- Eldorado Gold confirms positive arbitration ruling in Greece.
- This is a positive catalyst for the company, but the problems are not over.
- The stock should have more upside once the market realizes how and when Eldorado Gold will be financing the development of the Greek project.
This article is an update to my bullish thesis on Eldorado Gold (NYSE:EGO) outlined in “Eldorado Gold Is Undervalued, First Target $2.20-$2.40”.
Finally, there’s some positive news from Eldorado Gold. The Q4 report has disappointed the market, as capital expense estimates for three major projects (Lamaque, Kisladag and Skouries) came significantly higher than previously expected. With the continuation of work on Skouries under a big question at that time, the market felt free to sell Eldorado Gold shares below $1.00.
The company has just announced that it has received positive arbitration ruling regarding the technical study for the Madem Lakkos metallurgy plant for treating Olympias and Skouries concentrates. This is exactly what the company has been waiting for. Here’s the comment from Eldorado Gold’s CEO on this issue:
"We respect and acknowledge the Panel's ruling. We have always acted in good faith and in a manner we understood to be in accordance with our obligations under the Transfer Contract, including our commitment to developing the Kassandra assets in accordance with the Greek State's approval of the Investment Plan in 2006, and the Environmental Impact Study in 2011. We have repeatedly communicated this commitment, including during the course of the arbitration.
We believe this decision provides a foundation to allow us to advance dialogue with the Greek government in order to define a mutually-agreeable and clear path forward for our Kassandra investments. We look to the Greek State to fulfil its obligations under the Transfer Contract including issuing the outstanding permits for the Skouries project. The full, efficient and responsible development of the Kassandra assets will benefit the Greek State and its citizens, the local communities, our shareholders and our teams of Greek employees.
Eldorado has continued to demonstrate its commitment to improving the environmental impact of our investments by recently submitting the updated Technical Study for the Skouries Project which reduces our project footprint by forty percent."
This is a major win for Eldorado Gold, but it is absolutely not the end of the company’s problems. Eldorado Gold has no resources to develop Lamaque, Kisladag and Skouries simultaneously. Start-up costs for Lamaque are $100 million, $490 million for Kisladag and $690 million for Skouries. Combined, it’s a bill of roughly $1.3 billion against $480 million of cash on the balance sheet at the end of 2017.
Obviously, Eldorado Gold will have to search for ways to finance these projects. Also, the company has to deal with $600 million senior notes due December 15, 2020. Together with the notes, the “capital call” on Eldorado Gold increases to $1.9 billion.
In my opinion, the company has little chance to do all three projects at one time. For this to be possible, it will have to raise about $1.5 billion in the debt market, which does not look plausible at this time. I expect that Eldorado Gold will try to sell some non-core assets to raise cash and proceed with Lamaque and Kisladag while continuing to work with the Greek government on Skouries. Thus, I don’t think that the company will run itself into a financial wall by spending all money that it has and failing to pay the bonds due at the end of 2020.
In my opinion, the company’s valuation remains attractive. Now that Skouries has received a positive arbitration ruling, Eldorado Gold will be evaluating options on how to proceed with the project. I expect to hear more on this topic when the company releases its Q1 2018 earnings on April 26 after the market close and discusses its results on a conference call on April 27. Once the market realizes that the company is not going to commit suicide by putting all cash up to the last penny on 3 projects at once, it will turn its eye to valuation, and Eldorado Gold shares will have significant upside from current levels. I remain optimistic regarding the perspectives of both the company and the stock.
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