EDITOR: | July 2nd, 2015

Playing God (or Confucius) with Eldorado Gold

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Much opprobrium has been heaped upon Kinross for “dumb deals” but little has been said about Eldorado Gold (NYSE: EGO | TSX: ELD). Despite this Eldorado has been a very poor performer in recent years and much of that has to do with its own deal history. In this piece I shall strap on my investment banker battle gear and discuss what I would do to mend this broken vessel.

EGO_10_years

The History

As the company’s name implies it originally had a Latin focus. We used to frequently come across Latin mining companies that would say that “such and such asset” they were (re)developing had once been Eldorado’s.  This focus had mainly been in Brazil and Mexico.

The company’s first major more off-piste was into Turkey. Whatever possessed them to do that still has me boggled as my own experience of Turkish corruption was lesson enough. Still because that worked out the market cap of Eldorado was pushed up and the company’s geographical diversification campaign was self-justified.

In the middle of last decade it had made a tentative step into China with its acquisition in 2005 of the Tanjianshan property in northwest China. The mine was relatively small with total reserves of less than one million ounces, but it gave Eldorado a chance to prove that it could build and operate in China. It was already in production in 2006, and Eldorado has added more ounces than it mined in every year of operation after that.

Then in August 2009, as gold was in full recovery mode and when China was still regarded as safe, and yet exotic, locale in which Western companies could invest (before the great RTO debacle), Eldorado Gold bought the ASX-listed Sino Gold Mining for CAD$2 billion in an all-share deal that was designed to more than double the size of its gold production in China. Including the shares issued for the deal, EGO had a market cap then of $6.8bn. Now its $2.9bn.

The acquisition of Sino Gold was expected boost Eldorado’s annual gold production to about 550,000 ounces, from 330,000 ounces. The deal also expanded the company’s project pipeline with annual production expected to rise to 850,000 ounces by 2011 and over one million ounces by 2013.

The most recent big splurge by Eldorado turned out to not be even vaguely as felicitous as the move into China. The transaction most redolent of Kinrossism was the purchase of European Goldfields that Eldorado Gold took that over for $2.4bn in February 2012. We dealt with this one only a few weeks ago when commenting on Greece but it brought along four advanced projects of which, several years later, only one (Olympias) is operating and with volumes that by current day standards are fairly puny. Potential is there but the Greek “powers that be” keep putting stones on the road despite local enthusiasm for the projects and the jobs they might bring.

The company re-entered Brazil in 2010 when it acquired the Tocantinzinho property via its takeover of Brazauro for $122.4mn. The project has been on-again/off-again. Eldorado was once very Brazil-centric when it operated the São Bento mine, which had its heyday in the 1990s.

So the current state of play production-wise is shown below:

ego_stats

Some Investment Bank Prescriptions

Firstly one does not have to be a genius to know that splitting off the Chinese assets from the rest of Eldorado has the potential to electrify the stock price of both halves of this business. There are three truisms:

  • The Chinese love gold
  • Chinese investors love China
  • Investors elsewhere hate China

These sound like good enough reasons alone to create a spinco of the Asian business and send it on its merry way. It is more than likely that this entity (listed in Hong Kong?) would quickly attract a bidder and be taken out giving long-suffering shareholders a premium. A goodly chunk of the group debt could be pushed out into the Chinese spinco.

This would leave the rump of Eldorado. This is composed of the Turkish assets (two producing mines), $500mn in cash (at March quarter end), the Greek assets and the Brazilian activities. In Brazil, it owns the Vila Nova iron ore mine and is advancing the Tocantinzinho gold project (2P Reserves of 1.9 Moz Au @1.43 g/t). The Vila Nova mine is currently on care and maintenance pending a recovery in iron ore prices. In Mexico there are no interests these days. Quite clearly having one operating asset (in the future) does not make EGO into a Latin American mining company. But then again, it doesn’t have to be.

Other sorts of combos could be pondered. For instance it could combine its Turkish assets with Alacer Gold (TSX: ASR and ASX: AQG) and list the merged entity on the Istanbul Stock Exchange, where there is only one listed miner worth mentioning (Koza Altin).

It could take a run at some beaten down gold-producing assets or advanced projects in Latin America. Mexico is an obvious place to go hunting. Chesapeake Gold (TSXV: CKG) could be a good fit to bulk up in Mexico via an all-stock bid.

It could venture a merger-of-equals type arrangement with Iamgold.

Alternatively, it could spin out China and Turkey (in the aforementioned merger with Alacer) and retain some stock to sell/place into strength thus bringing cash in to fund an acquisitions war chest. It already has a mighty war chest but one can never have too much money in the current bargain basement market for mining assets. Really daring would be going after Patagonia Gold (PGD.L) or Everton (EVR.v). Orosur, the Uruguayan/Chilean gold miner could be snatched up. More daring would be going after Mandalay, the gold/antimony/silver miner which straddles Australia, Chile and Sweden.

The opportunities and configurations are virtually endless for a cashed-up (ex-China) Eldorado as it would also have stock that it could use as currency.

Conclusion

I had originally favoured Eldorado for its earnings potential but with the grim news out of Greece and our dim view on big projects in Turkey, we see Eldorado now as a takeout or restructuring candidate. Ideally the company should be broken up into a Chinese piece, a Turkish-listed piece and an “other” piece. The other piece should ideally be with a Latin American focus as the company was originally envisaged.

The problem of “what might have been” in the mid-tier Canadian players is a constant. The mid-tier gold group on the TSX has shown themselves to be more than exceptionally unimaginative, even by the low standards of the mining industry. The ”rescue” of Osisko by Yamana/Agnico just about took the cake for uninspired deals and summed up the level of deal-doing skills in the mid-tier.

It doesn’t take a genius (or even me) for Eldorado to work out what ails it and the cure thereto. What cause thus withholds it from grasping the nettle and getting its show back on the road? If Eldorado doesn’t grab the opportunity then maybe someone else shall. In which case the gains will probably go to the raider not the shareholders… but wasn’t that always the way of the world?


Christopher Ecclestone

Editor:

Christopher Ecclestone is the EU Editor for InvestorIntel and is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten ... <Read more about Christopher Ecclestone>


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