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Eldorado aims to double production with European Goldfields bid

Eldorado's agreement with European Goldfields, announced Sunday, comes at a time when gold prices have been hit hard.


Eldorado Gold Corp. is on the cusp of creating a mining powerhouse around the Mediterranean.

With a $2.5-billion bid for European Goldfields, the owner of two undeveloped Greek gold projects, the Vancouver-based Eldorado is hoping the new assets will help it meet its goal of more than doubling this year's production to about 1.4 million ounces by 2015.

The agreement, which was announced Sunday, comes at a time when gold has been hit hard. Since bullion peaked just shy of $1,900 (U.S.) per ounce in August, it has dropped 15 per cent, and some argue it could fall even more.

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Still, analysts on Monday were generally positive about the deal. The acquisition fits into Eldorado's strategy because it consolidates a region in which the miner is already established, Brad Humphrey at Raymond James wrote in a note to clients. It will also help keep cash operating costs low and maintains a gold-only focus, they said.

Investors were less impressed, sending Eldorado shares tumbling more than 12 per cent in Toronto trading on Monday.

Eldorado chief executive officer Paul Wright was undeterred about the outlook for gold, insisting a long-term view is key to his industry. Mining "is a capital-intensive, long-term business," he said. While "the market tends to think in nanoseconds, if you're actually trying to build a business, you need to be thinking in years, if not decades."

European Goldfields fits snugly into Eldorado's operations in that continent. The acquirer has assets in Turkey, and developed its Greek Perama Hill project for the past few years, so it knows the territory. Adding two new assets to the mix will help to diversify its project base.

The same is true for European Goldfields shareholders, who will add assets in China and South America if they approve the takeover. "Clearly our shareholders will benefit from a diversification of operations," Goldfields chief financial officer Tim Morgan-Wynne said on a conference call Monday.

European Goldfields' management team is also impressed by what it believes is a well-run operation at Eldorado. The acquirer has net cash of just over $300-million and generated free cash flow of about $160-million in the first three quarters of the current fiscal year. This cash can be put toward developing the two Greek assets, which will become Eldorado's first and third largest unconstructed projects, based on resource estimates.

To date, about half of Eldorado's existing production has been developed internally, while the remaining half has come through acquisitions. Though Mr. Wright is open to doing deals, he doesn't intend to get too big.

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"We don't plan on building a company that's going to have a production level beyond two million ounces a year because beyond that it becomes increasingly difficult to replenish production," he said.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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