Eldorado Gold: Margins Up Sharply, But Annual Output Below Plan (NYSE:EGO)

The Q4 Earnings Season is well underway and one of the first companies to report its results was Eldorado Gold (NYSE:EGO). Operationally, the company had a solid quarter, but as noted in my previous update, the company would have its work cut out for it to meet guidance, given that it would need a record 150,000+ ounce quarter to meet its guidance mid-point. Since then, the stock has revised guidance lower by 2% to 485,000 ounces at the mid-point, but has also improved its cost guidance, targeting ~$1,200 all-in sustaining costs [AISC] which will be below the sector average. And while the drop in the guidance midpoint for output was disappointing, 2024 should be a much better year with Olympias optimized, Lamaque back on track, and Kisladag also optimized with the addition of the new North Heap Leach Pad and a fine ore agglomeration drum. Let’s take a closer look at the Q3 results below:

All figures are in United States Dollars unless otherwise noted.

Q3 Production & Sales

Eldorado Gold (“Eldorado”) released its Q3 results last week, reporting quarterly production of ~121,000 ounces of gold, a 2% increase from the year-ago period. This was helped by a sequential improvement out of Kisladag, which has seen a significant increase in tonnes stacked (~3.62 million tonnes) and better grades, and a much better quarter from Olympias where production hit a multi-year high at ~18,700 ounces. The result was a 13% increase in revenue despite a lower average realized gold price than its peers that have reported to date ($1,879/oz vs. ~$1,920/oz), and a significant increase in operating cash flow to $108.1 million. And with higher-grade stopes on deck at Lamaque in Q4 and Kisladag and Olympias optimized, we should see a strong finish to the year at these three assets so that Eldorado can sneak in at the lower end of its marginally downward revised FY2023 guidance (475,000 to 495,000 ounces vs. 475,000 ounces to 515,000 ounces previously).

Digging into the operations a little closer, Kisladag had a solid Q3, producing ~37,200 ounces at industry-leading AISC of $884/oz, an improvement from the $993/oz AISC last year. This improvement in costs has partially been attributed to a collapse in the Turkish Lira vs. the US Dollar (UUP) that has slid from 19.0 to 1.0 to 28.0 to 1.0 (USD/TRY), but also lower electricity and fuel costs in Turkiye. Moving to Lamaque, it was a decent quarter here given the disruptions in Q2 (lost shifts because of wildfires in Quebec), with ~43,800 ounces produced at $1,099/oz vs. ~42,500 ounces at $1,106/oz in the year-ago period. Looking at production, higher throughput helped to offset lower grades in the period (7.04 grams per tonne of gold vs. 7.32 grams per tonne of gold) with fewer working faces available. And similar to its Turkiye operations, Eldorado benefited from favorable FX with the weakness in the Canadian Dollar, helping it to deliver lower AISC despite elevated sustaining capital in the period.

On a positive note, we should see higher throughput and production in 2024 with up to 190,000 ounces produced and the company expects to move some of Ormaque’s inferred resources (839,000 ounces at 11.74 grams per tonne of gold) into reserves by year-end. Meanwhile, Kisladag continues to perform very well with the addition of higher-capacity grasshopper conveyors (improved stacking efficiency), a high-new HPGR circuit, and the benefit of the new North Heap Leach Pad. Hence, there’s certainly lots to be positive about these two assets, and the company will be getting a third solid asset added to its portfolio by late 2025 with Skouries (~140,000 ounces per annum at industry-leading AISC) remaining on schedule and budget for commercial production in 2026.

Finally, as for Olympias, the mine had an impressive quarter with ~18,800 ounces produced at $1,319/oz, a significant improvement from the ~16,100 ounces produced in the year-ago period at $2,070/oz. Eldorado noted in its prepared remarks that the mine is finally seeing benefits from the transition to bulk emulsion blasting and increased ventilation, and also higher productivity in the Flats where it’s able to mine larger stopes. As for costs, Eldorado saw a benefit from higher ounces sold, lower unit costs for some consumables and fewer sales subject to the 13% VAT on concentrate sales, in addition to lower sustaining capital spending ($4.7 million vs. $5.7 million). So, while the improvement in unit costs was partially due to being up against easy comparisons, it’s certainly nice to see this asset moving in the right direction, and with further gains on deck with it still operating well below its goal of 650,000 tonnes per annum (Q3 2023 annualized throughput rate of ~500,000 tonnes).

So, was there any bad news?

While the operational results were solid, Eldorado Gold did drop its guidance midpoint by ~2% from 495,000 ounces to 485,000 ounces, though this partially reflects the wildfires in Quebec which were obviously out of its control. And while Q4 will be the strongest of the year with 135,000+ ounces produced assuming no hiccups, I wouldn’t expect much of an improvement in costs vs. Q3 levels given that Eldorado has some catching up to do on sustaining capital which is sitting at ~66% of annual guidance with just one quarter to go (implying a back-end weighted spending schedule).

Costs & Margins

Moving over to costs and margins, Eldorado a solid quarter, benefiting from easy year-over-year comps, lower energy/fuel costs, improved productivity, and the benefit of a weaker Canadian Dollar and Turkish Lira. This was evidenced by Q3 AISC of $1,177/oz (down 7% year-over-year) and Q3 cash costs of $698/oz, which were down 13% year-over-year. The result of this significant cost decline plus a stronger gold price was that Eldorado saw a 64% improvement in margins to $702/oz (Q3 2022: $429/oz), placing its AISC margins above the industry average in the quarter. And given that it has lowered guidance slightly on AISC to $1,190/oz to $1,240/oz vs. $1,190/oz to $1,290/oz previously, Eldorado is now expected to enjoy a ~5% improvement in costs year-over-year during a period where many producers are struggling to even hold the line on costs on a year-over-year.

Valuation

Based on ~208 million fully diluted shares and a share price of US$11.00, Eldorado trades at a market cap of ~$2.29 billion and an enterprise value of ~$1.95 billion. This continues to leave Eldorado at a discount to mid-tier peers like Alamos Gold (AGI) and Lundin Gold (OTCQX:LUGDF). And while this discount may be justified from a free cash flow standpoint given that Eldorado is not generating free cash flow given the period of elevated spending at Skouries, it will be a cash flow machine in 2026 ($300+ million in annual free cash flow), suggesting that patient investors will be rewarded. Plus, what I believe to be very reasonable multiples of 6.0x FY2024 cash flow per share estimates and 0.90x P/NAV (8% discount rate on Olympias/Skouries) and a 35/65 weighting on P/CF vs. P/NAV, respectively, I see a fair value for the stock of US$13.90, which translates to a 25% upside from current levels.

Although this represents attractive upside from here, I am looking for a minimum 40% discount to fair value when buying smaller-cap cyclical stocks, and after applying this discount, EGO’s ideal buy zone comes in at US$8.30 or lower. And while there’s no guarantee that the stock gets back to these levels, I prefer to pay the right price or pass entirely. So, while EGO was nearing a low-risk buy zone in my previous update, I don’t see the relative being nearly as attractive here, especially following its significant outperformance vs. the GDX over the past few weeks. Hence, I remain neutral short-term, and continue to prefer what I believe to be more attractive reward/risk bets elsewhere in the market.

Summary

Eldorado Gold put together a solid Q3 with costs well below the industry average, and while Q4 will see some catch-up on sustaining capital, it should be offset by the strongest production quarter of the year at 135,000+ ounces, with a further dip in AISC next year because of more normalized levels of sustaining capital (equipment rebuilds, & tailings management related costs at Lamaque/Olympias). This is positive for Eldorado because it should gradually improve sentiment for the stock after a tough 2022 (13% miss on AISC mid-point), ahead of what will be a transformation from a margin standpoint in 2026 (full year of commercial production at Skouries). To summarize, I see Eldorado as one of the better positioned names given its path to industry-leading growth and margin expansion, and I would view any pullbacks below US$8.40 as buying opportunities.