Eldorado Gold (EGO) Ratings, Outlook Affirmed by S&P

September 21, 2016 10:38 AM EDT

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S&P Global Ratings today said it affirmed its 'BB-' long-term corporate credit and unsecured notes ratings on Eldorado Gold Corp. (NYSE: EGO). The outlook is negative.

We revised our country risk assessment for the Republic of Turkey to high from moderately high, which reflects the lowering of the sovereign rating on Turkey that followed our previous research update on Eldorado in May 2016. However, this did not affect our ratings or outlook on Eldorado.

"We expect Eldorado will generate earnings and cash flow above our previous expectations following the recent upward revision to our gold price assumptions," said S&P Global Ratings credit analyst Jarrett Bilous. "However, the corresponding improvement in our estimate of the company's prospective credit ratios is not sufficient to warrant a rating action at this point," he added.

In our view, Eldorado's exclusive reliance on its two mines in Turkey following the sale of its mining interest in China and significant capital investments allocated toward its development projects heightens the company's credit risk profile.

Our weak business risk assessment primarily reflects our view of the company's limited operating diversity, exposure to higher-risk countries relative to certain peer companies, and sensitivity to gold price volatility, given its limited commodity diversification. Eldorado recently closed the sale of its 82%-owned Jinfeng mine and expects to close its remaining Chinese mining interests this year, consistent with our previous expectations. Given these sales, we consider the company's business risk profile to be at the lower end of our weak assessment category--mainly because Eldorado's Kisladag mine will account for the vast majority of earnings and cash flow.

We assess Eldorado's financial risk profile as aggressive, but expect the company to generate earnings and cash flow above our previous expectations. The improvement reflects the recent upward revision to our gold price assumptions. We now estimate the company to generate an adjusted debt-to-EBITDA ratio of about 3x in 2016 and in the mid-2x area in 2017, and FFO-to-debt of about 30% over this period. We consider these ratios as strong for the financial risk assessment. However, we also take into account the sensitivity of Eldorado's credit measures to potential gold price fluctuations, particularly given its limited mine diversification, as well as the financial risk associated with estimated free cash flow deficits over the next few years.

The negative outlook primarily reflects our view of Eldorado's heightened rating sensitivity to the ramp-up of its development projects in Greece, following the material estimated decline in the company's earnings and cash flow from the sale of its mining interests in China. In our view, reduced visibility regarding expected contributions from its development projects could weaken our assessment of Eldorado's business risk or financial risk profiles over the next 12 months.

We could lower the rating if we expect Eldorado to generate adjusted debt-to-EBITDA above 3x in the next two years. In our view, this could result from slower-than-expected contributions from its development projects, notably Olympias, which we incorporate in our 2017 estimates. Production delays and a corresponding increase in Eldorado's prospective cash cost position, in our opinion, could also weaken the company's business risk profile and lead to a downgrade.

We could revise the outlook to stable if, over the next 12 months, we believe the ramp-up of Eldorado's development projects will progress generally in line with or ahead of our expectations, thereby stabilizing the company's business risk profile. In addition, we would also expect the company to generate adjusted debt-to-EBITDA below 3x while maintaining strong liquidity.



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