Eldorado Gold Wants 750 Million Euros From Greece

Following a positive Greek arbitration ruling back in April, investors and traders alike have been waiting for Eldorado Gold’s (EGO) next moves. Time went by, but the situation in Greece remained unclear. In the second quarter report (I wrote about it here), there had been no updates on Greece. Here’s what the company had to say on the topic during the second quarter conference call:

“We have been in active and ongoing talks with the Greek government since the arbitration decision was issued in early April but have been disappointed by the government’s failure to act […] We remain open to a continued dialog on the steps required to allow the Skouries development to continue, but we’ll, if need be, take the necessary steps to protect our investments in Greece”.

As I noted in my article on the company’s second-quarter results, an indication of “necessary steps to protect our investments in Greece” did not promise a fast resolution of the case. At that time, it was unclear what route Eldorado Gold would choose to resolve its problems in Greece. However, we now know the answer.

On September 2018, Eldorado Gold issued a press release in which it stated that its Greek subsidiary, Hellas Gold S.A., has filed an application for payment with the Greek state. Here’s what the company had to say on this issue:

“The application requests payment of approximately €750 million for damages suffered by the company arising from delays in the issuance of permits for the Skouries project, including damages for out of pocket costs and loss of profits. The application is a non-judicial request for payment and does not initiate legal proceedings […] We hope that this matter can be resolved in an amicable manner without needing to go down the route of arbitration”.

In short, the company’s plan is to show the Greek government the amount of damages it will be pursuing through arbitration if it does not get permits, in hopes that Greece will issue these permits. At the current exchange rate, Eldorado Gold calls for a payment of about $880 million. That’s more than the company’s current capitalization. There are three theoretically possible scenarios:

1. Greece pays €750 million. This is a complete fairy tale. While theoretically possible, this scenario is absolutely impossible in practice. In my view, the probability of this scenario is infinitely close to zero.
2. Greece issues permits. This is the best scenario for Eldorado Gold’s stock. Currently, the market puts zero value to Skouries. Once permits are issued and legal framework is settled, Eldorado Gold will be free to find a joint venture partner or just sell the project to the highest bidder. Such a development will be a major upside catalyst.
3. Greece enters legal battle. I’m not a lawyer so it’s hard for me to give any precise evaluation of Eldorado Gold’s chances in a legal battle against Greece. One thing is certain – such a battle will drag on for many months. During these months, Eldorado Gold’s hands in Greece will be tied up. The company will not be able to market the project for a potential joint venture or sale. The stock market’s attention will shift to Eldorado Gold’s ability to raise financing for the completion of the Kisladag development (and whether the recent developments on the Turkish currency front are a game changer for costs).

In my opinion, there’s a decent chance that Eldorado Gold’s shares will stay under pressure in the short term. The reason for this is that Eldorado Gold’s move clearly shows that no progress in Greece has been made. However, the development looks good for the longer-term perspectives, as it shows that Eldorado Gold’s management is finally making concrete steps to protect their asset. The news does not change my fundamental view of the company – Eldorado Gold remains undervalued at current levels, but more steps (notably, securing funding for Kisladag) should be taken to unlock this value.