) breezes past those of nearest rivals Yamana Gold (NYSE: AUY ) and Agnico-Eagle Mines (NYSE: AEM ) .
Thanks to copious supplies of silver, copper, lead, and zinc contained within the targeted asset portfolio, this acquisition promises to enhance Eldorado's already enviable position among the industry's lowest-cost gold producers. Of course, Eldorado must first persuade European Goldfields shareholders to accept a bid that comes in about 19% below estimated net asset value (at $1,200 gold). Because I consider the Eldorado shares they would stand to acquire similarly undervalued, I think the deal is likely to proceed so long as competing bidders do not materialize. Eldorado's recent adoption of a vanguard dividend formula derived from gold sales volumes and the prevailing gold price further sweetens the pot.
Another snapshot of under-rewarded achievements
To gain an appreciation of the deeply disconnected nature of Eldorado's current share valuation, please step inside my Foolish time machine. Since I encouraged Fools to follow the yellow brick road to China after Eldorado announced its transformative bid for Sino Gold back in August 2009, the shares had advanced a seemingly respectable 42% through Friday's pre-announcement close of $14.98. But let's take a moment to review Eldorado's key achievements over that same period to gauge whether that advance looks sufficient.
Over the corresponding period, gold reserves grew by 43%, from 12.7 million to 18.2 million ounces. The price of gold surged 67%, from $955 to nearly $1,600 per ounce. One of the industry's most powerful growth trajectories yielded a surge in annual output of 79%, from 364,000 to 650,000 ounces of gold, with only a modest increase in production costs. The resulting margin explosion produced a 138% increase in earnings per share between the respective third quarters of 2009 and 2011, while cash flow from operations promptly quintupled to reach $160 million!
I've seen plenty of golden achievements go under-rewarded within the precious-metals industry, but even within this treasure trove of deep bargains, Eldorado shines brilliantly. Regardless of the outcome of this friendly acquisition, I intend to maintain my bullish CAPScall for Eldorado Gold over the long haul. That pick has already outperformed the S&P 500 by 183% since July 2007, and I expect that trend of outperformance to continue as the bull market for gold marches onward. Reflecting that outlook, and the bargain valuation I perceive at present, I have now converted that CAPScall into a Top Pick.
Greece's under-appreciated bounty
Because the world's financial spotlight remains legitimately fixed upon Greece's current position at the nucleus of Europe's acute debt crisis, investors may have overlooked the significance of the nation's buried treasure in gold, silver, and base metals. Fools may recall that Qatar's sovereign wealth fund launched a $1 billion strategic investment in European Goldfields back in October, as the first in a planned series of gold-focused investments that are expected to reach $10 billion! European Goldfields confirmed Monday that Qatar's offer of a $600 million loan remains on the table, but that shareholders will vote first on the Eldorado offer before a vote on the financing from Qatar's wealth fund can proceed. But it's not immediately clear whether Eldorado would need the financing to develop European Goldfields' past-producing Olympias mine and the nearby Skouries project in turn. On a pro forma basis, Eldorado would boast cash and equivalents of $470 million, not to mention robust cash flow with the Efemcukuru mine in Turkey entering commercial production (as the company's fifth operating gold mine).
Eldorado CEO Paul Wright sounds doubly excited while characterizing northeastern Greece as "a very, very prospective region," and is pledging investment of some $2 billion within the economically stagnant region if the proposed transaction proceeds. To Eldorado's enticing Perama Hill project in Greece, the deal would add European Goldfields' existing Stratoni polymetallic mine, the two advanced development projects (Olympias and Skouries), and a trio of "drill-ready" exploration targets. Silver Wheaton (NYSE: SLW ) shareholders may recognize the Stratoni mine as a longstanding source of that company's low-cost silver, and will wish to take note of European Goldfields' contention that the mine retains "exciting exploration upside."
Bright signs amid a tough year for gold stocks
Even as we prepare to close the lid on a surprisingly negative year for gold stocks -- with the Market Vectors Gold Miners ETF (NYSE: GDX ) off by 17% year to date -- sustained activity on the consolidation front offers investors encouragement for the year ahead. Eldorado's $2.4 billion bid for European Goldfields punctuates an active year that saw Newmont Mining's (NYSE: NEM ) taking Fronteer Development away from investors in a deal of similar scale, and AuRico Gold's (NYSE: AUQ ) exciting pair of acquisitions totaling $1.9 billion. Yamana Gold's clever sale of Agua Rica, for which the ultimate reward remains dependent upon the long-term outlook for gold prices, could yet prove to be the biggest gold transaction of the year.
I interpret this resilient continuation of a longstanding consolidation trend as a powerful reminder that gold miners expect substantial continuation of this secular bull market for gold, and that organic growth initiatives alone will not suffice in meeting the rising tide of global investment demand for gold. With the exception of select outperformers, gold mining stocks may not have been the best place to be for 2011 in particular. But as we head into 2012, I believe the stage has been set for continued consolidation to bolster a decisive continuation of the longer-term bull-market trend.
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