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Thursday, 05/24/2018 7:58:39 AM

Thursday, May 24, 2018 7:58:39 AM

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Eldorado Gold: Is There An End To This Greek Tunnel?

May 22, 2018 2:49 PM - Seeking Alpha

Today, we learn from Reuters that Greece aims to resolve a long-standing standoff with Canada's Eldorado Gold.

The news is very encouraging, and it signals that the Greek Energy minister George Stathakis is now ready to negotiate.

Assuming that the Greek impasse is resolved shortly, the company stock will climb quickly well above $2. I recommend accumulating EGO.

Skouries mine in Greece. Courtesy Eldorado Gold.

Investment Thesis

Eldorado Gold (EGO) is a mid-tier Canadian gold miner with several international operations. The company sought in vain to regain its footing after divesting its Chinese assets for nearly $1 billion and recently acquiring Integra Gold (with its flagship project called Lamaque in Quebec).

Unfortunately, the company has faced intense winds with a never-ending dispute with the new government of Greece and some additional technical issues in its major producing mine in Turkey called Kisladag. The latter is a low-grade, bulk-tonnage, open pit operation that has used heap leach for gold recovery and has been open since 2006.

Those interferences resulted in a catastrophic impact on the stock price in October 2017. Since then, EGO could not recover and languished just above $1 up until the 4Q'17 results when the stock tumbled another 12% to $0.80.

Since then, the stock has languished just below $1 for well over 30 days which forced the company to take steps to stay listed in the NYSE.

The company has been put to the vote on June 21, a proposition to implement a reverse split 1:5 because the company did not meet the $1 NYSE requirement. In its first-quarter 2018 results, Eldorado Gold announced:

New York Stock Exchange ("NYSE") regulations stipulate that listed issuers must maintain a minimum average closing share price of US$1.00 per share calculated over a period of 30 consecutive trading days. On April 18, 2018, Eldorado received notice from the NYSE that it no longer met this requirement.

Eldorado anticipates that it will request shareholder approval at its 2018 Annual and Special Meeting, to be held on June 21, 2018, to effect a share consolidation with a ratio of 5-for-1 in order to regain compliance with the NYSE's continued listing requirements. The proposed share consolidation will be subject to receipt of shareholder approval and all necessary regulatory approvals, including from the NYSE and the Toronto Stock Exchange.

As everyone knows a reverse split is considered negative for the stock price even if it doesn't affect the value of EGO in theory.

In the graph below, the 30-day moving average is 0.97 as of May 22, 2018, which means that a few days above $1 would be sufficient to regain compliance again and eliminate the need of a reverse split. This specific situation highlights the importance of the today's news.

The Greek Saga

1 - Arbitration proceeding initiated by the Greek government

I will not open the long and acrimonious dispute history between Eldorado Gold and the Greek Government; it would be too long. I will speak about the last episodes instead and will clarify the best I can what is going on.

Note: The Skouries mine has been placed in care & maintenance. Development CapEx for 2018 will be reduced to $20 million in 2018.

Eldorado Gold received on September 14, 2017, arbitration notice from the Greek government.

Formal notice from Greece's Ministry of Finance and Ministry of Environment and Energy (the "Ministries") initiating Greek domestic arbitration. This arbitration is pursuant to the provisions of the Contract between the Greek State and Hellas Gold and in it the Ministries have named its nominee to the three person arbitral panel.

The arbitration notice alleges that the Technical Study for the Madem Lakkos Metallurgical Plant for treating Olympias and Skouries concentrates in the Stratoni Valley, submitted in December 2014, is deficient and thereby is in violation of the Transfer Contract and the environmental terms of the project. The Company is highly confident that the subject Technical Study is robust and consistent with the Transfer Contract, the Business Plan and the approved environmental terms of the project.

In short, the problem is about the way Eldorado Gold intends to process its ore in its Madem Lakkos Metallurgical Plant. The process is called "flash smelting" pyrometallurgical technology, which is a technology developed by a Finnish company called Outotec.

People opposed to the project are arguing that the technology cannot be applied in Greece as the arsenic content is too high. Eldorado Gold replied that the method had been thoroughly tested and proven by the specialized Finnish company Outotec, of which, the Greek Council of State has repeatedly accepted the favorable opinion.

The Greek government has raised significant obstacles from the very beginning of this controversial project despite having been rebuffed many times by the High Court. It rejected technical studies, reviewed permits that have been already issued and delayed - by up to 31 months - the issuance of new licenses by many months.

The technical study for the construction of the metallurgy plant, which has been rejected last November by the Ministry of Environment [MoE] was submitted on December 22, 2014.

2 - The Panel's ruling denies the Greek State's motion in favor of Eldorado Gold

April 4, 2017, Eldorado Gold confirmed that the Arbitration Panel (the "Panel") in Greece had issued its ruling concerning the arbitration initiated by the Greek State.

The Panel's ruling rejects the Greek State's motion that the technical study for the Madem Lakkos metallurgy plant for treating Olympias and Skouries concentrates, as submitted by the Company's Greek subsidiary Hellas Gold S.A in December 2014, was in breach of the provisions of the Transfer Contract.

The Transfer Contract is the document dated December 12, 2003, whereby Hellas Gold originally acquired the Kassandra assets, comprised of Olympias, Skouries, and Stratoni, in the Halkidiki region of Greece and was ratified by Greek National Law No 3220/2004.

George Burns, Eldorado Gold's President, and CEO stated:

"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 fulfill its obligations under the Transfer Contract including issuing the outstanding permits for the Skouries project.

3 - Eldorado Gold updated the technical Report on March 29, 2018

To ease the concerns of the Greek government about the project, Eldorado Gold updated the Skouries Technical Report and filed it on March 29, 2018.

The updated design reflects some of the best available control technology, a dramatically reduced environmental footprint, and utilizes filtered dry stack tailings. Estimated capital cost of $689.2 million (including $87 million in contingency) to fully develop both the open pit and Phase I of the Skouries underground, generating an estimated after-tax project NPV $925 million at a 5% discount rate, an IRR of 21.2%, and a payback period of 3.4 years.

The company indicated the goal would be to get an annual gold production of 600K Au Oz by 2021.

These three technical reports for Lamaque, Kisladag and Skouries lay the foundation of our path forward and enable us to outline a strong near-term growth profile. By moving the Lamaque project into operation and constructing a mill at Kisladag, we expect to restore Eldorado Gold's production to over 600,000 ounces per year. And this is before factoring in any production from the Skouries project in Greece."

4 - Today, we learn from Reuters that Greece aims to resolve a long-standing standoff with Canada's Eldorado Gold

The article said that Greek Energy minister George Stathakis discussed the ruling with workers from Eldorado's Greek unit today. The energy ministry quoted Stathakis as saying without elaborating.

The main aim is to reach an agreement in the coming weeks within the spirit of the arbitration ruling,

The ministry did not specify what such an agreement will entail but said that the ruling meant that Greece had to make sure that Eldorado will produce pure gold, silver, and zinc in the country.

An energy ministry official said the arbitration panel ruled that Eldorado has not violated its contractual obligations so far. However, the government wanted the miner to undertake specific commitments, including a timetable for when it will submit pending reports on the metallurgy plant.

It is not the end of the tunnel yet, but we can see that the two sides are in the final phase of the negotiation, and hopefully, Eldorado Gold will be able to get all the permits required to resume work at Skouries which has been put on care & maintenance. The question is when, and the answer should be within weeks, in my opinion.


The news is very encouraging, and it signals that the Greek Energy minister George Stathakis is now ready to negotiate and release the permits that have been blocked for months forcing Eldorado to put the Skouries mine on care & maintenance. We have to be cautiously optimistic about what M. Stathakis is saying based on the past. I will celebrate only when the permits will be effectively granted and received by Eldorado Gold.

The stock is trading now just above $1, its cheapest level since 1998 which is making no sense. The fair value of the company is well over this insane market's valuation which can be explained if the Greek assets are discounted to zero.

Furthermore, the company is not threatened by bankruptcy, with a net debt of $131 million. The company also holds $463.8 million in cash, cash equivalents, and term deposits, and $250 million in undrawn lines of credit at March 31, 2018.

2017 Reserves

The company ended 2017 with proven and probable gold reserves of 392 million tonnes at 1.37 grams per tonne gold, containing 17.3 million ounces.

In 2018, Eldorado expects to produce 290-330k ounces of gold, including pre-commercial ounces from Lamaque. The forecast for cash costs is $580-630 per ounce.

One issue that the company will have to resolve very soon is how to finance the cost of the three main projects that are needed to achieve a production of 600K Oz by 2020. Especially, the new mill project in Kisladag Turkey.

CapEx is approximately $1.1 billion including Skouries. Lamaque requirements are not an issue and should be covered by the cash on hand and future revenues.

However, assuming that the Greek impasse is resolved shortly, the company stock will climb quickly above $2. I recommend accumulating EGO.

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