The underperformance seen by Eldorado Gold Corp. (EGO, Financial) versus the VanEck Vectors Gold Miners (GDX, Financial) on the New York Stock Exchange year to date, 35% versus 126%, was not justified given the fact that the miner is well positioned to fund its “highly prospective” organic growth opportunities, Goldman Sachs analyst Andrew Quail said.
Goldman Sachs upgraded Eldorado from neutral to buy while raising the price target from $4.40 to $5.00.
Quail expects growth projects to drive Eldorado’s adjusted free cash flow improvement of 60% by the end of 2018 and the company to reinstate its dividend in early 2017.
What worsened Eldorado’s performance on the stock market is the existence of an uncertain situation in Turkey (where the company has two operating gold mines) as a result of the attempted military coup of mid-July for which the Turkish Parliament approved the state of emergency.
As a matter of fact since mid-July Eldorado’s share price fell by 14% while GDX increased 4%.
Following a seasonal decline in the gold price (it went down 4% in less than three weeks from July 6 to July 25), other gold stocks have seen their share prices fall – Yamana Gold (AUY, Financial) -3.4% and Kinross Gold (KGC, Financial) -2.22% – but there isn’t any doubt that the failure of the attempted military coup mid-July in Turkey where Eldorado has two operating gold mines (Kisladag with 49,924 ounces of gold produced in the second quarter at cash operating costs of $479 per ounce, and Efemcukuru with 23,406 ounces of gold produced in the second quarter at cash operating costs of $509 per ounce) had a negative impact on the share price of this gold stock.
The seasonal decline in the gold price slowed down other gold stocks’ increases in the stock market: Barrick Gold (ABX, Financial) gained 1.3%, Iamgold Corp. (IAG, Financial) 6.5% and Agnico Eagle Mines (AEM, Financial) 4.5%.
It is also true that during the first 6½ months of the year, Eldorado increased less than its peers on the New York Stock Exchange: 65% versus Yamana's 216%, Barrick Gold's 191%, Iamgold's 237%, Agnico's 113% and Kinross' 197%.
But as the development of projects in Greece will add more clarity to Eldorado’s growth pipeline, the stock should start to uptrend again.Â
The expected close in the third quarter of the sale of its Chinese mining properties – specifically the Jinfeng, White Mountain and Tanjianshan mines, as well as the Eastern Dragon project – will bring an improvement in the company’s risk profile, provide Eldorado with plenty of cash (approximately $900 million) and fund the organic growth and should lower costs that are reflected in the new EBITDA estimates which have been raised for 2016, 2017 and 2018.
Its Enterprise Value/EBITDA is 13.06 and price-book (P/B) is 0.85.
Disclosure: I have no positions in any stock mentioned in this article.
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