Moody’s downgrades its outlook on Eldorado Gold

Eldorado Gold’s (TSX: ELD; NYSE: EGO) troubles in Greece and Turkey have prompted Moody’s Investors Service to downgrade its rating outlook for the gold producer from stable to negative.

“The negative outlook reflects Eldorado’s elevated leverage, the execution risk in developing key projects in Greece where government actions have delayed development and production challenges at its main operating mine in Turkey,” the credit rating agency’s analyst Jamie Koutsoukis said in a note.

“Delays on its two main mining projects in Greece have been driven by setbacks in receiving permits and licences, reflecting the risk of operating in a jurisdiction with higher political risk and lack of proven mining legislation and regulations,” the analyst said. “Also the company will generate lower cash flow from operations, as gold recovery from the leach pad at its main operating mine, Kisladag, has not met expectations.”

In October, Eldorado said that in light of the lower recoveries, it was revising its 2017 production guidance for the Kisladag open-pit operation to 170,000 to 180,000 oz. gold, down from the 230,000 to 240,000 oz. it forecast at the beginning of 2017. Guidance for next year is under review.

Eldorado’s Kisladag gold mine in western Turkey. Credit: Eldorado Gold.

“Further metallurgical test work on heap leaching is ongoing to determine the extent of the materiality of the impact on gold resources and reserves, and possible implications for the carrying value of the mine,” Eldorado said in a news release at the time. “In parallel with ongoing laboratory heap-leach test work, the company is investigating alternative treatment 1 methods for this material, which includes studies on finer particle breakage, either through milling, or high-pressure grinding roll crushers.”

In a conference call after the company released its financial and operating results for the third quarter (loss attributable to shareholders of $4.2 million [1¢ per share], compared to a profit of $20.7 million [3¢ per share] in the third quarter of 2016), George Burns, Eldorado’s president and CEO, said the company had previously contemplated building a mill at Kisladag.

“Our strategy now is to push forward on multiple processing options with the focus on the milling scenario while assessing the performance of the deeper material when placed on the heap leach, along with test work to determine the viability of the high-pressure grinding roll option,” he told analysts and investors on the conference call.

If it chooses to build a mill, Burns said, there are already key pieces of the required infrastructure in place, and Eldorado could continue to use the crushing circuit that is available, as well as the carbon handling and elution circuit on-site. “The additional required equipment would include the mills, thickeners, leach and CIP tanks, along with cyanide detoxification and tailings filtration,” he said. “We already have all the space required and could potentially build the project in approximately two years, depending on permits and delivery of long-lead items.

“As for the cost, this is a good question that our team is working on,” he continued. “But based on a quick glance at some other key projects that have come online in the last few years, they were built in the range of US$300 million to US$400 million for the corresponding sections of the plant, equipment and installation required.”

The company plans to complete a prefeasibility study on building a mill by the end of the first quarter of 2018. If the mill option is chosen, the company expects permitting would take 12 months and construction another two years, bringing the start time to the first quarter of 2021, assuming the company can’t do any work until all the permitting is finished.

As for Greece, he said, Eldorado has “after a considerable amount of back and forth with the Greek Ministry of Energy and Environment” received all of the final permits required for Olympias Phase II, but permits for its Skouries project are outstanding. Eldorado still needs the amended electromechanical installation permit for the flotation plant, as well as the permit for relocating antiquities at the Skouries site.

During the EIA process, in the area of the open pit at Skouries, a potential furnace from the time of Alexander the Great was identified. “It’s a small archaeological finding that the company has committed to relocating,” Burns said during the call. “I’d describe it as a fairly minor bit of work to relocate this and it’s simply getting the authorizations to move it … we’ve got local support to relocate the facility, it’s just simply getting the final permits and executing the work.”

While Burns said he believed the company had “now entered into positive and constructive talks” with the Greek government, which enabled Eldorado to continue with the commissioning of Olympias Phase II and plant construction at Skouries during the third quarter, the company also received a notice regarding the arbitration issue.

The notice alleges that the technical study for the Madem Lakkos metallurgical facility — which is effectively Olympias Phase III, and which will treat Olympias and Skouries concentrates — is deficient. (Olympias III is the next large investment after Skouries.)

Burns said the company says the technical study is “robust and consistent with the transfer contract, the business plan and the proved environmental terms of the project.” In terms of permitting, however, Burns said during the question-and-answer part of the call that the company’s patience is not infinite.

“We’ve got pretty good indications that the permits will be forthcoming shortly. But for sure, we don’t have a lot of patience in this regard. We need to see progress. We need to see this constructive dialogue move into issuance of permits. And if that doesn’t happen, yes, we’ve got to move into the care and maintenance mode and protect ourselves from a legal, and an investment, perspective.”

Eldorado ended the third quarter with cash and equivalents and term deposits of $546 million, compared to $888 million at the end of 2016. The decrease in the balance owed to using $241 million in capital programs, $122 million in acquiring Integra Gold and $11 million in dividend payments to shareholders, partly offset by cash flow generated from operating activities before changes in working capital of $63.5 million.

Moody’s noted that while it revised its ratings outlook on the company to reflect Eldorado’s execution risk bringing its Greek projects into production and lowering production levels at Kisladag, which is the company’s “largest EBIDTA contributor,” it also said that the company “has good liquidity,” with a $546-million cash balance and an undrawn, $250-million unsecured revolving credit facility, maturing in November 2020.

“The large cash balance will allow Eldorado to fund Moody’s estimated free cash flow consumption of $350 million in 2018, as the company continues to spend on developing its new mines,” it said, adding that it expects Eldorado “will maintain good covenant headroom … the company does not have any material debt maturities until 2020, when its credit facility and $600 million unsecured notes become due.”