Eldorado Gold (EGO 3.55%), a mid-tier gold and base metals producer, is expected to report its first-quarter earnings on May 2. Management has high hopes for 2019, including an increase in annual gold production and a reduction in all-in sustaining costs (AISC) compared with 2018. Ultimately, the company aspires to generate enough free cash flow by the end of the year so that it can shore up its balance sheet by retiring debt.
Investors may be eager to see the company's quarterly results and evaluate whether it is well positioned to realize its lustrous expectations for the coming year, but digging through a miner's earnings report can be overwhelming, and it's not uncommon to feel buried under the piles of facts and figures. So, let's prepare for the company's report by keying in on some points we can expect management to address.
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What to watch with production
Meeting its gold production forecast is critical if the company expects to generate significant cash flow to lighten its balance sheet and retire debt. Whereas management estimates 2019 gold production of 390,000 ounces to 420,000 ounces, it is expected to be higher in the second half of the year, so investors shouldn't raise the red flag if it seems to hover around the 86,000 ounces that it produced in Q1 2018.
At Lamaque, for example, where gold production for 2019 is expected to be 100,000 to 110,000 ounces, commercial production only began late in the first quarter. In order to meet this target, Eldorado expects to mine and process 500,000 metric tons of ore at an average grade of 7.0 grams per metric ton (g/t). Similarly, in late January, Eldorado announced the decision to resume mining and heap leaching at Kisladag, with 2019 gold production forecast to be 145,000 to 165,000 ounces, so production for Q1 should be lower than subsequent quarters.
Keep an eye on costs
Besides digging more yellow stuff out of the ground, the company believes that controlling its costs will help it to achieve better flow of the green in 2019. Reporting 2019 AISC of $994 per gold ounce, Eldorado estimates AISC per gold ounce of $900 to $1,000. According to management, one of the main drivers of this reduction will be Lamaque. While the company, overall, reported cash operating costs of $625 per gold ounce in 2018, management estimates cash operating costs per gold ounce of $550 to $600 for Lamaque in 2019.
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Another factor contributing to lower costs, presumably, will be Olympias. Whereas the mine's cash operating costs were $730 per gold ounce in 2018, Eldorado estimates they will be $550 to $650 in 2019. In the first quarter, however, investors can expect the mine, located in Greece, to report at the upper end of this range. On the company's Q4 2018 conference call, Paul Skayman, Eldorado's COO, said that "costs at Olympias are expected to decrease quarter-on-quarter due to higher production of other metals."
Digging into the debt
Looking beyond the performances of the company's individual mines, investors can expect management to address the company's debt. This is an especially relevant topic because the company has $600 million in senior notes coming due in December 2020. Although internally generated cash will provided one avenue toward repaying the debt, it's likely that the company will have to resort to additional means. On the Q4 2018 call, for example, Jason Cho, Eldorado's executive vice president of strategy and corporate development, stated that the company is "looking at various alternatives, whether it is considering bank debt or some sort of term debt, whether it is a partial refi of the high yield plus utilization of cash on balance sheet," and, when asked by an analyst, added that the company is not discounting the possibility of asset sales.
Considering the recent flurry of activity in the gold industry, such as Yamana Gold's sale of Chapada and the joint venture in Nevada between Barrick Gold and Newmont Goldcorp, it wouldn't be especially surprising if Eldorado had a major announcement that revealed a significant influx of cash to help it address its looming debt.
What's at stake for Eldorado
While the market celebrated Eldorado's decision to restart operations at Kisladag, it will be interesting to see if the company met its expectations for the mine's performance in the first quarter, and it will be equally interesting to see what additional insights that management shares regarding the mine's forecasted performance. Likewise, I'll be curious to see if Lamaque remains on track to meet its gold production and cost estimates for the year. But the most important thing will be commentary regarding the significant debt due in 2020 and how management intends to handle it.
