At first glance, it doesn’t seem like there are too many factors in favour of Eldorado Gold Corp. (TSX: ELD)(NYSE: EGO). Gold prices are under pressure given strong U.S. economic data and waning inflation expectations.
Geopolitical risks are also not doing much for gold prices as markets, to put it bluntly, don’t seem to care about geopolitical tensions and investors aren’t turning to gold as a safe haven.
Despite this, if you scratch beneath the surface, Eldorado is indeed a promising long-term stock to keep in your portfolio. The key phrase here being “long term.” While some investors may argue the company’s dividend yield is a stingy 0.2%, I look at it as a positive.
Sometimes high dividend yields are due to the fact that people don’t have reinvestment opportunities. But in Eldorado’s case, there is visibility in growth. Short-term, this may not be a great buy, but if you are looking to buy a stock for the long-term (three to five years) Eldorado is a strong option. As the saying goes, “patience is a virtue.”
Eldorado will be larger five years from now partly because it does not need to depend on equity and credit markets to build its product pipelines. Broadly speaking, the company has almost no debt right now as it had to hold off on some projects due to issues with permits.
The company is closer to getting some of these permits in China over the next 6-12 months, particularly for the Eastern Dragon mining project in partnership with CDH Investments. Construction on the project is expected to be completed in 2015 and production to begin around the same time as well, which will likely lead to the company eventually listing its Chinese property assets on the Hong Kong market. They also have the liberty of holding off on some projects, if gold prices continue to remain low.
Furthermore, Eldorado Gold is a pure play on gold and is not really affected by muted gold prices. It doesn’t have bi-products like some of its counterparts like Agnico Eagle Mines Ltd. or Goldcorp Inc. Its balance sheets are some of the best in the industry and its income statements look good. So does its ability to build mines and operate them in many different countries and cultures. All these factors well protect Eldorado from downside risks.
The company is a good story of low cost and strong production growth. It is one of the cheapest equity stocks in the sector on a price-to-net asset value basis. But as always, investors must be cautious on any/all investments. One way to do this is to monitor the company’s cash flows.
