Eldorado Gold Corp. (EGO, Financial) skyrocketed 27.6% to $3.75 per share on Thursday following its decision to recommence mining and heap leaching at its Kisladag gold mine located in Turkey.
At the beginning of 2019 the company introduced a plan to substantially improve its heap leach recoveries. That is, the company will now be capable of recovering more precious metal from the leachate residing in the pond after percolation through the heap of the crushed mineral with cyanide solution.
This has allowed Eldorado Gold Corp. to arrest the development of a project to build a conventional mill at Kisladag that would have been able to produce 270,000 ounces every year from a 3.1 million-ounce gold deposit starting in 2021.
The result is that Eldorado Gold Corp. can save more than $500 million that will now be used elsewhere than the mill at Kisladag. Part of the total liquidity will be used to reduce its $601.5 million in debt. Further, the company can dedicate its total energies and resources to making its 2020 gold target of 520,000 to 550,000 ounces of gold output. The production target represents a hefty 70-75% growth from revised guidance the company issued in the third trimester of 2018.
Also, thanks to the contribution from the Lamaque mineral deposit in Canada, the company will meaningfully improve its output already in 2019. The miner is now targeting a gold production of 390,000 ounces to 420,000 ounces versus previous guidance of 300,000 ounces to 325,000 ounces.
A supportive commodity price will also help Eldorado Gold Corp. to increase sales, earnings and free cash flow.
There isn’t any doubt that there are more catalysts today than yesterday that may justify an investment in this gold producer. But, what value can be assigned to one share of Eldorado Gold Corp. if the bullion will average, let's say, between $1,300 and $1,350 an ounce in 2019?
Assuming that Eldorado Gold Corp. will hit 420,000 ounces of produced gold in 2019, one share may be worth around $3.55. The share price of $3.75 at close Thursday already represents a 6% premium to this appraisal and is above the 50- and 100-day simple moving average lines though still below the 200-day SMA line. Thus, it makes sense to take some profit off the table above $4.35 per share. This vision is corroborated by a 14-day Relative Strength Index of 74. The index is near overbought levels following a 43.2% jump in just one day of trading, and the share price may start to downtrend again soon, commodity permitting.
The share price will likely be influenced by the earnings announcement for the fourth quarter of 2018 because results will still be affected by reduced output from operating issues in Turkey. Compared to the same period of 2017, Eldorado Gold Corp. will almost certainly have realized a lower price from the sale of one ounce of gold. The yellow metal decreased 3.6% to $1,228.09 per troy ounce year-over-year. For sure, this will have impinged on results for the quarter. At that point, it may make sense to acquire shares of Eldorado Gold Corp.
The stock has a market capitalization of $594.34 million, a price-book ratio of 0.17 versus an industry median of 1.74 and an enterprise value-Ebitda ratio of 9.86 compared to an industry median of 9.3. These ratios also suggest that Eldorado Gold Corp. may be overpriced.
Further, Wall Street recommends holding and not buying the stock. Regarding the price target, there is instead a discrepancy between Yahoo Finance’s average of $1.98 and MarketWatch’s average of $6.15 per share.
Disclosure: I have no positions in any securities mentioned.
