TEXT - S&P rates Eldorado Gold Corp

Tue Nov 13, 2012 11:02am EST
 
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Overview
     -- We are assigning our 'BB' long-term corporate credit rating, and 
stable outlook, to Vancouver-based gold producer Eldorado Gold Corp. 
     -- We are also assigning our 'BB' issue-level rating to the company's 
proposed US$500 million senior unsecured notes. We understand that the 
proceeds from the unsecured notes will be used for general corporate purposes 
including to help fund Eldorado's growth plans in the next few years.
     -- Eldorado operates five gold mines in Turkey and China, a polymetallic 
mine in Greece, and an iron ore mine in Brazil. The company is developing 
multiple gold projects within its existing operating regions, as well as in 
Romania.
     -- The stable outlook reflects our view that Eldorado's low cost 
production base should support steady funds from operations generation as well 
as help maintain adequate liquidity in a multiyear period of heightened 
capital spending.

Rating Action
On Nov. 13, 2012, Standard & Poor's Ratings Services assigned its 'BB' 
long-term corporate credit rating, and stable outlook, to Vancouver-based gold 
producer Eldorado Gold Corp. 

At the same time, Standard & Poor's assigned its 'BB' issue-level rating to 
the company's US$500 million senior unsecured notes. We understand that the 
proceeds from the unsecured notes will be used for general corporate purposes 
including helping fund Eldorado's growth plans in the next few years.

Rationale
The rating on Eldorado reflects what we view as the company's credit 
strengths, which include its low pro forma debt levels, better-than-average 
cost position, strong credit measures amid high contemporary metals prices, 
and an expanding production profile. These strengths are somewhat offset, we 
believe, by the company's exposure to volatile commodity prices, limited 
operating diversity, and the execution risks surrounding its collection of 
growth projects.

Eldorado operates five gold mines in Turkey and China, a polymetallic mine in 
Greece, and an iron ore mine in Brazil. The company is developing multiple 
gold projects within its existing operating regions, as well as in Romania. 

The company's fair business risk profile reflects its reliance on several key 
assets for the majority of its earnings, potential challenges at its 
development projects, some fairly short reserve lives at several of its 
producing assets, and potential earnings fluctuations resulting from its 
reliance on volatile gold and base metals prices. This is offset, in our 
opinion, by a low-cost, long-term production base and the continuation of 
strong margins and earnings in the current metals price environment. 

In our opinion, Eldorado's limited operating diversity is a key rating 
constraint. The company has relied on its top three mines for the majority of 
its production and operating income in the past few years. It is particularly 
sensitive to potential operating disruptions at its largest asset, the 
Kisladag project in Turkey, which accounts for about 40% of 2012 forecast gold 
output and about 65% of proven and probable reserves attributable to producing 
mines. We expect that this concentration should moderate as the company brings 
several gold projects into commercial operations in the next several years. 
Nevertheless, we estimate that contributions from Eldorado's Kisladag mine 
will remain more than one-third of total production as the mine increases gold 
output to more than 470,000 ounces by 2014. 

We believe that Eldorado's operations, much like those of its peers, are 
exposed to the social, political, and operating risks attendant in the mining 
industry. In the case of Eldorado, our view reflects the company's recent 
permitting delays in China and a court-ordered production outage in Turkey, as 
well as the development issues (for example, permitting delays and social 
unrest) that other mining companies have experienced within Eldorado's key 
growth markets (Greece and Romania). These elevated risks are somewhat 
cushioned by the portfolio effect that comes with a company spreading its 
asset base across multiple countries. Even so, we expect that prolonged delays 
in project timelines could temper potential operating diversity improvements 
that would likely be conducive to a stronger business risk profile.

Standard & Poor's views Eldorado's cost profile as one of the best in the 
mid-tier gold producer peer group. The company's cost position is supported by 
its connections to lower-cost grid power, comparably low royalty rates, and 
the fairly stable mine head grades at Kisladag, its largest operation. We do 
note that the company's operating portfolio generally lacks the significant 
byproduct credits that--at contemporary metals prices--have improved the mine 
economics and reported cash costs at several of its peers. At the same time, 
we expect relatively steadier operating income and production at Eldorado 
throughout the commodity cycle because it is less exposed to volatile copper 
and silver prices.

Eldorado's gold reserve base of 29 million ounces should support a 16-year 
mine life, and compares favorably with several of the company's larger gold 
producing peers. The company has developed several exploration discoveries 
into large-scale mining operations, which we believe support long-term 
production visibility beyond current reserve estimates. That said, Eldorado's 
reserve base includes several producing assets that have fairly short 
five-year mine lives as well as about 11 million ounces of gold attributable 
to development projects situated in regions of Greece and Romania, which have 
historically been opposed to mining development.

Our base case operating assumptions for Eldorado in the next 18 months 
incorporate the following:
     -- A gold price of US$1,400 per ounce and an iron ore price of US$80 per 
metric ton, both of which we believe should allow the company to generate 
margins close to those it has recently achieved. We believe that these prices 
would compel the company to advance its growth plans without materially 
diminishing its financial risk profile; and
     -- The company's annual production through 2013 should remain fairly 
stable, with EBITDA of close to US$600 million per year. At these earnings 
levels, we would expect free cash burn to peak next year assuming the company 
maintains its current project development timelines.

In our opinion, Eldorado's low pro forma debt levels and strong credit 
measures support its significant financial risk profile. We believe that the 
company's low pro forma debt capitalization partially cushions its sensitivity 
to gold and iron price fluctuations. Pro forma to the proposed US$500 million 
unsecured notes, we estimate that a US$150 per ounce reduction in the 
company's gold margin (realized gold price less cash costs) increases its 
debt-to-EBITDA leverage ratio by less than a half turn, which is an increase 
of far less magnitude than that of a few of its investment-grade 
gold-producing peers. Under our base case operating assumptions, we expect 
Eldorado to generate an adjusted debt-to-EBITDA leverage ratio of about 1x and 
an adjusted funds from operations (FFO) to debt of more than 65%.

Financial flexibility could become strained, in our view, if the company 
spends about US$2 billion on growth and expansion projects in the next five 
years, as planned. While the majority of the company's growth capital is 
targeted for projects within economically weak Europe, Eldorado will likely 
remain exposed to similar industry cost pressures that have overwhelmed the 
project budgets of several of its peers. That said, we believe that the 
comparatively smaller scale of its projects and potential adjustments to 
development timelines could ease free cash burn in any given year.

Liquidity
We view Eldorado's liquidity as adequate based on our assessment of the 
following factors:
     -- That sources of liquidity will be greater than 1.2x uses in the next 
12 months and greater than 1.0x thereafter. Sources of funds include its pro 
forma cash balances, FFO generation, and close to full availability on its 
upsized US$375 million revolving credit facility.
     -- Sources would be greater than uses even if forecast EBITDA declines by 
15%.
     -- Estimated FFO should cover US$400 million in capital spending in 2012. 
However, next year's capital spending rises to US$700 million, which should 
lead to a free cash burn of close to US$300 million.
     -- Nevertheless, we expect some spending flexibility next year as actual 
capital outlays could be lower than the company's latest expectations given 
our view of possible project development delays. 
     -- Furthermore, we would expect the company to adjust its common stock 
dividend payments in a manner that would favor financial flexibility over 
shareholder returns.

The company has several asset-level debt maturities totaling US$45.6 million 
due in the next six months. About US$42 million of the maturities are related 
to the Eastern Dragon project in China that were expected to be repaid once 
Eastern Dragon obtained the project approvals needed to draw down on some 
project-financing loans. These maturities could potentially be extended once 
again to accommodate the project's revised start-up timeline. Nevertheless, 
Eldorado could repay all of its debt maturities from existing sources of cash. 
The company's revolving credit facility matures in October 2015 but we expect 
it to be amended and extended for an additional four years and increase to 
US$375 million concurrent to the closing of Eldorado's proposed senior 
unsecured notes.

Recovery analysis
We rate Eldorado's proposed US$500 million senior unsecured notes 'BB' (the 
same as the corporate credit rating on the company). 

Given that Eldorado's producing assets are situated in jurisdictions that we 
view to be either the least creditor friendly (Turkey and Brazil) or where we 
have not reviewed the insolvency regime (China), our approach in assigning our 
issue-level rating to the proposed notes identifies priority claims that rank 
ahead of the notes offering.

We believe, however, that the recovery prospects for the proposed notes are 
sensitive to the amount of proposed bonds and of future senior and equally 
ranking debt. Pro forma to a net asset balance of US$6.4 billion and total 
priority claims of US$710 million, we estimate that priority claims could 
increase by about US$250 million before approaching the 15% of net asset 
threshold where we would lower the senior unsecured rating by one notch.

Outlook
The stable outlook reflects our view that Eldorado's low-cost production base 
should support steady FFO generation as well as help maintain an adequate 
liquidity position during a multiyear period of heightened capital spending. 
Assuming gold prices remain consistent with our base case operating scenario, 
in the next several years we expect the company to generate a rolling 12-month 
FFO of about US$400 million with an adjusted FFO-to-debt ratio above 70%.

We could lower the rating if Eldorado's mining costs and gold prices 
meaningfully deteriorate to levels where negative free operating cash flow 
rapidly escalates, straining the company's adequate liquidity position. This 
could occur if the company's gold margins shrink to less than US$600 per ounce 
and capital spending costs meaningfully escalate, driving adjusted FFO to debt 
below 50%, likely causing free cash burn above US$700 million in 2013.

A positive rating action is unlikely through next year, given the execution 
risks surrounding the concurrent development of multiple growth projects. 
However, one could occur if the company makes faster-than-expected 
construction progress on its development projects while maintaining its 
significant financial risk profile.

Related Criteria And Research
     -- Criteria | Corporates | Industrials: S&P Lowers Its Nickel And 
Aluminum Price Assumptions For The Rest of 2012; Other Metals Price 
Assumptions Unchanged, July 12, 2012
     -- Methodology and Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Mining 
Industry, June 23, 2009 
     -- Criteria | Corporates | Recovery: Update: Jurisdiction-Specific 
Adjustments To Recovery And Issue Ratings, June 20, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008

Ratings List
Eldorado Gold Corp.
Ratings Assigned
 Corporate credit rating        BB/Stable/--
US$500 million notes           BB