Eldorado Scoops Up 20% Stake In Sino Gold

Eldorado Gold (ELD-T, EGO-X) plans to buy a 19.9% stake in China-focused Sino Gold Mining (SIOGF-O, SGX-A) in an all-share transaction with Gold Fields (GFI-J, GFI-N) valued at US$282 million.

The deal will see Eldorado acquire about 58 million Sino Gold shares currently held by Gold Fields. In return, Gold Fields will receive 27.8 million Eldorado shares, or about 7% of the company. The exchange ratio works out to 48 Eldorado shares for every 100 Sino Gold shares.

Eldorado already operates the Tanjianshan mine in China and the way president and CEO Paul Wright sees it, this deal is an opportunity to further invest in the country.

“Eldorado and Sino Gold both have a history of success in China and have become the two largest foreign gold producers in China,” Wright said in a statement.

Gold Fields, based in South Africa, will have a top-up right for 18 months that will apply if Eldorado decides to buy another 5% or more of the outstanding Sino Gold shares for a higher exchange ratio than Gold Fields received.

Gold Fields and Eldorado aren’t strangers to one another. Gold Fields predecessor Gencor acquired a 45% interest (fully diluted) in Eldorado through an asset-for- equity swap back in 1996 for the Sao Bento gold mine in Brazil and some projects in Turkey.

“A lot of people still working for us in Turkey worked for Gencor,” says Nancy Woo, Eldorado’s vice-president of investor relations.

Woo says that until 2003, when Gold Fields completely divested Eldorado, someone from the company sat on Eldorado’s board.

The Tanjianshan mine, located in Qinghai province, produced 118,000 oz. gold in 2008 and is expected to produce 95,000 to 100,000 oz. this year. The company also has projects in Greece and Turkey. In total, Eldorado expects to produce 330,000 oz. gold this year at a cash cost of US$300 per oz.

Sino Gold operates two mines in China, the Jinfeng and White Mountain mines. Jinfeng, located in Guizhou province in southwestern China, is the second-largest gold mine in the country. It reached commercial production in September 2007, and in 2008, produced about 151,000 oz. gold. The White Mountain gold mine is in Jilin province in northeastern China. Production there began last fall, with commercial production achieved by January this year. Annual production is expected to be 65,000 oz. gold.

Gold Fields CEO Nick Holland said the time was right for selling the company’s Sino Gold shares. He said more than one other company had expressed interest in Gold Fields’ stake in Sino, but that Eldorado made the most sense.

“It has enabled us to crystallize the value of our investment while retaining exposure to China as a potential area for the future,” Holland said in a statement.

Eldorado’s future plan for the Sino investment is up in the air, Woo says. “It’s going to be accretive no matter which way we look at it.”

She says Eldorado is still interested in acquiring other advanced gold projects in China.

“Doing a block like this isn’t going to preclude us from future transactions that we’ve said we would do in terms of advanced exploration properties,” Woo says.

Eldorado shares recently traded at $10.27 apiece in a 12-month range of $3.44-11.90. The company has 371 million shares outstanding.