Endeavour Mining |
Ity CIL project pours first gold |
Q418/FY18 results |
Metals & mining |
1 April 2019 |
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Endeavour Mining is a research client of Edison Investment Research Limited |
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On 19 March, Endeavour announced that the Ity CIL project had poured its first gold, approximately four months ahead of schedule (and within 18 months of its start) and under budget. The crushing, milling and CIL circuits are all reported to have rapidly achieved their stable nameplate capacity of 4Mtpa and commercial production is expected to be declared early in Q219. Following performance tests, Endeavour has launched an optimisation and de-bottlenecking exercise to increase plant nameplate capacity by 1Mtpa, or 25%, to 5Mtpa, at a minimal cost of US$10–15m.
Year |
Revenue (US$m) |
EBITDA (US$m) |
PBT* |
Operating cash flow per share (US$) |
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 |
770.2 |
316.0 |
50.2 |
2.39 |
213.2 |
528.7 |
12/20e |
979.2 |
513.0 |
256.8 |
3.67 |
185.9 |
370.8 |
Note: *PBT is normalised, excluding amortisation of acquired intangibles and exceptional items. **Includes restricted cash.
Q418/FY18 results
For the second time in succession, Endeavour’s quarterly results were materially ahead of our expectations in Q418, driven by universally higher production and lower costs at each of the company’s continuing operations. Adjusted net earnings from continuing operations were US$13.2m higher than our prior expectations, driven by a US$31.4m positive variance in revenue partly offset by US$9.3m and US$13.1m negative variances in depreciation and taxation, respectively.
FY19 guidance
After producing 612koz gold at an all-in sustaining cost (AISC) of US$744/oz from continuing operations in FY18, Endeavour provided guidance to the effect that it will produce 615–695koz gold at an AISC of US$760–810/oz in FY19. Our financial forecasts for FY19 are based on Endeavour producing 619.7oz at an AISC of US$802/oz at an average gold price during the year of US$1,287/oz (indicative quarterly forecasts are provided in Exhibit 4 on page 6 of this report).
Valuation: Honing in on US$32.93/share
In valuing Endeavour, we have opted to discount potential cash flows back over four years from end-FY18 then to apply an ex-growth, ad infinitum terminal multiple of 10x (consistent with a discount rate of 10%) to forecast cash flows in that year (FY22). For Endeavour, our estimate of cash flow in FY22 is US$3.29 per share (including exploration expenditure), in which case our terminal valuation of the company at end-FY22 is US$32.93/share (cf US$33.63/share previously), which (in conjunction with forecast intervening cash flows) discounts back to a value of US$27.91/share at the start of FY19.
Ity CIL project pours first gold
On 19 March, Endeavour announced that the Ity CIL project had poured its first gold, approximately four months ahead of schedule (and within 18 months of the start of the project) and under budget.
As of the date of the announcement, approximately 135,160t of ore had been processed in the one month since ore was first introduced into the CIL processing plant on 20 February. The crushing, milling and CIL circuits are all reported to have rapidly achieved their stable nameplate capacity of 4Mtpa and commercial production is expected to be declared early in Q219.
Following the performance tests already concluded, Endeavour has since launched an optimisation and de-bottlenecking exercise which is expected to increase the plant nameplate capacity by 1Mtpa, or 25%, to 5Mtpa, at a minimal cost of US$10-15m, mainly via the expedient of upgrading the pipes and pumps and installing a second 50 tonne oxygen plant with no additional mining fleet required. These plant upgrades are expected to be completed during scheduled plant maintenance shut-downs over the course of the next six months. Residual capital expenditure for the project in FY19 is estimated to be US$50–60m. In the meantime, an aggressive exploration programme at La Plaque target is underway with the aim of publishing an updated resource in Q219.
Q418 and FY18 results
For the second time in succession, Endeavour’s quarterly results were materially ahead of our expectations in Q418, driven by universally higher production from each of the company’s operating assets and universally lower all-in sustaining costs, compared with both our expectations and management’s prior guidance, as shown in the exhibit below:
Exhibit 1: Endeavour production and AISC costs, by mine, actual vs guidance (FY18)
Mine |
Production guidance |
Production outcome |
AISC cost guidance |
AISC outcome |
Houndé |
Top end of 250–260koz |
277koz |
Low end of US$580–630/oz |
US$564/oz |
Agbaou |
Lower end of 140–150koz |
141koz |
Low end of US$860–900/oz |
US$819/oz |
Karma |
Low end of 105–115koz |
109koz |
Top end of US$780–830/oz |
US$813/oz |
Ity (heap leach) |
Surpassed guidance of 60–65koz by Q3 |
85koz |
Bottom half of US$790–850/oz |
US$719/oz |
Continuing operations |
Upper end of 555–590koz |
612koz |
Bottom end of US$760–810/oz |
US$744/oz |
Tabakoto |
Low end of 115–130koz |
115koz |
Above US$1,200–1,250/oz |
US$1,369/oz |
Source: Endeavour Mining
From a financial perspective, the immediate consequence of production being 21.0% above our forecast for the quarter (see Exhibit 1) was that revenue was 27.0%, or US$31.4m, above our forecast as well. This was ostensibly offset by a US$27.0m negative variance in costs, such that gross profit for the quarter was within 6% of our prior estimate. However, c US$26m of the increase in operating expenses could be attributed to a non-cash inventory adjustment at Karma to write-down inventory, which contributed to operating expenses but not adjusted net earnings from continuing operations. Other major variances from our prior expectations were:
■
Depreciation: US$9.3m greater than expected as a result of higher production (since Endeavour depreciates on a unit of production basis).
■
Exploration costs expensed: US$3.0m better than expected.
■
Net interest: US$2.8m better than expected and US$2.8m lower than Q3, which was something of a surprise given Endeavour’s rising net debt profile.
■
A US$16.2m loss on financial instruments (which we declined to attempt to forecast).
■
Tax charge: US$13.1m higher than expected, such that the group’s marginal rate of tax for the full year was 78.3% and for the quarter was in excess of 100%. Note that Endeavour’s tax charge is very variable on a quarterly basis and particularly in the fourth quarter, when a reconciliation exercise is traditionally conducted between full year tax and that assessed for the prior quarters.
■
Earnings from discontinued operations (ie Tabakoto), which were US$95.6m worse than our expectations, included an additional US$68.7m loss on disposal and US$24.1m in other losses that were booked during Q4 to add to the US$32.0m impairment made to the same asset in Q3.
A simple summary of the variance between our prior forecast of adjusted net earnings from continuing operations and the actual outcome is that revenues were US$31.4m higher than expected, but offset by depreciation and taxation also being US$9.3m and US$13.1m higher than expected, respectively. These were somewhat offset by exploration and the net interest charge being US$3.0m and US$2.8m lower than expected, respectively. Together, these five items account for a US$14.8m positive variance of actual compared to forecast adjusted net earnings from continuing operations. All of the other items together sum to a (negative) US$1.6m variance, such that the overall variance between our forecast and the actual outcome was a positive US$13.2m, as shown in Exhibit 2, below/overleaf:
Exhibit 2: Endeavour Mining FY18 earnings, by quarter (US$000s unless otherwise indicated)
Q4/Q3 |
Q4 vs Q4e |
||||||||||
Q118* |
Q218 |
Q318 |
Q418e |
Q418 |
Change |
Variance |
Variance (units) |
FY18e |
FY18 |
Variance (units) |
|
Houndé production (koz) |
73.8 |
66.9 |
60.7 |
63 |
75.8 |
24.9 |
20.3 |
12.8 |
264 |
277.2 |
13.2 |
Agbaou production (koz) |
32.1 |
33.7 |
31.2 |
37 |
44.4 |
42.3 |
20.0 |
7.4 |
134 |
141.3 |
7.3 |
Karma production (koz) |
28.2 |
21.0 |
26.1 |
29 |
33.5 |
28.4 |
15.5 |
4.5 |
104 |
108.7 |
4.7 |
Ity heap leach production (koz) |
18.3 |
25.0 |
21.0 |
15 |
20.6 |
-1.9 |
37.3 |
5.6 |
79 |
84.8 |
5.8 |
Tabakoto production (koz) |
32.4 |
26.8 |
26.5 |
27 |
29.6 |
11.7 |
9.6 |
2.6 |
112 |
115.2 |
3.2 |
Total gold produced (koz) |
152 |
147 |
139 |
144 |
174.2 |
25.3 |
21.0 |
30.2 |
582 |
612.1 |
30.1 |
Total gold sold (koz) |
154 |
151 |
134 |
144 |
173.4 |
29.4 |
20.4 |
29.4 |
583 |
612.1 |
29.1 |
Gold price (US$/oz) |
1,328 |
1,306 |
1,161 |
1,225 |
1,198 |
3.2 |
-2.2 |
-27 |
1,237 |
1,199 |
-38.0 |
Cash costs (US$/oz) |
524 |
608 |
643 |
680 |
555 |
-13.7 |
-18.4 |
-125 |
612 |
579 |
-33.0 |
AISC (US$/oz) |
669 |
768 |
820 |
846 |
707 |
-13.8 |
-16.4 |
-139 |
773 |
744 |
-29.0 |
Revenue |
|
|
|
|
|||||||
- Gold revenue |
198,894 |
189,515 |
155,764 |
176,341 |
207,784 |
33.4 |
17.8 |
31,443 |
720,514 |
751,957 |
31,443 |
Cost of sales |
|
|
|
|
|||||||
- Operating expenses |
83,276 |
92,646 |
86,238 |
97,860 |
124,832 |
44.8 |
27.6 |
26,972 |
360,020 |
386,926 |
26,906 |
- Royalties |
12,183 |
10,254 |
8,293 |
9,854 |
10,338 |
24.7 |
4.9 |
484 |
40,584 |
41,068 |
484 |
Gross profit |
103,435 |
86,615 |
61,233 |
68,627 |
72,614 |
18.6 |
5.8 |
3,987 |
319,910 |
323,963 |
4,053 |
Depreciation |
(39,504) |
(43,538) |
(35,911) |
(40,786) |
(50,116) |
39.6 |
22.9 |
(9,330 |
(159,739) |
(169,069) |
-9,330 |
Expenses |
|
|
|
|
|||||||
- Corporate costs |
(6,488) |
(6,130) |
(5,888) |
(5,957) |
(8,001) |
35.9 |
34.3 |
(2,044) |
(24,463) |
(26,573) |
-2,110 |
- Impairments |
0 |
0 |
0 |
1,129 |
0 |
N/A |
-100.0 |
(1,129) |
1,129 |
0 |
-1,129 |
- Acquisition etc costs |
0 |
0 |
0 |
0 |
0 |
N/A |
N/A |
0 |
0 |
0 |
0 |
- Share based compensation |
(2,668) |
(10,109) |
(4,007) |
(7,000) |
(8,147) |
103.3 |
16.4 |
(1,147) |
(23,784) |
(24,931) |
-1,147 |
- Exploration costs |
(2,754) |
(2,284) |
(2,583) |
(3,000) |
0 |
-100.0 |
-100.0 |
3,000 |
(10,621) |
(7,621) |
3,000 |
Total expenses |
(11,910) |
(18,523) |
(12,478) |
(14,828) |
(16,148) |
29.4 |
8.9 |
(1,320) |
(57,739) |
(59,125) |
-1,386 |
Earnings from operations |
52,021 |
24,554 |
12,844 |
13,012 |
6,350 |
-50.6 |
-51.2 |
(6,662) |
102,431 |
95,769 |
-6,662 |
Interest income |
0 |
0 |
N/A |
N/A |
0 |
0 |
0 |
0 |
|||
Interest expense |
(7,496) |
(4,549) |
(6,679) |
(7,743) |
(4,947) |
-25.9 |
-36.1 |
2,796 |
(26,467) |
(23,671) |
2,796 |
Net interest |
(7,496) |
(4,549) |
(6,679) |
(7,743) |
(4,947) |
-25.9 |
-36.1 |
2,796 |
(26,467) |
(23,671) |
2,796 |
Loss on financial instruments |
(11,403) |
10,922 |
24,755 |
(16,239) |
-165.6 |
N/A |
(16,239) |
24,274 |
8,035 |
-16,239 |
|
Other expenses |
(165) |
(818) |
(173) |
(402) |
132.4 |
N/A |
(402) |
(1,156) |
(1,558) |
-402 |
|
Profit before tax |
32,957 |
30,109 |
30,747 |
5,269 |
(15,238) |
-149.6 |
-389.2 |
(20,507) |
99,082 |
78,575 |
-20,507 |
Current income tax |
10,772 |
17,095 |
17,443 |
5,540 |
21,212 |
21.6 |
282.9 |
15,672 |
50,850 |
66,522 |
15,672 |
Deferred income tax |
(4,881) |
4,432 |
(2,007) |
0 |
(2,551) |
27.1 |
N/A |
(2,551) |
(2,456) |
(5,007) |
-2,551 |
Total tax |
5,891 |
21,527 |
15,436 |
5,540 |
18,661 |
20.9 |
236.8 |
13,121 |
48,394 |
61,515 |
13,121 |
Marginal tax rate |
17.9 |
71.5 |
50.2 |
105.1 |
(122.5) |
-344.0 |
-216.6 |
(227.6) |
48.8 |
78.3 |
29.5 |
Profit after tax |
27,066 |
8,582 |
15,311 |
(271) |
(33,899) |
-321.4 |
12,408.9 |
(33,628) |
50,688 |
17,060 |
-33,628 |
Net profit from discontinued ops. |
593 |
(24,025) |
(35,705) |
(56) |
(95,658) |
167.9 |
170,717.9 |
(95,602) |
(59,193) |
(154,795) |
-95,602 |
Total net and comprehensive loss |
27,659 |
(15,443) |
(20,394) |
(327) |
(129,557) |
535.3 |
39,519.9 |
(129,230) |
(8,505) |
(137,735) |
-129,230 |
Minority interest |
14,567 |
(132) |
(3,619) |
2,522 |
(3,695) |
2.1 |
-246.5 |
(6,217) |
13,338 |
7,121 |
-6,217 |
Minority interest (%) |
52.7 |
0.9 |
17.7 |
(771.1) |
2.9 |
-83.6 |
-100.4 |
774.0 |
(156.8) |
(5.2) |
151.6 |
Profit attributable to shareholders |
13,092 |
(15,311) |
(16,775) |
(2,849) |
(125,862) |
650.3 |
4,317.8 |
(123,013) |
(21,843) |
(144,856) |
-123,013 |
|
|
|
|
||||||||
Basic EPS from continuing ops. (US$) |
0.116 |
0.037 |
0.136 |
(0.026) |
(0.292) |
-314.7 |
1,023.1 |
(0.266) |
0.347 |
(0.001 |
-0.348 |
Diluted EPS from continuing ops. (US$) |
0.116 |
0.037 |
0.136 |
(0.026) |
(0.292) |
-314.7 |
1,023.1 |
(0.266) |
0.339 |
(0.001) |
-0.340 |
Basic EPS (US$) |
0.122 |
(0.142) |
(0.156) |
(0.026) |
(1.167) |
648.1 |
4,388.5 |
(1.141) |
(0.203) |
(1.344) |
-1.141 |
Diluted EPS (US$) |
0.121 |
(0.142) |
(0.155) |
(0.026) |
(1.165) |
651.6 |
4,380.8 |
(1.139) |
(0.198) |
(1.342) |
-1.144 |
Norm. basic EPS from continuing ops (US$) |
0.222 |
(0.064) |
(0.094) |
(0.036) |
(0.142) |
51.1 |
294.4 |
(0.106) |
0.111 |
(0.075) |
-0.186 |
Norm. diluted EPS from continuing ops (US$) |
0.221 |
(0.064) |
(0.094) |
(0.036) |
(0.141) |
50.0 |
291.7 |
(0.105) |
0.111 |
(0.075) |
-0.186 |
Adj net earnings attributable (US$000s) |
24,411 |
9,189 |
(1,408) |
3,070 |
16,271 |
-1,255.6 |
430.0 |
13,201 |
35,262 |
53,132 |
17,870 |
Adj net EPS from continuing ops. (US$) |
0.227 |
0.085 |
(0.013) |
0.028 |
0.151 |
-1,261.5 |
439.3 |
0.123 |
0.327 |
0.493 |
0.166 |
Source: Endeavour Mining, Edison Investment Research. Note: *Q1 restated to reflect Tabakoto as a ‘discontinued operation’. Company reported basis.
Compared to Q318, all five of Endeavour’s producing mines benefited from the end of the rainy season in Q4. Houndé, in particular, reported a record quarter, as it mined higher grade areas and stockpiled low-grade ore, while deferring stripping into the 2019 financial year on account of a shift in the mine plan to focus on the Vindaloo Main and Central pits. This compared to a third quarter in which access to higher grade ore was limited by the rains and processing costs were driven higher by the utilisation of fresh ore in the mills instead. Grades similarly improved at Agbaou as a result of greater extraction at the South pit following earlier stripping; at the same time, recoveries improved on account of a greater proportion of oxide ore processed, which supplanted low-grade feed from stockpiles, whereas some waste capitalisation was also deferred into 2019. In addition to improved mining and stacking rates after the end of the rainy season, operations at Karma continued to benefit from the improved leach characteristics of Kao oxide ore in H218, compared to the transitional material mined from the GG2 pit in H1.
Opportunistic mining to feed the heap leach operation at Ity ceased in mid-December, ahead of the commissioning of the CIL plant this year. Nevertheless, the operation performed ahead of expectations, as mining costs and the stripping ratio declined while recoveries improved on account of the better leach characteristics and higher grade of the ore mined from the Bakatouo pit. Finally, in its last quarter under Endeavour management, an improvement in underground production at Tabakoto partially offset a decline from open-pit sources; tonnes milled declined as a result, although gold output increased with higher grades processed in the quarter (although the grade overall for the year remained 21.4% lower than in FY17 after the end of mining at the Kofi C pit in 2017 and the Kofi B pit in H118).
FY19 cost and production guidance and Edison forecasts
The 2018 financial year was transitional for Agbaou, in particular, with a focus on waste capitalisation activities that then provided access to higher-grade areas in the latter part of Q418 and an extension of mining in the existing pit. At the same time, operations at Karma will be affected by the mining of transition ore in the Kao pit and the extension of mining to Kao North.
Historically, Endeavour has a good record of meeting its production and cost guidance targets. For FY19, these are as follows (cf both FY18 actuals and our forecasts):
Exhibit 3: Current Endeavour production and AISC cost guidance, by mine, FY19 vs FY18 and Edison forecast
Production |
All-in sustaining costs (AISC) |
|||||
Mine |
FY19e guidance (koz) |
Edison FY19e forecast (koz) |
FY18 (koz) |
FY19e guidance (US$/oz) |
Edison FY19e forecast (US$/oz) |
FY18 (US$/oz) |
Houndé |
230–250 |
230.4 |
277 |
720–790 |
768 |
564 |
Agbaou |
120–130 |
120.0 |
141 |
850–900 |
900 |
819 |
Karma |
105–115 |
109.3 |
109 |
860–910 |
890 |
813 |
Ity |
160–200 |
160.0 |
85 |
525–590 |
547 |
719 |
Continuing operations |
615–695 |
619.7 |
612 |
760–810 |
802 |
744 |
Tabakoto |
N/A |
N/A |
115 |
N/A |
N/A |
1,369 |
Source: Endeavour Mining
Within this context our financial forecasts for Endeavour for FY19, by quarter, are as follows:
Exhibit 4: Endeavour Mining FY19 earnings forecasts, by quarter (US$000s unless otherwise indicated)
FY18 |
Q119e |
Q219e |
Q319e |
Q419e |
FY19e |
|
Houndé production (koz) |
277.2 |
46.6 |
46.6 |
68.6 |
68.6 |
230.4 |
Agbaou production (koz) |
141.3 |
24.7 |
31.8 |
31.8 |
31.8 |
120.0 |
Karma production (koz) |
108.7 |
23.0 |
23.0 |
28.3 |
35.0 |
109.3 |
Ity production (koz) |
84.8 |
5.0 |
44.4 |
55.3 |
55.3 |
160.0 |
Tabakoto production (koz) |
115.2 |
N/A |
N/A |
N/A |
N/A |
N/A |
Total gold produced (koz) |
612.1 |
99.4 |
145.8 |
183.9 |
190.6 |
619.7 |
Total gold sold (koz) |
612.1 |
99.4 |
145.8 |
183.9 |
190.6 |
619.7 |
Gold price (US$/oz) |
1,199 |
1,304 |
1,318 |
1,263 |
1,263 |
*1,243 |
Cash costs (US$/oz) |
579 |
781 |
646 |
533 |
515 |
594 |
Mine level AISC (US$/oz) |
744 |
1,007 |
816 |
680 |
659 |
758 |
Revenue |
||||||
- Gold revenue |
751,957 |
122,405 |
184,953 |
227,165 |
235,662 |
770,185 |
Cost of sales |
||||||
- Operating expenses |
386,926 |
77,565 |
94,248 |
98,110 |
98,110 |
368,034 |
- Royalties |
41,068 |
6,492 |
8,713 |
11,002 |
11,512 |
37,719 |
Gross profit |
323,963 |
38,348 |
81,991 |
118,053 |
126,041 |
364,432 |
Depreciation |
(169,069) |
(44,764) |
(48,492) |
(58,856) |
(62,925) |
(215,036) |
Expenses |
||||||
- Corporate costs |
(26,573) |
(5,957 |
(5,957) |
(5,957) |
(5,957) |
(23,828) |
- Impairments |
0 |
0 |
0 |
0 |
0 |
0 |
- Acquisition etc costs |
0 |
0 |
0 |
0 |
0 |
0 |
- Share based compensation |
(24,931) |
(5,333) |
(5,333) |
(5,333) |
(5,333) |
(21,332) |
- Exploration costs |
(7,621) |
(821) |
(821) |
(821) |
(821) |
(3,285) |
Total expenses |
(59,125) |
(12,111) |
(12,111) |
(12,111) |
(12,111) |
(48,445) |
Earnings from operations |
95,769 |
(18,528) |
21,388 |
47,086 |
51,005 |
100,951 |
Interest income |
0 |
0 |
||||
Interest expense |
(23,671) |
(12,938) |
(12,938) |
(12,938) |
(12,938) |
(51,753) |
Net interest |
(23,671) |
(12,938) |
(12,938) |
(12,938) |
(12,938) |
(51,753) |
Loss on financial instruments |
8,035 |
0 |
||||
Other expenses |
(1,558) |
1,033 |
0 |
0 |
0 |
1,033 |
Profit before tax |
78,575 |
(30,433) |
8,450 |
34,148 |
38,067 |
50,230 |
Current income tax |
66,522 |
2,671 |
10,471 |
14,634 |
14,572 |
42,348 |
Deferred income tax |
(5,007) |
0 |
0 |
0 |
0 |
0 |
Total tax |
61,515 |
2,671 |
10,471 |
14,634 |
14,572 |
42,348 |
Marginal tax rate |
78.3 |
(8.8) |
123.9 |
42.9 |
38.3 |
84.3 |
Profit after tax |
17,060 |
(33,104) |
(2,021) |
19,514 |
23,494 |
7,883 |
Net profit from discontinued ops. |
(154,795) |
0 |
0 |
0 |
0 |
0 |
Total net and comprehensive loss |
(137,735) |
(33,104) |
(2,021) |
19,514 |
23,494 |
7,883 |
Minority interest |
7,121 |
(1,092) |
3,570 |
5,915 |
6,304 |
14,698 |
Minority interest (%) |
(5.2) |
3.3 |
(176.6) |
30.3 |
26.8 |
186.5 |
Profit attributable to shareholders |
(144,856) |
(32,013) |
(5,591) |
13,599 |
17,190 |
(6,815) |
) |
||||||
Basic EPS from continuing ops. (US$) |
(0.001) |
(0.296) |
(0.052) |
0.126 |
0.159 |
(0.063) |
Diluted EPS from continuing ops. (US$) |
(0.001) |
(0.285) |
(0.050) |
0.121 |
0.153 |
(0.061) |
Basic EPS (US$) |
(1.344) |
(0.296) |
(0.052) |
0.126 |
0.159 |
(0.063) |
Diluted EPS (US$) |
(1.342) |
(0.285) |
(0.050) |
0.121 |
0.153 |
(0.061) |
Norm. basic EPS from continuing ops (US$) |
(0.075) |
(0.296) |
(0.052) |
0.126 |
0.159 |
(0.063) |
Norm. diluted EPS from continuing ops (US$) |
(0.075) |
(0.285) |
(0.050) |
0.121 |
0.153 |
(0.061) |
Adj net earnings attributable (US$000s) |
53,132 |
(27,854) |
9,162 |
17,315 |
21,092 |
19,715 |
Adj net EPS from continuing ops. (US$) |
0.493 |
(0.258) |
0.085 |
0.160 |
0.195 |
0.182 |
Source: Endeavour Mining, Edison Investment Research. Note: Company reported basis; *Includes adjustment for Karma stream.
Readers are cautioned 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 Q4a and Q4e in Exhibit 2). To this end, it is worth noting that the top end of Endeavour’s production guidance is 75.3koz gold above Edison’s forecast for the year, which is worth a material US$97.9m in additional revenue to the company (at the current spot price of gold) for a potentially negligible incremental cost and therefore has the ability to almost treble Endeavour’s profit before tax in the year relative to our forecasts above. In addition, as in FY18, a degree of seasonality may be expected between Q319 and Q419, which has not been taken into consideration at this stage. As such, the exhibit above should be regarded as more indicative than prescriptive with respect to the individual quarters. Within that context, however, the table above nevertheless demonstrates the effects of a number of anticipated operating developments over the course of the year, including:
■
The processing of lower-grade stockpiles at Agbaou in Q1.
■
The processing of low-grade stockpiles at Karma in H1.
■
Production from the higher-grade Bouere pit at Houndé in H2.
■
The start of commercial production from the Ity CIL project in Q2 (cf Q3 assumed previously).
Reserves and resources
On 8 February 2019, Endeavour updated its mineral resource estimate at Kalana Main (and therefore the entire Kalana project), incorporating a lower cut-off grade of 0.5g/t (cf 0.9g/t previously), as follows:
Exhibit 5: Kalana consolidated mineral resource estimate (8 February 2019 vs end-FY17)
8 February 2019 |
Previous* |
Change (%) |
Change (units) |
||||||||||||
Tonnes |
Grade |
Contained gold (koz) |
Tonnes |
Grade |
Contained gold (koz) |
Tonnes |
Grade |
Contained gold |
Tonnes |
Grade |
Contained gold (koz) |
||||
Kalana Main |
|||||||||||||||
Measured |
0.0 |
0.00 |
0 |
||||||||||||
Indicated |
26.6 |
2.69 |
2,290 |
||||||||||||
Inferred |
6.4 |
2.75 |
560 |
||||||||||||
Total |
33.0 |
2.69 |
2,849 |
||||||||||||
Kalanako |
|||||||||||||||
Measured |
0.0 |
0.00 |
0 |
||||||||||||
Indicated |
2.1 |
2.27 |
150 |
||||||||||||
Inferred |
0.2 |
4.66 |
25 |
||||||||||||
Total |
2.3 |
2.37 |
175 |
||||||||||||
Tailings |
|||||||||||||||
Measured |
0.0 |
0.00 |
0 |
||||||||||||
Indicated |
0.7 |
1.75 |
40 |
||||||||||||
Inferred |
0.0 |
0.00 |
0 |
||||||||||||
Total |
0.7 |
1.79 |
40 |
||||||||||||
Total |
|||||||||||||||
Measured |
0.0 |
0.00 |
0 |
9.5 |
4.19 |
1,280 |
-100.0 |
N/A |
-100.0 |
-9.5 |
N/A |
-1,279.8 |
|||
Indicated |
29.4 |
2.62 |
2,480 |
14.2 |
3.96 |
1,810 |
107.0 |
-33.7 |
37.0 |
15.2 |
-1.34 |
670.3 |
|||
Inferred |
6.6 |
2.78 |
585 |
1.7 |
4.39 |
240 |
288.2 |
-36.8 |
143.7 |
4.9 |
-1.61 |
344.9 |
|||
Total |
36.0 |
2.65 |
3,065 |
25.4 |
4.08 |
3,330 |
41.7 |
-35.1 |
-7.9 |
10.6 |
-1.43 |
-264.6 |
|||
Source: Endeavour Mining, Edison Investment Research. Note: The 2019 resource estimate is based on a 0.5g/t cut-off grade and is constrained by a conceptual US$1,500/oz pit shell. *As at 31 December 2017.
Endeavour considers the updated 2019 geological model to be more robust and accurate for the following reasons:
■
The geological model was updated with over 30,000m of in-fill drilling completed since the project was acquired in late 2017. In total, more than 2,200 holes and more than 221,000 assays (including over 103,000 LeachWELL assays) were used to refine the geological model.
■
A total of 135 veins within 61 vein packages were individually modelled as opposed to the previous approach of applying geostatistics to 56 grouped vein packages, which thereby improved confidence in the vein packages/domain boundaries.
■
Mineralised intersections outside the defined wireframes where continuity was not proven were excluded.
On the basis of Kalana’s updated 8 February resources (as opposed to those prevailing at 31 December 2018), a comparison of Endeavour’s group-wide reserves and resources compared with those extant at 31 December 2017 revealed the following changes:
■
A 2.8Moz decline in gross resources (on a 100% basis) and a 2.3Moz decline in resources on an attributable basis. However, the overwhelming majority of the decline could be attributed to the sale of Tabakoto at the end of Q418. On an underlying basis, excluding both Tabakoto and Fetekro (for which a maiden resource was announced in November 2018), gross resources declined by just 0.1Moz (or 0.7% of Endeavour’s total); on an attributable basis, underlying resources actually increased, albeit by a relatively modest 1.2%.
■
Over the same time, group gross reserves declined by 1.1Moz. Once again, however, the overwhelming majority of the decline could be attributed to the sale of Tabakoto. On an underlying basis, reserves declined by only 0.6Moz (ie on a par with production in 2018), or 7.2%. Underlying attributable reserves, by contrast, declined by 5.6%.
■
Adjusting for the reduced aggregate group milling rate in the aftermath of the Tabakoto sale, the aggregate mine life of the group, based on both reserve and resource tonnages, actually increased (albeit modestly – eg by less than one year in each case) – reflecting, among other things, Tabakoto’s below (group) average official mine life, especially when measured with respect to proven and probable reserves.
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 end-FY18 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.
In the wake of its FY18 results, our estimate of Endeavour’s cash flow in FY22 has reduced fractionally from US$3.36 to US$3.29 per share, on which basis our terminal valuation of the company at end-FY22 is US$32.93/share (cf US$33.63/share previously), which (in conjunction with forecast intervening cash flows) discounts back to a value of US$27.91/share at the start of FY19.
Exhibit 6: Endeavour forecast valuation and cash flow per share, FY19–FY22 (US$/share)
|
|
Source: Edison Investment Research |
Financials
Endeavour had US$517.5m in net debt (including restricted cash) on its balance sheet at end-FY18 (vs US$509.2m at end-Q3 and US$399.9m at end-Q218), after US$87m in accelerated capex during the quarter (vs US$110.8m in capex in Q318) and US$453.3m for the full year. This level of net debt equates to a gearing (net debt/equity) ratio of 60.3% (vs 52.1% at end-Q3) and leverage (net debt/[net debt + equity]) ratio of 37.6% (vs 34.3% at end-Q3). Note that US$517.5m accords with Endeavour’s FY18 accounts; it differs from the figure of US$536m quoted in some of the company’s other materials because the formal accounting treatment of the finance leases on the balance sheet in particular requires future cash flows to be discounted back to present value – whereas the higher figure is quoted on an undiscounted basis. In addition, the higher figure does not include restricted cash.
With only US$50–60m in capital on the Ity CIL project to be expended in FY19 (the majority in H119), Endeavour has now passed the period of greatest capex intensity on growth projects in the immediately foreseeable future – at least until the development of Kalana. With sustaining capex, non-sustaining capex and exploration expenditure of c US$160m at Endeavour’s other projects however, we estimate that cash flows before financing in FY19 will be close to break-even, such that we are forecasting that Endeavour will have virtually unchanged net debt of c US$528.7m as at end-FY19, which will equate to a gearing ratio of 60.6% and a leverage ratio of 37.7%. Thereafter, net debt should decline rapidly (see Exhibit 7) such that we estimate the company will be net debt-free in early FY22 (notwithstanding capex related to the Kalana project), at which point it will potentially be able to make dividend distributions to shareholders.
Exhibit 7: Financial summary
US$'000s |
2016 |
2017 |
2018 |
2019e |
2020e |
||
December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
566,486 |
652,079 |
751,957 |
770,185 |
979,241 |
Cost of Sales |
(376,794) |
(597,528) |
(487,119) |
(454,197) |
(466,225) |
||
Gross Profit |
189,692 |
54,551 |
264,838 |
315,987 |
513,016 |
||
EBITDA |
|
|
213,916 |
201,166 |
264,838 |
315,987 |
513,016 |
Operating Profit (before amort. and except.) |
127,981 |
70,379 |
95,769 |
100,951 |
309,639 |
||
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
(36,272) |
(149,942) |
8,035 |
0 |
0 |
||
Other |
(1,989) |
(2,242) |
(1,558) |
1,033 |
0 |
||
Operating Profit |
89,720 |
(81,805) |
102,246 |
101,984 |
309,639 |
||
Net Interest |
(24,593) |
(18,789) |
(23,671) |
(51,753) |
(52,872) |
||
Profit Before Tax (norm) |
|
|
101,399 |
49,348 |
70,540 |
50,230 |
256,767 |
Profit Before Tax (FRS 3) |
|
|
65,127 |
(100,594) |
78,575 |
50,230 |
256,767 |
Tax |
(27,643) |
(32,945) |
(61,515) |
(42,348) |
(79,913) |
||
Profit After Tax (norm) |
73,756 |
16,403 |
9,025 |
7,883 |
176,854 |
||
Profit After Tax (FRS 3) |
37,484 |
(133,539) |
17,060 |
7,883 |
176,854 |
||
Net loss from discontinued operations |
(154,795) |
0 |
0 |
||||
Minority interests |
7,121 |
14,698 |
36,486 |
||||
Net profit |
(137,735) |
7,883 |
176,854 |
||||
Net attrib. to shareholders contg. businesses (norm) |
(8,100) |
(6,815) |
140,368 |
||||
Net attrib.to shareholders contg. businesses |
(65) |
(6,815) |
140,368 |
||||
Average Number of Shares Outstanding (m) |
80.6 |
98.5 |
107.7 |
108.1 |
108.1 |
||
EPS - normalised ($) |
|
|
(0.38) |
(0.06) |
(0.08) |
(0.06) |
1.30 |
EPS - normalised and fully diluted ($) |
|
(0.38) |
(0.06) |
(0.08) |
(0.06) |
1.25 |
|
EPS - (IFRS) ($) |
|
|
(0.83) |
(1.59) |
(1.34) |
(0.06) |
1.30 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
33.5 |
8.4 |
35.2 |
41.0 |
52.4 |
||
EBITDA Margin (%) |
37.8 |
30.8 |
35.2 |
41.0 |
52.4 |
||
Operating Margin (before GW and except.) (%) |
22.6 |
10.8 |
12.7 |
13.1 |
31.6 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
1,073,562 |
1,331,745 |
1,594,202 |
1,597,381 |
1,579,937 |
Intangible Assets |
29,978 |
6,267 |
4,186 |
4,186 |
4,186 |
||
Tangible Assets |
1,039,529 |
1,317,952 |
1,543,842 |
1,547,021 |
1,529,577 |
||
Investments |
4,055 |
7,526 |
46,174 |
46,174 |
46,174 |
||
Current Assets |
|
|
283,536 |
361,766 |
327,841 |
343,935 |
559,241 |
Stocks |
110,404 |
141,898 |
126,353 |
148,112 |
188,316 |
||
Debtors |
36,572 |
95,212 |
74,757 |
80,278 |
97,461 |
||
Cash |
124,294 |
122,702 |
124,022 |
112,836 |
270,756 |
||
Other |
12,266 |
1,954 |
2,709 |
2,709 |
2,709 |
||
Current Liabilities |
|
|
(149,626) |
(241,185) |
(248,420) |
(238,478) |
(238,154) |
Creditors |
(145,311) |
(223,527) |
(224,386) |
(214,444) |
(214,120) |
||
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 |
973,548 |
1,171,734 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
164,522 |
244,092 |
274,938 |
301,129 |
476,639 |
Net Interest |
(19,626) |
(15,212) |
(26,734) |
(51,753) |
(52,872) |
||
Tax |
(10,625) |
(22,301) |
(24,018) |
(42,348) |
(79,913) |
||
Capex |
(212,275) |
(441,396) |
(486,498) |
(213,215) |
(185,934) |
||
Acquisitions/disposals |
32,098 |
(37,332) |
33,179 |
(5,000) |
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) |
(11,186) |
157,920 |
||
Opening net debt/(cash) |
|
|
152,856 |
26,672 |
218,140 |
518,607 |
529,793 |
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 |
529,793 |
371,873 |
Source: Endeavour Mining sources, Edison Investment Research. Note: *Excludes restricted cash. EPS normalised from 2018 reflect continuing business only. 2017 is shown as previously reported (ie not restated).
|
||||||||||||
|
||||||||||||