Eldorado Overpays for Integra Gold

On May 15,  Eldorado (EGO) announced the acquisition of the roughly 90% it does not already own of Integra Gold. The offer of CAD 1.2125 per Integra share gives shareholders the option of all cash, all Eldorado equity, or a combination of the two. The offer represents a 52% premium to the May 12 closing price and 46% premium to the 20-day volume-weighted average price. The acquisition represents the first major strategic move of Eldorado’s new CEO George Burns, who took the helm on April 28.

Integra’s key asset is the Lamaque South project. Located in an area of historically successful mines, the mine has more than 1.4 million ounces of indicated resources at a 5 grade per metric ton cut-off. Early plans call for a 10-year underground mine producing roughly 125,000 ounces per year at all-in sustaining costs of about $634 per ounce. Net capital costs of $85 million, lowered by preproduction revenue helps make launch costs manageable. We estimate the project could net an aftertax return of roughly 35%-40%.

Despite the attractiveness of the project, the premium Eldorado paid gives us pause. Taking into account the price paid, we estimate the after-tax return to be roughly zero. In other words, Eldorado must extract more value beyond the current mine plan to justify the price paid. We are trimming our fair value estimates to USD 4.10 per share and CAD 5.60 per share, respectively, down from USD 4.30 and CAD 5.90. Eldorado’s no-moat rating remains unchanged.

We are also lowering Eldorado’s stewardship rating to Standard. Our previous rating of Exemplary was based on its strategy of targeting more challenging markets, allowing it to avoid paying full prices for assets. With the acquisition, Eldorado enters Canada, a region that is often the setting for bidding wars, given its status as a friendly mining jurisdiction. We are less confident that the company will avoid overpaying, which has plagued gold miners in the past when competing in popular geographies.

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