Eldorado Gold: Sky's The Limit, But The Sun's Burning Up There

Summary

• Eldorado Gold had an outstanding quarter in terms of revenue with a record of $173.70 million. The company is back on track with gold production more in control and debt.
• The gold sold in the second quarter was 113,685 Au Oz at a gold price of $1,321 per oz, which was another pleasant surprise.
• My target for 2019-2020 is still $10-$11.

Image: Efemçukuru Gold Mine Source: EJAtlas

Investment Thesis

The Vancouver-based Eldorado Gold (NYSE:EGO) released its second-quarter of 2019 results, and finally this time, the company managed to release decent earnings with record revenues. I could not believe my eyes and thought just for a moment, that it was another company report.

Investing in Eldorado Gold has been like walking a steep and interminable dune where every step forward was followed by a half step backward. With management led by CEO George Burns, that I consider less than stellar, who almost bankrupted the company with his ill-timed decision to build an unnecessary mill for $500+ million at the Kisladag mine in Turkey.

But, let's celebrate this quarter and forget for a moment how difficult it has been for suffering long shareholders. The chart below is showing a tremendous downturn with the stock going from $3+ to now almost $8.30.

The investment thesis is now more straightforward. The company is on the right track, and production seems in control.

Potential of a quick resolution of the Greek impasse in Skouries seems possible since "New Democracy" won the last elections and stated numerous times that they were in favor of the Skouries project and intend to deliver the permits quickly.

Data by YCharts

As I said earlier, 2019 shapes up as a classic turnaround story.

The first positive move was when management decided to act more responsibly (Kisladag) and displays a more professional strategy aiming at solving the company near future issues (Debt, gold production, and CapEx control). Three critical steps have been achieved:

• A significant increase in gold production expected from the new mine called Lamaque in Canada, which has been declared commercial with about 110K Oz of gold in 2019.
• The gold sale issues at Efemcukuru have been solved.
• The company has provided an entirely new strategy at Kisladag which brings total production in 2019 to between 390K Oz to 420K Oz, with a total CapEx 2019 expected to be only $93 million.

However, Olympias ramp-up is still a significant disappointment with meager gold production below expectation. The production achieved in 2018 was 46,750 Oz well below the expected 55,000 to 65,000 ounces, and the company posted only 16,852 Oz for the first half of 2019).

Thus, my investment thesis is to accumulate EGO progressively on any weakness with a long-term target of around $11, assuming a resolution of the Greek impasse late in 2019 which may come at the end of 2019. However, the stock has reached a fair valuation, and while I expect more improvement, the rate of climbing will drastically normalize to more normal growth. Trading a good part of your position is required more than ever.

Eldorado Gold - 2Q'19 Balance Sheet And Gold Production: The Raw Numbers

Eldorado Gold	4Q'17	1Q'18	2Q'18	3Q'18	4Q'18	1Q'19	2Q'19
Total Revenues in $ Million	101.44	131.91	153.17	81.07	92.87	80.02	170.7
Net Income in $ Million	−20.8	8.7	−24.4	−128.0	−218.2	−27.6	12.2
EBITDA $ Million	7.01	46.68	37.77	−1.09	4.13	5.52	74.5 (press release)
EPS diluted in $/share	−0.10	0.05	−0.15	−0.80	−1.38	−0.17	0.08
Cash from Operating Activities in $ Million	14.9	22.9	36.7	12.1	−5.3	3.2	51.0
Capital Expenditure in $ Million	105.2	67.0	74.3	71.2	61.5	86.1	48.0
Free Cash Flow in $ Million	−90.3	−44.1	−37.6	−59.2	−66.9	−82.9	3.0 (estimated by Fun Trading)
Total Cash $ Million	490.0	463.8	433.5	387.8	293.0	227.5	119.9
Long term Debt in $ Million	593.8	594.3	594.9	595.4	596.0	596.5	482.5
Shares outstanding (diluted) in Million	158.9	158.8	158.7	158.4	158.4	158.3	158.4
Eldorado Gold Production Au Oz	4Q'17	1Q'18	2Q'18	3Q'18	4Q'18	1Q'19	2Q'19
Production gold Au Oz	84,054	89,374	99,105	84,783	75,887	82,977	91,803
AISC	1 104	878	934	1 112	1 200	1 132	917
Gold Price	1 280	1 333	1 287	1 177	1 245	1 265	1,321

Click to enlarge

_{Source: company filings and Morningstar/Ycharts}

Note: For the 2Q'19 EBITDA, I used the estimate indicated in the press release.

Balance Sheet And Production Discussion

1 - Revenues for 2Q'19 were $173.70 million at the end of June. Revenues were at a record high this quarter with a whopping $173.70 million, up 13.4% from the same quarter a year earlier, and more than doubled sequentially. The record revenues came from a more significant gold sale than the company has produced this quarter due to problems at Efemcukuru.

The gold sold in the second quarter was 113,685 Au Oz at a gold price of $1,321 per oz, which was another pleasant surprise.

Eldorado Gold indicated a gold price realized below the price of gold for the last two precedent quarters, and it seems that the trend has finally stopped. Below are the gold price achieved per quarter since 3Q'16.

Note: The average price of gold for the first quarter of 2019 was $1,307 per oz, and EGO was able to sell its gold at an average of $1,265 per oz.

2 - Net debt is now $362.6 million at the end of June.

Total cash continues to decline and stands now at $119.9 million, down from $227.5 million the previous quarter. The rapid degradation of the cash on hand is a concern and should be addressed seriously by the company. In the press release it is said that the liquidity is now below $300 million:

The Company finished the quarter with approximately $300 million of available cash including $119.9 million in cash, cash equivalents and term deposits and approximately $179 million available under its $250 million line of credit, with $71 million of capacity on the line of credit allocated to secure certain obligations in connection with its operations.

The company indicated that it sold its Vila Nova idle Iron mine recently and sold an NSR held in a property in Turkey:

The Company completed a sale of a net smelter royalty interest held on a property in Turkey for consideration of $8.1 million, of which $5.0 million will be settled through the transfer of an exploration license and the balance to be paid in cash. Subsequent to the quarter, the Company also executed a share purchase agreement for the sale of its Vila Nova iron ore mine for consideration of $9 million in cash, subject to the purchaser securing financing and other standard closing conditions

Unfortunately, the company has not been able to divest its Tocantinzhino Mine in Brazil, which should generate well over $100 million in cash, in my opinion.

3 - Free cash flow is negative this quarter as well

Note: Free cash flow for 1Q'19 has been calculated by Fun Trading and is estimated while waiting for the Morningstar numbers. Eldorado Gold was able to show a little positive free cash flow this quarter, and it is something that we should celebrate. The Lamaque mine now producing commercially is the primary reason.

EGO has minus $206 million in Free Cash Flow yearly ("TTM"). This situation should get much better in 2019 with a reduced CapEx of $93 million and commercial production at Lamaque.

4 - Gold production details

Production for the second quarter of 2019 was 91,803 Au oz, down 7.4% year over year and up 10.6% sequentially. However, sequentially production number is quite firm as we can see in the graph below: Note: Lamaque has been declared commercial at the end of the first quarter of 2019.

New 2019-2021 Guidance confirmed this quarter.

_{Source: EGO 6K filing.}

Guidance is 390K-420K ounces of gold for 2019 and increasing to 520K-550K in 2020, and back to 350K-380K in 2021.

Conclusion and Technical Analysis

Eldorado Gold had an outstanding quarter in terms of revenue with a record of $173.70 million. The company is back on track with gold production more in control and debt on its way to be reduced. Furthermore, the price of gold is now showing exceptional strength and trading above $1,450 per oz.

The last thorn in Eldorado Gold's foot is the Skouries issue, of course. The recently elected Greek government which has succeeded the leftist Syriza seems willing to solve the dispute and let Eldorado Gold complete the project finally.

However, as always in politic, you have the "promise" and then the reality. The reality is that the project is still on hold and the permits for Skouries have not been released despite what Kiriakos Mitsotakis said.

[H]e 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.

The market could see that as a disappointment after so many promises gone with the wind in the past. The CEO George Burns said in the press release:

We are encouraged by our initial discussions with the Greek government. Realizing the potential of Eldorado's investments in Greece offers significant value for our investors, local communities and the Greek economy. We look forward to a strong second half of the year and are on track to meet our consolidated annual guidance of 390,000-420,000 ounces of gold at all-in sustaining costs of $900-1000 per ounce of gold sold

Technical Analysis (short-term).

EGO had an exponential rise since touching $3 at the end of May. However, it seems that $8.25-$8.35 is shaping up as new resistance and without any positive news from Greece, we may have reached exhaustion, which suggests that EGO is trading at long term resistance and could retrace on any gold weakness. To draw the Line resistance, use the January 2019 around $3.35 to now $8.30.

Assuming that the pattern is an ascending channel; first-line support should be a parallel from the low in January at about $2.80, which indicates a resistance now at $7.10.

It is at this level that I see the first serious retracement for EGO, at which point I recommend adding.

However, EGO will move in correlation with the gold price, and if the momentum continues strong, EGO could eventually cross the resistance and climb higher. I do not see this eventually very likely without some good news from Greece.

My target for 2019-2020 is still $10-$11.

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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.