Eldorado pulls plug on Greek project; stock tanks

Drillers at the Skouries gold-copper project in Greece. Credit: Eldorado GoldDrillers at the Skouries gold-copper project in Greece. Credit: Eldorado Gold

Eldorado Gold (TSX: ELD; NYSE: EGO) is suspending construction at its Skouries gold-copper project due to a continued lack of government support, and cautions it will halt its Olympias underground mine, if the Ministry of Energy and Environment doesn’t change its tune.

“The fundamental issue is — for reasons I don’t really understand fully— we’re not where we need to be with this government,” Paul Wright, president and CEO, said on a conference call.

Although Skouries received an approval on its environmental impact study in 2011, Eldorado has been struggling since 2012 to receive its other permits to advance construction. In March 2015, the ministry blocked Eldorado from completing the processing plant at Skouries, and in August, revoked the technical studies for both Skouries and Olympias, causing Eldorado to temporarily suspend both projects in the Halkidiki Peninsula and lay off workers.

The miner resumed both projects and started rehiring last October after Greece’s Council of State — the country’s Supreme Court — issued an injunction relief, temporarily reversing the ministry’s decision on the technical studies. The court has yet to make a decision on Skouries’ building permit, which has been delayed for three years.

“We have been frustrated for a number of years as it relates to the building permit… which was revoked and has led to a court action. We are still awaiting a Council of State decision,” Wright said.

The lack of a permit has hindered construction and increased Skouries’ costs, Wright explains. “It has nothing to do with metal prices… It doesn’t really make sense to continue at this very low level of efficiency.”

Eldorado has invested over US$300 million at Skouries to date and had more than 600 employees and contractors at site. The company anticipates it will take up to three months to wind down the project and dismiss its workers. Once complete, the estimated holding costs are US$1 million a month.

Wright cautions activities at Olympias will also be suspended if Eldorado doesn’t receive approval for the installation permit to refurbish the existing mill by the end of March. Eldorado applied for the permit last December so it could ready the mill in order to start underground production in early 2017. The ministry has 60 days to issue a permit. If it doesn’t, Eldorado will halt all construction and development activities, effectively dismissing another 500 workers.

Responding to an analyst’s question on whether getting a favourable court ruling on Skouries will be enough to resume construction, Wright said that’s “not sufficient” and that Eldorado would need more government support.

“The government has to come to grips with this investment, this sector. We’re no longer prepared to simply advance our projects under the protective cover of the judiciary and establishing our rights to advance under court decisions. That’s not a model we are prepared to operate under anymore.”

Although the company has local support for its projects, Haywood Securities analyst Kerry Smith points out there is a sub-set of Greece’s slim majority government that is against all forms of development, including mining projects. A disconnect exists between the Council of State and the government ministries, which appear to dismiss judicial rulings, he explains.

“The issue will be getting the ministry to quit dragging its feet and expeditiously process permit applications and approvals through the various levels of government,” Smith writes. He remains bullish on the stock with a “buy” and $6.50 target price.

Given the current investment climate in Greece, the company has put spending at its Stratoni underground silver-lead-zinc mine in Halkidiki on hold. It’s assessing whether it should carry out a three-year, US$25-million drill program to extend Stratoni’s current three-year mine life.

It has also placed its Perama Hill and Sapes projects in Thrace on care and maintenance. Eldorado says it has been waiting more than two years for the ministry’s approval on Perama’s environmental impact study and for a drilling permit at Sapes.

Wright remains confident Eldorado will be able to develop its growth projects under “a government” in Greece, but admits, “We can’t wait forever though.”

Eldorado will start evaluating how else it could deploy its strong cash position, roughly sitting at US$450 million at the end of September 2015.

It will be meeting with ministry representatives on Jan. 13, and will provide additional details on its Greek assets, with its 2015 operating results and 2016 guidance, in late January.

“As development stalls in Greece, and the stock arguably remains unrewarded for its Chinese exposure, we speculate whether Eldorado’s motivation to meaningfully diversify its geopolitical exposure to other parts of the world may gain momentum over the course of 2016,” Raymond James’ Phil Russo writes. He maintains a “market perform” rating and reduced his target price to US$4.75 from US$5.25 per share.

Eldorado Gold, which operates three gold mines in China and two in Turkey, fell 19% on the suspension news to close Jan. 12 at $3.53 per share. It has a 52-week trading window of $3.26 to $9.68. 


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