Eldorado battles Q3 costs in China

Eldorado Gold (ELD-T, EGO-N) forecasts gold production this year from its operating mines in China, Turkey, Greece and Brazil will reach 660,000 ounces at cash operating costs of US$465 per oz.

In the third quarter the company produced 169,565 ounces at an average cash operating cost of US$493 per oz., which includes pre-commercial production at Efemcukuru, Eldorado’s second gold mine in Turkey.

Kerry Smith of Haywood Securities in Toronto models the company’s gold production at 660,000 ounces in 2012 at a cash operating cost of US$475 per oz., and 840,000 ounces in 2013 at US$430 per oz., and describes Eldorado as one of the low-cost gold producers under his coverage with cash costs that are consistently in the lowest quartile of the world cost curve.

Net income for the quarter was $78.5 million or 11¢ a share, down from the year-earlier quarter of $102.5 million or 19¢ a share mainly due to lower gold sales volume and prices, the company reported.

Eldorado generated $110.8 million in cash from operating activities before changes in non-cash working capital, compared with $159.7 million in the same quarter of 2011.

“The current year has been challenging for Eldorado, as operational setbacks and delays, specifically with the Chinese assets, have resulted in lower grades, throughput, and inevitably higher cash costs,” Haywood’s Smith wrote in a research note. “However as Eldorado works out the issues at its current operating mines and brings low-cost operations, such as Eastern Dragon on line, we should see lower cash costs and higher margins. In our model, with the addition of Eastern Dragon, Perama Hill, and Skouries, Eldorado should achieve production of 1.5 million ounces in 2015 at a cash cost below US$300 per oz.”

Although Smith expects capital costs will be higher than Eldorado expects and anticipates “some slippage in the project timeline owing to execution risk,” he stills believes the company will be able to “bring on significant low-cost production and cash-flow growth” and sees Eldorado’s shares as “a compelling investment at current levels.”

Eldorado’s projects in development include Eastern Dragon in China’s Heilongjiang province, Perama Hill, Olympias and Skouries in Greece, Certej in Romania and Tocantinzinho in Brazil. It currently has two operating mines in Turkey (Kisladag, Efemcukuru), three mines in China (Jinfeng in Guizhou province, Tanjianshan in Qinghai and White Mountain in Jilin), the Stratoni silver-lead-zinc mine in northern Greece, and an iron ore mine, Villa Nova, in Brazil.

“The start-up of Eastern Dragon, which still requires permitting, but should be in production by 2014, would deliver cash costs below US$100 per oz. in our model, owing to  the large silver credit, and would help to lower average cash costs from the Chinese operations,” Smith wrote. “The Kisladag operation continues to be the workhorse, generating about 50% of total gross margin in the Q3/12.”

At presstime in Toronto, Eldorado was trading at $13.99 per share within a 52-week range of $9.94-20.17 and has about 713 million shares outstanding.

Cosmos Chiu of CIBC World Markets in Toronto decreased his 12-18 month target price on the stock after Eldorado reported its third quarter results from $18 per share to $16 per share.