In a Jan. 31 research note, analyst Andrew Kaip reported BMO Capital Markets improved its outlook on Eldorado Gold Corp. (ELD:TSX; EGO:NYSE) after the producer announced it will halt mill construction at its Kisladag mine in Turkey.
To reflect its changed view, BMO increased its rating on Eldorado to Outperform and revised its target price on the midtier company to CA$6.50 per share from CA$5. Eldorado currently trades at around CA$5.31 per share.
The stock rallied on the news, and for good reason, Kaip wrote, "given the move has, in our view, financially deleveraged the company." Without that $520 million capex burden, Eldorado now can generate enough cash to pay off its $600 million in debt, due at the end of 2020.
Eldorado chose to shelve mill construction after it discovered it could produce 22 million tons of 1.1 grams per ton gold ore via heap leaching, "with gold recoveries in the 58% range," Kaip explained. However, taking this approach for a three-year period, he pointed out, would lower the economic potential of the Kisladag mill option, "which we now see as [having a] sub-10% internal rate of return at $1,200 per ounce gold based on the residual reserve."
The analyst added that upside remains because Eldorado no doubt will keep evaluating the potential for a positive scenario, based on grades and recovery, in which it adds more heap-leached material to the mine plan. Also, the company may, in the future, be able to "reconfigure the mill mine plan to resurrect value."
Kaip reviewed Eldorado's recently announced production and cost guidance for 2019 to 2021. The company projects production in 2019 to fall within 390,000–420,000 ounces (390–420 Koz), and this would include precommercial output of 10 Koz. In 2020, it would rise to 520–550 Koz then drop in 2021 to 350–380 Koz.
As for all-in sustaining cost guidance, it is estimated at $900–1,000 per ounce in 2019, dropping to $800–900 per ounce in 2020 and then going back up to $900–1,000 per ounce in 2021.
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Disclosures from BMO Capital Markets, Eldorado Gold, January 31, 2019
IMPORTANT DISCLOSURES
Analyst's Certification
I, Andrew Kaip, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.
Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Company Specific Disclosures
Disclosure 9B: BMO Capital Markets makes a market in Eldorado Gold in United States.
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