Eldorado Gold: The Greek Dilemma And The Skourie Project Uncertain Future
Jan. 30, 2015 3:32 PM ET
Seeking Alpha
Eldorado gold stock is losing 20% today, after the negative comments made by Mr Panagiotis Lafazanis, the new Greek minister of the environment and Energy, about the Skourie project.
The Skourie project in Northern Greece is considered the flagship project of the company with projected construction completed by 2016.
The costly project has a $200 million capex for 2015 and could be in jeopardy if the new government is against it.
A quick presentation
Eldorado gold is a gold producer with operations around the world. EGO is operating six mines, and conduct six development projects, including three projects in Greece:
Olympias
Skouries
Perama Hill
At the recent conference call following the 2014 production results, the company indicated that the development work at Skouries, was advancing as scheduled and the company expected to invest about $200 million in 2015, to complete the construction by 2016.
Significant advancement of construction at Skouries: completion of the mill foundations; installation of the SAG and ball mills; and construction of the tailings dam began during the fourth quarter.
The work at Stratoni-Olympia is advancing as well and commissioning was scheduled around mid-2016.
Olympia mine is expected to produce about 20K Oz to 25K Oz in 2015 (lead/silver concentrate, zinc concentrates and a gold concentrates,) from Phase I tailings re-processing. Capital spending for 2015 is around $110 million.
Paul Wright, Chief Executive Officer of Eldorado said recently:
We are driving our development projects forward and I would like to highlight the significant progress made during 2014 at Skouries. The mill foundations and the installation of the SAG and regrind mills were completed and installation of the ball mill will be completed in the second quarter. We look forward to advancing Skouries throughout 2015, along with commencing construction on the Olympias Phase II Project. These are two mines of exceptional quality, which will add significantly to Eldorado's growth profile in 2017.
These two projects, are well advanced, and are the main driver for the future growth of the company starting 2017. A total of $310 million in capital expenditure has been scheduled for 2015, and both projects should be in production by 2017.
On January 20, 2015, EGO released the 2015 production guidance, and the street was disappointed with the production numbers. Production of gold was forecasted below 2014 production, between 640K Oz to 700K Oz at an AISC of $960/Oz-$995/Oz, compared to about 790K Oz in 2014 at a low AISC of $780/Oz.
Comparing the different mines production, it seems that the Kisladag mine is to be blamed mostly for the drop, with a production notably lower than 2014.
Today, we learn that:
Greece's new government says it is strongly opposed to a planned gold mine to be operated by Eldorado Gold, that is among the biggest foreign investment projects in the country, the energy minister tells Reuters.
The stock lost another 20% on top of 25% a few days ago, when the company released guidance for 2015. This is a huge haircut in few days.
Commentary:
The news from Reuters has dealt a strong blow to the company's stock, which considers the Skourie project in Northern Greece as its flagship project, and a potential for a needed production growth in 2017. In 2012, EGO promised to invest $1 billion in the mine in five years, and has scheduled to spend $200 million in 2015, alone.
This mine site was very controversial from the get-go; and has been unpopular among the local population for many years. Locals protested violently in the past, to preserve the beautiful Halkidiki peninsula landscape of beaches and forest, which are surrounding the project.
As we all know, Greece last week elected a new left-wing government.
Mr. Panagiotis Lafazanis, the new State minister (Environment and Energy) of the ruling Syriza party, talked about the Skourie project, in an interview with Reuters:
We are absolutely against it and we will examine our next moves on it
The comments by Mr. Panagiotis Lafazanis, were unfortunately expected. These comments came at a no-surprise, and totally in-line with the campaign pledges.
Of course, the minister declined to reveal if the government would try to block the Skourie project, from being completed in 2016.
The Skourie project will represent a "test" for this new government, and it is the last word that Eldorado gold wants to hear after spending so much cash in the future mine.
The question is whether or not EGO will be able to complete the mine as scheduled or even at all? This uncertainty is very damaging for the company stock because production will be going down in 2017 without Greece.
EGO already is forecasting a production down 15% in 2015 compared to 2014, and this situation may reduce significantly expectation for 2016 and 2017?
It is very early to say anything for certain, right now, however, the risk is non-negligible, which is why the stock lost 20% today.
Greece is another politically unstable Country, and gold miners have learned to be suspicious of the negative effect of some unreasonable politicians caught between a hard place and a rock. I can write here a long list of Canadian and US companies that have suffered greatly from this unilaterally changes dictated by nonsense.
Depending on what will be decided for Skourie, EGO is clearly either greatly undervalued or still fairly highly valued?
If the new government of Greece cannot afford to cancel the project for economical reasons, then EGO will recover quickly. However, even at this price the risk of a total impasse or unwarranted delays in the negotiations, can put more downside pressures on the stock?
I believe it is prudent to HOLD now, until this issue has been solved.
