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Is Eldorado Gold a Buy?

Neha Chamaria, The Motley Fool

Investors in Eldorado Gold (NYSE: EGO) have long-awaited good news. Shares of the Canadian gold miner have, after all, shed 75% value in just the past three years, hugely lagging peers like Yamana Gold (NYSE: AUY), which has seen its shares drop around 18% during the period. As if Eldorado's key development projects in Greece running into regulatory hurdles wasn't enough, the gold miner found itself mired in further trouble when it suspended operations at its largest mine, Kisladag in Turkey, in early 2018 after a sharp dip in production.

It is therefore no surprise that Eldorado stock has shot up in recent weeks, piling on nearly 50% gains already this year, as of this writing, after the miner announced plans to restart Kisladag and offered encouraging production guidance for the next three years.

Is this the start of a much-awaited recovery in Eldorado Gold, signaling you buy the stock while it still trades below $5 in anticipation that Kisladag will help the miner start afresh?

Kisladag holds the key to Eldorado Gold's future

Kisladag is Eldorado Gold's flagship mine and one of its only four operating mines. Production from Kisladag, however, has declined steadily over the years. In fiscal 2014, for example, the mine produced 311,233 ounces of gold. Around the same time, Eldorado decided to defer expansion at Kisladag and invest in its projects in Greece instead, primarily the high-potential Olympias and Skouries mines.

A close-up view of gold bars.

Image source: Getty Images.

Nonetheless, Eldorado gave out a rosy production outlook for Kisladag through 2019. If things had turned out as planned, 2019 would've been a stellar year for Kisladag and Eldorado.

That was, however, not to be.

Gold Ounces Per Year 2015 2016 2017 2018 2019
Projected 230,000-245,000 235,000-250,000 255,000-270,000 310,000-325,000 375,000-390,000
Actual 281,280 211,161 171,358 172,009 145,000-165,000*

*Estimate production for 2019. Data source: Eldorado Gold financials.

Lower-than-expected gold recovery rates forced Eldorado to halt operations at Kisladag in early 2018. Management has since strived to get the mine up and running, even approving a deviation from heap leach method of gold recovery to milling, which would require an investment of nearly $520 million.

Given the backdrop, Eldorado's latest announcement to suspend the mill project and resume heap leaching and mining at Kisladag in coming weeks has come as a relief for investors.

Among other benefits, heap leaching requires "minimal" capital investment, which means Eldorado can put the money for the mill project to better use, particularly debt repayment. As of Sept. 30, 2018, Eldorado had long-term debt worth nearly $600 million.

Importantly, the debt's due for maturity in December 2020. Now Eldorado's existing cash flows fall considerably short to cover the debt -- it generated only $66 million in operating cash flow in 2018. Moreover, management didn't really specify where that $520 million would come from. So Eldorado will likely refinance the $600 million debt or may even issue shares to raise funds, which is something investors should watch out for. Potential sale of its developing mine in Brazil, Tocantinzinho, could help raise some money as well.

There's another reason why the market is seeing Eldorado in better light: The latest development at Kisladag comes at a time when another of the company's mines, Lamaque, which it acquired in July 2017 with Integra Gold, is set to start commercial production in Q1 2019.

Thanks to Kisladag and Lamaque, Eldorado now expects its gold production to jump more than 50% by 2020.

A table showing Eldorado Gold's production and cost outlook for 2019-2021.

Image source: Eldorado Gold.

While all of this sounds great, there are three risks investors who intend to bet on Eldorado Gold now should be aware of. 

Three reasons Eldorado Gold is a risky investment

To start, Eldorado is heavily reliant on Kisladag for growth, which itself sounds like a risky proposition for now. Moreover, production from Kisladag is expected to drop dramatically in 2021, per the miner's forecast. As Eldorado conducts further testwork to extend the life of the mine, the possibility of a mill project to boost production after 2021 can't be ruled out. Eldorado's financials need to be in top shape by then.

Second, Eldorado's outlook for all-in-sustaining cost (AISC) -- which is a comprehensive cost measure used in the gold industry and is a key determinant of a miner's profitability -- is at the higher end of the industry cost curve. Conversely, most gold peers, including Yamana Gold, have strived to cut costs lately, with Yamana even rapidly ramping up its low-cost Cerro Moro mine to boost margins. Fluctuations in gold prices, therefore, are likely to hit Eldorado harder.

Third, Eldorado's Skouries mine in Greece is stuck in a limbo, as development was suspended in November 2017 after permit delays. Eldorado filed an application for 750 million euros, or roughly $855 million, in damages last September, but there's been no update since. Meanwhile, Eldorado is spending money on the mine's care and maintenance, and will need at least two years to construct and commission the mine even after getting full permits. In short, Skouries remains a long-drawn battle.

The only reason Eldorado stock could head higher

It's imperative that Eldorado delivers on Kisladag now, so you might want to wait a couple of quarters to see how things are shaping up at the mine. Also, the upcoming election in Greece is a major event to keep an eye on. With the opposition leader declaring his intent to push Skouries forward if he wins the election, it could be a make-or-break moment for the project. That's the only potential catalyst that could drive Eldorado Gold shares any higher in the near term. For now, it's speculation at best. 

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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.