In a BMO Capital Markets July 10 research report on Eldorado Gold Corp. (ELD:TSX; EGO:NYSE), analyst Andrew Kaip wrote, "While we view the Integra acquisition as neutral, based on the benefit of future tax synergies and/or demonstrated resource growth, we expect it will take time for ELD to overcome the perception that it overpaid for Integra," adding that "benefits of the acquisition also include a step towards diversifying growth away from Greece. We now expect Canada to contribute ~30% of growth over the next 5 years, compared with Greece at ~60%."
After acquiring Integra on May 15, "shares of ELD have declined 33% versus a 7% decline in the GDX and a flat gold price," Kaip stated. "We typically expect shares of the acquirer to come under pressure as investors arbitrage the deal. However, shares of ELD have continued to underperform relative to peers owing to a number of external events that have placed selling pressure on shares of ELD."
Those external events included "index deletions, Greek arbitration and more recently the production revisions at Kisladag," the report notes, adding the company "would not meet its original 2017 guidance at Kisladag at 230-245koz, due to higher-than-expected cyanide requirements in the heap leach. Revised guidance was established at 180-210koz in 2017, and the company expects to recover gold ounces in 2018 that were deferred from 2017."
Despite the downturn in the stock, "in our view, the move to purchase Integra looks to be well timed, as it begins the process of diversifying jurisdictional risk away from Greece to lower-risk operating countries," Kaip stated.
BMO's investment thesis notes that "While ELD represents a compelling opportunity on valuation relative to peers, the company's capital-intensive and execution-exposed development strategy combined with residual concerns over Greek exposure are likely to leave investors on the sidelines until the company succeeds on delivering on growth."
BMO has a Market Perform rating on Eldorado and a target price of $4.00 per share. The stock is currently trading around $3.13.
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