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Eldorado Is the Gold Standard

Eldorado Gold is one of the few gold miners that enjoys an economic moat.

Joung Park, 10/10/2011

We believe Eldorado Gold EGO has earned a narrow economic moat. While little has changed in recent years in regards to Eldorado's position within the gold mining industry, we have gradually developed a greater appreciation for the firm's ability to generate economic profits in a normalized gold price environment (which we presently assume to be roughly $1,200 per ounce).

Economic moats in mining are almost entirely predicated on sustaining a low-cost position, which in turn depends on three major factors: low production costs, long reserve lives, and prudent capital allocation.

We believe Eldorado scores near the top of the industry on all three of these metrics, which should help the firm to generate economic profits throughout most of the gold price cycle.

Enviable Cash Costs Relative to Peers
Eldorado Gold boasts the lowest cash costs within our gold mining coverage universe, with total cash costs of $423 per ounce in 2010. This figure includes direct mining costs and overhead expenses, as well as royalties paid to various governments. The firm's cash costs compare favorably with the gold mining industry average of $579 per ounce in 2010. We attribute Eldorado's low cash cost to the firm's high gold grades and easy ore access.

Eldorado's total proven and probable gold reserves grade sits at 1.1 grams per ton--higher than the industry average, but certainly not a remarkable figure. However, the firm's average gold grade is weighed down by lower grades at Kisladag (0.74 grams per ton), which comprise over half of the company's entire gold reserves. Gold reserve grades at Eldorado's other mining assets tend to be very high, such as the Efemcukuru mine at 9.1 grams per ton. Higher gold grades mean fewer tons of ore need to be mined and processed to yield the same amount of gold, which helps lower cash costs. Even Kisladag, which seems to exhibit mediocre gold grades, enjoys rock-bottom production costs because it produces the yellow metal through heap leaching, a mining technique that relies more on large volumes of ore throughput rather than on high gold grades.

In addition to its above-average gold grades, Eldorado's low-cost position is also supported by easy access to the gold ore. The majority of Eldorado's gold comes from surface open-cut mining, which is simpler and cheaper than extracting gold from underground. And the firm's underground mines are either a combination of open pits and underground tunnels, or very shallow underground holes by industry standards, which again helps minimize mining costs.

Joung Park is an equity analyst with Morningstar.

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