Forecasts up; valuation up

Endeavour Mining 11 November 2019 Update
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Endeavour Mining

Forecasts up; valuation up

Q3 results

Metals & mining

11 November 2019

Price

C$23.12

Market cap

C$2,541m

C$1.3203/US$

Net debt (US$m) at end September 2019*

615.1

*Including IFRS 16 leases

Shares in issue (thousands)

109,925

Free float

70.1%

Code

EDV

Primary exchange

TSX

Secondary exchange

US OTC

Share price performance

%

1m

3m

12m

Abs

(9.3)

(15.6)

19.9

Rel (local)

(12.4)

(18.0)

9.1

52-week high/low

C$28.79

C$16.36

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

Ity expansion to 5Mtpa completed

Q419

Kari West and Center maiden resource

Q419

Kari West and Center maiden reserve

Q120

Le Plaque resource and maiden reserve

Q120

Fetekro PEA

Q120

Houndé and Ity updated mine plans

Q120

Analyst

Charles Gibson

+44 (0)20 3077 5724

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.

Year
end

Revenue (US$m)

EBITDA (US$m)

PBT*
(US$m)

Operating cash flow
per share (US$)

Capex (US$m)

Net debt**
(US$m)

12/17

652.1

201.2

49.3

2.25

441.4

216.8

12/18

752.0

264.8

70.5

2.33

486.5

517.5

12/19e

893.9

372.3

129.8

2.58

233.1

526.8

12/20e

1,085.8

598.1

352.0

4.05

146.9

273.8

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

Ity plant expansion scheduled for completion end-Q4

Following the performance test conducted in Q219, optimisation and de-bottlenecking work has commenced on the Ity process plant expansion, which is expected to increase plant capacity by 1Mtpa, or 25%, to 5Mtpa by the end of Q419 at a cost of US$10–15m. All other things being equal, we estimate that this change increases the NPV10 of the Ity CIL project by US$117.7m, or 14.0%, or US$1.07 per share as at 1 January 2020 (at Edison’s updated gold prices).

Valuation: Up 17.1% to US$32.30/share

In valuing Endeavour, we have opted to discount potential cash flows to shareholders back over four years from FY19 and then apply an ex-growth, ad infinitum terminal multiple of 10x (consistent with a discount rate of 10%) to the forecast cash flow in that year (FY22). Since our last note, we have updated our life of operations financial model for Endeavour to reflect our updated gold price forecasts (see Exhibit 7 and Portents of economic weakness: Gold – doves in the ascendant) as well as Ity’s expansion of its process plant throughput rate from 4Mtpa to 5Mtpa. As a result, our estimate of Endeavour’s cash flow in FY22 has increased materially to US$4.20 per share (cf US$3.23/share previously), on which basis our terminal valuation of the company at end-FY22 is US$41.99/share (cf US$32.33/share previously), which (in conjunction with forecast intervening cash flows) discounts back to a value of US$32.30/share in FY19 (cf US$27.58/share previously).

Endeavour Mining is a research client of Edison Investment Research Limited

Q3 results summary

Endeavour’s Q3 results were considerably ahead of our forecasts, despite a challenging rainy season in which more than four times as much precipitation fell than in the equivalent period in Q316. The effects of the weather were notable particularly in individual mines’ unit mining costs (as opposed to processing or G&A costs), which were flat or increased in every instance, not least as a result of additional water pumping costs being incurred. In addition, inventory adjustments added to the cost of sales at Houndé, Agbaou and Karma. However, production also rose at three of Endeavour’s four mines – the exception being Houndé, where output dropped by 6.1% quarter-on-quarter. Note that this performance followed a Q2 in which all of Endeavour’s mines also outperformed our production expectations, with the exception of Karma. Overall, group production increased by 5.5% relative to the prior quarter (NB historically, production has tended to fall in Q3 relative to Q2) and was 3.5% above our forecasts, driven by increases in both tonnes milled/processed (+3.3% q-o-q) and head grades (+6.3%), despite the selective utilisation of low-grade stockpiles, partially offset by a decline in recovery rates at all of the mines with the exception of Agbaou.

Financial results included a US$49.5m loss on financial instruments (see dedicated section on page 4) and a US$10.6m charge for deferred tax. Even so, stripping these out, earnings were US$28.0m compared with Edison’s forecast of US$10.4m – albeit almost all of the difference could be accounted for by the additional US$15.7m in revenues that were generated by Endeavour’s 6.1koz increase in production relative to our forecasts plus a further 4.5koz of sales over and above production. Net adjusted EPS of 30.2c was more than twice our forecast of 12.9c. Otherwise, operating cash flow (before working capital items) more than doubled to US$1.05/share, return on capital employed increased to 15% (on an annualised basis) and net debt (excluding IFRS 16 leases – see Financials, below) reduced by US$52m. Capex continued to fall with sustaining plus non-sustaining capex amounting to no more than US$24.3m across the company’s four mines.

Operational performance

From an operational perspective, the best performance during the quarter was recorded by Ity, where an increase in production of 10.9% on an ostensibly flat cost base resulted in an increase in the mine’s earnings of 85.5%, or US$15.8m, relative to the prior quarter, albeit aided by a relatively low marginal tax rate and a lower than ambient minority charge. Of note was a moderation in reagent consumption, which had previously been required to achieve higher recoveries on some ores containing high cyanide soluble copper as the blend of ores fed to the mill stabilised. By contrast, rain slowed the development of the high-grade Bouéré deposit at Houndé, which was mined at a slower rate than planned and necessitated the augmentation of the mill feed with low-grade stockpiles, which also reduced metallurgical recoveries on account of the ore blend. In addition, Houndé attracted a deferred tax charge, which resulted in an increased marginal tax rate, as well as a higher than ambient minority charge. Agbaou similarly attracted a deferred tax charge as well as a higher than ambient minority charge. Operationally however, it benefited from higher throughput and recovery (as a result of increased capacity utilisation and, consequently, lower unit processing and G&A charges) and a lower stripping ratio as mining focused on the deeper elevations of the North Pit and as it commenced in the South Pit extension, which resulted in an increase in capitalised waste, albeit less than anticipated owing to better than expected unit mining costs. Finally, at Karma, mining transitioned from the Kao Main pit to the Kao North pit early in the quarter, with the result that the stacked grade increased owing to the oxide nature of the new ore, while metallurgical recovery rates declined at the same time as tonnes stacked declined, owing to 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. As at Houndé and Agbaou, Karma experienced a deferred tax charge, which increased its marginal tax rate. It also recorded a sharply higher depreciation and depletion charge (although no more than in line with the increase in production). However, there was no charge for minority interests.

A detailed analysis of Endeavour’s financial and operational performance, relative to both the previous quarter and our prior expectations (as set out in our note, Endeavour Mining: Valuation US$27.58; potential 32% upside, published on 3 October 2019) is as follows:

Exhibit 1: Endeavour Mining earnings, by quarter, Q218Q319

(US$000s unless otherwise indicated)

Q218

Q318

Q418

Q119

Q219

Q319e

Q319a

Q3/Q2

Q3a vs Q3e

Change
(%)

Variance
(%)

Variance (units)

Houndé production (koz)

66.9

60.7

75.8

55.4

58.2

58.2

54.7

-6.0

-6.0

-3.5

Agbaou production (koz)

33.7

31.2

44.4

31.8

34.6

32.2

36.1

4.3

12.1

3.9

Karma production (koz)

21.0

26.1

33.5

22.1

21.0

23.5

26.2

24.8

11.5

2.7

Ity production (koz)

25.0

21.0

20.6

11.5

57.3

60.8

63.8

11.3

4.9

3.0

Tabakoto production (koz)

26.8

26.5

29.6

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Total gold produced (koz)

147

139

174.2

120.8

171.3

174.7

180.8

5.5

3.5

6.1

Total gold sold (koz)

151

134

173.4

120.9

170.7

174.7

185.3

8.6

6.1

10.6

Gold price (US$/oz)

1,306

1,161

1,198

1,304

1,285

1,474

1,443

12.3

-2.1

-31

Mine level cash costs (US$/oz)

608

643

555

659

632

605

613

-3.0

1.3

8

Group level AISC (US$/oz)

768

820

707

877

790

856

803

1.6

-6.2

-53

Revenue

 

 

 

– Gold revenue

189,515

155,764

207,784

151,310

219,371

251,582

267,292

21.8

6.2

15,710

Cost of sales

 

 

 

– Operating expenses

92,646

86,238

124,832

88,363

103,318

105,631

114,599

10.9

8.5

8,968

– Royalties

10,254

8,293

10,338

8,989

11,032

13,669

14,480

31.3

5.9

811

Gross profit

86,615

61,233

72,614

53,958

105,021

132,282

138,213

31.6

4.5

5,931

Depreciation

(43,538)

(35,911)

(50,116)

(36,132)

(51,970)

(60,757)

(54,509)

4.9

-10.3

6,248

Expenses

 

 

 

– Corporate costs

(6,130)

(5,888)

(8,001)

(6,061)

(5,143)

(5,957)

(6,166)

19.9

3.5

-209

– Impairments

0

0

0

0

0

0

0

N/A

N/A

0

– Acquisition etc costs

0

0

0

0

0

0

0

N/A

N/A

0

– Share based compensation

(10,109)

(4,007)

(8,147)

(2,600)

(4,385)

(5,333)

(5,238)

19.5

-1.8

95

– Exploration costs

(2,284)

(2,583)

0

(4,361)

(1,674)

(1,271)

(3,858)

130.5

203.5

-2,587

Total expenses

(18,523)

(12,478)

(16,148)

(13,022)

(11,202)

(12,561)

(15,262)

36.2

21.5

-2,701

Earnings from operations

24,554

12,844

6,350

4,804

41,849

58,964

68,442

63.5

16.1

9,478

Interest income

0

0

0

0

0

0

0

N/A

N/A

0

Interest expense

(4,549)

(6,679)

(4,947)

(4,919)

(12,386)

(20,224)

(14,170)

14.4

-29.9

6,054

Net interest

(4,549)

(6,679)

(4,947)

(4,919)

(12,386)

(20,224)

(14,170)

14.4

-29.9

6,054

Loss on financial instruments

10,922

24,755

(16,239)

1,123

(11,757)

(1,445)

(49,528)

321.3

3,327.5

-48,083

Other expenses

(818)

(173)

(402)

(197)

4,574

0

(673)

N/A

N/A

-673

Profit before tax

30,109

30,747

(15,238)

811

22,280

37,295

4,071

-81.7

-89.1

-33,224

Current income tax

17,095

17,443

21,212

13,478

13,845

18,667

16,917

22.2

-9.4

-1,750

Deferred income tax

4,432

(2,007)

(2,551)

(1,224)

1,531

0

10,699

598.8

N/A

10,699

Total tax

21,527

15,436

18,661

12,254

15,376

18,667

27,616

79.6

47.9

8,949

Marginal tax rate (%)

71.5

50.2

(122.5)

1,511.0

69.0

50.1

678.4

883.2

1,254.1

628

Profit after tax

8,582

15,311

(33,899)

(11,443)

6,904

18,629

(23,545)

N/A

N/A

-42,174

Net profit from discontinued ops.

(24,025)

(35,705)

(95,658)

0

0

0

0

N/A

N/A

0

Total net and comprehensive loss

(15,443)

(20,394)

(129,557)

(11,443)

6,904

18,629

(23,545)

N/A

N/A

-42,174

Minority interest

(132)

(3,619)

(3,695)

3,224

6,193

8,197

8,654

39.7

5.6

457

Minority interest (%)

0.9

17.7

2.9

(28.2)

89.7

44.0

(36.8)

N/A

N/A

-81

Profit attributable to shareholders

(15,311)

(16,775)

(125,862)

(14,667)

711

10,432

(32,199)

N/A

N/A

-42,631

 

 

 

Basic EPS from continuing ops (US$)

0.037

0.136

(0.292)

(0.136)

0.006

0.095

(0.293)

N/A

N/A

-0.388

Diluted EPS from continuing ops (US$)

0.037

0.136

(0.292)

(0.131)

0.006

0.091

(0.293)

N/A

N/A

-0.384

Basic EPS (US$)

(0.142)

(0.156)

(1.167)

(0.136)

0.006

0.095

(0.293)

N/A

N/A

-0.388

Diluted EPS (US$)

(0.142)

(0.155)

(1.165)

(0.131)

0.006

0.091

(0.293)

N/A

N/A

-0.384

Norm. basic EPS from continuing ops (US$)

(0.064)

(0.094)

(0.142)

(0.146)

0.113

0.108

0.158

39.8

46.3

0.05

Norm. diluted EPS from continuing ops (US$)

(0.064)

(0.094)

(0.141)

(0.141)

0.113

0.104

0.158

39.8

51.9

0.054

Adj net earnings attributable (US$000s)

9,189

(1,408)

16,271

(4,910)

8,519

14,227

33,155

289.2

133.0

18,928

Adj net EPS from continuing ops (US$)

0.085

(0.013)

0.151

(0.045)

0.078

0.129

0.302

287.2

134.1

0.173

Source: Endeavour Mining, Edison Investment Research. Note: Company reported basis.

Once again, it is notable that both the tax charge and the minority interest charge during the quarter were above those that would naturally be expected, given the realities of Endeavour’s commercial circumstances. On an underlying basis however, the marginal current income tax rate was more in line, equating to 33.8% of underlying pre-tax profits (compared to 17.5–25.0% for those of Endeavour’s individual operations), while the underlying minority charge equated to 24.1% of underlying profits after tax (compared to 10–15% for those of Endeavour’s individual operations) – albeit it is noticeable that both of these numbers have always exhibited considerable volatility, historically, on a quarterly basis.

Gains/(losses) on financial instruments

The largest single variance between Edison’s Q319 forecasts and actual results related to losses on financial instruments. Edison had forecast a loss of US$1,445k compared to an actual figure of US$49,528k. However, whereas Edison’s forecast was based on the anticipated loss on the realisation of contracts relating to its gold revenue protection strategy during the quarter, the actual loss reflected a number of other items, which are summarised below:

Exhibit 2: Endeavour Q3 gain/(loss) on financial instruments

Item

Amount (US$000s)

Percent of total (%)

Gain/(loss) on other financial instruments

(1,307)

2.6

Change in value of receivable relating to sales of Tabakoto and Nzema to reflect increasing uncertainty

(22,389)

45.2

Gain/(loss) on gold revenue protection programme

(8,138)

16.4

Unrealised gain/(loss) on convertible senior bond derivative

(14,168)

28.6

Gain/(loss) on foreign exchange

(3,526)

7.1

Total gain/(loss) on financial instruments

(49,528)

100.0

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

In addition to the additional four items, in the third quarter, of the US$8,138k charge relating to the gold revenue protection programme, only US$1,633k related to realised losses (ie tolerably close to Edison’s forecast of US$1,445k) with the balance relating to unrealised losses for the balance of the programme:

Exhibit 3: Gain/loss on gold revenue protection programme

Amount

(US$000s)

Percent of total (%)

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

(1,633)

20.1

Unrealised gain/(loss) on gold price protection strategy

(6,505)

79.9

Gain/(loss) on gold revenue protection programme

(8,138)

100.0

Source: Endeavour Mining.

Note that the charges relating to realised and unrealised gains/(losses) on the gold revenue protection programme relate to the short-term strategy put in place by Endeavour 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. Now that the gold price has reverted below US$1,500/oz however (and is close to our forecast of US$1,474/oz for the quarter) the bought put option contracts will be ‘out of the money’ and therefore has the potential to result in reversals of these losses in future quarters (all other things being equal).

Note also that, in recognition of the change in value of the Tabakoto and Nzema receivables (Exhibit 2), we have removed an assumed cash inflow of US$10m from our cash-flow forecasts for FY19 in Exhibit 9.

Ity process plant expansion

Following the performance test conducted in Q219, optimisation and de-bottlenecking work commenced, which is expected to increase plant capacity by 1Mtpa, or 25%, to 5Mtpa at a cost of US$10-15m. During the third quarter, plant throughput achieved an annualised rate of 4.7Mtpa after the installation of larger motors on the primary apron feeder and vibrating grizzly at the crusher as well as increased lime addition capacity, which accounted for c US$4m of the budgeted capital expenditure. The remainder of the upgrade is on track to be completed in Q419 and will account for the remainder of the budget.

While Edison expects Ity’s Q419 performance to be broadly in line with its performance in Q319, in the longer term, the advantage of increasing plant capacity to 5Mtpa will be to bring processing capacity in line with the mining rate at Ity, thereby avoiding the build-up of large stockpiles for processing once mining operations have been concluded, as shown graphically in the Exhibit below:

Exhibit 4: Ity mining and processing rates and grades, 5Mtpa vs 4Mtpa plan

Source: Endeavour Mining, Edison Investment Research.

Note that, for the purposes of the above analysis, Edison has simply brought forward 1Mt of production at the appropriate grade (from the 2017 optimisation study) from FY21 into FY20, 2Mt from FY22 into in FY21, 3Mt from FY23 into FY22 etc, such that exactly the same amount of gold is mined at exactly the same cost over a shorter timeframe. No other changes have been made.

All other things being equal, we estimate that this change increases the NPV10 of the Ity CIL project by US$117.7m, or 14.0%, or US$1.07 per share as at 1 January 2020 (at Edison’s updated gold prices – see below).

FY19 guidance and Edison forecasts

Historically, Endeavour has a good record of meeting its production and cost guidance targets. Moreover, historically, Q4 has always been one of Endeavour’s strongest quarters. Within this context, Ity is on track to achieve the upper end of its full-year 2019 production guidance range of 160-200koz, as it continues to mine into harder fresh ore. The challenge for management in the fourth quarter will be to successfully manage the transition from soft ore. At the same time, the lower average grade required to fill excess plant capacity beyond its nameplate design (see below) coupled with higher royalty costs is expected to result in all-in sustaining costs (AISC) finishing near the top end of the guidance range of US$525-590/oz.

To a greater or lesser extent, some of the rains experienced in Q3 continued into October, especially at Houndé, which has delayed the ramp up at the high grade Bouéré deposit. As a result, the stripping ratio at Houndé is expected to stay high in Q4 and the ramp up will only occur towards the end of the quarter and in the beginning of Q120 – albeit this will be partially offset by the fact that the grade of the ore mined there is expected to reach c 3g/t (cf a blended head grade of 1.85g/t processed in Q319).

In the light of these expectations and its mines’ performances to date, Endeavour has slightly adjusted its guidance for the full-year to the following, which are similarly compared with Edison’s updated forecasts (see also Exhibit 6):

Exhibit 5: Endeavour production and AISC cost guidance, by mine, FY19 and Edison forecast

Production (koz)

AISC (US$/oz)

Mine

Previous FY19e guidance (koz)

Current FY19e guidance (koz)

Edison new FY19e forecast (koz)

Previous FY19 forecast (koz)

Previous FY19e guidance (US$/oz)

Current FY19e guidance (US$/oz)

Edison new FY19e forecast (US$/oz)

Previous FY19e forecast (US$/oz)

Houndé

230–250

Slightly below range

218.5

240.4

720–790

Above range

908

798

Agbaou

120–130

Upper end of range

132.0

128.1

850–900

Slightly below range

835

852

Karma

105–115

Lower end of range

105.0

102.5

860–910

Slightly above range

911

892

Ity*

160–200

195-200

195.0

185.1

525–590

Top of range

568

591

Group total

615–695

650-695

650.5

656.0

**760–810

**795-845

**835

**808

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

Aside from the changes to production and cost estimates noted in Exhibit 5 above, Edison’s forecasts for FY19 continue to reflect Endeavour’s sustaining and non-sustaining capital cost guidance for each of its mines for the remainder of the year, with the result that our financial and operational forecasts for Endeavour for Q419 and FY19 are now as follows:

Exhibit 6: Endeavour Mining FY19 earnings forecasts, by quarter


(US$000s unless otherwise indicated)

FY18

Q119

Q219

Q319

Q419e

(previous)

Q419e

(current)

FY19e

(previous)

FY19e

(current)

Houndé production (koz)

277.2

55.4

58.2

54.7

68.6

50.2

240.4

218.5

Agbaou production (koz)

141.3

31.8

34.6

36.1

29.5

29.5

128.1

132.0

Karma production (koz)

108.7

22.1

21.0

26.2

35.9

35.7

102.5

105.0

Ity production (koz)

84.8

11.5

57.3

63.8

55.3

62.2

185.1

195.0

Tabakoto production (koz)

115.2

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Total gold produced (koz)

612.1

120.8

171.3

180.8

189.3

177.6

656.0

650.5

Total gold sold (koz)

612.1

120.9

170.7

185.3

189.3

177.6

655.6

654.5

Gold price (US$/oz)

1,199

1,304

1,285

1,443

1,474

1,474

*1,365

*1,365

Mine level cash costs (US$/oz)

579

659

632

613

497

633

591

634

Mine level AISC (US$/oz)

744

827

760

777

688

884

769

835

Revenue

– Gold revenue

751,957

151,310

219,371

267,292

273,071

255,905

895,334

893,878

Cost of sales

– Operating expenses

386,926

88,363

103,318

114,599

94,134

112,395

391,446

418,675

– Royalties

41,068

8,989

11,032

14,480

15,649

14,138

49,339

48,639

Gross profit

323,963

53,958

105,021

138,213

163,288

129,373

454,549

426,565

Depreciation

(169,069)

(36,132)

(51,970)

(54,509)

(66,841)

(58,757)

(215,699)

(201,368)

Expenses

– Corporate costs

(26,573)

(6,061)

(5,143)

(6,166)

(7,943)

(8,221)

(25,104)

(25,591)

– Impairments

0

0

0

0

0

0

0

0

– Acquisition etc costs

0

0

0

0

0

0

0

0

– Share based compensation

(24,931)

(2,600)

(4,385)

(5,238)

(5,333)

(5,333)

(17,651)

(17,556)

– Exploration costs

(7,621)

(4,361)

(1,674)

(3,858)

(1,271)

(1,271)

(8,577)

(11,164)

Total expenses

(59,125)

(13,022)

(11,202)

(15,262)

(14,547)

(14,825)

(51,332)

(54,311)

Earnings from operations

95,769

4,804

41,849

68,442

81,901

55,790

187,518

170,885

Interest income

0

0

0

0

Interest expense

(23,671)

(4,919)

(12,386)

(14,170)

(14,224)

(13,345)

(51,753)

(44,820)

Net interest

(23,671)

(4,919)

(12,386)

(14,170)

(14,224)

(13,345)

(51,753)

(44,820)

Loss on financial instruments

8,035

1,123

(11,757)

(49,528)

(12,079)

(60,162)

Other expenses

(1,558)

(197)

4,574

(673)

0

0

4,377

3,704

Profit before tax

78,575

811

22,280

4,071

67,677

42,446

128,063

69,608

Current income tax

66,522

13,478

13,845

16,917

21,785

17,479

67,775

61,719

Deferred income tax

(5,007)

(1,224)

1,531

10,699

0

0

307

11,006

Total tax

61,515

12,254

15,376

27,616

21,785

17,479

68,082

72,725

Marginal tax rate

78.3

1,511.0

69.0

678.4

32.2

41.2

53.2

104.5

Profit after tax

17,060

(11,443)

6,904

(23,545)

45,892

24,966

59,982

(3,118)

Net profit from discontinued ops.

(154,795)

0

0

0

0

0

0

0

Total net and comprehensive loss

(137,735)

(11,443)

6,904

(23,545)

45,892

24,966

59,982

(3,118)

Minority interest

7,121

3,224

6,193

8,654

9,985

7,932

27,599

26,003

Minority interest (%)

(5.2)

(28.2)

89.7

(36.8)

21.8

31.8

46.0

(834.1)

Profit attributable to shareholders

(144,856)

(14,667)

711

(32,199)

35,907

17,034

32,383

(29,121)

Basic EPS from continuing ops (US$)

(0.001)

(0.136)

0.006

(0.293)

0.327

0.155

0.295

(0.265)

Diluted EPS from continuing ops (US$)

(0.001)

(0.131)

0.006

(0.293)

0.315

0.150

0.284

(0.257)

Basic EPS (US$)

(1.344)

(0.136)

0.006

(0.293)

0.327

0.155

0.295

(0.265)

Diluted EPS (US$)

(1.342)

(0.131)

0.006

(0.293)

0.315

0.150

0.284

(0.257)

Norm. basic EPS from continuing ops (US$)

(0.075)

(0.146)

0.113

0.158

0.327

0.155

0.405

0.283

Norm. diluted EPS from continuing ops (US$)

(0.075)

(0.141)

0.113

0.158

0.315

0.150

0.390

0.274

Adj net earnings attributable (US$000s)

53,132

(4,910)

8,519

33,155

40,080

20,673

57,916

57,437

Adj net EPS from continuing ops (US$)

0.493

(0.045)

0.078

0.302

0.365

0.188

0.527

0.523

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

We note that forecasting on a quarterly basis is prone to large variations between actual and forecast numbers (as demonstrated, not least, by the variances observed between Q319 actual figures and Q319 estimates in Exhibit 1, above). To this end, it is worth noting that the top end of Endeavour’s production guidance is 44.5koz gold above our updated forecast for the year, which is worth a material US$62.0m in additional revenue to the company (net of royalties) and therefore has the ability to increase Endeavour’s full year profit before tax by 89.1% relative to our forecasts above (all other things being equal). As such, the exhibit above should be regarded as more indicative than prescriptive with respect to the individual quarters.

Gold price

In addition to our short-term FY19 forecast adjustments, we have also adjusted our longer-term gold price assumptions to those set out in our recent report, Portents of economic weakness: Gold – doves in the ascendant, as follows:

Exhibit 7: Updated Edison gold price forecasts*

US$/oz

2020e

2021e

2022e

2023e

Updated real gold price forecast (US$/oz)

1,572

1,395

1,387

1,350

Previous real gold price forecast (US$/oz)

1,482

1,437

1,304

1,303

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

Conclusion and valuation

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 FY19, therefore, we have opted to discount potential cash flows back over four years from FY19 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.

Since our last note, we have updated our life of operations financial model for Endeavour to reflect our updated gold price forecasts (see Exhibit 7 and Portents of economic weakness: Gold – doves in the ascendant) as well as Ity’s expansion of its process plant throughput rate from 4Mtpa to 5Mtpa. As a result, our estimate of Endeavour’s cash flow in FY22 has increased materially to US$4.20 per share (cf US$3.23/share previously), on which basis our terminal valuation of the company at end-FY22 is US$41.99/share (cf US$32.33/share previously), which (in conjunction with forecast intervening cash flows) discounts back to a value of US$32.30/share at FY19 (cf US$27.58/share previously).

Exhibit 8: Endeavour forecast valuation and cash flow per share, FY19–22e (US$/share)

Source: Edison Investment Research

Financials

Endeavour had US$615.1m in net debt (including IFRS 16 leases) on its balance sheet at end-Q319 (vs US$653.2m at end-Q219, US$615.3m at end-Q119 and US$517.5m at end-Q418), after US$32.8m in net capex during the quarter (vs US$66.1m in Q219, US$103.9m in Q119, US$87.1m in Q418 and US$110.8m in Q318). This level of net debt equates to a gearing (net debt/equity) ratio of 74.4% (vs 76.5% at end Q219, 72.4% at end Q119, 60.3% at end-Q418 and 52.1% at end-Q318) and leverage (net debt/[net debt + equity]) ratio of 42.7% (vs 43.3% at end-Q219, 42.0% at end-Q119, 37.6% at end-Q418 and 34.3% at end-Q318). Note that US$615.1m accords with Endeavour’s Q319 balance sheet; it differs from the figure of US$608.5m quoted in some of the company’s other materials on account of the fact that it includes US$9.3m in IFRS 16 leases (albeit mitigated by the fact that future cash flows associated with certain debt instruments are 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 Kalana and/or Fetekro. In the new gold price environment, we calculate that cash flows will be strongly positive in Q419, such that we are forecasting that the company will have net debt of c US$526.8m as at end-FY19 (cf US$523.3m previously), which will equate to a gearing ratio of 62.2% (cf 57.4% previously) and a leverage ratio of 38.4% (cf 36.4% previously). Note however, that this forecast is dependent on trade and payables reverting to something close to their normal historical relationship with operating expenses and attaining a level of c US$190.4m at end-FY19 compared to a level of US$134.3m at end-Q319 and US$177.3 at end-FY18. Thereafter, net debt should decline rapidly such that we estimate the company will be net debt-free in late FY21 (cf early FY22 previously) notwithstanding any capex related to the Kalana project, at which point it will potentially be able to make dividend distributions to shareholders.

Exhibit 9: Financial summary

US$'000s

2016

2017

2018

2019e

2020e

December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

566,486

652,079

751,957

893,878

1,085,812

Cost of Sales

(376,794)

(597,528)

(487,119)

(521,625)

(487,745)

Gross Profit

189,692

54,551

264,838

372,254

598,066

EBITDA

 

 

213,916

201,166

264,838

372,254

598,066

Operating Profit (before amort. and except.)

127,981

70,379

95,769

170,885

397,877

Intangible Amortisation

0

0

0

0

0

Exceptionals

(36,272)

(149,942)

8,035

(60,162)

0

Other

(1,989)

(2,242)

(1,558)

3,704

0

Operating Profit

89,720

(81,805)

102,246

114,427

397,877

Net Interest

(24,593)

(18,789)

(23,671)

(44,820)

(45,834)

Profit Before Tax (norm)

 

 

101,399

49,348

70,540

129,770

352,042

Profit Before Tax (FRS 3)

 

 

65,127

(100,594)

78,575

69,608

352,042

Tax

(27,643)

(32,945)

(61,515)

(72,725)

(100,951)

Profit After Tax (norm)

73,756

16,403

9,025

57,044

251,092

Profit After Tax (FRS 3)

37,484

(133,539)

17,060

(3,118)

251,092

Net loss from discontinued operations

(154,795)

0

0

Minority interests

7,121

26,003

46,029

Net profit

(137,735)

(3,118)

251,092

Net attrib. to shareholders contg. businesses (norm)

(8,100)

31,041

205,062

Net attrib.to shareholders contg. businesses

(65)

(29,121)

205,062

Average Number of Shares Outstanding (m)

80.6

98.5

107.7

109.8

109.9

EPS - normalised ($)

 

 

(0.38)

(0.06)

(0.08)

0.28

1.87

EPS - normalised and fully diluted ($)

 

(0.38)

(0.06)

(0.08)

0.27

1.81

EPS - (IFRS) ($)

 

 

(0.83)

(1.59)

(1.34)

(0.27)

1.87

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

33.5

8.4

35.2

41.6

55.1

EBITDA Margin (%)

37.8

30.8

35.2

41.6

55.1

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

22.6

10.8

12.7

19.1

36.6

BALANCE SHEET

Fixed Assets

 

 

1,073,562

1,331,745

1,594,202

1,640,961

1,587,705

Intangible Assets

29,978

6,267

4,186

4,186

4,186

Tangible Assets

1,039,529

1,317,952

1,543,842

1,590,601

1,537,345

Investments

4,055

7,526

46,174

46,174

46,174

Current Assets

 

 

283,536

361,766

327,841

319,616

625,285

Stocks

110,404

141,898

126,353

171,900

208,810

Debtors

36,572

95,212

74,757

90,444

106,220

Cash*

124,294

122,702

124,022

114,725

367,709

Other

12,266

1,954

2,709

(57,453)

(57,453)

Current Liabilities

 

 

(149,626)

(241,185)

(248,420)

(272,515)

(252,505)

Creditors

(145,311)

(223,527)

(224,386)

(248,481)

(228,471)

Short term borrowings

(4,315)

(17,658)

(24,034)

(24,034)

(24,034)

Long Term Liabilities

 

 

(246,811)

(451,705)

(729,290)

(729,290)

(729,290)

Long term borrowings

(146,651)

(323,184)

(618,595)

(618,595)

(618,595)

Other long term liabilities

(100,160)

(128,521)

(110,695)

(110,695)

(110,695)

Net Assets

 

 

960,661

1,000,621

944,333

958,771

1,231,195

CASH FLOW

Operating Cash Flow

 

 

164,522

244,092

274,938

345,368

546,703

Net Interest

(19,626)

(15,212)

(26,734)

(44,820)

(45,834)

Tax

(10,625)

(22,301)

(24,018)

(61,719)

(100,951)

Capex

(212,275)

(441,396)

(486,498)

(233,127)

(146,934)

Acquisitions/disposals

32,098

(37,332)

33,179

(15,000)

0

Financing

174,702

116,536

(6,231)

0

0

Dividends

(2,612)

(5,177)

(1,956)

0

0

Net Cash Flow

126,184

(160,790)

(237,320)

(9,297)

252,984

Opening net debt/(cash)

 

 

152,856

26,672

218,140

518,607

527,904

HP finance leases initiated

0

0

0

0

0

Other

0

(30,678)

(63,147)

0

0

Closing net debt/(cash)*

 

 

26,672

218,140

518,607

527,904

274,920

Source: Company sources, Edison Investment Research. Note: EPS normalised from 2018 to reflect continuing business only. 2017 is shown as previously reported (ie not restated). *Excludes restricted cash.


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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.

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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.

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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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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.

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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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