Eldorado Gold Corp. (EGO, Financial) jumped 2.5% to 93 cents on the back of an arbitration ruling in favor of the Canadian miner.
Greek authorities made the ruling based on a technical study Eldorado submitted for the Madem Lakkos Metallurgical Plant in December 2014. The Greek authorities had alleged Hellas Gold S.A., a subsidiary of Eldorado Gold Corp. in Greece, of providing an incomplete document, breaking not only the transfer contract but also the environmental conditions of the project. The panel therefore rejected the motion filed by the Greek State.
The transfer contract refers to the agreement by which the ownership of the Kassandra assets passed to Hellas Gold. The Kassandra assets are located in the Greek region of Halkidiki and consist of a 95% ownership that Eldorado Gold holds in Olympias, Skouries and Stratoni through its Hellas Gold subsidiary.
ElDorado Gold CEO George Burn commented:
“We believe this decision provides a foundation to allow us to advance dialogue with the Greek government in order to define a mutually-agreeable and clear path forward for our Kassandra investments. We look to the Greek State to fulfil its obligations under the Transfer Contract including issuing the outstanding permits for the Skouries project. The full, efficient and responsible development of the Kassandra assets will benefit the Greek State and its citizens, the local communities, our shareholders and our teams of Greek employees.”
Eldorado Gold can finally move on with its projects in the Halkidiki region: It takes approximately two years before Eldorado Gold can complete construction of the mine at Skouries.
After the positive panel’s ruling, there is no more impediment to Hellas Gold in its decision to proceed with a project that, according to the updated technical document of March 29, outlines a 21.2% after tax internal rate of return and a $925 million Net Present Value (NPV). At Skouries, the company targets an average annual gold production of 140,000 ounces at an all-in sustaining cost of $215 per ounce sold and an average annual copper production of 66.9 million pounds.
The positive ruling will also unblock the Phase 3 of the Olympias projects. From that phase, Eldorado Gold expects to reach, in approximately 4 to 7 years’ time, a gold production ramp-up to something like 170,000 ounces per year. That also includes an additional 130,000 ounces of gold equivalent since the company also produces concentrates of lead-silver and zinc, which will be treated at the metallurgical plant in the adjacent Stratoni Valley. The company’s engineers are currently developing innovative designs for the new mill site that will rise up in the Stratoni Valley.
Even though the projects will start to deliver no earlier than in two to three years, the positive news is a catalyst to Eldorado Gold. As of today, the stock is trading cheaply and at a strong discount.
As you can see in the chart powered by GuruFocus, despite the jump on April 4, the gold stock is still trading at such low prices that we need to go back more than 14 years.
To restate the annual gold production to 600,000 ounces, Eldorado Gold will need to add approximately 330,000 ounces to the 2019 to 2020 levels. Over that span of time, Kisladag is expected to produce only 40,000 to 50,000 ounces from existing leach pad inventories.
To accomplish this target, the company must invest about $489.8 million at KiŠŸladaÄŸ mine in Turkey plus $689.2 million at Skouries mine. To bring Lamaque to an average yearly production of 117,000 ounces of saleable metal in 2019 over a seven-year period, Eldorado Gold must invest an initial capital of $99 million. Lamaque is expected to process 25,000 to 35,000 ounces of gold in 2018.
Many investors have already expressed concern about whether the company has enough financial means to develop and complete all the three projects at the same time. However, I do not think they should be worried. Burns said that the company has “no immediate needs for financing and will continue to prioritize its project development opportunities and prudently deploy the capital."
Burns’ comments make me think that Eldorado Gold will give priority to the most rewarding project which, at a 34.3% IRR based on a gold price of $1,300 per ounce, is Lamaque.
The Canadian project has also to be preferred for timing reasons. The project is characterized by an expected payback period of 3.7 years and an after tax NPV at 5% discount rate of approximately $205 million.
To complete the Ontarian project, Eldorado Gold has more than ample liquidity, which is approximately $735 million and consisting in $485 million of cash on hand and line of undrawn credit of about $250 million.
A debt of about $593.24 million will not be a problem to Eldorado Gold Corp. since the company can extend the maturity of the senior notes. That, scheduled for Dec. 15, 2020, can be prolonged through a corporate refinancing transaction. One of its peers, Iamgold Corp (IAG) did a similar transaction in 2017.
Eldorado Gold will easily be able to sustain the enhanced financial cost burden with the profitability of its operations. Those are just in line with the industry in terms of an Ebitda margin of 20%. In addition, an industry coverage of 2.47 is well above the threshold of 1.5. Investors usually use this to screen between companies.
Once Lamaque is online, the company, also helped by a supportive commodity, will find the necessary financial resources to continue with the other two projects of Skouries and Kisladag.
In addition, there is one more thing that is eluding investors and that will play as a short-term catalyst. If we carefully read the information that Eldorado Gold Corp. provides on its website on phase 2 of the Olympias project, the company states the following: “Phase 2 production is estimated to be approximately 72,000 ounces of gold per year plus approximately 55,000 ounces of gold equivalent.”
That is because, in addition to payable production of gold, the company will extract pyrite and arsenopyrite mineral (72,000 ounces). It also expects to produce concentrates of lead-silver and zinc. The volume of lead-silver and zinc concentrates is equal to a production of equivalent gold (about 54,000 ounces). It illustrated by the following calculations:
The company says that:
Payable production of gold: 68,000 to 76,000 oz
Payable production of silver: 985,00 to 1.45 million ounces
Payable production of lead: 11,000 to 16,000 tons
Payable production of zinc: 14,000 to 16,000 tons
Prices of the commodities in 2017:
One ounce of gold: $1,257.12
One ounce of silver: $17.0445
Lead Futures - (LEADc1): $93.026 average price per ton of lead negotiated
Zinc Futures - (MZNc1): $2,891.21 average price per metric ton
1 metric ton equals to approximately 35,274 ounces
Gold/Silver: 73.76 times
Gold/Lead: 476,182 times
Gold/Zinc: 15,331 times
That means that 985,00 to 1.45 million ounces of payable silver is equals to 13,354 to 19,658 ounces of gold equivalent or an average of 16,506 ounces of gold equivalent.
About 11,000 to 16,000 tons of payable lead is equals to 815 to 1,185 ounces of gold equivalent or an average of 1,000 ounces of gold equivalent.
About 14,000 to 16,000 tons of payable zinc is equals to 32,212 to 36,813 or an average of 34,513 ounces of gold equivalent.
Therefore, the volume of gold equivalent that Eldorado Gold Corp. expects to add to the 72,000 ounces of gold production is approximately 54,019 ounces.
At current valuations, Eldorado Gold Corp should draw the attention of value investors. Today, you can buy a stock in a gold mining company that has wisely decided to suspend ore mining at Kisladag before the mill feasibility is complete. For good reason: “The margin per ounce under a milling scenario is considerably better than heap leaching," Eldorado Gold Corp. reports.
(Disclosure: I have no positions in any stock mentioned in this article.)
