Eldorado Gold: Weakening Gold Price Not Helping (NYSE:EGO)

Part I – Introduction

The Vancouver-based Eldorado Gold (NYSE:EGO) released its preliminary production results for the third quarter of 2022 on October 12, 2022.

Note: This article is an update of my article published on August 18, 2022. I have followed EGO on Seeking Alpha since January 2015.

1 – Production Snapshot and 2022 guidance

1.1 – 3Q22 decent production

EGO delivered another decent gold production this quarter. Gold production came in at 118,790 Oz, down slightly from 125,459 ounces produced in 3Q21 and up from 113,462 Oz delivered the preceding quarter.

Kisladag production increased significantly, and Olympias continues to be strong, as shown below.

1.2 – Eldorado Gold maintains full-year consolidated production guidance of 460K to 490K ounces.

Eldorado remains on track to achieve the low end of consolidated full-year guidance for 2022 of 460K ounces as operating trends continue to improve and sequential quarterly improvements in production are realized.

Cash operating cost is expected to be $640 to $690 per ounce, and the average all-in-sustaining costs (“AISC”) will be $1,075 to $1,175 per ounce.

2 – Investment Thesis

The investment thesis continues to be a challenge. The stock dropped even more than its peers due to management’s lack of decisive actions. However, on September 7, 2022, Eldorado finally secured €680 million for the Skouries gold project in Greece.

…is pleased to announce that it has entered into a mandate letter (“Mandate Letter”) with Greek banks for a credit committee approved €680 million project finance facility for the development of the Skouries Project in Northern Greece (“Skouries” or the “Project”).

CEO George Burns said:

We remain confident in the Feasibility Study capital cost estimate of US$845 million, and with the project finance facility in place, the Company has the balance sheet capacity to fund the remaining capital cost for completion of the Project. We also continue to evaluate opportunities for complementary sources of financing. A final decision to re-start construction remains subject to Board approval, which we expect to seek in the second half of 2022.

One issue is that recent inflationary pressures will probably increase capital cost estimate by over 10%, which may complicate the overall financing. Hence, waiting for the final decision and a definitive financing package is prudent. Furthermore, the gold price is now weakening and closing at $1,630 per ounce today.

The Skouries project is a gold-copper porphyry deposit located within the Halkidiki Peninsula of Northern Greece. The life of the mine is 20 years, and the project is expected to produce an aggregate of 140K oz of gold and 67 million pounds of copper per annum.

It is an excellent time to take advantage of the low stock price and start a gradually long-term accumulation. It must be incremented by short-term trading using the LIFO method to turn this process worthwhile. The solution is to trade EGO short-term LIFO using at least 50% of your entire position while keeping a core long-term.

This two-level strategy has succeeded in my marketplace, “The Gold And Oil Corner,” and I believe it is the safer way to play EGO. However, only US investors can use LIFO. Please read my note at the end of this article.

3 – Stock Performance

The stock has underperformed the VanEck Vectors Gold Miners ETF (GDX) and Newmont Corp. (NEM) and is now down 40% on a one-year basis.

Part II – Gold Production Details For 3Q22

On October 12, 2022, the company announced the initial gold production for the third quarter of 2022.

The third quarter of 2021 production came in at 118,790 Au Oz, down 5.3% year-over-year and up 4.7% sequentially.

1 – Olympias Mine

Olympias had steady production and solid grade control, evidence of the progressive transformation in action. The company said that other transformation initiatives continue at pace as the mine ramps up productivity. However, full-year 2022 production at Olympias is expected to be lower than planned.

Production came in at 16,122 ounces compared to 15,779 ounces produced in 2Q22 and 13,745 ounces in 3Q21.

2 – Lamaque Mine

At Lamaque, third-quarter production was slightly below plan due to lower throughput. Underground development of high-grade stopes progressed well during the quarter and should help output in 4Q22.

Production came in at 42,454 ounces, up from 37,369 ounces in 3Q21 and down 9.5% sequentially. It was a slight disappointment here.

3 – Kisladag Mine

Third-quarter gold production at Kisladag increased by 27% and 35% over the first and second quarter, respectively. However, production was still well below the 3Q21.

The sequential increase in gold production was due to the rise in tonnes placed on the pad during the second quarter.

The on-belt agglomeration continues to perform as expected. As part of the North heap leach pad project, larger conveyors will be installed on schedule in the fourth quarter, further improving materials handling capabilities in the belt agglomeration circuit and throughput rates.

Thus, Eldorado expects production at Kisladag to be weighted to the year’s second half.

Production came in at 37,741 ounces, down from 51,040 ounces in 3Q21 and 297,973 ounces produced in 2Q22.

4 – Efemcukuru Mine

Production was in line with expectations. Gold production was 22,473 ounces compared to 23,305 ounces in the same quarter last year.

Gold production, throughput, and average gold grade aligned with expectations.

5 – Commentary about the weakening of the Turkey Lira

We should expect increased costs due to the weakening of the Lira.

The Company’s profits from mining operations in Turkey are taxed at the enacted rate and the resulting current income tax expense can be further increased or reduced by other items. In the third quarter, the Company expects the Turkish current income tax expense on mining profits, at an enacted rate of 22%, to be further increased up to $2 million. The expected increase is primarily related to the weakening of the Lira in the quarter and the resulting generation of taxable unrealized foreign exchange gains, partly offset by reductions related to Lira deposits and the investment tax credit relating to Kisladag.

Technical Analysis And Commentary

EGO forms an ascending channel pattern with resistance at $7 and support at $5.50. Ascending channels are considered bullish, but these patterns often form within longer-term downtrends as continuation patterns, which may be the case here.

The trading strategy I suggest is to sell about 50% between $6.9 and $7.1 (trading LIFO). Conversely, I recommend accumulating on any weakness at or below $6.0 (50MA) with possible lower support at $4.75, depending on the Fed’s November action.

Watch gold like a hawk.

Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States by Generally Accepted Accounting Principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stocks, one for the long term and one for short-term trading.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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