Eldorado Gold Corp (EGO)

[JohnCM]

Eldorado Gold: Will Recent News Spark A Rally?

May 23, 2018 6:36 PM ET
Vladimir Zernov - Seeking Alpha

Summary

The Greek government might finally issue the necessary permits for Eldorado Gold.

The company will have to find a way to finance the completion of the Greek project.

Upside will come, especially if Eldorado Gold presents a viable game plan.

Shares of Eldorado Gold (EGO) have recently returned back above $1.00 following the news that Greece is aiming to resolve a dispute with the company regarding its plant that was supposed to process ore from mines Olympias and Skouries. I outlined my bullish thesis on Eldorado Gold back in February, and it's high time to update that thesis.

The Q1 report and the subsequent earnings call showed that Eldorado Gold planned to focus on two projects, Lamaque and Kisladag, while putting the troubled Skouries on hold. Skouries suffered from various delays and problems with permits, so even after the company won arbitration in Greece regarding the project, it did not change its mind.

The recent news shows that Greece might issue all the necessary permits in line with the arbitration ruling. In theory, this will give Eldorado Gold the opportunity to develop Skouries. However, the big problem is that the company does not have sufficient funds to develop three projects at once. Moreover, Kisladag project is not fully covered and Eldorado Gold will have to find a way to finance it. In my opinion, financing challenges are the main reason why Eldorado Gold shares trade at such a low valuation.

So, does the recent news change the big picture for Eldorado Gold? Yes and no. Once the company gets all the permits, the market might stop discounting Skouries completely, and Eldorado Gold's share price will rise. However, it does not appear as if the company will be able to finance the project on its own, as it will already have to deal with Kisladag financing and debt maturity extension.

The rational thing to do in the current environment is to either find a joint venture partner for Skouries - and develop the mine together with this joint venture partner - or sell the project. A joint venture makes more sense since Eldorado Gold is halfway through the project, so if the company is ready to allocate a roughly 50% stake in the project to a willing partner, it might not have to spend any more cash on its completion. If the permits are obtained, Eldorado Gold will have a theoretical opportunity to conduct such negotiations.

The news is definitely positive for Eldorado Gold, although we'll have to wait for actual moves from the Greek government as there have been many back-and-forth movements over the years of the project development. After this, the fundamental evaluation of the project will depend on Eldorado Gold's actions.

The company must find a way to finance the completion of the project (or to sell it), otherwise it's dead money. I'd expect that the stock market will react positively once the permits are obtained, and even more positively if Eldorado Gold presents a viable value extraction plan to investors.

The factor that limits short-term upside is the lack of short interest in the company's shares. Typically, shorts serve as a perfect fuel for upside in such situations, but a material short interest should be present for a short squeeze to develop. However, one could expect increased interest from value-oriented investors, as Eldorado Gold's fate and short-term price fluctuations do not depend on the fluctuations of the gold price.

To sum up: The news is positive and will bring upside. The extent of this upside depends on how fast the permits will be obtained and how fast the company will present a viable game plan to investors. I believe that the bullish thesis is slowly developing, and am maintaining my first longer-term target of $2.20-$2.40 for Eldorado Gold.