Eldorado Gold: Major Refinancing Exercise

About: Eldorado Gold Corporation (EGO)
by: Vladimir Zernov

Eldorado Gold announces a $450 million credit facility.

The company also launches a $300 million notes offering.

This is positive news: Eldorado Gold had a plan on how to deal with 2020 debt.

The market might have been busy with other things on the day of the announcement. I'd watch the stock for a short-term upside play.

While most market participants were focused on a big down day for equities caused by a new round of the U.S. – China trade war, Eldorado Gold (EGO) shared very important news on refinancing. The recent quarterly report was not good while the conference call was a pure disaster, so actual refinancing steps with a concrete plan to eliminate 2020 maturity are surely welcome news. Here’s how Eldorado Gold decided to solve its debt problem:

  1. Eldorado Gold gets a $450 million senior secured credit facility. It consists of a $200 million term loan and a $250 million revolving credit facility. The term loan will be used (together with other sources) to redeem 2020 notes. The revolving credit facility is for general purposes. Note that Eldorado Gold has $71 million in letters of credit which are deemed to be outstanding under the new facility.
  2. Eldorado Gold launches a $300 million senior secured second lien notes offering. The notes will mature in 2024. At this point, the interest rate is unknown.
  3. Eldorado Gold will use the proceeds from the $200 million term loan, $300 million notes offering and cash on hand to redeem $600 million 6.125% notes due December 2020, the full amount of its debt.

At the end of the first quarter, Eldorado Gold had $221 million of cash. While the size of the cash position has been materially reduced in comparison with the end of 2018, future cash flow coming from Kisladag and Lamaque should stabilize and then increase available cash on the balance sheet. In this light, the company’s decision to contribute $100 million of cash to the redemption of 2020 notes is a move that makes perfect sense.

Eldorado Gold has been long silent about any details on its plans to deal with the 2020 maturity, so the announcement is a major positive factor for Eldorado Gold. Bankruptcy fears were mostly erased when the company announced that it will not proceed with the Kisladag mill, and they’ll be completely off the table when the company finishes refinancing. It will be interesting to see what interest rate will be obtained for second lien notes – surely, Eldorado’s interest payments will increase compared to the current state of affairs, but the size of such an increase remains unclear. Anyway, I do not expect any crushing effect on the company’s finances as the term loan received a decent rate for a company in Eldorado’s situation (LIBOR +2.25-3.25%).

I believe that most market participants were busy with other stocks on the day when Eldorado Gold announced its refinancing, so the stock moved mostly in line with gold equities due to positive gold price performance which benefited from another round of the U.S. – China trade war. Thus, the impact of the news (solution to the debt problem) may not be fully priced in, opening a possibility for a short-term upside play. Longer-term share price performance will depend on gold prices and the company’s ability to restore investors’ confidence.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in EGO over the next 72 hours. 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.

Additional disclosure: I may trade any of the above-mentioned stocks.