This Gold Miner Is Shining
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Adding some gold exposure to a portfolio seems like smart idea now that the Fed has promised to keep monetary stimulus at unprecedented levels for an indefinite period of time. From a macroeconomic perspective, the timing seems quite adequate for an investment in gold miners, and in terms of company specific analysis, Eldorado Gold (NYSE: EGO) has proven to be an outstanding company among its peers.
Gold miners are price takers as opposed to price formers, meaning that individual companies have no influence on the price of their product, which is determined by global supply and demand forces. Production costs are much more stable than gold prices, so fluctuations in commodity prices can have a big impact each company´s profitability, for better or for worse.
For this reason, production costs are a factor of utmost importance in the gold mining business. Cost structure determines company´s ability to successfully go through changing industry conditions, and it’s also a reflection about management´s aptitude when it comes to selecting the most convenient projects and executing operations efficiently.
Eldorado sets itself apart from other gold miners by focusing on capital efficiency and choosing only the most profitable – low cost – projects. The company has development and exploration businesses in Turkey, China, Greece and Brazil. Its largest gold producer is its Kisladaj mine in western Turkey; the company obtains almost 40% of its revenue from that low-cost excavation. Eldorado is also working on a second Turkish project, Efemcukuru, which is much smaller than Kisladaj but will have even lower production costs.
This gold miner has a very strong presence in China, a country in which most western gold miners have not been able to conduct operations. Eldorado has three low-cost mines in China, and a fourth mine, Eastern Dragon, is expected to start production in 2012. Because of its silver byproduct credits, Eastern Dragon is expected to be another low-cost project for Eldorado.
According to the company´s management, Eldorado had total unit cash cost of $472 per ounce of gold in 2011, while the average for the industry is around $600. The company is planning to expand rapidly in the middle term, with a planned increase of more than 160% in production over the next five years. The plan is ambitious, and the business is always risky, but Eldorado has proven to investors that it can deliver above average results.
When compared to other companies in the industry like Barrick Gold (NYSE: ABX), Goldcorp (NYSE: GG), Newmont (NYSE: NEM) and AngloGold Ashanti (NYSE: AU), Eldorado excels in two important aspects: it has the highest operating profit margins in the group, and it has also achieved the highest growth rates, both in sales and earnings per share, over the last five years. This is a very powerful combination considering that growth and profitability don´t usually mix very well, since new projects can have higher expenses in their first stages.
Eldorado doesn´t look particularly cheap at a P/E above 30, but keeping in mind its ambitious expansionary plans, this current valuation can certainly be an attractive entry point if the company manages to keep delivering superior growth.
Besides, the company is committed to translating the benefits of higher gold prices to its shareholders via dividend payments. In October of 2011 Eldorado initiated a gold price-linked dividend scheme that will increase its dividend in a higher gold price scenario. This provides an extra way for investors to capitalize a bullish scenario for the yellow metal and the company´s ability to profit from it.
From a top down approach, monetary stimulus by the Federal Reserve can be an important driving force for higher gold prices. At the same time, on a bottom up perspective, Eldorado can be an interesting way to profit from than trend via a company which has a successful track record of growth and profitability, and also some exciting plans to expand and keep shinning in the future.
acardenal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.