Endeavour Mining is an intermediate gold producer, with four mines in Côte d’Ivoire (Agbaou and Ity) and Burkina Faso (Houndé and Karma) and two major development projects (Ity CIL and Kalana) in the highly prospective west African Birimian greenstone belt.
Endeavour Mining’s Q3 results were considerably ahead of our forecasts, despite a challenging rainy season. Nevertheless, production rose at three of Endeavour’s four mines and overall group production increased by 5.5% relative to Q2 (NB historically, production has tended to fall in Q3 relative to Q2), while net adjusted EPS almost quadrupled to 30.2c. As a result, we have updated our underlying FY19 forecasts (see Exhibit 1 on page 3 for a detailed analysis of EDV’s Q3 results and Exhibit 6 on page 7 for changes to our Q419 and FY19 estimates). In addition, we have incorporated our longer-term gold price forecasts into our financial model as well as the 25% expansion of the Ity processing plant from FY20. Otherwise, operating cash flow (before working capital items) more than doubled to US$1.05/share in Q3, return on capital employed increased to 15% (on an annualised basis) and net debt (excluding IFRS 16 leases) reduced by US$52m. Capex continued to fall, putting Endeavour in a strong position to benefit from the gold price and to deleverage rapidly, while maintaining growth optionality via its exploration activities.
EDV’s exploration programme is intended to extend and maintain near-term production rates into the foreseeable future. In valuing Endeavour, we have opted to discount forecast cash flows back over four years and then to apply an ex-growth multiple to terminal cash-flows consistent with a 10% discount rate, which results in a value for EDV of US$27.58/share. We have recently increased our FY19 earnings forecasts to reflect the higher gold price environment. Q319 results are scheduled for 5 November.