Eldorado Gold Corp. (EGO, Financial) (TSX:ELD, Financial) has informed the market on Thursday that its ordinary stock is expected to start trading on a post 5-to-1 consolidated basis at the opening of trading next week Monday, Dec. 31.
Following the reverse stock split, Eldorado will have 158,801,722 shares outstanding.
The Canadian gold and base metals producer decided to reduce the volume of its shares outstanding because after a tumble to record low levels, the share price was consistently trading below the minimum bid price required by the New York Stock Exchange. The share price declined as a market response to the company’s decision to sharply revise its annual production downwards due to operating issues in Turkey.
Eldorado Gold Corp. remains, however, an important gold and base metals producer player in the worldwide mining industry, and investors should consider allocating to its common stock but not before the market has completely digested the reverse stock split. This is because the market usually doesn’t positively welcome this kind of corporate action, and the share price may fall soon after the share consolidation is completed. The stock was trading around 59 cents per share at close Thursday. After the reverse stock split, it may trade around $2.95 per share.
Which share price value investors should, therefore, consider as an entry point? The answer is not more than $2 per ordinary share traded after reverse stock split, for several reasons.
From total gold reserves of 16.9 million ounces, the company will derive its production of 345,000 to 350,000 ounces for full year 2018 thanks to the contribution of the KıŠŸladaÄŸ and Efemcukuru mines in Turkey and the Olympias mine in Greece.
This means that one ordinary share of Eldorado Gold Corp. resulting from the reverse stock split should be worth about $3.80 in terms of annual volume of gold produced, considering a long-term gold price of $1,300 per ounce. The appraisal also considers 117,000 ounces of annual volume of gold produced at the Lamaque mine in Canada starting next year.
Since value investors like to discount the figure to increase the likelihood that they are getting a bargain, a price of about $2 per ordinary share of Eldorado Corp. post-reverse stock split should represent a fair valuation.
From that entry point, investors then will need some catalysts to have their investment appreciate over time. Besides the Lamaque project in Canada, Eldorado Gold Corp. is advancing the mill project at KıŠŸladaÄŸ in Turkey to produce 270,000 ounces of gold every year over a mine life of nine years starting in the first half of 2021. The increased output will be about 65% higher than the production guided for the full current year.
The company has budgeted in approximately $520 million the total amount of funds needed for the building of a conventional carbon in the pulp mill at KıŠŸladaÄŸ that will sustain a 3.1 million ounces reserve with expected metallurgical recovery rates of about 80%.
Eldorado Gold will support the advancement of KıŠŸladaÄŸ with $635 million in reported total liquidity at the end of the third quarter of 2018 and with a yearly operating cash flow of about $100 million, commodity permitting.
The total liquidity appears to be just enough to cover the company’s growth plan.
Further, GuruFocus is rating the financial strength of Eldorado Gold’s balance sheet with a score of 5 out of 10, so the company is moderately prepared in case of a recession that clients of Goldman Sachs fear may arrive already in 2020. The KıŠŸladaÄŸ mill development project is expected to be delivered a year later, so Eldorado Gold represents a high-risk investment.
The stock has a recommendation rating of 3 out of 5, which means hold and not buy. But the average target price of $9.15 per share after reverse stock split represents a 210% growth to reach within the next 52 weeks. Such increase will materialize if the commodity averages abundantly above $1,300 an ounce in 2019.
Two additional interest rate hikes from the U.S. central bank and the beginning of a new trade war between the U.S. and China may create some upside pressure on gold in 2019. However, it is unclear whether those factors will be enough to catapult gold well beyond $1,300 an ounce next year.
There is a chance that the average price will really pass the $1,350 resistance level test in 2019. In that case, it may make sense to buy Eldorado Gold in 2019 but at no more than $2 per share.
Disclosure: I have no positions in any stock mentioned.
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