Ity CIL project pours first gold

Endeavour Mining 1 April 2019 Update
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Endeavour Mining

Ity CIL project pours first gold

Q418/FY18 results

Metals & mining

1 April 2019

Price

C$19.90

Market cap

C$2172m

C$1.3403/US$

Net debt (US$m) at end December 2018

517.5

Shares in issue

108.1m

Free float

70.1%

Code

EDV

Primary exchange

TSX

Secondary exchange

US OTC

Share price performance

%

1m

3m

12m

Abs

0.3

(9.0)

(15.6)

Rel (local)

(0.4)

(19.6)

(19.5)

52-week high/low

C$24.2

C$16.4

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 two major development projects (Ity CIL and Kalana) in the highly prospective west African Birimian greenstone belt.

Next events

Ity CIL production

Early Q219

La Plaque resource update

Q219

Q119 results

May 2019

Kalana feasibility study

Q120

Analyst

Charles Gibson

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

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
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

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
(Mt)

Grade
(g/t)

Contained gold (koz)

Tonnes
(Mt)

Grade
(g/t)

Contained gold (koz)

Tonnes

Grade

Contained gold

Tonnes
(Mt)

Grade
(g/t)

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).


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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 Edison analyst 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.

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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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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.

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Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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.

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Frankfurt +49 (0)69 78 8076 960

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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 Edison analyst 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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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

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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 (nor will such persons be able to purchase shares in the placing).

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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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