Eldorado Gold Corp. Is Upgraded: Is This a Signal to Buy?

Why now is the time to take advantage of stronger gold prices with Eldorado Gold Corp. (TSX:ELD)(NYSE:EGO).

| More on:
The Motley Fool

Gold is now firmly back in favour with investors after surging 11% in recent months from its 52-week low in early November 2014. It is now trading at over US$1,270 per ounce, its highest price since September 2014. It has also triggered a round of upgrades for gold mining stocks among analysts with one of the latest being Eldorado Gold Corp. (TSX:ELD)(NYSE:EGO). Investment bank Macquarie Group upgraded its outlook for Eldorado from “neutral” to “outperform” primarily because of firmer gold prices.

So what?

Gold miners are one of the best ways to invest in gold and cash in on the recent rally. This is because unlike gold bullion or ETFs they offer investors leveraged exposure to the price of gold. Essentially, this means that as the price of gold rises and their profitability grows, the return on their shares is magnified, although the inverse occurs when the price of gold falls.

However, despite the recent gold rally, the outlook for the precious yellow metal remains uncertain. Investment bank Goldman Sachs has forecast that gold will peak at US$1,262 per ounce in 2015 and then decline under pressure from a stronger U.S. economy and resurgent U.S. dollar.

This makes it important for investors to determine whether a gold miner is well positioned to cash in on the gold rally as well as also being capable of weathering lower gold prices should they occur.  To achieve these objectives gold miners need to have a low cost operating structure, and Eldorado has some of the lowest costs in its industry, reporting third quarter 2014 all-in-sustaining-costs (AISCs) of US$735 per ounce.

Surprisingly, this is significantly lower than the large senior gold miners that should be better able to manage operating costs because of their economies of scale. For the same period, Barrick Gold Corp. reported AISCs of US$834 per ounce, making it the lowest cost senior miner. By comparison, U.S. gold mining giant Newmont Mining Corp. reported AISCs of US$995 per ounce and Goldcorp Inc. had AISCs of US$1,066 per ounce.

At current prices these low operating costs allow Eldorado to generate a healthy operating margin of US$536 per ounce. This means the recent bump in gold prices should translate into stronger earnings and greater profitability than for many of its peers.

I believe this indicates Eldorado is a superior play on the gold rally compared to the senior gold miners, and even more so when its highly liquid balance sheet and low degree of leverage is considered. At the end of the third quarter, Eldorado had cash on hand of US$539 million and net debt lower than its operating cash flow, thus giving it considerable operational flexibility.

This leaves it well positioned to bulk up its balance sheet for as long as gold prices remain strong, while being able to weather any sustained weakness should gold fall as sharply as some analysts have predicted.

Now what?

I believe Eldorado offers investors a solid opportunity to play the current rally in gold, despite the pessimistic outlook for gold prices after 2015. Nonetheless, this investment doesn’t come without risk, with considerable potential downside should there be sustained drop in gold prices. Yet this threat is offset by Eldorado’s solid balance sheet and low operating costs that will allow it to remain profitable even if gold falls.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Metals and Mining Stocks

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Stocks for Beginners

Cameco Stock and More: 3 TSX Commodity Titans to Watch in 2024

Cameco stock and these others will provide you with growth that goes beyond just a year or two, with all…

Read more »

Handwriting text writing Are You Ready For Tomorrow question. Concept meaning Preparation to the future Motivation Stand blackboard with white words behind blurry blue paper lobs woody floor.
Stocks for Beginners

3 Reasons to Buy Lundin Stock Like There’s No Tomorrow

Lundin stock (TSX:LUN) has been killing its production of copper and plans on blowing its records out of the water…

Read more »

Gold bars
Stocks for Beginners

TSX Materials in March 2024: The Best Stock to Buy Right Now

Materials have been quite volatile, though the price of gold has surged to all-time highs. That makes this stock a…

Read more »

Gold bars
Metals and Mining Stocks

Will Gold Stocks Rally in 2024?

Down almost 30% from all-time highs, Franco-Nevada is a gold mining stock trading at a discount to consensus price target…

Read more »

A miner down a mine shaft
Stocks for Beginners

Canadian Mining Stocks: Buy, Sell or Hold?

Canadian mining stocks have seemed like such a strong investment, but with shares down significantly this year, what should we…

Read more »

Gold king in chess game face with the another silver team on black background (Concept for company strategy, business victory or decision)
Stocks for Beginners

Great News for Gold Stock Investors!

Gold has hit an all-time high! Which is good news for some gold stocks, and really good news for others.

Read more »

Gold bullion on a chart
Metals and Mining Stocks

If Gold Prices Continue to Climb, These 3 Stocks Could Skyrocket

Market certainty and geopolitical tensions typically enhance the demand for gold, and this rise is reflected in a wide range…

Read more »