Eldorado’s big fat offer for European Goldfields

A miner working underground at European Goldfields' Olympias polymetallic project in Greece. Photo by European GoldfieldsA miner working underground at European Goldfields' Olympias polymetallic project in Greece. Photo by European Goldfields

Eldorado Gold‘s (ELD-T, EGO-N) proposed acquisition of European Goldfields (EGU-T, EGU-L) will enable increased gold production from 650,000 oz. in 2011 to over 1.4 million oz. by 2014 – or a rate of 30% on an annualized basis – the company’s chief executive Paul Wright said on a conference call. 

“Given our strong balance sheet, we will be able to accomplish this growth using only internal cash flow and existing credit facilities,” Wright says. “We consider this transaction to be highly accretive to our gold reserve per share and expect future production to reinforce Eldorado’s position as one of the lowest-cost gold producers on the planet . . . our production growth remains second to none, and we materially improve our gold reserves on both an absolute and per share basis.”

The friendly deal would also guarantee that Eldorado’s status as the “dominant gold producer in the highly prospective Aegean region” will continue into the future, he says. Eldorado Gold is an intermediate gold producer with operating, development and exploration assets in Turkey, China, Greece and Brazil.

Eldorado announced that it plans to acquire European Goldfields for $2.5 billion in a deal that values European Goldfields at $13.08 per share, based on the Dec. 16 closing share price of Eldorado’s common shares on the Toronto Stock Exchange.

The offer represents a 48% premium to European Goldfields’ $9.96-per-share closing price on Dec. 5, on the last day before
European Goldfields announced it had received preliminary approaches. The offer is a 56.5% premium to European’s 20-day volume weighted average price (VWAP), based on the VWAPs of both companies on the TSX for the period ended Dec. 5. 

Shareholders of European Goldfields will receive 0.85 of an Eldorado share and $0.0001 in cash for each share. If the acquisition is completed, Eldorado and European Goldfields shareholders will own 78% and 22% of the combined company, respectively.

“Based on closing share and commodity prices it appears Eldorado is paying about one hundred dollars per ounce [total gold-equivalent resource] for European Goldfields, which compares favourably to recent transactions averaging implied value of one hundred and thirty-eight dollars per ounce, excluding Red Back and Andean,” Dan Rollins, an analyst at UBS Investment Research, commented in a note. “Given the implied valuation and likelihood many parties have kicked European Goldfields’ tires, an interloper for European Goldfields cannot be ruled out at this time.”

The combined company will have a market capitalization of $11 billion, and its greater liquidity will enable any size of investor to comfortably trade in and out of the stock, Wright says. 

“There’s a strong rational to put these two companies together,” Wright explains. Among other things the new company will have an extensive and balanced portfolio of assets spanning a global operating footprint across Turkey, Greece, China and Brazil.

European Goldfields has attributable gold reserves of 9.2 million oz. and assets at various stages in Greece, Romania and Turkey. It operates the Stratoni mine in Greece and is developing the Skouries and Olympias projects in Greece, and the Certej project in Romania. It is also partnered with the largest construction company in Greece, Aktor S.A.

Olympias is a brownfields project with reserves of 4.1 million oz. and the potential to produce 120,000 oz. to 225,000 oz. a year, Wright says. Plant refurbishment is underway and the Environmental Impact Study has been approved by the Minister of Environment, Energy and Climate Change. Skouries is a large development project in northeastern Greece with defined reserves of 3.6 million oz. gold. A planned mine is expected to produce 150,000 oz. gold and 30,000 tonnes of copper annually, Wright notes. Its EIS has also been approved and long lead-time items are in storage.

“Assuming a successful completion of the merger with European Goldfields, Eldorado’s production by country will be more diversified and weighted more in the Aegean region, with almost sixty percent coming from Greece and Turkey in 2014,” Kerry Smith, an analyst at Haywood Securities, said in a note to clients.

Wright says that he looks forward to an intensive exploration program on the European Goldfield permits. 

“A big part of this transaction is to further solidify our position in the Aegean,” Wright asserts, adding that northeastern Greece is geologically prospective and underexplored. “Once European Goldfields’ assets are built and begin to contribute production, this region will be the hub of our operations and a big part of what the new company represents. We believe that if we can create dominant regional businesses, which is made much easier with fewer active competitors in key gold-producing countries, that you will create a sustainable, competitive advantage.”

Eldorado did much the same thing in China through its 2009 acquisition of Sino Gold, Wright says, which made the company the largest international gold producer in China.

In a 14-page research note, Smith of Haywood Securities outlined the pros and the cons of the deal. On the positive side, he says, European Goldfields’ attributable gold reserves of 9.2 million oz. will be accretive on a per-share basis to Eldorado’s attributable reserves of 18.2 million oz. The deal is also accretive to Eldorado’s net asset value, given European Goldfields’ producing Stratoni mine, near-term projects Olympias, Skouries and Certej, and an estimated US$3 million net present value. He also notes that Eldorado’s integration of Sino Gold “bodes well for European Goldfields’ integration.”

In terms of what could go wrong, however, Smith says Eldorado will have to manage seven producing assets – including one from European Goldfields – and one project in construction, five – with three from European Goldfields – in the feasibility, permitting or development phase, and one project in the prefeasibility phase. As a result, he sees “increased execution risk of delivering multiple projects in a short time span.” He also points out that 25% capital expenditure overruns “are very likely for the European Goldfields projects,” and there is also a risk of higher taxes in Greece. In addition there can be dilution to near-term 2012-2013 cash flow. 

Smith also argues that he sees “no other likely bidders” for European Goldfields.

The agreement has received the support of each company’s board of directors and is backed by BlackRock Investment Management, which holds 7.3% of European Goldfields and is one of its largest institutional shareholders. 

The transaction will require approval from at least two-thirds of European Goldfields’ shareholders and a majority of Eldorado’s shareholders. The agreement outlines a break fee of $75 million. European Goldfields has also agreed to put off a shareholder vote it had scheduled on a proposed financing by Qatar Holding.


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