Eldorado Gold: The Positive Arbitration Ruling Is Just The Beginning

Summary

• Eldorado Gold won the arbitration against the Greek government.
• The remaining Skouries mine permits should be received sooner or later.
• Eldorado Gold should focus on Lamaque and Kisladag and leave Skouries at care and maintenance at least by 2022.
• EGO is a great buy at a share price below $1.

Eldorado Gold (NYSE:EGO) announced a positive ruling of the arbitration panel regarding its Greek Skouries mine. According to the news release:

The Panel's ruling rejects the Greek State's motion that the technical study for the Madem Lakkos metallurgy plant for treating Olympias and Skouries concentrates, as submitted by the Company's Greek subsidiary Hellas Gold S.A. ("Hellas Gold") in December 2014, was in breach of the provisions of the Transfer Contract.

Due to the positive ruling, Eldorado's management expects that the remaining permits for its Skouries mine will be issued:

We look to the Greek State to fulfil its obligations under the Transfer Contract including issuing the outstanding permits for the Skouries project.

Despite the positive ruling of the panel, it is yet unknown when the Skouries permits will be issued. However, last week, Eldorado filed a new Skouries technical report that envisions a significantly reduced environmental footprint of the mine. Together with the positive arbitration ruling, the decreased environmental footprint should help with the permitting process.

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Although the positive ruling of the arbitration is a very good news, the initial market optimism has faded quite quickly. Although the stock opened almost 10% up, the majority of the gains was wiped out quite quickly. The explanation that the main reason is that the stock market is down can hardly hold, as gold (GLD) and the gold miners (GDX) (GDXJ) were slightly up. The main reason for the relatively cold reaction is the uncertainty regarding Eldorado's ability to finance the development of its projects.

According to the March 21 news release that sent Eldorado's shares 20% lower, the company will need $490 million for construction of the Kisladag mill, $99 million to take the Lamaque mine into production, $689 million to build the Skouries mine, and $600 million to repay the December 2020 senior notes. As of the end of 2017, Eldorado Gold held cash, cash equivalents and term deposits worth $485 million. Moreover, it had also undrawn credit lines of $250 million at its disposal.

Eldorado shouldn't have any problem with financing the Lamaque mine development. Although the CAPEX and pre-commercial production costs are estimated at $179 million, the pre-commercial gold sales should be able to cover $80 million of this amount. The Lamaque mine development should take place in 2018, with first gold production in early 2019 and commercial production in late Q1/early Q2 2019. It means that the vast majority of the expected costs should be expended in 2018. From Q2 2019, Lamaque should be able to contribute to Eldorado's cash flow significantly, as it is expected to produce 117,000 toz gold per year at an AISC of $717/toz on average.

The Kisladag mine should produce 120-130,000 toz gold in 2018 and 40-50,000 toz gold in 2019. To get back on track, it will need the mill. Eldorado expects that a feasibility study that includes the mill should be completed in October. The construction should start in early 2019 if all of the necessary permits are received in time. If everything goes well, the mill should be commissioned in late 2020. According to the PFS, thanks to the mill, Kisladag should be able to produce 270,000 toz gold per year at an AISC of $778/toz on average. The mill construction should cost $490 million. As it shouldn't start until early 2019 and it will take approximately two years, Eldorado's cash remaining after the Lamaque mine construction together with the undrawn credit lines and 2018, 2019 and 2020 cash flows should be more than enough to finance the projected Kisladag mill CAPEX.

Eldorado should be able to refinance the December 2020 senior notes. The problem is the Skouries mine. Although Skouries should produce only 140,000 toz gold per year on average, the AISC is projected only at $215/toz, due to the high copper credits. At the current metals prices, it should be able to generate free cash flow around $150 million per year. This is why the mine is an important asset for Eldorado Gold. The problem is that the CAPEX is estimated at $689 million. This is a CAPEX Eldorado Gold can hardly afford in the near future. However, the final permits haven't been received yet; moreover, the whole project has been put on care and maintenance due to the permit delays and the arbitration. The care and maintenance costs are estimated only at $3-5 million per year. Right now, the best option for Eldorado Gold, even if it receives the remaining permits soon, is to postpone the Skouries development by several years. The production should commence two years after the construction is restarted. If Eldorado decides to restart the construction in 2022, after Lamaque and Kisladag are fully ramped-up, there is a good chance to finance the Skouries development from internal sources, as Lamaque and Kisladag should be able to generate cash flow over $200 million per year if the current metals prices prevail. Adding to it Olympias and Efemcukuru, Eldorado's 2021, 2022 and 2023 cash flows could be able to cover the remaining Skouries CAPEX.

And there are also other options. As indicated during the earnings call, Eldorado may evaluate the sale of some non-core assets. For example, the Romanian Certej project has reserves of 2.4 million toz gold (1.69 g/t gold) and 15.5 million toz silver (11 g/t silver) and the Brazilian Tocantinzinho project has reserves of 1.8 million toz gold (1.43 g/t gold). Also the Brazilian Vila Nova iron ore mine that was put on care and maintenance in 2014 due to low iron ore prices has some value.

Another option is to find a JV partner for Skouries or Kisladag. Especially Skouries could be very interesting for a potential partner due to the very low gold production AISC and a long mine life that is estimated at 23 years.

Conclusion

The favorable ruling of the arbitration panel is a positive news, however, it is only the first step on Eldorado Gold's way back to its mid-tier gold producer status. Although the management has a lot of work to do, there are several options how to come through the hard times. The best option is probably to develop Lamaque and Kisladag and to postpone the Skouries development by several years. It is possible to conclude that the situation is much better than Eldorado's share price indicates. I believe that buying Eldorado Gold's shares below $1 will turn out to be a great investment.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long EGO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.