Investors in Eldorado Gold (NYSE: EGO) have long-awaited good news. Shares of the Canadian gold miner have, after all, shed 75% value in just the past three years, hugely lagging peers like Yamana Gold (NYSE: AUY), which has seen its shares drop around 18% during the period. As if Eldorado's key development projects in Greece running into regulatory hurdles wasn't enough, the gold miner found itself mired in further trouble when it suspended operations at its largest mine, Kisladag in Turkey, in early 2018 after a sharp dip in production.
It is therefore no surprise that Eldorado stock has shot up in recent weeks, piling on nearly 50% gains already this year, as of this writing, after the miner announced plans to restart Kisladag and offered encouraging production guidance for the next three years.
Is this the start of a much-awaited recovery in Eldorado Gold, signaling you buy the stock while it still trades below $5 in anticipation that Kisladag will help the miner start afresh?
Kisladag holds the key to Eldorado Gold's future
Kisladag is Eldorado Gold's flagship mine and one of its only four operating mines. Production from Kisladag, however, has declined steadily over the years. In fiscal 2014, for example, the mine produced 311,233 ounces of gold. Around the same time, Eldorado decided to defer expansion at Kisladag and invest in its projects in Greece instead, primarily the high-potential Olympias and Skouries mines.
Image source: Eldorado Gold.
While all of this sounds great, there are three risks investors who intend to bet on Eldorado Gold now should be aware of.
Three reasons Eldorado Gold is a risky investment
To start, Eldorado is heavily reliant on Kisladag for growth, which itself sounds like a risky proposition for now. Moreover, production from Kisladag is expected to drop dramatically in 2021, per the miner's forecast. As Eldorado conducts further testwork to extend the life of the mine, the possibility of a mill project to boost production after 2021 can't be ruled out. Eldorado's financials need to be in top shape by then.
Second, Eldorado's outlook for all-in-sustaining cost (AISC) -- which is a comprehensive cost measure used in the gold industry and is a key determinant of a miner's profitability -- is at the higher end of the industry cost curve. Conversely, most gold peers, including Yamana Gold, have strived to cut costs lately, with Yamana even rapidly ramping up its low-cost Cerro Moro mine to boost margins. Fluctuations in gold prices, therefore, are likely to hit Eldorado harder.
Third, Eldorado's Skouries mine in Greece is stuck in a limbo, as development was suspended in November 2017 after permit delays. Eldorado filed an application for 750 million euros, or roughly $855 million, in damages last September, but there's been no update since. Meanwhile, Eldorado is spending money on the mine's care and maintenance, and will need at least two years to construct and commission the mine even after getting full permits. In short, Skouries remains a long-drawn battle.
The only reason Eldorado stock could head higher
It's imperative that Eldorado delivers on Kisladag now, so you might want to wait a couple of quarters to see how things are shaping up at the mine. Also, the upcoming election in Greece is a major event to keep an eye on. With the opposition leader declaring his intent to push Skouries forward if he wins the election, it could be a make-or-break moment for the project. That's the only potential catalyst that could drive Eldorado Gold shares any higher in the near term. For now, it's speculation at best.
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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.