Eldorado Gold: Further Upside Ahead

Eldorado Gold: What To Expect In Q3

This is an earnings preview for Eldorado Gold (EGO), a mid-tier gold miner that has guided for 2020 gold production of between 520,000-555,000 ounces at $850 to $950/oz all-in sustaining costs. Eldorado is the owner of four producing gold mines, located in Canada, Turkey, and Greece, and several development projects in Romania and Brazil.

Since my last coverage on Sept. 7, shares of Eldorado Gold have outperformed the benchmark VanEck gold miners index (GDX), returning 22.65% over the past month compared to a 2.07% decline in the GDX.

Previous coverage: Eldorado Gold is Undervalued with Production Upside (9/7/20)

After several recent positive developments, I think shares have only become more attractive to investors.

Here’s a look at what to expect from Eldorado’s Q3 2020 earnings, which are set to be released on Thursday, Oct. 29, and other positive developments.

Q3 2020 Production Results

(Eldorado Gold’s production is up significantly compared to last year. Credit: Eldorado press release)

While Q3 production is essentially flat from last quarter, it is well above last year’s levels and I expect a really strong earnings.

Eldorado Gold reported preliminary Q3 2020 production of 136,672ozAu, a 35% rise over Q3 2019. Year-to-date production is up 41% to 390,404ozAu, compared to 276,376ozAu last year.

The biggest year-over-year gains came from its Kisladag and Olympias mines.

At Kisladag in Turkey, production rose 66% to 50,176ozAu, while at Olympias, output rose 75% to 15,182ozAu. Kisladag actually is performing as expected this year, but improvements are being made to increase capacity, which it will start to see in Q1 2021.

Olympias is seeing benefits of increased investments in mine development that have improved productivity compared to last year, and this is why production increased 75% year-over-year, according to the company.

The company’s Lamaque gold mine in Quebec had record production in Q3 due to a rise in tonnes mined per day, and underground development into higher grade ore. Lamaque produced 39,525ozAu in Q3, a 23% rise year-over-year.

Earnings Expectations

Last quarter, Eldorado reported some pretty strong results, with 137,782ozAu of gold production at $859/oz all-in sustaining costs.

With an average realized gold price of $1,726/oz, its margins were $867/oz and this led to cash flow of $100 million, free cash flow of $63.4 million, EBITDA of $131.8 million, and net earnings of $45.6 million, or $.27 per share.

For Q3, we already know that production will be down slightly from last quarter (by 1,000ozAu). However, we also know that its average realized gold price will be north of $1,900/oz, well above Q2’s figure of $1,726/oz.

If its AISC comes in at $850/oz, its margins per ounce will be in the $1,000-$1,050/oz range. Therefore, I’m expecting its cash flow, free cash flow, EBITDA and net earnings to be a bit higher compared to Q2 2020.

(Earnings estimates from 6 analysts covering Eldorado Gold. Source: E*Trade)

The consensus of 6 analysts covering the stock is EPS of $.34, with a low estimate of $.228 and a high estimate of $.39. I’m expecting EPS to meet or exceed $.34.

Finally, Eldorado ended last quarter with $440 million, and I think Eldorado’s cash position should exceed $500 million to end Q3 2020. It ended Q2 with approximately $380 million in total debt, however, it announced on Sept. 8 that it repaid $58.6 million of its senior secured notes, so debt is likely closer to $320 million now.

Most of its remaining debt doesn’t mature until 2024, so its balance sheet is looking healthy.

Eldorado’s Valuation

Eldorado continues to trade at a low valuation despite the recent run-up in its stock price. The mining sector as a whole is undervalued compared to the price of gold (GLD), but Eldorado is particularly cheap compared to peers. I initially compared its valuation to peers back in early September, and I have updated that valuation in the below table.

Miner P/E ratio EV/EBITDA P/CF (FWD)
EGO 12.47 6.59 5.25
AUY 21.74 7.70 8.78
IAG 16.34 3.72 5.12
AGI 25.05 12.0 10.79
SSRM 14.82 19.39 9.30
Median 21.56 10.75 9.30

(Eldorado’s valuation grade and underlying metrics, as of writing on 10/13/20. Credit: Seeking Alpha)

The stock continues to trade at a lower valuation compared to mid-tier mining peers such as IAMGOLD (IAG), Yamana Gold (AUY) and Alamos Gold (AGI).

Greece Approves Test Drilling

I think the recent news of Greece approving test drilling at Eldorado’s Mavres Petres deposit (part of the Stratoni silver-lead-zinc mine) is very bullish and bodes well for its other plans in Greece.

For some background, Eldorado has the permits for its Skouries project in Greece, which is currently on care and maintenance with construction about half complete.

Eldorado is in talks with Greece on a revised investment plan which would secure higher royalties from the miner’s development projects, including Skouries, and the miner is not moving forward with construction until the deal is reached.

Skouries is a gold-copper deposit that contains 3.8 million ounces of gold and 1.7 billion pounds of copper in reserves. The mine is estimated to produce 140,000 ounces of gold and 66.9 million pounds of copper annually at just $215/oz all-in sustaining cost, which would make this one of the lowest-cost mines in the world and a highly profitable operation.

Based on the feasibility study, Skouries carries a post-tax net present value of $925 million, using a conservative gold price of $1,300/oz and a copper price of $2.75/lb, and the value is actually closer to $2 billion using spot gold and copper prices (which is nearly its entire current market cap.) With gold and copper prices rising and Greece’s economy suffering from low unemployment (17%), I think it is in both parties’ interests to get the project moving forward, and I wouldn’t be surprised to see some positive news by year’s end.

Bottom line: Eldorado Is a Buy

I believe Eldorado Gold is a buy on any pullbacks ahead of its Q3 2020 earnings report. The stock is worth a buy based on its valuation, both from an earnings standpoint and the valuation of its future growth potential through its development projects – I feel the market is wrongly placing little to no value on its Skouries, Tocantinzinho, Perama Hill or Certej projects. Strong Q3 earnings and a potential agreement with Greece on the revised investment plan are catalysts for a re-rating.

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.