Eldorado Gold Corp Is Poised for a Steady Year

Low costs and steady production growth could mean more upside is ahead for Eldorado Gold.

May 15, 2014 at 9:32AM

Eldorado Gold (NYSE:EGO) did not have any major news to share when it recently reported its first quarter results. There was also no surprise in the company's earnings, as they hit analysts' estimates almost exactly. However, this is good news in the current environment, as Eldorado Gold's business is progressing steadily.

Low costs position Eldorado Gold among leaders
Eldorado Gold reported that its first quarter all-in sustaining costs (AISC) were just $786 per ounce of gold. This is a remarkable performance that is below Barrick Gold's (NYSE:ABX) first quarter AISC of $833 per ounce of gold. Barrick is one of the lowest-cost producers, and having costs lower than Barrick is a significant achievement.

Eldorado Gold reiterated its AISC guidance of $910-$980 per ounce for 2014, together with the production guidance of 730,000-800,000 ounces. Sustaining capital is not evenly divided between quarters, so one can expect higher quarterly AISC going forward. In addition, the company expects grades to come down a little bit at its White Mountain and Jinfeng mines, which will also contribute to the rise in costs. Still, the first quarter performance opens the door for optimism that Eldorado Gold's costs will be at the low end of guidance, or even below that mark.

Low costs continue to be of paramount importance as gold trades around $1,300 level. Even recent geopolitical tensions connected to the crisis in Ukraine failed to push gold higher. This fact highlights the risk of further downside in gold prices. Miners with higher costs like IAMGOLD (NYSE:IAG) are especially vulnerable to such downside. IAMGOLD recently reported that its first quarter AISC improved to $1,198 per ounce of gold, but this number is still too close to the current gold price. In addition, first quarter AISC tend to be lower due to the timing of sustaining capital spending, creating room for cost increases in the coming quarters.

Healthy operational cash flow provides further growth
Eldorado Gold's low costs helped the company to retain healthy operational cash flow. As a result, Eldorado Gold can spend money on its growth projects without sacrificing its balance sheet. The company targets $170 million for sustaining capital this year, while spending $345 million on development and $45 million on exploration.

At current gold prices, Eldorado Gold is unlikely to generate any meaningful free cash flow. However, one cannot expect any deterioration of its financial position. The company finished the first quarter with as much as $614.2 million of cash on its balance sheet, with just $585.2 million of long-term debt. This is a sufficient cash cushion in case gold prices drift lower. This is not the case for the higher-cost producer IAMGOLD, however, which had just $139.9 million of cash on its balance sheet at the end of the first quarter.

Bottom line
Eldorado Gold is a solid performer with low costs and a solid balance sheet. It has a pipeline of growth projects in Greece, Brazil, Romania, and China. Despite Eldorado Gold's achievements on the cost front, the company still trades at a discount to book value. In my opinion, Eldorado Gold has further room for upside unless gold prices dive toward the $1,200 mark.

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