Company Name: Common Stock: Eldorado Gold (EGO)
Current Market Price: $9.73
Market Capitalization: $1.62 billion
Eldorado Gold Stock – Summary of the Company
Eldorado Gold is a global gold mining company headquartered in Vancouver, Canada. The company has producing mines in Canada, Brazil, Turkey, Greece, and Romania. In addition they own exploration and development stage properties. Eldorado Gold was founded in 1991 and currently has over 4,000 employees.
Eldorado Gold Stock – Revenue and Sales Analysis
Gross revenue in 2019 was $618 million, a 34% increase from $459 million in 2018, but still well below the high watermark for the last 5 years of $863 million in 2015.
Eldorado Gold had net income of $73.6 million in 2019. This was a significant improvement over 2018, when the company showed an accounting loss of $362 million. However, this loss was overstated due to a one-time impairment charge of $447 million.
Cash flows from operating activities were $166 million in 2019, a significant increase over 2018 cash flows from operating activities of $67.5 million.
Eldorado Gold’s revenue comes almost entirely from the sale of gold. They have some revenue from silver, lead, and zinc sales but these represent a small portion of total sales.
Eldorado Gold – Royalty and Streaming Agreements
In June 2019 Eldorado Gold sold a 2.5% net smelter royalty on one of its Turkey properties for $8 million.
Eldorado Gold Stock – Balance Sheet Analysis
Eldorado Gold has an average balance sheet. Liquidity is sufficient and liability levels are not excessive.
At year end 2019, the company had $185 million in cash on hand and $436 million of total current assets, $163 million of which was inventory.
Most the company’s assets are long term assets such as property and equipment. At year end 2019, the company had total long term assets of $4.2 billion.
Current Liabilities were $222 million at the end of 2019, most which were related to accounts payable and the current portion of debt.
Long term liabilities were $953 million at the end of 2019. Most of this is related to long term debt, and a $413 million deferred income tax liability.
It is worth noting that Eldorado Gold does have a defined benefit pension obligation. While the liability is currently small, at $18 million, this could increase significantly in the future. EGO common stock investors should carefully consider the effects this pension plan will have on future cash flows, and thus on returns to common shareholders.
Eldorado Gold – Debt Analysis
Eldorado Gold had $479 million in total debt at year-end 2019. Most this debt will be due in 2024. In June of 2019 the company issued $300 million in senior secured notes due in 2024, at a 9.5% coupon rate. A portion of the proceeds were used to retire a portion of notes due in December 2020.
EGO – Moody’s Rating
Eldorado Gold currently has a B3 credit rating, which is considered speculative and below investment grade. In September 2019 Moody’s completed a periodic review of Eldorado Gold and stated that its rating was “constrained”.
Eldorado Gold’s B3 rating is constrained by its high costs and weak profitability, execution risk in its ability to deliver increased production, particularly at its Kisladag mine, relatively high geopolitical risks related to their assets in Greece, small scale (362 thousand GEOs in 2018), and high leverage (7.0x as at Q2/2019). However, the rating benefits from adequate liquidity and no near term refinancing risk as maturities were extended to 2023 and beyond.
Eldorado Gold Stock – Share Dynamics and Capital structure
Eldorado Gold had 159.9 million common shares outstanding at year end 2019. The company had an additional 5.7 million in options outstanding. The company has no preferred shares and share based compensation is negligible. Total diluted shares outstanding is around 164 million shares.
The company does have senior notes, but none of these notes are convertible. The capital structure appears to be acceptable for common shareholders.
Dividends
Eldorado Gold did not pay a dividend to common shareholders in 2019. The last time it paid a dividend was in March of 2017.
Eldorado Gold – Management Structure – Skin in the game
Over the past 12-18 month insiders have been net buyers of Eldorado Gold’s stock. The most notable purchase was made by the VP and CFO. Insider buying is usually viewed as a good signal for the company’s future prospects.
Although insiders have been net buyers, the percentage of the company they own is relatively small, less than 1%.
Eldorado Gold Stock – 3 Metrics to Consider
Interest Coverage Ratio
Cash/Interest and Lease Expense
$185 million/$43 million= 4.3
In 2019 Eldorado Gold had interest and lease expenses totaling $43 million. An interest coverage ratio of 4.3 indicates the company has sufficient liquidity to meet the current portion of its debt obligations.
Working Capital Ratio
Current Assets/Current Liabilities
$436/$222=1.97
A working capital ratio of 1.97 indicates the company has sufficient short term assets to meet all its short-term obligations, meaning the company has sufficient short term liquidity.
Price to Book Ratio
New Gold Share Price/ Book Value per Share
$9.73/$21.11=.46
EGO stock has a book value per share of $21.11. Based on diluted shares outstanding of 164 million, EGO has a price to book ratio of .46. A price to book ratio of .46 indicates that EGO stock is currently trading well below the book value of its assets. However, given that the company realized an impairment cost of $447 million in 2018, the book value of assets may be overstated.
Gold Market – Economic Factors and Competitive Landscape
Gold mining is a highly competitive, capital intensive business. The company will need to compete fiercely for both new projects and capital. However, given the current economic environment of global money printing and zero or negative interest rates, it would appear gold companies are poised to benefit from a strong economic tailwind.
Eldorado Gold Stock – Summary and Conclusions
Eldorado Gold has a well-diversified asset portfolio in terms of both the number of producing mines and jurisdictions. Operating results have been inconsistent. The company has been able to grow top line revenue, however 2019 was the first year in the last five years the company was profitable. Additionally, the company has not returned capital to shareholders via a divided since 2017.
The company was able roll over a larger portion of its debt in 2019, issuing new notes maturing in 2024. Liquidity should not be constrained in the short term. However, if the company is not able to improve its operating results, repayment of these notes in 2024 could seriously impair returns to common equity holders.
EGO stock currently trades well the book value of its assets. However, it is unclear what the true value of these assets is. If management can consistently produce acceptable operating results, then they may be able to realize the full value of these assets. In this scenario investors can currently purchase EGO stock with a significant margin of safety. But if operating results remain inconsistent then further impairment charges are likely. In this scenario management will need to further impair the balance sheet and the book value of the company’s assets will prove overstated.
Disclaimer
This is not investment advice. Nothing in this analysis should be construed as a recommendation to buy, sell, or otherwise take action related to the security discussed. If I own a position in the security discussed, I will clearly state it.
This is not intended to be a comprehensive analysis and you should not make an investment decision based solely on the information in this analysis. I hope this serves as a useful starting point for a more comprehensive analysis, and hopefully draws attention to aspects of the company that were overlooked or merit further investigation. This is by no means intended to be a complete analysis. Again, this is not investment advice, do your own research.
