Ashley Redmond: I am here with Joung Park, equity analyst here in Chicago. He covers the gold mining industry quite extensively and just recently wrote a report on Eldorado Gold. So to give you a quick rundown of the company, it's based in Vancouver, a gold mining company active in the development and exploration in Turkey, Greece, China and Brazil. The firm also operates several gold mines and development projects in China as well as the Vila Nova iron ore mine in Brazil.
So what's your overall impression now of Eldorado.
Joung Park: Hi Ashley. I'm glad to be here. We actually think Eldorado is a fantastic company. It's one of the favourite gold miners that we cover, and this is because it has rock-bottom cash costs that are in the bottom quartile of the industry, explosive growth profile, and top-notch management. Plus, it's one of the rare gold miners with an economic moat, and in fact it's the only Canadian-based gold miner that we currently cover that is awarded a moat.
Redmond: Can you go into more detail about that, why is it awarded an economic moat?
Park: Yeah, that's a great question. We think that economic moats in gold mining are predicated on three main factors. One is low cash costs, so that these miners can generate economic profits even in a low gold price environment; two is a long mine life so that these economic profits can continue to be sustained for years to come; and finally, a prudent management that allocates capital wisely, because even if you have the lowest-cost mines, if you squander shareholder capital through expensive acquisitions or pour capital into projects that don't pan out that's going to ruin the economics for even the most low-cost miner. And we think Eldorado has all of these features.
Redmond: That's great. And I'm sure a lot of the investors watching want to know how does the stock look from a valuation standpoint?
Park: Yeah, absolutely. The stock is currently trading at $14 per share and our fair value estimate is $19 per share. So we think Eldorado is significantly undervalued at these levels. Now, if you look at the traditional multiples, such as a price-to-earnings or price-to-book for Eldorado, it might not look like a screaming buy. It's been trading in line with industry multiples. But you have to remember that this is a very high quality gold miner with great growth potential. We're projecting that gold production will more than double from 2011 levels over the next five years. So you're getting a great company for a reasonable price. It's kind of like picking up a Lexus for the price of a Toyota. We that's a compelling opportunity for investors.
Now if Eldorado is such a great company, why is it trading so cheaply? Well, we think the main reason for this is that investors have had negative sentiments about its recent acquisition of European Goldfields, which occurred in December of 2011. They have some concerns about the legacy of environmental opposition to mining in Greece, but we think that these concerns are overblown, which is why we think it's a compelling opportunity at current levels.
Redmond: Okay, that's great. And I did have another question for you, what are some risks for investors that are interested in Eldorado?
Park: Yeah, that's a great question. The primary risk, of course, is gold prices. If gold prices decrease then that's not good for a miner that digs gold out of the ground. However, because of its low cash costs, we think that Eldorado is more insulated from such downward swings in gold prices than would be a typical miner. Some other risks to look out for is execution risk, because they're bringing a lot of new projects online, so there could be perhaps some delays on these projects, and also geopolitical risk, because they are, again, operating in Greece, which has had that historical opposition to gold mining. But we think that that's not going to be too much of a problem for Eldorado given that Greece is currently desperate for foreign capital and additional tax revenue, given that they're going through their sovereign debt crisis and fiscal austerity measures, and plus Eldorado already successfully operates in China, which many investors would regard as a tough political jurisdiction for a miner to be in. So all these factors give us confidence that Eldorado will be able to navigate these choppy geopolitical concerns and produce value for shareholders.
Redmond: I did have one last question for you. What do you think about the management of Eldorado?
Park: Yeah, that's a great question. As we mentioned before, we think that management is top calibre, and there is a number reasons for this. One is that we think that they have a very good technical background. The CEO of Eldorado, Paul Wright, he's been with the company since 1999, and he is actually a former mining engineer. And if you look at the makeup of the executive officers, more of them have a Masters in geology or mining than an MBA, which we think is a good thing for a gold mine to have, because they can evaluate projects and bring it online more efficiently because they have that background.
And secondly, Eldorado has very shareholder-friendly policies. They recently enacted a gold-price-linked dividend, which we like because it takes cash out of the hands of management when gold prices are perhaps peaking, and it provides the immediate return for shareholders. So looking at these factors, we really like Eldorado's management team.
Redmond: Great, thank you so much.
Park: Yeah, thanks for having me.
