Eldorado Gold Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Eldorado Gold is a mid-tier gold producer with a global portfolio of mining assets, focused primarily on gold production in Canada, Turkey, and Greece.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Eldorado Gold Corporation is a gold mining company engaged in the exploration, development, and operation of mining and milling properties. Their portfolio mainly consists of operating and development assets across different countries.

  • Revenue Distribution: Eldorado Gold’s revenue stream is primarily dependent on the sale of gold. Revenue is largely influenced by production volume and average gold prices. The vast majority of revenue is derived from Canada, Turkey, and Greece.
    • Production Volume: This is subject to operating conditions and the company’s ability to successfully ramp up production at developing assets.
  • Gold Price: Volatility in the price of gold has a significant impact on the company’s revenue and profitability.
  • Industry Trends: The gold mining industry is heavily influenced by fluctuations in the price of gold. A weakening global economy or increased investor uncertainty will typically cause a rise in gold prices, while a strong economic outlook will depress gold prices. This has a direct impact on the profitability of gold miners like Eldorado. Moreover, increasing cost pressures driven by input costs (fuel, labor, etc) and more stringent regulations continue to pose an ongoing challenge to the industry. Additionally, social license-the acceptance of projects within their local community, is becoming an important risk that miners have to address.
  • Margins: Operating margins vary depending on operational efficiency and fluctuations in input costs. The company has been focusing on operational efficiency in its Turkish mines and using the excess cash generated by its Canadian assets, to develop them. It has resulted in a recent boost in margins.
  • Competitive Landscape: The gold mining industry is highly fragmented with a large number of companies with no single company controlling large market share. Therefore, there is intense competition from other miners and from potential new entrants into the market, as well as from other investment vehicles (such as cryptocurrencies and ETFs) that are often competing for investor capital.
  • What Makes the Company Different: While Eldorado isn’t the largest miner, they do have a diversified portfolio of assets across different regions. The company has managed to take some high growth assets like in Turkey and combine them with stable assets like in Canada and new development projects. While not immediately obvious, it provides the company with financial flexibility. Furthermore, the company owns 100% of its operating assets. While that may seem normal, it means the company has complete control over its properties.

Financials In-Depth

  • Revenue: For the year ended December 31, 2023, Eldorado Gold reported revenue of $794.6 million, compared to $715.9 million in 2022. The increase in revenue reflects an increase in the average realized gold price and a higher production volume.
    • The increase in production was largely supported by their mine Kisladag, which saw a 41% YoY increase in gold production.
    • 2023 gold production was 485,723 ounces compared to 475,917 in 2022. The increase in production volume will only improve the company’s position.
  • Gross Profit: Gross profit was $211.7 million in 2023, down from $249.2 million in 2022, primarily due to an increase in operating costs.
  • In 2023, cash operating costs were $813/oz, a 10% increase year-over-year. The increased expenses were driven primarily by increased sustaining capital spending as the company looks to maximize its operations.
    • Adjusting for the increase in production and cost inflation, they have been able to hold their all-in sustaining costs constant at the $1,300/oz price point for the year.
  • Net Loss: EGO reported a net loss of $281.5 million in 2023, compared to a net loss of $128.5 million in 2022. The net loss increase is primarily driven by lower operating profits and a $126 million impairment charge of its Stratoni properties, which it does not intend to spend any additional money on.
    • However, if excluding special items, they have a profit of $40 million on the year.
    • This shows the importance of understanding how non-recurring items can heavily impact earnings.
  • Cash Flow: Cash from operating activities totaled $361.2 million in 2023. The company’s cash position was $412.3 million at year-end, reflecting a reduction in cash balances compared to $502.4 million at the end of 2022.
  • Debt: The company’s debt outstanding was around $600 million by year end. The debt maturities are primarily in 2029 and after that year.
  • Recent Concerns: Eldorado’s financial performance is highly sensitive to price fluctuations in gold prices, and any sudden decline in pricing may negatively impact profits and revenue. The company also has had difficulty improving its cash flows because of high expenses relating to the development of its mines. Finally, investors should be mindful that a large portion of Eldorado’s operations are located in countries that are not politically stable, and there are always risks associated with those operations. Recent volatility in gold prices and market sentiment can significantly impact its stock value. The company does face concerns in operations, especially concerning permit delays and other approval timelines.
    • Recently there has been some negative news surrounding Turkey and its debt problems. The CFO did indicate they don’t have any problems with capital flow into or out of Turkey. They have a “net positive revenue from Turkey that is greater than what we spend”.

Moat Analysis

Eldorado Gold’s moat is relatively weak. Here’s a rating and detailed analysis:

  • Moat Rating: 2/5

    • Justification: The company’s primary moat is its ownership of valuable deposits, namely the Kisladag gold mine in Turkey. It produces good amounts of gold at great margins. But, there are more important factors that make this a weak moat.

      • The company has no pricing power, and cannot influence the price of gold. The gold market is a commodity market, and the success of Eldorado is highly dependent on market factors.
      • Eldorado also lacks cost advantage, since other similar companies can operate at the same or better efficiency.
  • Legitimate Moat Risks:
    • Political and Legal Risks: Eldorado operates in countries with political and legal risks that can severely impact their operations. Any adverse political event, changes to the legal regulations or increased taxes in these countries may disrupt the company’s operations and ability to generate profits.
    • Operating Risks: Mining operations are complex and require large amounts of capital expenditure. Any delay in starting a new project may incur higher debt, decreasing long-term profits.
  • Commodity Price Risks: The price of gold is a primary factor to the success of Eldorado. Any decrease in gold prices could severely damage their revenues and profitability and affect the underlying value of their assets. * Environmental Regulations and Community Relations: Increasingly stringent regulations coupled with the pressure of public perception can increase costs and impact timelines of existing projects.

Business Resilience

Eldorado Gold has shown resilience in handling previous market challenges, but faces the same systemic risks facing other mining companies. Their geographic diversification can lessen the impact of a singular geopolitical event but, this does not mean they are isolated.

The management has been trying to focus on its better assets to ensure profits and free cash flow generation but, there remains a level of concern that their development phase will be a very capital-intensive process. In general, they are well-positioned to handle downturns, but the company’s balance sheet is not the strongest.

Understandability

  • Understandability Rating: 2 / 5

    • Justification: While the business operations are generally straightforward, valuing a company like Eldorado Gold can be quite complex.

      • Complexity of the Business Model: While the basics of gold mining are understandable, the intricacies of each mine, its grade, and its expected output all add a level of complexity for the average investor. Moreover, understanding the nuances between its geographical locations adds an additional layer of analysis required before understanding its risks and opportunities.
    • External Factors and Financial Reporting: The volatility of commodity prices, fluctuations in foreign exchange rates, coupled with often complicated company reports, and accounting conventions make it hard to create an accurate representation of their financials and projections.
    • Dependency on Expert Knowledge: A deeper understanding of the geology, mining and engineering, alongside financial reporting conventions, is needed to understand the underlying value of assets.

Balance Sheet Health

  • Balance Sheet Health: 4 / 5

    • Justification: Eldorado’s balance sheet is reasonably healthy. While their assets may not seem to be incredibly high as compared to their liabilities, the assets in Eldorado are all physical tangible assets that can be sold or used by other companies. Their debt is not overly concerning, as debt is relatively small as compared to the total enterprise value. Furthermore, debt maturities are pushed out past 2028, giving the company more time to generate profits. On the other hand, they have not generated too much cash from operations.
      • Assets: A large portion of assets are directly tied to the value of gold. Changes in the price of gold could have a substantial impact on asset values, creating some risk. This could cause problems in a bear market.
      • Debt: As mentioned previously, their debt is relatively low and is not an immediate concern. However, they have little cash reserves, so it is worth keeping an eye on.