Eldorado Gold: Key Takeaways From The Second Quarter 2018
Jul. 30, 2018 9:23 AM ET Seeking Alpha
Eldorado Gold released its 2Q'18 results on July 28. It was a good quarter with record revenues. However, Eldorado Gold posted a loss of $24.39 million, or $0.03 per share.
It is increasingly evident that the company will have to forget about commercializing the Skouries mine quickly under this unpopular Socialist Greek Government.
EGO is showing an ascending triangle pattern with a resistance line around $1.14-1.15 and support line at $1.05.
Skouries mine in Greece. Courtesy: Eldorado Gold
Investment Thesis
Eldorado Gold (EGO) is a mid-tier Canadian gold miner with several international operations mainly in Turkey, Greece, and Quebec.
We have to face it; it becomes increasingly evident that the company will have to forget about commercializing the Skouries mine quickly under this unpopular Socialist Greek Government that has been proven unreliable and untrustworthy.
Based on this observation, we will have to modify the way we trade EGO to maximize profit. We should see it as a marathon rather than a short distance run. It means that trading EGO will remain potentially the best strategy while keeping a limited long-term holding.
The Greek Minister of Energy is still refusing to release the necessary permits in spite of what the Greek Energy minister George Stathakis said on May 22, to a group of workers from Eldorado mine worried about losing their job. The April 4 decision of the arbitration panel, which ruled that Eldorado has not violated its contractual obligation (read my article here,) has done nothing to change this disturbing status quo. George Burns said in the conference call:
Unfortunately, we have no updates on the outstanding permits at Skouries in Greece. We have been in active and ongoing talks with the Greek government since the arbitration decision was issued in early April but have been disappointed by the government's failure to act on earlier assurances to address the Skouries permitting issue following the conclusion of the arbitration. We remain open to a continued dialog on the steps required to allow the Skouries development to continue, but we'll, if need be, take the necessary steps to protect our investments in Greece.
However, it is perhaps a positive element, after all, assuming that the leftist-led Syriza government will be voted out in about a year or less. The company has already more than one can chew with the Lamaque mine in Canada and Kisladag mill project in Turkey.
At Kisladag, Eldorado, Gold intends to build a new mill with an estimated project capital of $490 million (including $378 million for the mill, $112 million for waste stripping, and $55 million in contingency). I believe this amount can be reduced to $420 million, in my opinion. Paul Skayman said in the conference call:
On the Kisladag mill project. We are working with an engineering firm to progress the feasibility study, which is on track to be completed in Q3 this year. We've gone to tender and received bodes on major equipment and we also continue to examine efficiencies in the crushing circuit. Approximately 30% of our capital cost are in Turkish Lira, which means the currency exchange rate is working in our favor. Our pre-feasibility study outlined an average rate of 3.8TL to the U.S. dollar, versus the current rate of 4.7.
At Lamaque, the company intends to focus on the development of the Triangle deposit - one of the three currently identified deposits at Lamaque - and refurbishment of the previously producing Sigma mill. Estimated capital cost of ~$150 million of pre-commercial production costs, offset by ~$70-80 million in pre-commercial gold sales, for a net start-up capital of ~$100 million.
Then, it is easy to see why there is a real benefit of delaying Skouries project with an 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.
Jason Cho said in the conference call:
we are actively evaluating strategic and funding options and are engaged in discussions with various third parties. With year-to-date net change in cash is $55 million, a strong cash balance of $430 million versus $485 million at the end of 2017 plus access to $250 million in a non-drawing revolver. We have more than sufficient fundings for the remainder of this year at all of 2019.
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.
Presentation Snapshot
Eldorado Gold is producing gold mainly from two mines in Turkey (80,076 Au oz. 2Q'18) and now producing at Olympias II in Greece (15,895 Au Oz) while advancing the Lamaque mine in Canada.
Reminder: The company completed the sale of three mines in China in November 2016 and acquired Integra Gold on July 10, 2017 (Lamaque Project).
Eldorado Gold owns three projects in Greece: Skouries, Olympias, and Stratoni ("zinc"). Please read the company presentation published on July 27, 2018.
Quarterly production went significantly down due to the Chinese assets sale and slowing production at Kisladag, which is expected to produce about 40K to 50K oz in 2019.
The company is expecting to build a new mill at the site with the feasibility study on track to be completed in October 2018 and the final board decision.
The mill will support a 3.1 million ounce reserve with expected metallurgical recoveries of approximately 80% to produce an average of 270K ounces of gold per year over nine years. Please read the March 16, 2018, technical report for more information.
However, Kisladag will produce a total of 200k to 225k Au Oz from 2018 to 2020 before the new mill is completed. Good news this quarter is the higher production from Kisladag which is attributed to improved leach kinetics and triggered revised guidance indicated below.
Source: EGO Presentation
Olympias has been declared commercial on January 1, 2018, shows a significant production increase in 2018.
Lamaque in Quebec will be declared commercial in 1Q'19 (Estimated) with an estimated 117k oz. Increasing to about 135K oz. in 2020.
Georges Burns, the CEO, said in the 2Q'18 conference call:
I'm proud to be reporting an excellent quarter for Eldorado. Production exceeded expectations, costs were in line with budget, and our teams continue to make good progress at Lamaque and the Kisladag mill project. We also had some solid exploration success at Lamaque.
Eldorado Gold - Balance Sheet And Gold Production: The Raw Numbers
Eldorado Gold 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18
Total Revenues in $ Million 116.23 114.74 111.88 82.74 95.35 101.44 131.91 153.17
Net Income in $ Million 20.74 -32.55 3.83 11.22 -4.18 -20.81 8.72 -24.39
EBITDA $ Million 48.52 39.36 16.62 3.00 19.91 7.01 12.84 TBD
Profit margin % (0 if loss) 17.8% 0 3.4% 13.6% 0 0 6.6% 15.9%
EPS diluted in $/share 0.03 -0.05 0.01 0.02 -0.01 -0.03 0.01 -0.03
Operating Cash flow in $ Million 59.9 48.9 47.8 -27.7 -7.0 14.9 22.9 36.7
Capital Expenditure in $ Million 85,6 91,2 73,8 75,0 91,8 105.2 67.0 74.3
Free Cash Flow in $ Million -25,7 -42,3 -26,1 -102,8 -98,8 -90.3 -44.1 -37.6
Total Cash $ Million 403.8 911.5 687.8 530.2 545.0 484.5 463.8 433.5
Long term Debt in $ Million 591.0 591.6 591.8 592.7 593.2 593.8 594.3 594.9
Dividend per share in C$ 0,01 0,01 0,01 0,01 0 0 0 0
Shares outstanding (diluted) in Million 716.6 716.6 717.3 717.5 785.6 794.0 794.0 793.3
Eldorado Gold Production Au Oz 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18
Production gold Au Oz 117,782 103,144 75,172 63,692 70,053 84,054 89,374 99,105
AISC 890 880 791 846 925 1,104 878 934
Gold Price 1,335 1,211 1,222 1,262 1,290 1,280 1,333 1,287
Source: company filings and Morningstar/GuruFocus
Balance Sheet And Production Discussion
1 - Revenues
It was an excellent quarter regarding production and revenues. However, Eldorado Gold posted a loss of $24.39 million, or $0.03 per share, for the second quarter. Revenues were $153.17 million up 85.1% from a year ago and up 16.1% sequentially.
2 - Net debt
Total cash continues to decline but at a slower pace. Total cash stands now at $433.5 million, down from $530.2 million the same quarter last year after Eldorado Gold acquired Lamaque in Quebec. However, the company has still a very low net debt of $161.4 million.
Liquidity: The company has a strong financial position with $433.5 million in cash and $250 million available through undrawn credit facility at end of Q2.
It is apparent that Eldorado Gold will have to divest some non-core assets to finance both Lamaque and Kisladag mill. I guess that the company will probably sell Tocantinzhino and, eventually, Certej to reduce the need for equity financing, which is not popular and may further erode the stock price.
Jason Cho said in the conference call:
we are actively evaluating strategic and funding options and are engaged in discussions with various third parties. With year-to-date net change in cash is $55 million, a strong cash balance of $430 million versus $485 million at the end of 2017 plus access to $250 million in a non-drawing revolver. We have more than sufficient fundings for the remainder of this year at all of 2019.
3 - Free cash flow is negative due to CapEx requirements
Note: Free cash flow for 2Q'18 has been calculated by Fun Trading and is estimated while waiting for the Morningstar numbers.
EGO has minus $270.7 million in Free Cash Flow ("TTM"), which explains why the company stopped paying a dividend starting 3Q'17. Hopefully, with the ramp-up at Olympias and production at Lamaque in early 2019, the situation will improve significantly.
4 - Gold production details
Production for the fourth quarter was 99,105 Au oz, up 18.9% year over year and 6.3% sequentially.
Note: Olympias Phase II commissioning was completed, and commercial production was achieved on December 31, 2017.
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.
2018 Outlook And New Plans
Eldorado Gold revised its 2018 guidance upwards to 330k to 340k ounces of gold from previous guidance of 290k to 330k ounces. Cash cost is expected to remain in the previously disclosed range of $580 to $630 per ounce.
The company indicated the goal would be to get an annual gold production of 600K Au Oz by 2021.
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. As mentioned last quarter and consistent with what we've observed actually in Q2 for cash on balance sheet combined with internally generated capital fully supports the development of Lamaque, and provides ample runway to substantially advance construction at Kisladag, without drawing on the revolver.
Commentary
It was a good quarter overall and another boring conference call with no important issues discussed (Greek permits, TZ sales etc.) I have been disappointed by the lack of news regarding Skouries permits, but I am confident that Eldorado Gold is following a good expansion strategy by focusing on Lamaque and Kisladag mill and put Skouries on care and maintenance.
George Burns said in the conference call:
At our AGM, Eldorado received shareholder approval to amend the company's articles to allow for a share consolidation with the ratio of five for one. The board continues to evaluate the merits of a share consolidation taking into account the best interests of the company, its trading price and the requirements in the New York Stock Exchange. The board has till the end of this year to effect the share consolidation.
The issue of a reverse split is still ongoing, but it is not an imminent threat, in my opinion. As long as EGO remains compliant, the company will not implement a reverse split. We will have to monitor the 30-day moving average, which is now $1.07.
Technical Analysis
EGO is showing an ascending triangle pattern with a resistance line around $1.14-1.15 (sell recommendation at or above that level unless a definitive breakout is showing with strong volume) and a line support around $1.05 (Buy recommendation if support holds). I see a limited risk on the downside, but we could re-test 0.80 (I recommend a strong buy at this level) on any bad news.
Ascending triangle patterns are considered bullish formations in technical analysis, which means that we should expect a positive breakout midterm. If the line resistance at ~$1.15 is crossed with large volume (Skouries permits news for example), the next immediate resistance should be around $1.40-1.45 (Sell recommendation).
