Eldorado's gold production of 162,000 ounces during the quarter represented a 9% increase from the first quarter, with most of the increase stemming from the successful implementation of Phase III of the Kisladag expansion, which lifted ore throughput to 12.5 million tons per year. A much more significant move for the company, however, is the potential Phase IV expansion at Kisladag, which would double ore throughput to 25 million tons per year.
We think the successful implantation of Phase IV at Kisladag would add roughly $2 of equity value per share, but we only incorporate this in our scenario analysis for now (and not in our fair value estimate for Eldorado) given that management has not yet made a positive construction decision on this expansion project. Management said during the call that an updated study on Phase IV would be released within the next couple weeks.
In addition to the potential expansion at Kisladag, Eldorado is also moving the chains on the Efemcukuru and Eastern Dragon projects. Efemcukuru poured its first gold during the quarter, but it could take several quarters for this underground mine to reach run-rate production levels because of delayed construction on the concentrate treatment plant. Eastern Dragon also experienced a slight delay in its construction schedule, as management now expects gold production to start in the first quarter of 2012 (as opposed to the fourth quarter of 2011). However, slight hiccups are to be expected at any new mine, and we are satisfied that progress at Efemcukuru and Eastern Dragon have generally been on pace.
Like many of its peers within the gold mining industry, Eldorado experienced significant production cost inflation during the quarter, with total cash costs coming in at $477 per ounce compared to $410 per ounce in the year-ago quarter. However, the firm's operational cash costs did not increase very much; instead, much of this increase stemmed from higher royalties as well as the Qinghai province's implementation of a new ecological compensation fee on Eldorado's Tanjianshan gold mine.
The fee is assessed at CNY 40 per ton milled, which we estimate will increase unit cash costs by roughly $60 per gold ounce going forward given the current USD/CNY exchange rate. While this ecological fee is a provincial initiative and does not apply to Eldorado's other two Chinese gold mines, we think that if the other Chinese provinces follow Qinghai's example, this could significantly hurt Eldorado. For the latest updates PRESS CTR + D or visit Stock Market news Today
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