TEXT - S&P rates Eldorado Gold Corp
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
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