Eldorado Gold: The Recovery Is Proceeding Well

Summary

• Revenues were higher than I expected this quarter with $204.66 million, up from $80.02 million the same quarter a year earlier, and up 6.6% sequentially.
• The production for the first quarter of 2020 was 115,949 Au Oz, up 39.7% year over year, and down 2.5% sequentially. The company sold a little over 116K ounces.
• It is time to look at EGO as a long-term investment again. However, it is crucial to trade short term about 30% of your holding.
• Looking for a helping hand in the market? Members of The Gold And Oil Corner get exclusive ideas and guidance to navigate any climate. Get started today »

Image: Lamaque Gold Mine. Source: Mining.com

Investment Thesis

The Vancouver-based Eldorado Gold (NYSE:EGO) released its results for the first quarter of 2020 on April 30, 2020. Production for the quarter was 115,949 Au Oz, which was quite impressive. It was not a surprise because the company released the preliminary production results on April 9, 2020, and I have already commented on this part.

Eldorado Gold has changed drastically for the past year and a half. From Kisladag mine unexpected resurrection to the end of the struggle with Greece, the company moved from near bankruptcy to a sturdy gold miner with high production and future potential. A quick look at the two years chart shows the miraculous transformation.

Data by YCharts

The company has not solved all its ongoing issues, but we can see the light at the end of the tunnel. Kisladag is now producing at a level that was not experienced for many quarters, Lamaque looks strong, and Olympias is starting to deliver what was expected after a long and challenging ramp-up. The last problem is still the company's Greek assets and notably the Skouries mine. It is time to look at EGO as a long-term investment again.

George Burns, the CEO, said in the conference call:

The COVID-19 pandemic has diverted both our own and the Greek government's attention, leaving limited time to discuss advancement of our investment.

Eldorado Gold - 1Q'20 Balance Sheet And Gold Production: The Raw Numbers

Eldorado Gold	4Q'18	1Q'19	2Q'19	3Q'19	4Q'19	1Q'20
Total Revenues in $ Million	92.87	80.02	170.7	172.3	191.9	204.66
Net Income in $ Million	−218.2	−27.6	12.2	4.2	91.2	-4.88
EBITDA $ Million	4.13	5.52	70.97	73.91	158.7	80.15
EPS diluted in $/share	−1.38	−0.17	0.08	0.03	0.57	-0.03
Cash from Operating Activities in $ Million	−5.3	3.2	51.0	51.2	45.15	53.27
Capital Expenditure in $ Million	61.5	86.1	51.9	34.8	41.8	40.48
Free Cash Flow in $ Million	−66.9	−82.9	-0.8	16.4	3.4	12.79
Total Cash $ Million	293.0	227.5	123.6	138.2	181.0	366.47
Long-term Debt in $ Million	596.0	596.5	482.5	483.1	479.7	445.1
Shares outstanding (diluted) in Million	158.4	158.3	158.4	161.7	170.9	165.2
Eldorado Gold Production Au Oz	4Q'18	1Q'19	2Q'19	3Q'19	4Q'19	1Q'20
Production gold Au Oz	75,887	82,977	91,803	101,596	118,955	115,950
AISC	1 200	1 132	917	1 031	1 110	952
Gold Price	1 245	1 265	1 321	1 513	1 475	1 580

Click to enlarge

Source: Company filings and Morningstar

Balance Sheet And Production Discussion

1 - Revenues for 1Q'20 were $204.66 million at the end of March. Revenues were higher than I expected this quarter with $204.66 million, up from $80.02 million the same quarter a year earlier, and up 6.6% sequentially. The company recorded a net loss to shareholders in the first quarter of $4.9 million or $0.03 loss per share.

However, the adjusted net earnings for the quarter were $12.5 million or $0.08 earnings per share. The increase in revenue is due to the higher average realized gold price in the first quarter of 2020 at $1,580 per ounce, compared to $1,265 per ounce in the comparative quarter in 2019.

The gold sold in the first quarter was 116,219 ounces at a gold price of $1,580 per oz. 2 - Net debt is now $228.66 million at the end of March. Total cash increased this quarter and stands now at $366.5 million, up from $181.0 million in the previous quarter.

The company took a particular proactive measure due to the COVID-19 pandemic. In the press release the company said:

Partial draw-down of credit facility as proactive measure: On March 30, 2020, the Company drew $150 million under its revolving credit facility as a proactive measure in light of the uncertainty surrounding the COVID-19 pandemic. The Company has no immediate need for the funds, however proceeds will be used for general corporate purposes, as required.

3 - Free cash flow was $12.8 million for the first quarter

The organic free cash flow is cash from operating activities minus CapEx.

EGO shows a profit of $31.8 million in yearly Free Cash Flow with $12.8 million for the first quarter of 2020.

It is excellent progress, and the chart above is showing a significant reversal in the past three quarters.

Gold production details for the 1Q'20

On April 9, 2020, the company announced the first-quarter gold production, and I have indicated below part of my precedent article about gold production which is remaining the same. Production for the first quarter of 2020 was 115,949 Au Oz, up 39.7% year over year, and down 2.5% sequentially. It is an excellent production level with a fourth full commercial quarter at Lamaque and impressive results at Kisladag and Olympias. Lamaque and Efemcukuru were down.

Note: Lamaque has been declared commercial at the end of the first quarter of 2019. Below is the production per mine compared from quarter to quarter.

Olympias ramp-up is improving significantly this quarter, and the five-year outlook seems promising.

Also, Lamaque was a bit disappointing as well. Production is going down gradually since 2Q'19 as we can see in the graph below:

The company released a recent update of the Proven and Probable gold reserves.

The Company's Proven and Probable gold Reserves totaled 16.4 million ounces as of September 30, 2019, compared to 16.9 million ounces as of September 30, 2018.

What is particularly interesting is that the company indicated a five-year operating outlook, which is very impressive. However, with the COVID-19, a few investors were wondering if the company could maintain guidance for 2020. George Burns said in the conference call:

At this time, we are maintaining guidance for 2020 of 520,000 ounces to 550,000 ounces of gold at an all-in sustaining cost of $850 to $950 per ounce sold. We will continue to evaluate capital allocation, operational performance, and monitor the impacts of COVID-19 on our business.

However, Eldorado's mines are operating now at 75% normal staffing levels, which is not a problem for production in the short term but could create some long-term impacts such on waste stripping, underground development, and drilling that are temporarily reduced.

Source: EGO

A critical driver for the next five years is, of course, the Kisladag mine in Turkey, with a production of 175K Oz extended to 2024 (mid-point).

Source: EGO Presentation

Conclusion And Technical Analysis

Eldorado Gold has climbed its way back to a compelling long-term gold miner. Lamaque and Kisladag are the trusted driving forces that are supporting the future of the company. Philip Yee has been an exceptional CFO and helped much during the recovery. However, CEO Georges Burns is still here, unfortunately.

Greece is now a backstage project and will probably happen in a few months and at a slow pace. It is not so important anymore.

I believe it is how we should look at the development of Skouries and other sites. High capital expenditures needed and an almost certainty that no other gold operators will be willing to partner with Eldorado Gold on any project in Greece due to an unreliable political system.

I regret that the company has not been able to sell Tocantinzinho and its properties in Romania. The cash is better, and with gold over $1,700 per ounce, it is quite strange that nothing has been done on this front yet?

Thus, I see EGO as a more reliable proxy for gold, and as long as gold is strong and momentum is going, it will support a fair valuation. Will the next step be a return to the dividend?

Technical Analysis (Short Term)

EGO experienced a steep drop starting early March to as low as about $4.75, which is defining now lower long-term support or a "buy flag." Since mid-March EGO is trading within an ascending channel pattern with resistance now at $10.85 and support at $9.10. It is quite early now, but the next pattern that could emerge, which is not indicated in the graph above, could be a descending triangle with resistance at $9.70 and support around $8.00.

In this case, I would take about half your winning position off the table, at between $9.50 and $10.25. Then, wait for another retracement at around $8.00, and start accumulating.

EGO is now a good proxy for gold, and it is essential to look at the gold price before deciding on any move. However, if the economy is slowly restarting, the gold price may start weakening.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

I trade short term EGO now but I may use the next drop to build again a long term position.

Comments

[baka_san]

Watched this for a long time'-Invest money in Greece, which will sap company resources, then watch the gov take it over through various means. Productive mines outside Greece, endless potential loss in country that has no rudder. Sometimes it is just time to sell an asset and move on where capital can become productive. Will hold what I have on off chance company will focus on money making ventures vice a wish and dream...could be wrong, maybe it will all work out, but promises to date haven't been met, and think they never will be.

[Fun Trading]

@baka_san

The beauty is that EGO doesn't need Greece to do quite well now. I think it is helping the company in the negotiations. However, Greece will always be Greece no matter what and even is Skouries is completed, I see a stream of issues, problems, disputes, and extra expenses...

Best regards,

[Joku_vaan]

Fun Trading: “Philip Yee has been an exceptional CFO and helped much during the recovery.”

To my knowledge, Philip Yee has not achieved anything exceptional for the company. The refinancing of the $600 million 6.125% senior notes due December 2020 was a disappointment, and IMO this is his most significant achievement to date. The refinancing included the new US$300 million 9.5% senior secured second lien notes due 2024 (offered at 98% of par).

On Sep 30, 2019 Philip Yee purchased in the public market 100000 EGO shares at about US$7.87. As a shareholder of EGO I like this kind of activity very much (and even see it as exceptional).

[Fun Trading]

@Joku_vaan

I think he put some financial discipline and tamed Georges Burns who is clueless. Refinancing of the debt and cash appropriation along with good accounting has been a support. If you compare with the precedent CFO it has been night and day.
When a job is well done it goes noticed but fundamental.

Best regards,

[zzw1999]

What’s your take on Greek parliament passing new law to relax environmental restrictions?
ca.finance.yahoo.com/...

[Fun Trading]

@zzw1999

Thank you for the link. However, the issue is not the law but the Greek government. Yes, it is much better now compared to the Syriza but you can see that the government is not really helping as it was promising.
Yes, they deliver a few permits but after many months of negotiation what have we accomplished? It is the same issue recurring over and over in Greece. It seems that they love shooting themselves in the foot, tries to heal, and shoot again.
Skouries and Eldorado Gold is a great source of revenue for Greece but on the one hand, they want it and on the other hand, they don't. Politic is a disease that has killed this "democratic" country. EGO lost a fortune trusting those guys and almost went bankrupt.

Best regards,

[zzw1999]

Thank you. So you still don’t believe Skouries problem is solved. Hopefully we will see something more definitive soon.

[Fun Trading]

@zzw1999

Thank you, yes I will believe it when I see it signed, agreed officially.

It has been so many months of waiting and no progress that I really wonder what is going on.
However, it is not a big deal for EGO now. Perhaps it is better that way because Skouries may need about $600 million in CapEx and I do not see a partner willing to go ahead with EGO.
Tough timing and high CapEx with a Greek government that you can only trust halfway, it is not simple and it may be a negative for EGO all considered.

[nyul747]

"if the economy is slowly restarting, the gold price may start weakening"
Gold was 1700 before the CV crisis, it is 1700 now. Why would it weaken? Considering the trillions of money printing and the fact that the economy is much worse now than it was in February, gold should be at 2000 at minimum.

[Fun Trading]

@nyul747

What is important is to look at all the spectrum of what could happen and set a Plan A and a Plan B. It is the way you do trade your way to success.
Gold is now bullish and it could go higher, I agree, but it could go lower as well. Also, you have seen it recently, gold can be high and gold miners can sell off all of a sudden.
You have to have an open mind in this market and assume that everything that can happen can happen, good or bad even if it appears illogical to you.

Best regards,

[Richard Clausen]

We have a few of the miners reporting earnings tomorrow. A significant amount of mines have been shut down due to the pandemic, but happened later in Q1. I suspect Q2 to be ugly for the miners and most everyone else. Brace for impact. I loaded up on miners in March and will get ready to trim positions once this hopium rally runs out of steam and physical gold has no further momentum pushing northward.
Always enjoy reading your articles.

[Fun Trading]

@Richard Clausen

Good thinking and I share it. I do not think we will have huge production in Q2 but the price of gold will compensate somehow. The issue is that gold miners are way overbought right now even including EGO and it means that if the gold momentum is not blowing the big bubble will start to deflate. It is just gravity and the market is well adapted to that. It is call cyclicity.
If you believe in EGO then just use the highs and take some profit off and keep the cash when the day will come to retrace. No need to sell off and no need to keep it to the sky.

Best regards,