Eldorado Gold's 30% Growth Should Be Only The Beginning

About: Eldorado Gold Corporation (EGO)
by: Peter Arendas

The debt refinancing was completed.

Greek parliamentary elections will be held on July 7.

The probable new prime minister stated that permits for Skouries will be issued over the first month of his rule.

Eldorado Gold's share price is up by more than 30% since the early elections were first mentioned.

Gold price above $1,300, expected positive Q2 financial results and a real chance to finish the Skouries permitting soon, indicate further upside potential.

Eldorado Gold's (EGO) share price experienced a notable decline after the Q1 2019 financial results were reported and after the terms of Eldorado's debt refinancing were announced. The share price reached the $3.1 level on Friday, May 24. However, the next Monday, it opened at $3.47 and it kept on climbing, up to the peak value of $4.46, reached on June 5. The sudden growth was initiated by the latest developments in the political situation in Greece and further supported by the gold price that grew from $1,280 to $1,320/toz.

Chart Data by YCharts

The Q1 2019 financial results, released on May 2, were not good. Eldorado Gold recorded earnings of $-27 million, adjusted net earnings of $-17.9 million and operating cash flow of $-9 million. However, the bad financial results were caused by some external factors that prevented the company from selling approximately 20,000 toz gold produced at its Efemcukuru mine. Although the sales will be most probably realized this quarter, further improving the Q2 financial results, the market reaction was very negative.

The markets reacted negatively also on the terms of Eldorado Gold's debt refinancing. The company issued senior second lien notes worth $300 million. The notes were issued at a 2% discount and they bear an interest of 9.5% p.a. They will mature in 2024. Eldorado was also able to secure a $450 million credit facility, consisting of a $200 million term loan and $250 million revolving credit facility. Both, the term loan and revolver, will bear an interest of LIBOR + 2.25-3.25% (approximately 4.5-5.5% right now). The term loan should be repaid in semi-annual payments starting on June 30, 2020, and the revolver should be repaid 4 years from closing.

The proceeds of the notes offering along with the term loan and revolver will be used to redeem the $600 million senior notes with maturity in December 2020. Although the refinancing is positive news, as it gives Eldorado some breathing space, the market reaction was negative. It was most probably caused especially by the fact that the new notes will bear an interest of 9.5%, while the old notes bear an interest of only 6.125%.

But the negative sentiment has changed suddenly, in late May. As I wrote in my last article about Eldorado Gold:

In the coming quarters, the volume of produced and sold gold should grow notably, due to the Lamaque mine ramp-up and the Kisladag mine restart. As a bonus, a new business-friendly government is expected to be elected in Greece this autumn, which should have a positive impact on Eldorado's Greek operations and development projects.

Right now, it seems that a new business-friendly government could be elected as soon as in July. The opinion polls were indicating that the ruling Syriza party lags behind the opposition New Democracy party quite notably. However, after Syriza lost to New Democracy by almost 10 percentage points, in the European Parliament elections, prime minister Tsipras announced that new elections should take place as soon as this summer. Moreover, in the regional elections, New Democracy won in 12 out of 13 regions. As a result, the parliamentary elections should be held on July 7 which is approximately three months earlier than originally expected.

Why is this a positive catalyst for Eldorado Gold's shares? Because New Democracy is supposed to be business-friendly. It wants to stimulate foreign investments in order to kick-start the Greek economy. And, what is even more important, according to a Bloomberg article from last October, Kyriakos Mitsotakis, the leader of New Democracy, claimed that he will issue permits for Skouries during his first month in office. The article states:

The leader of New Democracy, currently Greece’s main opposition party -- who will become prime minister if his party wins general elections next year -- says what the country needs more than anything else is investment. With that in mind, he says he will issue permits for the mining project in Skouries, northern Greece, in his very first month in office and push for the development of the site of the former Athens Airport of Hellinikon.

Given that the elections will be held on July 7, there is a good probability that Eldorado Gold will receive the permits for Skouries by the end of August.

The Skouries project contains reserves of 3.77 million toz gold and 1.72 billion lb copper. It should be able to produce 140,000 toz gold and 66.9 million lb copper per year on average. Due to the high copper credits, the AISC is estimated only at $215/toz. At a gold price of $1,300/toz and a copper price of $2.75/lb, Skouries should be able to generate cash flow around $150 million per year. The after-tax NPV (5%) is $925 million and after-tax IRR is 21.2%.

The mine construction started back in 2013 but it was interrupted during the H1 2016, due to some delayed permits. It recommenced during the summer of 2016, but in 2018, the project was put on care and maintenance, as the permitting delays continued. In April 2018, Eldorado Gold won an arbitration, but the Greek government still hasn't issued all of the permits needed to complete the mine construction and commissioning.

The problem is, that according to the 2018 updated technical report, it should cost almost $700 million to complete the mine construction. This is too much for Eldorado Gold right now. However, after all of the permits are finally obtained, the value of the property will increase rapidly. Due to the very good economics of the project, some new options will open up for Eldorado Gold, including a joint venture or sale of the asset.


The Skouries wild card got into the play sooner than expected. The Greek parliamentary elections will be held on July 7, almost exactly one month from now. If the New Democracy party wins (which is highly probable) and its leader becomes the new prime minister, it is possible to expect the Skouries permits to be issued very soon, maybe in August or even late July. If the gold price remains above $1,300/toz and Eldorado Gold reports good Q2 results (which is probable, given that a meaningful volume of gold produced in Q1 will be sold only in Q2 due to the logistical issues at the Efemcukuru mine), the share price may re-test last summer's highs just below $6 by the end of this summer.

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.