EndAFO a good thing

Endeavour Mining 1 May 2020 Update
Download PDF

Endeavour Mining

EndAFO a good thing

SEMAFO acquisition

Metals & mining

1 May 2020

Price

C$25.06

Market cap

C$2,755m

C$1.4034/US$

Net debt (US$m) at end December 2019

535.9

Shares in issue (000s)

109,925

Free float

70.1%

Code

EDV

Primary exchange

TSX

Secondary exchange

US OTC

Share price performance

%

1m

3m

12m

Abs

25.2

(7.5)

31.8

Rel (local)

13.4

8.4

47.8

52-week high/low

C$28.79

C$18.51

Business description

Endeavour Mining is an intermediate gold producer, with four mines in Côte d’Ivoire (Agbaou and Ity) and Burkina Faso (Houndé and Karma) and one major development project in Mali (Kalana), all in the highly prospective West African Birimian greenstone belt.

Next events

Kari West and Center maiden reserve

Q220

Houndé and Ity updated mine plans

Q220

Fetekro PEA

Q220

Kalana updated feasibility study

H220

Analyst

Charles Gibson

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

On 23 March, Endeavour announced that it had entered into a definitive agreement with SEMAFO, whereby it will acquire all of the issued and outstanding securities of SEMAFO at a rate of 0.1422 Endeavour shares per SEMAFO share. At a stroke, the combination will create the largest gold miner in West Africa, with 26.9Moz Au of resources, 10.9Moz Au of reserves and c 1Moz pa Au of production, and project Endeavour into the ranks of the gold mining majors, ranking in the top 15 in the world in terms of both production and market capitalisation. On the terms announced, the acquisition will be accretive to Endeavour on the major measures of cash flow and profitability, as well as in terms of both resources and reserves.

Year end

Revenue (US$m)

EBITDA (US$m)

PBT*
(US$m)

Operating cash flow
per share (US$)

Capex (US$m)

Net debt**
(US$m)

12/18

752.0

264.8

70.5

2.33

486.5

518.6

12/19

886.4

355.7

106.9

2.75

254.9

535.9

12/20e

1,135.3

544.2

286.5

3.93

244.1

394.1

12/21e

1,063.2

576.8

319.8

3.98

93.5

89.3

Note: Pre-acquisition basis. *PBT is normalised, excluding amortisation of acquired intangibles and exceptional items. **Includes restricted cash.

Maximising regional presence

The rationale for the combination is threefold: 1) with production immediately in excess of 1Moz gold per annum (cf 650.4koz in FY19), it will enhance Endeavour’s strategic position, 2) it will give it critical mass with four mines producing close to 200koz per annum each plus three near-term development projects in the form of Fetekro, Kalana and Bantou and 3) it will enhance its capital markets profile with a larger market capitalisation and increased liquidity, such that it will meet the investment criteria of more generalist investors and larger funds and be eligible for inclusion in the Van Eck Vectors Gold Miners’ ETF (the GDX), among others.

Two-year focus on cash generation before investment

After a period of relatively heavy investment, both Endeavour and SEMAFO (another specialist West African gold miner; see pages 2–6 for description) are now entering ‘harvest’ mode. Neither has any large capital commitments for the next two years, with the result that the focus of each was maximising cash-flow in FY20–21 before developing either Fetekro, Kalana or Bantou in FY22.

Valuation: EDV alone worth US$33.38/share

To date, COVID-19 has had a minimal effect on Endeavour’s operations in West Africa. In the wake of the recent increases in the gold price, our terminal valuation of Endeavour at end-FY22 is US$40.38/share (cf US$39.62/share previously) on a standalone basis, which (in conjunction with forecast intervening cash flows) discounts back to a value of US$33.38/share in FY20 (cf US$32.74/share in FY19 previously). At its current price, Endeavour’s acquisition of SEMAFO remains accretive to shareholders on a relative valuation basis. In addition, it remains materially cheaper than the majors (the ranks of which it is destined to join upon closure) on at least 94% (34 out of 36) of valuation measures.

SEMAFO acquisition

On 23 March, Endeavour announced that it had entered into a joint, definitive agreement with SEMAFO, whereby it will acquire all of the issued and outstanding securities of SEMAFO by way of a Plan of Arrangement under the Business Corporations Act (Québec). Under the terms of the agreement, Endeavour will pay 0.1422 shares for each SEMAFO common share, resulting in its issuing an additional 47.6m shares (cf 109.9m currently in issue). Based on the 20-day volume weighted average prices of each company until 20 March, these terms represented a 27.2% price premium for SEMAFO shareholders. Based on the closing prices of each company’s shares on 20 March, they represented a 54.7% premium for SEMAFO shareholders and implied an equity value for SEMAFO of c C$1.0bn. In the aftermath of the transaction, existing Endeavour and SEMAFO shareholders will own approximately 70% and 30%, respectively, of an entity producing c 1Moz gold per year and which generated US$121.6m in pre-financing cash flows in FY19 (note full Edison calculated pro-forma accounts for the enlarged company for FY18 and FY19 are provided in Exhibit 10).

Endeavour’s principal investor, La Mancha, has committed to invest US$100m into the combined entity in order to provide for a larger free float and greater stock liquidity, and both sets of board of directors have unanimously approved the transaction.

Pursuant to the rules of the TSX, the transaction will require approval by a simple majority of the votes cast by Endeavour’s shareholders and a two-thirds majority of votes cast by SEMAFO shareholders. In addition, Endeavour shareholders will be asked to approve the issuance of US$100m Endeavour ordinary shares to La Mancha by a simple majority.

La Mancha, the officers and directors of Endeavour (who together control approximately 31.8% of the outstanding shares of Endeavour) and the officers and directors of SEMAFO have all stated their support for the transaction. In addition to shareholder and court approvals, the transaction is subject to applicable regulatory approvals including TSX approval and the satisfaction of certain other customary closing conditions. The agreement includes customary provisions including non-solicitation provisions, a right to match any superior proposal and reciprocal termination fees of US$20m payable either way depending on circumstances.

It is anticipated that the transaction will close in Q220.

Endeavour: A specialist West African gold miner

Endeavour is an intermediate gold producer, with four mines in Côte d’Ivoire (Agbaou and Ity) and Burkina Faso (Houndé, Karma) and two major development projects (Fetekro and Kalana) in the highly prospective West African Birimian greenstone belt. Although not restricted to a particular geography or mode of operation, Endeavour has a preference for operating in francophone West Africa and for owner-operated (rather than contractor) mining. Its target is for all of its mines to have operational lives (on average) in excess of 10 years at an all-in sustaining cost (AISC) below US$850/oz. A summary of Endeavour’s strategy and assets may be found in our two Outlook notes From the ground upwards, published on 16 October 2018, and Q419 and FY19 results ahead of expectations, published on 20 March 2020.

SEMAFO: Also a specialist West African gold miner

Similarly focused on West Africa, SEMAFO currently operates two mines, both in Burkina Faso. SEMAFO’s corporate vision is to establish enduring relationships with the countries in which it operates and, via its experience, expertise and financial acumen, create partnerships to responsibly develop their natural resources. Over the past 20 years, it has successfully commissioned three gold mines in several jurisdictions and produced a cumulative c 3Moz gold (NB see Exhibit 1 for current year cost and production guidance). Following its acquisition of 13 Orbis permits in 2015, its property portfolio in Burkina Faso grew to in excess of 4,500km2, representing one of the most extensive land positions in the country.

A brief summary of SEMAFO’s two operating mines plus its main exploration assets is provided below.

Production assets

Boungou (90% ownership)

The Boungou permit, which contains the Boungou deposit, lies within the Diapaga greenstone belt, a north-east to south-west orientated belt that extends over 250km in length and over 50km in width in the Est region of south-eastern Burkina Faso. SEMAFO holds four contiguous permits, collectively known as the Tapoa Permit Group, covering approximately 70km in strike length along the Diapaga Belt. Laterite and alluvium cover extensive (lateral) portions of the permit; however, both are generally less than 10m in thickness

Commercial production at Boungou, which comprises an open-pit mine and 4,000tpd carbon-in-pulp processing plant, began on 1 September 2018. In 2019 (the first full year of operations), the mine delivered a total of 205,000oz gold at an AISC of US$497/oz over a 10-month period. However, operations were suspended in November, after an attack by unidentified insurgents on a convoy of five buses carrying 241 contractors and employees on the road between Fada and the mine site escorted by military personnel resulted in at least 99 casualties (killed and wounded). Prior to the attack, the mine had been forecast to produce 220,000–240,000oz gold.

While not detracting from the tragedy of the attack at both a personal and a corporate level, Endeavour has an enviable and long-standing track record in providing security for its sites and also a very good relationship with the government. One aspect of this that differentiates Endeavour, in particular, from its peers is that security at Endeavour is run as a business unit and not as a function of a mine’s general manager’s responsibilities. Among other things, this will mean the combined group of Endeavour and SEMAFO will be better positioned to manage its security in the region than previously, with Endeavour’s specialist security unit seeking to implement many of its security procedures and protocols at the earliest practicable moment. To that end, Boungou has been visited by both Endeavour’s head of security and also its president and CEO, Sébastien de Montessus and both are reported to be ‘very confident’ they can run the site securely. In the meantime, in February, SEMAFO announced a phased re-opening plan, whereby it will process stockpiled material during an initial three-month phase, during which it will use on-site supplies with limited deliveries of new supplies. All other things being equal, the plans anticipate a restart of mining activities in Q420, while continuing to process the current stockpile of 1.1Mt at an average grade of 3.4 g/t Au. However, to increase the frequency of deliveries required to operate after the initial three months, SEMAFO has stated that it will ‘need the government to improve security on the public road and in the surrounding region’, to which end it is in discussion with the authorities regarding the necessary security plan.

Capital costs relating to the re-start of the mine in Q4 are expected to amount to no more than US$10m, of which US$7m is represented by stripping costs and US$2m by sustaining capital. In the medium to longer term, Boungou’s target AISC is c US$500/oz.

Mana (90% ownership)

The Mana mine is located 260km south-west of Burkina Faso’s capital Ouagadougou. Originally a grassroots discovery, the processing plant has been expanded four times since its first gold pour in 2008 and it has now evolved into the third largest mine in the country with milling capacity in excess of 7,200tpd (2.6Mtpa) and having produced c 2.0Moz gold over the course of its life to date. In 2014, SEMAFO developed the high-grade Siou deposit from a blind discovery to production in a mere 18 months, thereby boosting both the mine’s production and reserve grade. As a result, production at Mana is now derived from both the Siou underground and open pits as well as the Wona open pit.

Siou is a high-grade gold deposit located some 20km from Mana. Conversion of Siou from an open pit into an underground mining operation began in Q318 with full underground production expected in Q120. A pre-feasibility study investigated the potential for extracting the deeper zone of the Siou deposit using underground mining operations (mainly long-hole stoping). Access to the operations is through a single portal and a 5.5m x 5.5m ramp at a 14° gradient. The location of the portal will allow mining in the northern part of the Siou pit to continue uninterrupted. The ultimate size of the underground mining operation will be more than 600m along strike by 200m deep. With the development of the underground project, a summary of the Siou operation in its entirety is as follows:

Siou proven and probable reserves of 3.0M tonnes at 5.29 g/t Au containing 0.5Moz gold

Siou proven and probable open-pit reserves of 0.9M tonnes at 3.43 g/t Au containing 0.1Moz gold

2,000tpd contract processing operation

Mine life in excess of eight years (from end-FY18)

Pre-production capital expenditure of US$51.7m

Development time of 18 months

During the five-year period between 2019 and 2023, SEMAFO is targeting

Average production of 209,000oz pa

Average AISC of US$871/oz

In early August 2019, SEMAFO reported a pit wall failure at Mana in the Wona pit. Since SEMAFO was then engaged in mining the southern part of the Wona pit, no mining was underway in the affected area at the time, no one was injured and no equipment was damaged, although, under the 2019 mine plan, some 45,000oz had been expected to be produced from the northern portion of the pit between late August and December. To regain access to ore in Wona North and to operate safely, SEMAFO made the decision to defer mining there until Q120 and, in the meantime, to bring forward the mining of 6Mt of waste material that was otherwise scheduled for FY21 and to push back the pit wall. As a result, production guidance for Mana in FY19 was reduced from 170–190koz to 130–140koz, although guidance for all-in sustaining costs remained ostensibly unchanged as the majority of the costs relating to the wall failure were capitalised. The mining plan for the Siou pit was not affected, however, and guidance for Boungou (at the time) was left unchanged at 220–240koz at an AISC of US$470–510/oz.

A summary of SEMAFO’s production guidance for FY20 is as follows:

Exhibit 1: SEMAFO FY20 production and cost guidance

Mana

Boungou

(Feb-Apr)

Boungou

(May-Dec)

Boungou

(total)

Group total

Production (koz)

185–205

42–46

88–104

130–150

315–355

AISC (US$/oz)

*1,050–1,120

530–560

745–795

680–725

895–960

Source: SEMAFO. *Including mine development.

From FY21 onwards, Mana’s AISC is targeted at less than US$850/oz for the remaining four to five years of its formal life. Note that the figures in Exhibit 1 may be compared with Endeavour’s cost and production guidance for its assets in FY20 in Exhibit 12, below.

Exploration assets

Mana

While Mana has only four to five years of formal life remaining, based on its reserves of 15.0Mt of ore, its additional 52.6Mt of resources have the potential to more than quadruple this. With a land position over 2,035km2 on the highly prospective Houndé gold belt, since November 1999 SEMAFO has completed more than 1,700,000m of drilling at Mana. In 2020, a US$2m budget has been established to follow up on targets identified by a geological review conducted by an external consultant in 2019. The majority of the 3,800m reverse circulation (RC) drill campaign will be carried out on three different areas around Siou. SEMAFO will also conduct an underground drill programme to test if mineralisation extends at depth below the existing underground mining plan.

Bantou (100% ownership)

The Bantou project includes Bantou Nord, Bantou and the Karankasso Zones (20% owned by Sarama), located some 170km south of Mana, also along the Houndé greenstone belt in Burkina Faso. A total of 1.2Moz gold were delineated by SEMAFO at Bantou in 2019 to add to the 0.7Moz added via the acquisition of Savary Gold's Karankasso properties. As of 31 December 2019, inferred mineral resources at Bantou amounted to 2.2Moz of gold and its initial 2020 exploration budget of US$4m is likely to increase as the exploration programme moves outside the existing zones and follows up promising intersections such as 14.6 g/t recorded over 21m at Tiébi.

Nabanga (100% ownership)

Located 250km south-east of Ouagadougou, the Nabanga project lies within the Nabanga exploration permit, comprising a resource of almost 1.0Moz:

Exhibit 2: Nabanga resource

Category

Tonnage

(Mt)

Grade

(g/t)

Contained gold

(koz)

Inferred

3.4

7.7

841

Source: SEMAFO. Note: As at 31 December 2019.

On 30 September, SEMAFO announced the results of a preliminary economic assessment (PEA) at Nabanga. Highlights of the study were as follows:

Life of mine production of 571,000oz gold at an AISC of US$760/oz by both open-pit and underground mining methods over a mine life of eight years

Pre-tax NPV of US$147m and post-tax NPV of US$100m, using a US$1,300/oz gold price and a 5% discount rate

Post-tax internal rate of return (IRR) of 22.6%

Metallurgical recovery of 92%

Pre-production capital expenditure of US$84m, including a 20% contingency, and US$56m in life-of-mine sustaining capital

Payback period: 4.4 years

In addition, opportunities exist to improve returns through an increase in resources and/or additional cost saving measures during and after mine development.

Korhogo (100% ownership)

The Korhogo project comprises a 380km2 exploration permit in the northern region of Côte d’Ivoire on the Banfora greenstone belt, which also hosts the multi-million ounce Tongon and Banfora gold deposits.

A provision of US$1m was allocated to exploration on Korhogo in 2019 in order to conduct auger and trenching programs in the southern part of the permit.

A summary of SEMAFO’s geological assets compared with those of Endeavour is as follows:

Exhibit 3: SEMAFO and Endeavour gold resources and reserves

Asset

Resource grade (g/t)

Resource*

(Moz)

Reserve grade (g/t)

Reserve*

(Moz)

Resources’ life of mine (years)

Reserves’ life of mine (years)

Ownership

(%)

Mana

2.24

4,872

2.91

1,407

25.7

5.7

90

Boungou

3.51

1,962

3.72

1,233

11.9

7.1

90

Nabanga

7.69

841

N/A

0.0

N/A

N/A

100

Bantou

1.37

2,245

N/A

0.0

N/A

N/A

100

SEMAFO total

2.21

9,921

3.24

2,640

N/A

N/A

90–100

Endeavour total

1.87

17,017

1.88

8,298

18.5

9.0

65–90

Grand total

1.98

26,938

2.09

10,938

N/A

N/A

65–100

Source: Edison Investment Research, Endeavour Mining, SEMAFO. Note: *100% basis; resources stated inclusive of reserves. Totals may not add up owing to rounding.

Aside from Endeavour’s higher resource and reserve numbers in absolute terms, also notable within the context of the above summary is Endeavour’s higher average conversion of resources into reserves (to date).

Rationale for the acquisition

In general, the combination of Endeavour and SEMAFO is also a combination of two successful and accomplished management groups with, in a number of ways, complementary management experience. From an operational and strategic perspective, the three main objectives achieved by the acquisition of SEMAFO by Endeavour are as follows:

An enhanced strategic position as the materially de-risked combined company transitions into ‘harvest’ mode in the aftermath of an intense period of investment.

Achieving critical mass, with six operating mines, of which four can (or have the near-term potential to) produce in excess of 200koz per annum each.

An enhanced capital markets’ profile.

From a financial perspective, the combination will allow for the usual cost savings in general and administrative costs. On average, the two groups, combined, recorded a return on capital employed of 11% in FY19 (management calculation). This they expect to increase to in excess of 20% in the near future, as the combined entity transitions from ‘investment’ mode (as represented by Endeavour’s recent investment into the Ity CIL project and SEMAFO’s investment in the Boungou project) to ‘harvest’ mode.

Strategic position

The combination of Endeavour and SEMAFO, two companies that specialise in gold mining in West Africa, will create the largest, single producer of gold in a region that (by Endeavour’s estimation) ranks number one in the world in terms of exploration success and number four in the world in terms of production over the course of the past 10 years:

Exhibit 4: Combination creates West Africa’s largest gold producer

Source: Endeavour Mining

In terms of price, Endeavour’s acquisition of SEMAFO is accretive to shareholders on a number of important measures of profitability and cash flow (see ‘Price of the acquisition’, below). In turn, the combination will allow it certain opportunities, such as:

The ability to leverage its size to improve risk management, eg from either a fiscal and/or a security standpoint.

Active portfolio management to maximise shareholder returns, including the ability to generate a more sustainable cash flow profile appropriate to the company’s balance sheet at any point in time.

Critical mass

In the near term, Endeavour’s focus is on cash flow generation. The acquisition of SEMAFO will immediately add Mana and Boungou to the combined company’s portfolio of producing mines and Bantou and Nabanga to its portfolio of near-term developments. As such, it will have four mines (Houndé, Ity, Mana and Boungou) with the ability to produce in the order of 200koz annually (see Exhibits 1 and 11), underpinning group production in excess of 1Moz per annum from six mines (including Karma and Agbaou) at an immediate AISC below US$900/oz and a targeted AISC of US$800/oz and certainly within the bottom third of the global cost curve.

In addition to being the largest single gold producer in West Africa, the combined entity will also be the largest producer in either Burkina Faso or Ivory Coast, individually, with a special focus on both the highly productive Houndé belt in the former and the Ity belt in the latter.

Capital markets profile

At present, management estimates the combined group has a pro-forma US$500m in liquidity immediately available to it via its various banking arrangements.

At the same time as becoming the largest regional producer of gold in West Africa, the combined Endeavour-SEMAFO entity will also be among the top 15 gold producers globally, as measured by both gold output and market capitalisation:

Exhibit 5: Top gold producers globally by annual production (Moz pa)

Exhibit 6: Top gold producers by market capitalisation (US$bn)

Source: Endeavour Mining

Source: Endeavour Mining

Exhibit 5: Top gold producers globally by annual production (Moz pa)

Source: Endeavour Mining

Exhibit 6: Top gold producers by market capitalisation (US$bn)

Source: Endeavour Mining

In relative terms, the acquisition will project the combined entity to the bottom of the group of super-major gold mining companies, globally (see Exhibit 16). From a practical perspective, the new company’s scale could make it a natural partner of choice for governments looking to develop their gold mining industries in the region.

Price of the acquisition

On the Thursday immediately prior to the announcement of the acquisition, the relative valuations of Endeavour and of SEMAFO were as follows:

Exhibit 7: Endeavour valuation relative to SEMAFO (19 March 2020)

Company

Ticker

Price/cash flow (x)

EV/EBITDA (x)

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Endeavour (Edison)

EDV

4.2

3.8

3.2

4.8

3.5

2.9

Endeavour (consensus)

EDV

3.7

3.2

3.3

4.5

4.0

4.0

SEMAFO

SMF

1.9

1.7

2.0

2.1

1.6

1.9

Source: Edison Investment Research, Refinitiv. Note: Priced at 19 March 2020.

Readers should note the discount of the SEMAFO multiples relative to the Endeavour multiples indicating that, at the time, the transaction would have been accretive to Endeavour shareholders on a relative valuation basis.

As at the time of writing, the same valuation measures are as shown in Exhibit 8, indicating that the transaction remains accretive to Endeavour shareholders notwithstanding the disproportionate intervening increases in SEMAFO’s multiples as a result of its re-rating since the transaction was announced (note that SEMAFO is currently trading at, to all intents and purposes, exactly the price that would be expected from Endeavour’s share price and the acquisition terms):

Exhibit 8: Endeavour valuation relative to SEMAFO (1 May 2020)

Company

Ticker

Price/cash flow (x)

EV/EBITDA (x)

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Endeavour (Edison)

EDV

4.5

4.5

4.0

4.6

4.1

3.4

Endeavour (consensus)

EDV

4.9

4.1

4.6

5.5

4.7

5.0

SEMAFO

SMF

3.3

2.6

3.4

3.2

2.3

3.1

Multiple increase* (%)

Endeavour (Edison)

+7

+18

+25

-4

+17

+17

Endeavour (consensus)

+33

+29

+38

+21

+18

+24

SEMAFO

+69

+54

+74

+54

+43

+63

Source: Edison Investment Research, Refinitiv. Note: Priced at 1May 2020. *Relative to 19 March 2020.

As noted previously, while Edison has analysed Endeavour since October 2018, it has never followed SEMAFO. As a result, we are not able to represent the price being offered by Endeavour for SEMAFO in terms of a detailed discounted cash (or dividend) flow valuation. Nor, at this stage, are we able to provide a detailed cash (or dividend) flow valuation for the combined entity.

Nevertheless, a summary of the valuations of the geological assets of both companies plus Edison’s estimate of the valuation of the consolidated group based on the companies’ respective reserves and resources (assuming imminent closure of the transaction), both at the current time and when the deal was announced, is as follows:

Exhibit 9: Endeavour and SEMAFO geological assets’ valuation

Company

Current

20 March 2020*

Enterprise value

(US$000’s)

Attributable resources (koz)

Attributable reserves (koz)

EV per resource oz (US$/oz)

EV per reserve oz (US$/oz)

EV per resource oz (US$/oz)

EV per reserve oz (US$/oz)

Endeavour

2,499

14,393

7,141

173.61

349.94

152.22

307.05

SEMAFO

823

9,237

2,376

89.15

346.55

49.00

190.48

Combined group

3,327

23.630

9,517

140.81

349.64

122.24

303.53

Source: Edison Investment Research (underlying data Endeavour Mining, SEMAFO, Bloomberg). Note: *Last trading day prior to announcement of acquisition. Totals may not add up owing to rounding.

Of note, within the context of the analysis in Exhibit 9, is the similarity between the current reserve valuations of the two companies (as evidenced in the column entitled ‘EV per reserve oz’). Differences in the valuation of resource ounces between the two companies may then be explained in terms of Endeavour’s historically higher rate of conversion of resources into reserves.

In the aftermath of the acquisition, the combined entity’s immediate strategic imperatives will be the continuation of exploration at Ity and Houndé plus investigating the potential to extend the mine lives at Mana and Boungou.

Endeavour-SEMAFO pro-forma results

While Edison has provided research and analysis on Endeavour since at least October 2018 (see our initiation note From the ground upwards, published on 16 October 2018), we have never formally followed SEMAFO. As a result, we have not yet undertaken any forward-looking analysis or forecasts of the combined group. Nevertheless, with that proviso, on the basis of SEMAFO’s historical financial results for 2018 and 2019, Edison has constructed the following pro-forma income and cash flow statements for the combined group plus its pro-forma end-FY19 balance sheet (note that the year-end for each company prior to the merger was 31 December):

Exhibit 10: Estimated pro-forma Endeavour-SEMAFO results (US$000s unless otherwise indicated)

Income statement

2018

2019

Cash flow statement

2018

2019

Balance sheet

2019

Revenue

Profit before taxation

83,844

21,242

Assets

- Gold revenue

1,048,636

1,362,121

Add back

 

 

Current assets

Cost of sales

 

 

- Depreciation

272,827

338,261

Cash and cash equivalents

288,186

- Operating expenses

537,742

598,238

- Financing costs

23,671

43,066

Restricted cash

9,964

- Royalties

54,461

73,623

- Share based payments

26,234

23,634

Receivables

63,873

Gross profit

456,433

690,260

- Financial instruments

(8,035)

57,968

Prepayments

19,963

Depreciation

(272,827)

(337,043)

- Impairments

0

136,639

Stocks

266,451

Expenses

 

 

- Cash paid on settlement of PSUs* etc.

(8,355)

(1,125)

Income taxes receivable

4,434

- Corporate costs

(43,661)

(38,290)

- Income taxes paid

(36,140)

(109,494)

Total current assets

652,871

- Impairments

0

(136,639)

- Payment of gold collar premium

5,795

(5,360)

 

- Acquisition etc costs

0

(4,552)

- Net non-cash inventory adjustments

18,413

6,790

Non-current assets

 

- Share-based compensation

(26,234)

(23,634)

- Foreign exchange loss

(17,116)

(3,764)

Mining interests

2,254,476

- Exploration costs

(7,621)

(9,893)

- Other

10,387

33,571

Deferred income taxes

5,498

Total expenses

(77,516)

(213,008)

Operating cash-flow before working cap.

371,525

541,428

Other long term assets

70,059

Earnings from operations

106,090

140,209

Change in working capital

 

 

Total non-current assets

2,330,033

Net interest

(27,110)

(51,607)

- Change in debtors

(13,881)

9,166

 

Loss on financial instruments

8,035

(57,968)

- Change in stocks

(20,080)

(26,978)

Total assets

2,982,904

Other expenses

(3,171)

(9,392)

- Change in prepayments

5,318

(2,366)

 

Profit before tax

83,844

21,242

- Change in creditors

22,146

(1,314)

Liabilities

 

Current income tax

68,658

83,759

Change in working capital

(6,497)

(21,492)

Current liabilities

 

Deferred income tax

4,979

13,494

Other

(6,184)

(813)

Trade and payables

241,086

Total tax

73,637

97,253

Net cash generated from operating activities

358,844

519,123

Creditor days

204.2

Marginal tax rate

87.8

457.8

 

 

Finance leases

42,504

Profit after tax

10,207

(76,011)

Cash-flows from investing activities

 

 

Derivative liabilities

16,373

Profit from discontinued operations

(154,795)

(4,394)

Mining interests’ capex

(600,943)

(393,481)

Income taxes payable

54,968

Total net and comprehensive loss

(144,588)

(80,405)

Cash paid for Ity interest

0

(453)

Total current liabilities

354,931

Minority interest

8,460

33,126

Cash acquired on acquisitions

0

232

 

Do. (%)

(5.9)

(41.2)

Net proceeds from sales

33,179

3,875

Long-term liabilities

 

Profit attributable to shareholders

(153,048)

(113,531)

Other

(88,526)

(7,746)

Finance leases

72,647

Net cash from investing activities

(656,290)

(397,573)

Borrowings

698,255

Basic EPS (US$)

(0.985)

(0.721)

 

 

Other

70,371

Diluted EPS (US$)

(0.980)

(0.718)

Cash-flows from financing activities

 

 

Deferred tax

122,463

DPS (US$)

0.000

0.000

Gross proceeds from issue of shares etc

1,461

2,574

Total long-term liabilities

963,736

 

 

Payment of financing and other fees

(2,300)

(2,165)

 

Average no shares in issue (000's)

155,303

157,384

Interest paid

(24,434)

(33,248)

Total liabilities

1,318,667

Derivatives (000's)

863

683

Proceeds of long-term debt

540,000

80,000

Fully diluted shares in issue (000's)

156,165

158,067

Repayment of long-term debt

(280,000)

(60,000)

Net assets

1,664,237

Repayment of finance leases

(26,998)

(34,740)

Minority interest

148,238

EBITDA

378,917

618,443

Deposit re reclamation liability bond

(157)

0

Do. (%)

8.9

Adjusted net earnings

80,625

203,392

Other

(6,083)

0

Net assets attributable

1,515,999

Related minority

22,783

33,184

Net cash from financing activities

201,489

(47,579)

 

 

Implied minority (%)

28.3

16.3

Contributed equity

 

Adjusted net earnings attributable

57,842

170,208

Net increase in cash

(95,957)

73,971

Issued share capital

2,579,636

Adjusted net EPS from continuing ops

0.372

1.081

Cash and at start of year

321,652

220,541

Equity reserve

72,487

Effects of forex changes

(3,198)

(172)

Accumulated profit

(1,128,792)

Cash before dividend

222,497

294,340

Other

(7,332)

Dividends to minorities

1,956

6,154

Shareholders’ funds

1,515,999

Cash at year end

220,541

288,186

Shares in issue (000s)

157,488

Source: Edison Investment Research (underlying data Endeavour Mining, SEMAFO). Note: *PSU=performance share units.

Self-evidently, since they are historical in nature, these numbers do not capture any transaction related impact on the financials, which will instead be recognised in FY20’s results. On the closure of the transaction, at current prices, Edison estimates that approximately US$51.2m in ‘goodwill’ will be written off by Endeavour against reserves, which compares with SEMAFO’s year-end 2019 net asset (book) value attributable to shareholders of US$798.1m. Readers should note that, for ease of presentation:

SEMAFO’s ‘current portion of long-term borrowings’ as at end-FY19 has been reclassified into long-term ‘borrowings’ in Exhibit 10, above.

SEMAFO’s short-term ‘provisions’ have been reclassified in the consolidated numbers in Exhibit 10, above, as ‘other’ long-term liabilities.

SEMAFO’s ‘share unit plan liabilities’ have been reclassified into ‘derivative liabilities’ in Exhibit 10, above.

Edison’s estimates of the contributions of each to the pro-forma income and cash-flow statements, above, to be as follows:

Exhibit 11: Estimated individual Endeavour and SEMAFO contributions to FY19 pro-forma income and cash-flow statements (US$000s unless otherwise indicated)

Income statement

EDV

SFO

Estimated pro-forma FY19

Cash-flow statement

EDV

SFO

Estimated pro-forma FY19

Revenue

Profit before taxation

(83,010)

104,252

21,242

- Gold revenue

886,371

475,750

1,362,121

Add back

Cost of sales

 

- Depreciation

197,219

141,042

338,261

- Operating costs

430,987

167,251

598,238

- Financing costs

43,066

43,066

- Royalties

48,139

25,484

73,623

- Share based payment expense

21,042

2,592

23,634

Gross profit

407,245

283,015

690,260

- Loss on financial instruments

57,968

57,968

Depreciation

(197,219)

(139,824)

(337,043)

- Impairment of mining interests

127,380

9,259

136,639

Expenses

 

- Cash paid on settlement PSUs etc.

(1,125)

(1,125)

- Corporate costs

(20,620)

(17,670)

(38,290)

- Income taxes paid

(65,997)

(43,497)

(109,494)

- Impairments

(127,380)

(9,259)

(136,639)

- Payment of gold collar premium

(5,360)

(5,360)

- Restructuring etc costs

(4,552)

(4,552)

- Net non-cash inventory adjustments

6,790

6,790

- Share-based compensation

(21,042)

(2,592)

(23,634)

- Foreign exchange loss

(3,972)

208

(3,764)

- Exploration costs

(9,893)

(9,893)

- Other

33,571

33,571

Total expenses

(183,487)

(29,521)

(213,008)

Operating cash-flows before non-cash working capital

294,001

247,427

541,428

Earnings/(loss) from operations

26,539

113,670

140,209

Change in working capital

Net interest

(43,066)

(8,541)

(51,607)

- Change in debtors

21,393

(12,227)

9,166

Loss on financial instruments

(57,968)

(57,968)

- Change in stocks

(10,794)

(16,184)

(26,978)

Other expenses

(8,515)

(877)

(9,392)

- Change in prepayments

(2,366)

(2,366)

Profit before tax

(83,010)

104,252

21,242

- Change in creditors

(349)

(965)

(1,314)

Current income tax

73,901

9,858

83,759

Change in working capital

7,884

(21,492)

Deferred tax

(20,145)

33,639

13,494

Other

(813)

(813)

Total tax

53,756

43,497

97,253

Net cash from operating activities

301,885

217,238

519,123

Mean tax rate (%)

(64.8)

41.7

457.8

Profit after tax

(136,766)

60,755

(76,011)

Cash-flows from investing activities

Net profit from discontinued ops

(4,394)

(4,394)

Capex (continuing operations)

(233,439)

(160,042)

(393,481)

Total net and comprehensive loss

(141,160)

60,755

(80,405)

Cash paid for additional Ity interest

(453)

(453)

Minority interest

22,558

10,568

33,126

Cash acquired on acquisitions

232

232

Do. (%)

(16.0)

17.4

(41.2)

Net proceeds from mining interest sales

3,875

3,875

Attributable profit

(163,718)

50,187

(113,531)

Other

(21,509)

13,763

(7,746)

Net cash from investing activities

(251,526)

(146,047)

(397,573)

EBITDA

355,690

262,753

618,443

Adjusted net earnings

96,270

107,122

203,392

Cash-flows from financing activities

Related minority

22,616

10,568

33,184

Gross proceeds from share issues etc.

292

2,282

2,574

Do. (%)

23.5

9.9

16.3

Payment of financing and other fees

(2,165)

(2,165)

Adjusted net earnings attributable

73,654

96,554

170,208

Interest paid

(33,248)

(33,248)

Adjusted net EPS

0.671

0.478

1.081

Proceeds of long-term debt

80,000

80,000

Repayment of long term debt

0

(60,000)

(60,000)

Repayment of finance lease obligation

(23,601)

(11,139)

(34,740)

Net cash from financing activities

21,278

(68,857)

(47,579)

Net increase/(decrease) in cash

71,637

2,334

73,971

Cash at start of the financial year

124,022

96,519

220,541

Forex effects

384

(556)

(172)

Cash at year-end (before dividend)

196,043

98,297

294,340

Dividend

6,154

0

6,154

Cash at year-end

189,889

98,297

288,186

Source: Edison Investment Research, Endeavour Mining, SEMAFO. Note: Year to end-December.

Endeavour FY20 forecasts (pre-acquisition)

Historically, Endeavour has a good record of meeting its production and cost guidance targets and FY19 was the seventh year in succession in which the company achieved its production and AISC cost targets.

Production and cost guidance for FY20, compared with Edison’s forecasts, is as follows:

Exhibit 12: Endeavour production and AISC cost guidance, by mine, FY20 vs Edison forecast

Production (koz)

AISC (US$/oz)

Mine

FY20e guidance
(koz)

Edison FY20e forecast (koz)

FY19
(koz)

FY20e guidance (US$/oz)

Edison FY20e forecast (US$/oz)

FY19

(US$/oz)

Houndé

230–250

234.4

223.3

865–895

932

862

Agbaou

115–125

111.2

137.5

940–990

1,080

796

Karma

100–110

107.6

96.5

980–1,050

1,028

903

Ity CIL

235–255

249.5

*193.1

630–675

677

616

Group total

680–740

702.6

650.4

**845–895

**916

**818

Source: Endeavour Mining, Edison Investment Research. Note: *Ity production is Ity CIL and residual Ity heap leach operation combined in FY19; Ity AISC is CIL only; **Includes corporate general & administrative costs.

Readers should note that changes in our cost forecasts relative to those set out in our last note (see Q419 and FY19 results ahead of expectations, published on 20 March 2020) have arisen solely as a consequence of our increased gold price expectations for the year (see ‘FY20 financial forecasts by quarter’, below), which affect royalties payable by Endeavour’s mines that, in their turn, contribute to AISC estimates. All other forecasts remain unchanged.

In general, the first half of FY20 in particular is expected to be an extension of circumstances in Q419. Ity will continue to mine into harder fresh ore at Daapleu, which will restrain recoveries before a degree of improvement in H220. However, its CIL plant should naturally be less affected by the uncertainties of the Q3 rainy season than its historical heap leach operation. In addition, the second lift of its tailings storage facility is reported to be progressing well and management believes that the mine, which is located in an area of acknowledged high rainfall, is now better prepared for the FY20 wet season than in previous years. Performance at Houndé will depend largely on its ability to mine Kari Pump in H220, for which a permit is expected to be received in Q2/Q3. In the meantime, it will continue to mine predominantly hard ore at a relatively high stripping ratio in H120, although this will be somewhat mitigated by its plant continuing to operate at or above nameplate capacity throughout the year. Readers should note that the difference between Edison’s cost and production forecasts for FY20 and company guidance may be explained by the timing of operations at Kari Pump. Whereas management expects a contribution from Kari Pump’s materially higher grade ore in H220, Edison’s forecasts assume that there is no such contribution until FY21, with the result that our cost forecasts in particular are slightly above the top of the guidance range for FY20 (and are therefore inherently conservative). At Agbaou, harder ore is expected to be mined, while the overall stripping ratio is anticipated to decrease slightly and throughput and recovery rates to decrease marginally owing to the harder ore blend. In the meantime, tonnes stacked at Karma are projected to increase as a result of the installation of the new stacker system and grades and recoveries to remain consistent with Q419 (albeit to improve upon FY19 generally, which was adversely affected by maintenance downtime related to the installation and commissioning of the tripper conveyor in addition to the heavy rains, which resulted in an increase in unit mining costs, among other things).

FY20 financial forecasts by quarter (pre-acquisition)

Whereas, in our last report (see Q419 and FY19 results ahead of expectations, published on 20 March 2020), we were forecasting quarterly gold prices of US$1,566/oz in Q120 followed by US$1,479/oz for the remainder of the year, we have now increased these to US$1,581/oz for Q120, US$1,686/oz for Q220 and US$1,670/oz for the remainder of the year. On this basis, Edison’s financial forecasts for Endeavour for FY20, by quarter, are now as follows (note that there has been no material effect of the coronavirus, to date, on Endeavour’s operations – see below):

Exhibit 13: Endeavour Mining FY20 earnings forecasts, by quarter


(US$000s unless otherwise indicated)

FY19

(underlying)

Q120e

Q220e

Q320e

Q420e

FY20e

(current)

FY20

(previous)

Houndé production (koz)

223.3

50.0

52.7

58.5

73.1

234.4

234.4

Agbaou production (koz)

137.5

24.1

29.7

24.1

33.4

111.2

111.2

Karma production (koz)

96.5

27.8

27.8

24.0

27.8

107.6

107.6

Ity production (koz)

193.1

59.5

61.9

59.7

68.5

249.5

249.5

Total gold produced (koz)

650.4

161.4

172.0

166.3

202.8

702.6

702.6

Total gold sold (koz)

648.8

161.4

172.0

166.3

202.8

702.6

702.6

Gold price (US$/oz)

1,367

1,581

1,686

1,670

1,670

*1,616

*1,465

Mine level cash costs (US$/oz)

646

720

702

665

605

670

670

Mine level AISC (US$/oz)

796

991

925

869

760

879

871

Revenue

– Gold revenue

886,371

248,928

283,287

271,114

332,021

1,135,349

1,029,250

Cost of sales

– Operating expenses

430,987

116,324

120,760

110,651

122,736

470,470

470,470

– Royalties

48,139

13,687

15,442

14,981

18,379

62,489

56,649

Gross profit

407,245

118,917

147,085

145,481

190,906

602,390

502,130

Depreciation

(197,219)

(51,245)

(53,410)

(51,454)

(55,054)

(211,163)

(211,163)

Expenses

– Corporate costs

(20,620)

(5,957)

(5,957)

(5,957)

(7,943)

(25,814)

(25,814)

– Impairments

0

0

0

0

0

0

0

– Acquisition etc costs

(4,552)

0

0

0

0

0

0

– Share based compensation

(21,042)

(5,333)

(5,333)

(5,333)

(5,333)

(21,332)

(21,332)

– Exploration costs

(9,893)

(2,750)

(2,750)

(2,750)

(2,750)

(11,000)

(11,000)

Total expenses

(56,107)

(14,040)

(14,040)

(14,040)

(16,026)

(58,146)

(58,146)

Earnings from operations

153,919

53,632

79,636

79,988

119,827

333,082

232,822

Interest income

0

0

0

Interest expense

(43,066)

(11,656)

(11,656)

(11,656)

(11,656)

(46,625)

(46,625)

Net interest

(43,066)

(11,656)

(11,656)

(11,656)

(11,656)

(46,625)

(46,625)

Loss on financial instruments

(57,968)

 

 

 

 

0

0

Other expenses

(8,515)

0

0

0

0

0

0

Profit before tax

44,370

41,975

67,979

68,331

108,170

286,456

186,197

Current income tax

73,901

15,343

20,914

21,051

29,409

86,717

65,165

Deferred income tax

1,560

0

0

0

0

0

0

Total tax

75,461

15,343

20,914

21,051

29,409

86,717

65,165

Marginal tax rate (%)

170.1

36.6

30.8

30.8

27.2

30.3

35.0

Profit after tax

(31,091)

26,632

47,066

47,280

78,761

199,740

121,031

Net profit from discontinued ops.

(4,394)

0

0

0

0

0

0

Total net and comprehensive loss

(35,485)

26,632

47,066

47,280

78,761

199,740

121,031

Minority interest

22,558

6,983

9,536

9,596

13,462

39,577

29,703

Minority interest (%)

(63.6)

26.2

20.3

20.3

17.1

19.8

24.5

Profit attributable to shareholders

(58,043)

19,649

37,529

37,685

65,299

160,163

91,328

Basic EPS from continuing ops (US$)

(0.489)

0.179

0.341

0.343

0.594

1.457

0.831

Diluted EPS from continuing ops (US$)

(0.489)

0.172

0.328

0.330

0.571

1.401

0.799

Basic EPS (US$)

(0.529)

0.179

0.341

0.343

0.594

1.457

0.831

Diluted EPS (US$)

(0.529)

0.172

0.328

0.330

0.571

1.401

0.799

Norm. basic EPS from continuing ops (US$)

0.081

0.179

0.341

0.343

0.594

1.457

0.831

Norm. diluted EPS from continuing ops (US$)

0.081

0.172

0.328

0.330

0.571

1.401

0.799

Adj net earnings attributable (US$000s)

73,654

23,584

41,782

41,935

69,721

177,022

107,114

Adj net EPS from continuing ops (US$)

0.671

0.215

0.380

0.381

0.634

1.610

0.974

Source: Endeavour Mining, Edison Investment Research. Note: Company reported basis. *Includes adjustment for Karma stream.

Relative to our last note, all other forecasts except the gold price for FY20 remain unchanged. Nevertheless, readers are cautioned that forecasting on a quarterly basis is prone to large variations between actual and forecast numbers. To this end, it is worth noting that the top end of Endeavour’s production guidance is 37.4koz gold (5.3%) above our forecast for the year, which is worth a material US$59.0m in additional revenue to the company (net of royalties) and therefore has the ability to increase our estimate of Endeavour’s FY20 profit before tax by 20.6% (all other things being equal). As such, the exhibit above should be regarded as indicative, rather than prescriptive, particularly with respect to individual quarters. Within that context a comparison between Edison’s FY20 adjusted net EPS from continuing operations estimates and consensus estimates, by quarter, is as follows:

Exhibit 14: Edison adjusted net EPS from continuing operations estimates vs consensus, FY20, by quarter (US$)

(US$/share)

Q1

Q2

Q3

Q4

Sum Q1–Q4

FY20

Edison forecast*

0.215

0.380

0.381

0.634

1.610

1.610

Mean consensus forecast

0.29

0.28

0.39

0.49

1.45

1.39

High

0.50

0.53

0.66

0.67

2.36

1.90

Low

0.17

0.14

0.16

0.36

0.83

0.68

Source: Refinitiv, Edison Investment Research. Note: *As per Exhibit 13. Priced 1 May 2020.

Absolute Endeavour valuation (pre-acquisition)

Endeavour is a multi-asset company that has shown a willingness and desire to trade assets to maintain production, reduce costs and maximise returns to shareholders (eg the sale of Youga in FY16, Nzema in FY17 and Tabakoto in FY18). Rather than our customary method of discounting maximum potential dividends over the life of operations back to FY20, therefore, we have opted to discount potential cash flows back over three years from FY20 and then to apply an ex-growth terminal multiple of 10x (consistent with using a standardised discount rate of 10%) to forecast cash flows in that year (ie FY22). In the normal course of events, exploration expenditure would be excluded from such a calculation on the basis that it is an investment. In the case of Endeavour, however, we have included it in our estimate of FY22 cash flows on the grounds that it may be a critical component of ongoing business performance in its ability to continually expand and extend the lives of the company’s assets. Note that, in the aftermath of the acquisition, the combined entity’s immediate strategic imperatives will be the continuation of exploration at Ity and Houndé plus investigating the potential to extend the mine lives of Mana and Boungou.

Compared with our last note, our estimate of Endeavour’s cash flow in FY22 on the above basis has increased by 2.0% to US$4.04 per share (cf US$3.96/share previously – the change being largely a consequence of the effect of lower levels of net debt on the interest charge in FY22), which should be credible within the context of its having generated US$1.10/share in cash flow from operations in Q419 alone. On this basis, our terminal valuation of the company at end-FY22 is US$40.38/share (cf US$39.62/share previously), which (in conjunction with forecast intervening cash flows) discounts back to a value of US$33.38/share at the start of FY20 (cf US$32.74/share previously).

Exhibit 15: Endeavour forecast valuation and cash flow per share, FY20–22e (US$/share)

Source: Edison Investment Research

Relative Endeavour valuation

Endeavour’s valuation on a series of commonly used measures, relative to a selection of gold mining majors, is as follows:

Exhibit 16: Endeavour valuation relative to peers

Company

Ticker

Price/cash flow (x)

EV/EBITDA (x)

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Endeavour (Edison)*

EDV

4.5

4.5

4.0

4.6

4.1

3.4

Endeavour (consensus)

EDV

4.9

4.1

4.6

5.5

4.7

5.0

Majors

 

Barrick

ABX

10.7

10.1

10.7

10.5

10.6

10.9

Newmont

NEM

11.9

10.0

11.3

10.4

8.8

10.1

Newcrest

NCM AU

10.5

8.2

8.9

8.4

7.5

7.8

Kinross

K

5.9

5.4

5.2

5.6

5.3

5.2

Agnico-Eagle

AEM

13.6

10.1

10.2

12.4

9.6

10.1

Eldorado

ELD

4.4

5.6

5.4

4.3

5.5

5.6

Average

 

9.5

8.2

8.6

8.6

7.9

8.3

Source: Edison Investment Research, Refinitiv. *Pre-acquisition basis. Note: Priced at 1 May 2020.

Of note is the fact that Endeavour’s valuation is materially cheaper than the averages of the majors on 100% of measures, regardless of whether Edison or consensus forecasts are used. On an individual basis, it is cheaper than the majors on at least 94% (34 out of 36) of valuation measures.

Financials

Endeavour had US$535.9m in net debt on its balance sheet at end-Q419, after US$40.2m in net capex during the quarter (vs US$110.8m in Q318). This level of net debt equates to a gearing (net debt/equity) ratio of 74.7% and leverage (net debt/[net debt + equity]) ratio of 42.7%. Note that US$535.9m reconciles with Endeavour’s Q419 balance sheet; it differs from the figure of US$528.2m quoted in some of the company’s other materials on account of the fact that the latter is calculated on the basis of the value of the minimum equipment finance obligations discounted back to present value rather than being presented on an undiscounted basis.

With capital expenditure relating to the Ity CIL project now having been, to all intents and purposes, completed, Endeavour has no major capex commitments in the future until the development of either Kalana and/or Fetekro. In the new gold price environment, cash flows were strongly positive in Q419 and we expect them to remain strongly positive into the foreseeable future, such that (excluding the merger with SEMAFO) we are forecasting that the company would have net debt of c US$394.1m as at end-FY20, which would equate to a gearing ratio of 43.8% and a leverage ratio of 30.5%. Thereafter, net debt would decline rapidly such that, all other things being equal, we estimate that the company would be net debt-free early in FY22 notwithstanding any capex related to the Kalana project, at which point it would have potentially been able to make dividend distributions to shareholders.

Estimated post-transaction consolidated financials

In contrast to Endeavour, as at end-December 2019, SEMAFO had US$10.7m in net cash on its balance sheet (excluding a further US$10.0m in ‘restricted cash’). When consolidated with Endeavour’s accounts, SEMAFO’s net cash position results in a group consolidated net debt position of US$515.2m (including ‘restricted cash’) as at end-December FY19 (see Exhibit 10). On the group’s expanded equity base, this results in a gearing (net debt/equity) ratio of 34.0% and a leverage (net debt/[net debt + equity]) ratio of 25.4%. Even under the influence of Endeavour’s assets’ cash flows alone, we would still expect the combined company to be net debt free in late FY21 based on our current gold price forecasts and assuming that the companies’ operations are not unduly affected by the coronavirus. Within this context, readers should note that SEMAFO recorded US$71.2m in positive pre-financing cash flows in FY19.

Risks and sensitivities

Gains or losses on financial instruments

During the year ended 31 December 2019, Endeavour put in place a gold revenue protection programme in order to maximise cash flow certainty during its debt reimbursement phase. Similar to the strategy it put in place during its recent construction phases, this comprises a deferred premium collar strategy using written (sold) call options and bought put options to (effectively) create a synthetic short position. The programme began on 1 July 2019 and will end on 30 June 2020 and covers a total of 360,000oz (approximately 50% of Endeavour’s total estimated production over the period), with a floor price of US$1,358/oz and a ceiling price of US$1,500/oz. As at end-Q419, 210,000oz remain outstanding under the collar derivative liability, implying that call options over 150,000oz of gold were exercised by counterparties in Q3 and Q419.

Edison’s short- to medium-term gold price forecasts are those set out in our recent report, Portents of economic weakness: Gold – doves in the ascendant, published on 14 August 2019, expressed in both nominal and real terms, below:

Exhibit 17: Edison gold price forecasts* (US$/oz)

US$/oz

2020e

2021e

2022e

2023e

Nominal gold price forecast (US$/oz)

1,635

1,509

1,560

1,421

Real gold price forecast (US$/oz)

1,572

1,395

1,387

1,350

Source: Edison Investment Research. Note: *See Portents of economic weakness: Gold – doves in the ascendant.

At US$1,670/oz at the time of writing, the gold price is currently 2.1% above Edison’s price forecast for CY20. In common with Edison’s stated practice, however, we use prevailing prices to generate our forecasts for the remainder of the current year (see Exhibit 13), followed by long-term forecasts thereafter (Exhibit 20).

While it is tempting to assume that a gold price above US$1,500/oz will automatically result in losses on Endeavour’s gold revenue protection programme, recent history would suggest that this is not a foregone conclusion. Exhibit 18, in particular, details Edison’s estimates of the losses and gains incurred by the programme during the past two quarters within the context of the gold price movement during the quarters and the extent of potential losses in Q120 and Q220, assuming that all remaining ounces covered by the revenue protection programme are exercised during those periods:

Exhibit 18: Gain/loss on gold revenue protection programme (US$000s)

Q220e

Q120e

Q419

Q319

Q219

Realised gain/(loss) on gold revenue protection strategy programme

(4,426)

(1,633)

Unrealised gain/(loss) on gold price protection strategy

7,229

(6,505)

Gain/(loss) on gold revenue protection programme

2,803

(8,138)

Gold price at end of period (US$/oz)

1,670

1,608

1,514

1,485

1,409

Gold price change during period (%)

+3.9

+6.2

+2.0

+5.4

Maximum gold price during period (US$/oz)

1,741

1,683

1,517

1,546

Gold price difference relative to US$1,500/oz (US$/oz)

*241

*183

*17

*46

Estimated ounces in programme exercised (oz)

105,000

105,000

75,000

75,000

Estimated potential realised gain/(loss)

(25,305)

(19,215)

(1,275)

(3,450)

Source: Endeavour Mining, Edison Investment Research. Note: *Based on maximum gold price during period.

Self-evidently, the extent of actual losses realised depends on, among other things, the timing and the exact price of gold when the contracts are exercised. Nevertheless, while the extent of the potential realised losses on the gold revenue protection programme in Q120 could not be considered trivial, it is worth noting that, historically, gains (or losses) on the gold revenue protection programme have not always been the largest constituent part of total gains (or losses) on financial instruments, as in Q319, as a case in point, below:

Exhibit 19: Endeavour Q3 and Q4 gain/(loss) on financial instruments (US$000s)

Item

Q419

Q319

Gain/(loss) on other financial instruments

(982)

(1,307)

Change in value of receivable relating to sales of Tabakoto and Nzema

35

(22,389)

Gain/(loss) on gold revenue protection programme

2,803

(8,138)

Unrealised gain/(loss) on convertible senior bond derivative

3,930

(14,168)

Gain/(loss) on foreign exchange

(3,592)

(3,526)

Total gain/(loss) on financial instruments

2,194

(49,528)

Source: Endeavour Mining. Note: Totals may not add up owing to rounding.

As a result of the inherent uncertainties surrounding gains (or losses) from financial instruments, they have been excluded from our forecasts in Exhibits 13 and 20. While the gold price protection strategy programme is a limited one therefore, investors should nevertheless be aware that the remaining contracts outstanding potentially represent an up to US$44.520m (US$0.405 per share gross of tax) risk to our FY20 earnings forecasts (albeit not our normalised or adjusted earnings forecasts).

COVID-19

Since the onset of the pandemic, governments in West Africa have acted decisively to implement appropriate response measures, using (where appropriate) their recent experience in dealing with Ebola in the region as a precedent. Out of three states of alert, West Africa is currently at a ‘Level 1’ state of readiness (ie that the virus remains predominantly outside West Africa), with the potential to escalate this to ‘Level 2’. In practice, this means that both Burkina Faso and the Ivory Coast have closed their borders and commercial flights both into and out of the countries have been suspended. Within this framework however, ‘key industries’ are allowed to remain operating and, in both countries, ministers are reported to be very keen that gold mining should continue. For their own protection therefore, mines have been isolated from the rest of the country.

Whether as a direct result of these measures or not, of all of the (populated) continents in the world, Africa to date has been the least affected by COVID-19. Endeavour has been supporting the national response in close collaboration with the health authorities in its host countries. In addition, it has mobilised and dispatched an expert medical response team to the region to provide it with an on-hand unit to respond rapidly to any infections that might arise at its mines.

At the asset level, each of the company’s operations are continuing to manage and respond to COVID-19 within the framework of the company’s incident management and response plan, which was activated at the outbreak of pandemic and has been validated by an epidemiologist special advisor to the company. As part of the response, a business continuity program has been put in place to protect employees while ensuring the safe operation of the company and its mines. Since early March, access to all mine sites has been strictly controlled with health screening in place for visitors, employees and contractors, and all non-essential travel has been cancelled. Endeavour has also asked any employee or contractor who is feeling unwell to stay at home and office workers are required to work from home.

On 14 March 2020, Endeavour was informed that an employee at the Houndé mine in Burkina Faso tested positive for COVID-19. The employee experienced mild symptoms hours after arriving at site, following his return from the UK. In line with the company’s COVID-19 protocol and procedures, the Burkinabe health authorities were immediately notified and the employee was placed in quarantine. The small number of people who had come into contact with the employee were all identified and also placed in quarantine as a preventative measure. As the employee did not show symptoms upon arrival and passed the mandatory health screening, the company further increased its preventive measures by introducing a mandatory 14-day quarantine period for any employees or contractors arriving in West Africa. As a result, of the few employees who had previously tested positive for COVID-19, all have now recovered and there have been no new reported cases since.

Consequently, Endeavour states that it has not witnessed any impact to production or operations at any of its mines or exploration activities as a result of COVID-19. It also states that it has sufficient inventory of supplies and equipment until at least the end of July 2020, while suppliers have confirmed that placed and forecast orders are intact. In the meantime, Endeavour has stated a readiness, if necessary, to charter its own planes to keep its operations supplied with necessary supplies and equipment.

From a financial perspective, Endeavour calculates its current cash-burn rate to be of the order of c US$70m per month, with the potential to reduce to US$25–30m per month (including paying all salaries) in the event that all mines are put on care and maintenance. As such, its current access to c US$300m of liquidity equates to approximately four months’ worth of costs at current rates of operation or 10 months at reduced rates.

To date, Endeavour’s efforts to combat the disease have concentrated on its global supply chain, health and safety systems, community relations and communication teams and, notably, includes the provision of medical equipment and supplies to local communities, such as masks, gloves and cleaning equipment, training dozens of local health workers and running COVID-19 awareness campaigns. It has undertaken to continue to provide these essential supplies and services for the duration of the pandemic in support of the healthcare centres in its local communities.

Simultaneously, Endeavour’s president and CEO Sébastien de Montessus has said that he will donate 30% of his base salary, and members of the leadership team and the board of directors have also volunteered to donate a portion of their salaries or fees for the next three months to combating the outbreak. As a company, Endeavour has said that it will match these funds to result in a total donation of approximately US$1m. The funds will be deployed by Endeavour’s community relations and medical teams to source much needed medical equipment for local community health centres and also to provide financial support to families and schools that have been affected by a loss of income as a result of the disease. These donations, combined with the amount already spent at the mines and supporting national and local efforts in Cote d’Ivoire, Burkina Faso, and Mali, will bring Endeavour’s total contribution to c US$6m.

Exhibit 20: Financial summary

US$'000s

2016

2017

2018

2019

2020e

2021e

2022e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

566,486

652,079

751,957

886,371

1,135,349

1,063,175

1,079,514

Cost of Sales

(376,794)

(597,528)

(487,119)

(662,613)

(591,105)

(486,391)

(477,512)

Gross Profit

189,692

54,551

264,838

223,758

544,244

576,784

602,002

EBITDA

 

 

213,916

201,166

264,838

355,690

544,244

576,784

602,002

Operating Profit (before amort. and except.)

127,981

70,379

95,769

158,471

333,082

359,180

530,627

Intangible Amortisation

0

0

0

0

0

0

0

Exceptionals

(36,272)

(149,942)

8,035

(189,900)

0

0

0

Other

(1,989)

(2,242)

(1,558)

(8,515)

0

0

0

Operating Profit

89,720

(81,805)

102,246

(39,944)

333,082

359,180

530,627

Net Interest

(24,593)

(18,789)

(23,671)

(43,066)

(46,625)

(39,411)

(8,930)

Profit Before Tax (norm)

 

 

101,399

49,348

70,540

106,890

286,456

319,768

521,697

Profit Before Tax (FRS 3)

 

 

65,127

(100,594)

78,575

(83,010)

286,456

319,768

521,697

Tax

(27,643)

(32,945)

(61,515)

(53,756)

(86,717)

(101,165)

(114,874)

Profit After Tax (norm)

73,756

16,403

9,025

53,134

199,740

218,604

406,823

Profit After Tax (FRS 3)

37,484

(133,539)

17,060

(136,766)

199,740

218,604

406,823

Net loss from discontinued operations

(154,795)

(4,394)

0

0

0

Minority interests

7,121

22,558

39,577

54,361

75,219

Net profit

(137,735)

(141,160)

199,740

218,604

406,823

Net attrib. to shareholders contg. businesses (norm)

(8,100)

30,576

160,163

164,243

331,604

Net attrib.to shareholders contg. businesses

(65)

(159,324)

160,163

164,243

331,604

Average Number of Shares Outstanding (m)

80.6

98.5

107.7

109.8

109.9

109.9

109.9

EPS - normalised ($)

 

 

(0.38)

(0.06)

(0.08)

0.28

1.46

1.49

3.02

EPS - normalised and fully diluted ($)

 

(0.38)

(0.06)

(0.08)

0.28

1.40

1.44

2.90

EPS - (IFRS) ($)

 

 

(0.83)

(1.59)

(1.34)

(1.49)

1.46

1.49

3.02

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

33.5

8.4

35.2

25.2

47.9

54.3

55.8

EBITDA Margin (%)

37.8

30.8

35.2

40.1

47.9

54.3

55.8

Operating Margin (before GW and except.) (%)

22.6

10.8

12.7

17.9

29.3

33.8

49.2

BALANCE SHEET

Fixed Assets

 

 

1,073,562

1,331,745

1,594,202

1,476,753

1,509,681

1,385,528

1,349,646

Intangible Assets

29,978

6,267

4,186

5,498

5,498

5,498

5,498

Tangible Assets

1,039,529

1,317,952

1,543,842

1,410,274

1,443,202

1,319,049

1,283,167

Investments

4,055

7,526

46,174

60,981

60,981

60,981

60,981

Current Assets

 

 

283,536

361,766

327,841

396,038

624,882

946,900

1,395,316

Stocks

110,404

141,898

126,353

168,379

218,336

204,457

207,599

Debtors

36,572

95,212

74,757

37,770

74,843

105,926

107,269

Cash

124,294

122,702

124,022

189,889

331,703

636,517

1,080,448

Other

12,266

1,954

2,709

0

0

0

0

Current Liabilities

 

 

(149,626)

(241,185)

(248,420)

(268,015)

(308,715)

(266,645)

(272,356)

Creditors

(145,311)

(223,527)

(224,386)

(238,584)

(279,284)

(237,214)

(242,925)

Short term borrowings

(4,315)

(17,658)

(24,034)

(29,431)

(29,431)

(29,431)

(29,431)

Long Term Liabilities

 

 

(246,811)

(451,705)

(729,290)

(788,279)

(788,279)

(788,279)

(788,279)

Long term borrowings

(146,651)

(323,184)

(618,595)

(696,383)

(696,383)

(696,383)

(696,383)

Other long term liabilities

(100,160)

(128,521)

(110,695)

(91,896)

(91,896)

(91,896)

(91,896)

Net Assets

 

 

960,661

1,000,621

944,333

816,497

1,037,569

1,277,504

1,684,327

CASH FLOW

Operating Cash Flow

 

 

164,522

244,092

274,938

367,882

519,246

538,842

603,227

Net Interest

(19,626)

(15,212)

(26,734)

(35,413)

(46,625)

(39,411)

(8,930)

Tax

(10,625)

(22,301)

(24,018)

(65,997)

(86,717)

(101,165)

(114,874)

Capex

(212,275)

(441,396)

(486,498)

(254,948)

(244,091)

(93,452)

(35,492)

Acquisitions/disposals

32,098

(37,332)

33,179

3,422

0

0

0

Financing

174,702

116,536

(6,231)

676

0

0

0

Dividends

(2,612)

(5,177)

(1,956)

(6,154)

0

0

0

Net Cash Flow

126,184

(160,790)

(237,320)

9,468

141,814

304,814

443,931

Opening net debt/(cash)

 

 

152,856

26,672

218,140

518,607

535,925

394,111

89,297

HP finance leases initiated

0

0

0

0

0

0

0

Other

0

(30,678)

(63,147)

(26,786)

0

0

0

Closing net debt/(cash)

 

 

26,672

218,140

518,607

535,925

394,111

89,297

(354,634)

Source: Company sources, Edison Investment Research. Note: Presented on pre-acquisition basis. EPS normalised from 2018 to reflect continuing business only. 2017 shown as originally reported (ie not restated). *Excludes restricted cash.

General disclaimer and copyright

This report has been commissioned by Endeavour Mining and prepared and issued by Edison, in consideration of a fee payable by Endeavour Mining. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues