The Road to Eldorado's Gold is Closed

It came to me as a complete shock, seeing one of my favourite mines down 30% on Thursday. A Turkish court had apparently ordered the shut down of Eldorado Gold's (EGO) cash cow, the Kisladag mine, responsible for 60% of the company's gold production in 2006.

According to Eldorado, the final decision by the court is still pending "on the appeal of a lower court order in favor of the company confirming the legality and validity of the Mine's Environmental Impact Assessment". The closure will be implemented in about 30 days. To clarify things, the company planned a conference call on Thursday evening and I was all ears.

During the conference call, CEO Paul Wright was talking of a group of people whose only interest was to discourage mining in the country. He did not know the name of that group and he did not go into details on the specifics of the court case. Last year, there was a problem with cyanide poisoning of villagers, which means that high levels of cyanide were found in villagers' blood. This was a result of the sodium cyanide heap leach method that was used by Eldorado during trial production and that presumably has been used until now.

From what I found, the Environment Impact Assessment was initially accepted in 2003, but was later found incorrect by doctors and scientists and challenged in court by villagers, working together through a group called "Elele" (hand-in-hand). In addition to the cyanide poisoning, there were also reports of levels of arsenic in local drinking water. I can imagine if this all has been proven correct, that there are serious issues.

Unfortunately, nothing was said about all this during the call. Problems with people opposing to the use of cyanide in the Kisladag region have been known since 1999, as the company did exploratory work. The first mining company that used cyanide in Turkey was Newmont Mining at its Ovacik mine in 2001. The mine was sold in 2005 to Turkish printing and mining company Koza Davetiye. The reason then given for the sale was the divestment of non-core assets. However, the Ovacik mine was - like the Kisladag mine - given bad publicity by Greenpeace and fought by locals in court, despite approvals that the company received from the Turkish Government.

It sounds to me that this may be the start of something bad. According to Eldorado Gold's CEO, the decision that has been made was not supported by legal proof. But opposition against the use of cyanide in the local mining industry is clearly nothing new in Turkey. Maybe Newmont was not too keen on bad publicity either?

I am, however, forced to review my position in Eldorado as the bad publicity is certainly not going to do the company any good and these environmental issues are usually not solved overnight.

Full Disclosure: At the time of writing, the author had a long position in the above-mentioned stock.

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