S&P: Eldorado Gold Corp. Downgraded To 'B' From 'B+' On Increased Financial Risk; Outlook Stable

S&P Global Ratings today said it lowered its long-term corporate credit rating on Vancouver-based gold producer Eldorado Gold Corp., to 'B' from 'B+'. The outlook is stable.

At the same time, S&P Global Ratings lowered its issue-level rating on Eldorado's senior unsecured notes to 'B' From 'B+'. The '3' recovery rating on the notes is unchanged, representing meaningful (50%-70%; rounded estimate 55%) recovery in the event of a default.

The downgrade primarily reflects our expectations of weaker earnings and cash flow for Eldorado following the release of the company's year-end 2017 financial results and outlook for 2018.

We attribute much of the decline to significantly lower gold output and higher cash costs at Eldorado's Kisladag mine. We estimate the company will generate an adjusted debt-to-EBITDA ratio of about 4x over this period--a level we consider high for the previous rating, particularly given significant growth-related capital expenditure over the next several years (US$1 billion through 2020). In our view, the corresponding weakening in the company's prospective liquidity position and potential for future operating issues have increased Eldorado's financial risk.

The stable outlook primarily reflects our view that Eldorado will generate adjusted debt-to-EBITDA of about 4x for the next two years. We also expect the company to incur significant capital expenditures over this period mainly related to its development projects. However, we believe the Eldorado will have sufficient cash on hand to fund the related estimated free cash flow deficits in 2018 and 2019.

We could downgrade the company if, over the next 12 months, we expect Eldorado to generate an adjusted debt-to-EBITDA ratio of about 5x, or higher-than-expected free cash flow deficits in 2018 and 2019. We believe this scenario could result from lower-than-expected gold output or margins, or higher capital expenditures that weaken our view of the company's ability to manage its future debt maturities and funding requirements.

Although we think it unlikely over the next 12 months, we could consider an upgrade if Eldorado generates an adjusted debt-to-EBITDA ratio in the 2x-3x range, with increased liquidity available to fund its growth projects. We would also expect the company to ramp up its development projects generally in line with or ahead of our expectations, to refinance its long-term debt and secure necessary financing for Kisladag related spending beyond 2019.
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