Eldorado Gold: A Reasonable 1st Quarter

Eldorado Gold (EGO) produced its first quarter results and hosted its conference call. There was much greater detail (particularly in the conference call) which has enabled me to update the company’s cash flow and capital needs.

Please read my previous article on Eldorado gold here, as it will help with an understanding of the issues.

I have been positive on the company as its share price has fallen and remain positive after the latest results and conference call. If you like the company it is because it is presently trading at a price to book valuation of 20.6%. Profits are presently negligible and will remain that way for the next 2 years. However if the company can deliver on its projections for development, it should deliver annual production of over 600,000 ounces of gold in 2020 from the present projection of 310,000 ounces this year. This will transform the p&l and should be the catalyst for the shares to reach the average price to book for the gold sector of 120%. This would result in a price gain of 583% over 2-3 years. The market however has 2 concerns that have meant that the share price has been on a downward spiral,

1. Can the company fund the development of its projects without a capital raise or without leveraging the balance sheet so much that it raises liquidity and solvency concerns?

2. The management has repeatedly failed to deliver on guidance and a serious of technical and permitting problems have sapped the markets confidence leading to a severely depressed share price.

The latest first quarter release has shed some light on these 2 problems in a positive way.

Capital position

The conference call was much more professional than previous episodes with no guesses to questions by the management and a much more focused business plan. Using the updated information I can now update the 2018 cash flow.

Activity Cash flow (in ‘000) Available cash (in ‘000)
Start of 2018 485,000
Cash flow from operations (note 1) 95,170
Care & maintenance (Skouries) (3000)
Exploration expense (from the conference call) (25,000)
Cap ex (from the conference call) (202,000)
Other income (note 2) 10,000
Finance cost (note 3) (36,750)
TOTAL (161,580)
End of 2018 323,420

This cash figure is approximately $50m better than I projected 3 months ago. It is mainly due to reduced exploration expense and capital spending. This is good news. Management seems to be being more careful with their cash pile. I was also happier to see some forward guidance on cash flow. In the conference call it was stated that all capital expenditure for 2018 and 2019 would come from available cash without recourse to the $250m revolving credit facility. There will be no need for additional capital before 2020 and the company will still have a credit facility of $250m!

Notes

Note 1 – Using the company’s midpoint guidance of 310,000 ounces of gold at cash costs of $605. The company has only given guidance for cash costs for 2018 at $580-630 (midpoint of 605). As cash costs in 2017 of $509 led to AISC of $922, we can assume that AISC for 2018 will be 922+605-509=1018. Assuming an average gold price of $1325 for the year we get

310,000 x (1325-1018) = 95,170,000

Note 2 – Other income is primarily investment income on the $485,000,000. In 2017 it was just over $17m but has fallen to just over $3m in the first quarter. As capital is being used up this run rate will fall. I have estimated $10m for the year.

Note 3 – $600m of notes with an interest expense of 6.125 gives $36,750,000.

Achieving Targets

In the first quarter there were no hiccups with production coming in the predicted range and cash costs of $571 (below the budgeted level). It is only 1 quarter but it is a start. If the company can keep hitting its budgeted targets for the next 2 years it should be able to finance all of the present projects. This will then just leave refinancing the $600m of bonds that mature in December 2020. I would suggest that if Lamaque is operational and Kisladag near to completion, this should not cause the company any undue stress. It is important for all management teams to hit their guidance and particularly so for Eldorado Gold after the last year of problems. The first quarter of 2018 was a move in the right direction.

Conclusion

The first quarter was uneventful for the company on an operational basis. It was nothing special (but within guidance) which is what Eldorado Gold needs if it is to finance its various projects. The Greek Government ruling means that there will be no write down of assets in the foreseeable future, which removes a major worry. I expect that the shares will start building a base over the next month or so between 90c and $1. However the management have proposed a 1 for 5 share consolidation to meet the NASDAQ listing rules. What effect this has on the shares in the short term is difficult to predict. I think that the shares offer compelling value over the longer term. It is possible however that the market just continues to undervalue the company for some time yet as the 600,000 ounce gold production figure is not for another two years. Patience may well be required but the potential upside valuation may well surprise us all.

Disclaimer – This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.

Disclosure: I am/we are long EGO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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