Eldorado Gold Poised for Rally

Investors see Eldorado Gold Corp. (EGO, Financial) as a cheap gold stock in terms of price-to-book value when compared to its peers and even being undervalued by the stock market when its balance sheet is under scrutiny and its pipeline of growth projects is taken into account.

Recently Credit Suisse downgraded Eldorado from outperform to neutral, citing headwinds in Turkey where the miner has the majority of its production outside Greece.

Eldorado’s operating gold mines in Turkey include Kisladag where 52,376 ounces of gold were produced in the first quarter at cash operating costs of $536 per ounce, and Efemcukuru where 27,516 ouncess of gold were produced at cash operating costs of $478 per ounce.

Credit Suisse cut the target price from $7.00 to $5.25. After the attempted military coup in mid-July in Turkey, the share price fell by 15%, and the state of emergency is expected to last about three months, creating geopolitical headwinds that will likely lessen a re-rating of the stock on the basis of the following potential upcoming positive catalysts seen and, in some cases, desired by the traders:

1. The buyback program. On June 7, Eldorado Gold announced the renewal of its normal course issuer bid, pursuant to which Eldorado may purchase up to 2,081,168 of its common shares representing approximately 0.30% of its total shares outstanding. The program is effective until June 12, 2017.
2. The payment of dividends even though analysts covering the company expect a decrease of 65% for the upcoming fiscal year. The consensus for 2017 is 1.2 cents. In 2015, Eldorado Gold Corp reported a dividend of 2 cents.

Eldorado will be able to fund the buyback program and can increase the dividend with the proceeds that will come from the sale of interests in the White Mountain and Tanjianshan mines and the Eastern Dragon development project for $600 million in cash.

Furthermore, additional flexibility will be provided to Eldorado with the renewal of the revolving credit facility that has been extended to June 13, 2020. It will increase the principle amount to $350 million.

The sale of the company’s asset in China will also bring an improvement in the company’s risk profile and provide Eldorado with plenty of cash to be invested in Greece, at Skouries and Olympia, and in the acquisition of new core assets as the gold price moves higher.

Currently Eldorado stock is cheap and the state of emergency in Turkey will likely plunge the stock further. Then, it will be wise to start adding some shares to the portfolio, considering the potential of the catalysts I have highlighted.

On July 28, after the market closes, Eldorado Gold Corporation will release its second-quarter financial results. For the second quarter, analysts’ consensus on EPS and revenue are 1 cent (high: 2 cents; low: -2 cents) and $195.54 million (high: $202.73; low: $183.25 million).

Disclosure: I have no positions in any stocks mentioned in this article.

Start a free seven-day trial of Premium Membership to GuruFocus.