Eldorado threatens to suspend investments in Greece

Eldorado Gold (TSX: ELD; NYSE: EGO) will suspend all investment at its operating mines, development projects and exploration assets in Greece due to chronic delays in permits and licences that have negatively impacted the company’s project schedules and costs.

President and CEO George Burns said the delay in issuing routine permits and licences for the construction and development of its Skouries and Olympias development projects; the lack of approval for its Perama Hill environmental impact assessment, which has been outstanding for the last three years; and the government’s intention to launch arbitration proceedings against Eldorado’s Greek subsidiary, without giving any explanation why, has pushed it to the brink.

The suspension will take effect on Sept. 22 and will include the company’s underground Stratoni silver-lead-zinc mine, which operates on the Halkidiki peninsula in northern Greece. The company anticipates it will have to spend $30 million initially to prepare for care and maintenance (C&M) activities across its Greek assets, after which sustaining C&M expenses should run at $25 million a year.

“Please know that this decision is not one we have taken lightly and not one I imagined having to take in the first five months of my tenure as president and CEO of Eldorado Gold, but unfortunately, since we were last in this position back in January 2016, there has been little change to the Tsipras government’s attitude towards our significant investment,” Burns told analysts and investors on conference call from Athens.

“I don’t think I need to remind any of you just how poorly our share price has performed as a result of the constant delays and public statements by certain members of the Greek government over the past two years,” he said. “It is extremely unfortunate, not to mention completely perplexing, to find ourselves at this impasse, particularly when Eldorado Gold has been busy creating jobs, paying taxes, generating export revenues and contributing to Greece’s long-term economic growth.”

Burns, who joined Eldorado Gold on Feb. 1 and assumed the role of CEO at the end of April, after holding senior positions at both Goldcorp (TSX: G; NYSE: GG) and Centerra Gold (TSX: CG), didn’t mince words.

“Prime Minister Tsipras repeatedly assures the capital markets that Greece is open for business … Tsipras was saying to potential French investors in Athens: ‘Invest in Greece, you won’t regret it.’ But how can I say this is the case, when the government neither engages constructively with us, or actively supports our investments.”

Burns continued that investors like Eldorado Gold need clarity of regulation and a supportive government to build an industry.

“The fact is, clear and sound regulation helps us do our jobs,” he explained. “Approvals must not be held hostage to political posturing or other agendas put forward by a vocal minority,” he said. “I urge the Greek government to rely on the policies, procedures and laws in place to expedite the approvals needed for investment projects.”

The most immediate outstanding permits that are required and to which the company is “legally entitled and are overdue” include the paste plant and operating permit at Olympias, and an electromechanical installation permit for the mill at Skouries. “Should we not receive these permits, we will be suspending our investment and moving into full care and maintenance mode.”

In a press conference in Athens, Burns noted that the international marketplace views Eldorado’s investment as a “litmus test for foreign investment in the country.”

The main adit at the Skouries project in Greece. Credit: Eldorado Gold.

“In addition to the nearly US$2 billion we paid to acquire the assets in 2012, Eldorado has since invested over US$1 billion in developing the Skouries and Olympias assets,” he said. “This figure could be double if we have the support and cooperation of the Greek government.”

Eldorado employs 2,400 employees, contractors and suppliers in Greece.

Some analysts applauded the move.

“This is a decision that Eldorado should have made a long time ago and we fully support it, as spending money on projects where you have no certainty of timing on permits or first production makes no economic sense,” Kerry Smith of Haywood Securities said in a client note.

“While there is still time to remedy this situation, we doubt a government that has dragged its feet for this long will now approve pending permits, or be quick to remedy the situation. However, this decision stops the spending until clarity is given, and probably the only voice the Greek government might listen to would be the ‘pot-banging’ by the soon-to-be-unemployed workers should they get more vocal, or the Greek Supreme Court, which could force the government to actually file the arbitration.”

Smith estimates that Eldorado’s Greek assets account for about $2.9 billion of the company’s $5.1-billion valuation and calculates the book value for the Greek assets is US$2.3 billion, or 57%.

Eldorado Gold has three nearby assets on northern Greece’s Halkidiki Peninsula: the Stratoni silver-lead-zinc mine; the Skouries gold-copper project; and the Olympias gold-silver-lead-zinc project. Credit: Eldorado Gold.

In a question-and-answer discussion with analysts on the conference call, Burns confirmed that Eldorado still doesn’t know what the arbitration is about and says there has been no formal notification — just statements by the Ministry of Energy and Environment that they will start the process shortly.

“We’re trying to open the door with the government to work through these issues,” Burns said. “We definitely need the permits in order to continue to invest — it’s a definite ‘have to have.’ Beyond that, this arbitration thing that has been hanging on since April is a huge overhang on our stock … once we know what the issue is, we’d welcome the opportunity to try to resolve it directly.”

Eldorado has had a troubled history in Greece.

In August 2015, the company suspended activities in the country when the government suspended technical studies on Skouries and Olympias. Eldorado later received injunctions from the Council of State in October 2015, allowing it to continue operations. In January 2016, Eldorado suspended development at Skouries due to difficulties with the government. It later received approval of a technical study allowing it to restart construction.

Jamie Koutsoukis and Donald Carter of Moody’s Investors Service called Eldorado’s plans to suspend investment “credit negative” because “the incremental production expected from the developments is necessary for the company to de-lever.”

“Adjusted debt-to-EBITDA — at June 30, 2017 — was 4.3 times, which is high relative to its peers,” the analysts wrote. “Also, increased production from new development in Greece was expected to reduce Eldorado’s concentration risk, which will remain elevated for longer than expected with the suspension of investment.”

Moody’s notes the company’s two mines in Turkey — Kisladag and Efemcukuru —account for more than 85% of production, and Kisladag makes up 65% of Eldorado’s cash gross profits.   

“Execution risks associated with Eldorado’s expansion plans in Greece are significant in our view,” Koutsoukis and Carter noted. “Completing two relatively sizeable, multi-year projects on time, within budget and at planned production levels is challenging, compounded by the location of its key development projects in Greece, where it has struggled with an uncooperative government.”

If Eldorado doesn’t get clarity from the government before the Sept. 22 deadline, Burns said, management has several options.

“We have used the courts in Greece when necessary to help us with permitting. That option is still available to us and we will use it if necessary, and we have the right to trigger arbitration ourselves … so we have some mechanisms available to us,” he said during the question-and-answer session. “My preferred option is to sit across from government and work through the issues, but if that doesn’t work, we would resort to the courts. We have found the legal system in Greece to be fair and reliable. We’ve had 18 court decisions, and they’ve ruled in our favour, so if necessary we’ll resort to those to get the permits that are legally due.”

Shares of Eldorado fell 6% to $2.34 on the news. Over the last year the company’s shares have ranged from a low of $2.24 (August 2017) and a high of $5.63 (September 2016).

Several analysts trimmed their target prices on the stock after the announcement. Michael Siperco of Macquarie Research cut his target price to $3 per share from $5 and BMO’s Andrew Kaip lowered his target price from $4 per share to $2.50. CIBC’s Cosmos Chiu trimmed his target price to US$2.25 from US$2.50.