Why Credit Suisse Sees Eldorado Gold Shares Rising Almost 60%

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It is no secret that gold and gold miners have enjoyed a massive 2016. What is surprising though is how few analysts, investors and economists were calling for gold’s massive performance ahead of time. At the end of 2015, most chartists and fundamental investors seemed worried that gold was heading well under $1,000 again — yet here are still up above $1300 and gold is up almost 25% so far this year.

What is amazing is how much gold miners have outperformed the broad market. Some have doubled and others have tripled. In the case of Eldorado Gold Corporation (NYSE: EGO), its performance, even after Friday’s market drop, was up only 18% so far in 2016. This might be above the market, but it is a sever laggard in the gold sector. If a new research report is right, Eldorado may have close to 60% upside ahead.

Back in June, 24/7 Wall St. highlighted that Eldorado was one of five gold stocks still under book value. Then Eldorado was given very high marks by Goldman Sachs in August, and Goldman Sachs can influence a stock from time to time — but shares were higher at $4.05 at that time.

The newest report for big upside comes from Credit Suisse’s Anita Soni. She covers precious metals for Credit Suisse in Toronto. Soni has decided to upgrade Eldorado Gold to Outperform from Neutral and she raised her price target to $5.50 from $5.00.

The call is based upon the company providing more clarity, as an attractive growth story with cheap valuations. All of this follows the company’s September 7 investor day meeting. Soni’s call from Monday said:

We upgrade Eldorado Gold to Outperform on improved clarity on its longer term outlook, attractive Price to Net Asset Value (P/NAV) and a receding Turkey exposure headwind. Our target increases as we raise our net asset value by 4% to $4.92 per share (U.S.) from $4.71 per share on increased value for Skouries, Perama and TZ, partly offset by less value for Efemcukuru and Olympias.

Our P/NAV target increases to 1.3 times from 1.0 times (peers at 1.4) with better visibility on the growth outlook. Our cashflow valuation is revised to 20 times our 2017 OpCFa of $0.22 per share, from prior $0.29 at 18 times. Implied mine life on 2017 is 31 years. We are lowering our EPS Estimates for the year 2017-2018 to $0.18/$0.18 from $0.23/$0.30.

Other catalysts are the final Chinese asset sale ($600 million), Olympias Phase II first production in early 2017, the Kisladag forestry permit receipt by end of 2016, the Skouries engineering completion in mid-2017, Skouries underground feasibility study results and the Olympias Phase III additional details. Other issues pointed out were listed below.

Credit Suisse’s view is that the Eldorado risks in Turkey are better reflected in the price and could even recede. That has likely helped Eldorado’s overall share underperformance versus gold peers since July 15. Soni said:

While President Erdogan’s crackdown against purported organizers of the failed coup remains ongoing, we note that foreign investment has not been impacted and the three-month State of Emergency is set to expire on October 21.

Four more growth drivers were noted as well. One is the Kisladag expansion to 20 metric tonnes per year. A second force is that the Olympias Phase II should add another 72,000 ounces per year. A third issue is that Skouries Phase I, which will start in 2019, adds about 141,000 ounces per year. Lastly, the Tocantinzinho (also expected to start in 2019) will add another 170,000 ounces per year.

Credit Suisse sees Eldorado as having sufficient cash on hand and available credit to maintain its cash level and to fund its growth plans until 2020 with gold at $1,300 per ounce. The firm estimates that Eldorado will need to refinance $195 million then of its $600 million in debt principal due. Even at $1,100 per ounce, Soni thinks that a deferral after 2017 could keep the 2020 refinancing manageable at about $218 million. As a reminder, free cash flow is expected to remain negative until 2020 due to growth capital spending.

Soni’s investment view stated:

We have a positive view of EGO’s underlying core assets Kisladag, Efemcukuru, Olympias and Skouries as well as its Perama project due to their low costs and long mine life. Post investor-day, there is greater visibility on Eldorado’s near and longer term outlook, which implies a peer leading growth profile. Additionally, we believe the Turkey exposure headwind will recede for EGO as it has underperformed peers by 15% since the failed coup. In our view these factors will contribute to a reduction in EGO’s P/NAV discount vs. peers over the next 12 months.

Shares of Eldorado closed at $3.50 after Friday’s big stock market sell-off. Its shares were trading up almost 5% at $3.67 on Monday afternoon but trading volume was not excessive at 4.3 million shares at 1:30 p.m. Eastern Time. Eldorado’s 52-week range is $1.87 to $5.16 and its consensus analyst price target is $5.84.

As far as the 57% upside projected in this call from Friday’s closing price, keep in mind that the average Dow and S&P 500 stock is given 8% to 15% upside in most other analyst calls with Buy and Outperform ratings.

One final word that 24/7 Wall St. would remind readers is that this is a transitional company, with many of the upside events having no taken place yet. Analysts often get their views wrong, and sometimes unforeseen outside forces jeopardize big upside targets.