Maiden resource paves way for potential project

Endeavour Mining 9 November 2018 Update
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Endeavour Mining

Maiden resource paves way for potential project

Fetekro maiden resource

Metals & mining

9 November 2018

Price

C$19.29

Market cap

C$2,078m

C$1.2977/US$

Net debt (US$m) at end June 2018

399.9

Shares in issue

107,752

Free float

70.1%

Code

EDV

Primary exchange

TSX

Secondary exchange

US OTC

Share price performance

%

1m

3m

12m

Abs

(4.4)

(13.9)

(14.2)

Rel (local)

(0.8)

(8.5)

(10.0)

52-week high/low

C$26.6

C$18.5

Business description

Endeavour Mining is an intermediate gold producer, with five mines in Côte d’Ivoire (Agbaou and Ity), Burkina Faso (Houndé, Karma) and Mali (Tabakoto) and two major development projects (Ity CIL and Kalana) in the highly prospective west African Birimian greenstone belt.

Next events

Kari-Pump maiden resource

Q418

Kalana updated resource and feasibility

Q418 and H119

Ity CIL production

Mid-FY19

Analyst

Charles Gibson

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

On 29 October, Endeavour (EDV) announced a maiden resource at its Fetekro property in north central Côte d’Ivoire of 719koz Au, contained within 9.8Mt. The resource equates to 4.0% of Endeavour’s prior, global resource (on a 100% basis), or 4.8% on an attributable basis. However, it equates to a rather more significant 4.5-7.6% of Endeavour’s 9.5-16.0Moz exploration target over the course of the next five years. Moreover, at 2.25g/t, its average grade is 21.0% above the average of Endeavour’s other resources. The target remains open at depth and to the south-east, while ground geophysics and geochemical data suggest that its mineralisation also extends towards the east and north-east. As a result, a second, 45,000m exploration campaign has now been launched by Endeavour in conjunction with a regional exploration programme to test nearby targets.

Year
end

Revenue (US$m)

EBITDA (US$m)

PBT*
(US$m)

Operating cash flow per share (US$)

Capex (US$m)

Net debt (US$m)

12/16

566.5

213.9

103.4

1.91

(212.3)

21.4

12/17

652.1

201.2

51.6

2.25

(441.4)

216.8

12/18e

709.1

247.3

49.4

1.51

(287.9)

304.1

12/19e

762.1

369.4

156.2

2.71

(230.5)

273.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and discontinued operations.

Resource multiple valuation up to 0.44/share

The cost of delineating Fetekro’s resource, to date, is reported to be US$6m (5.6 US cents per EDV share), which equates to a discovery cost of US$8.34 per resource oz of gold and is below the average estimated US$14.12/oz cost of discovery projected across its exploration programme for 9.5-16.0Moz over all of the group’s geological assets over the course of the next five years. Ultimately, Endeavour’s target at Fetekro is in excess of 2Moz (to support standalone production in the order of 150-200koz pa) and airborne surveys to date have confirmed that this scale is achievable. Applying a pre-development valuation for EDV’s existing resources of US$66.00/oz (see page 3) suggests a valuation for Fetekro to Endeavour of US$47.5m (or US$0.44/share), a valuation that is implicitly supported by applying a similar methodology to nine out of 14 of Endeavour’s peers with a similar positive pre-development resource valuation (see Exhibit 2).

Valuation: US$29.76 per share plus Fetekro

Endeavour’s exploration programme should be capable of supporting near-term production at its mines at elevated levels, as well as extending their lives by 5.4-17.2 years, on average. In valuing Endeavour, 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 a discount rate of 10%) to forecast cash flows in that year. In the case of Endeavour, our estimate of cash flow in FY22 is US$3.38 per share (including exploration expenditure), in which case our terminal valuation of the company at end-FY22 is US$33.76/share, which (in conjunction with forecast intervening cash flows) discounts back to a value of US$29.76/share at the start of FY19 – plus the potential value of Fetekro (above).

Fetekro maiden resource

Consistent with its strategic objective of identifying a new project as part of its five-year exploration strategy, set out in late 2016, Endeavour began exploration at Fetekro (located in north central Côte d’Ivoire at the northern end of the Oumé-Fetekro greenstone belt) in March 2017, following a strategic assessment of its exploration tenements (which ranked the property as a top priority target) and a full reinterpretation of the available historical data. Since then, nearly 32,000m have been drilled, mainly focused on the ‘highly prospective’ Lafigué target, where a large, mineralised vein system encompassing three main mineralised zones (denoted Lafigué South, Center [sic] and North) was defined over an area of 2.5km x 0.6km (being two-thirds of the total mineralised area defined to date). As a result, on 29 October, Endeavour declared a maiden resource at the property, as follows:

Exhibit 1: Fetekro maiden resource estimate

Category

Tonnage
(Mt)

Gold grade
(g/t)

Contained gold
(koz)

Measured

0.0

0.00

0

Indicated

6.8

2.25

494

Inferred

3.0

2.25

225

Total

9.8

2.25

719

Source: Endeavour Mining. Note: Resources have been constrained by a US$1,500/oz pit shell and a 0.50g/t cut-off. The Whittle pit shell optimisation assumed a base mining cost of US$2.50/t, mining recovery of 95%, mining dilution of 15%, a pit slope angle of 40°, metallurgical recoveries of 92% in oxide and 90% in transition, and fresh rock and processing and general & administrative costs of US$25/t.

The gold assays from the drill holes were composited to 1.0m intervals within the mineralised wireframes and capped at 30g/t gold.

To date therefore, the resource equates to 22.5oz of gold per metre drilled or 479,333oz per square kilometre of mineralisation. In the meantime, drill results suggest that the Lafigué target remains open at depth and to the south-east, while ground geophysics and geochemical data suggest that its mineralisation also extends towards the east and north-east. Based on initial analysis of the ore characteristics and orebody shape, Endeavour believes that these resources could be amenable to open pit mining as mineralisation starts at surface, while preliminary metallurgical test work suggests the potential for high rates of gold recovery.

In addition to those resources defined above, a preliminary assessment of a recent gold-in-soil campaign at Fetekro, coupled with versatile time-domain electromagnetics (VTEM), ground geophysics and geological mapping, suggests the occurrence of additional mineralised systems – and up to 14 targets – located within a 14km radius of the Lafigué target. A number of these targets have already been drill tested on a number of reverse circulation (RC) drilling fences. Of these, Target 4, which is located 4km south-west of Lafigué, is reported to have already returned ‘encouraging results’ and is currently being followed up with additional drilling. At the same time, three further, large gold-in-soil anomalies (which may be related to the shear zones hosting the regional mineralised quartz system veins) have also been identified in the western section of the property, covering an aggregate total area of 11.2km2 (note: 11.2km2 x 479.3koz/km2 = 5.4Moz). As a result, a second, 45,000m exploration (note: 45km x 22.5oz/m = 1.0Moz) campaign has now been launched at the Lafigué target by Endeavour, with the dual goal of:

testing the extension and the continuity of the mineralisation; and

converting the inferred resources into the indicated category.

The campaign will continue into 2019 in conjunction with a regional exploration programme to test nearby targets and is expected to result in an updated mineral resource estimate being published in late 2019.

Potential Fetekro valuation

Fetekro’s 719koz maiden resource equates to 4.0% of Endeavour’s prior, global resource (on a 100% basis), or 4.8% on an attributable basis. However, it equates to a rather more significant 4.5-7.6% of Endeavour’s 9.5-16.0Moz exploration target over the course of the next five years. Moreover, at 2.25g/t, its average grade is 21.0% above the average of Endeavour’s other resources.

Endeavour’s current enterprise value (EV) equates to a resource multiple of US$139.55 per attributable resource oz. On this basis, Fetekro’s resource would/should be valued at US$100.3m (or US$0.93/share). Given that almost all of Endeavour’s other resources relate to assets in which development (as well as exploration) capital has already been sunk, however, such an estimate is likely to be an over-estimation, except in the event that ore derived from the resource could easily be transported to other, nearby processing facilities. Within this context, investors should note that Endeavour’s balance sheet value of its ‘Mining interests’ as at 31 December 2017 (a measure of Endeavour’s investment into its resources in order to achieve their US$139.55/oz valuation) equated to US$73.55 per resource ounce on a 100% basis, which suggests a pre-development valuation of Endeavour’s resources of US$66.00/oz (being 139.55 - 73.55 = 66.00), on which basis Fetekro would be worth US$47.5m (or US$0.44/share).

Adopting a similar methodology, this valuation of US$66.00/oz may be compared with Endeavour’s peers as follows:

Exhibit 2: Endeavour peers’ pre-development valuation of resources

Company

Market capitalisation (US$m)

Net debt (US$m)

EV (US$m)

Book value of mining assets (US$m)

Pre-dev’t valuation of resources (US$m)

Resource (Moz)

Pre-dev’t value of resources (US$/oz)

Newmont Mining

17,344.7

1,064.0

18,408.7

12,209.0

6,199.7

116.700

53.13

Goldcorp

8,779.1

2,925.5

11,704.6

20,161.0

-8,456.4

105.550

-80.12

Newcrest Mining

11,837.9

1,056.4

12,894.3

8,480.0

4,414.3

120.000

36.79

Kinross Gold

3,612.2

789.6

4,401.8

5,071.7

-669.9

61.910

-10.82

Agnico Eagle Mines

9,113.9

1,094.9

10,208.7

6,173.0

4,035.7

51.678

78.09

Eldorado Gold

602.0

211.4

813.4

4,209.0

-3,395.6

41.134

-82.55

B2gold

2,667.4

472.4

3,139.8

2,091.7

1,048.1

20.776

50.45

New Gold

499.1

799.7

1,298.8

2,581.3

-1,282.5

19.073

-67.24

Semafo

753.7

32.2

785.9

703.3

82.6

7.744

10.66

Yamana Gold

2,363.9

1,629.5

3,993.4

6,780.2

-2,786.8

46.824

-59.52

Randgold Resources

8,067.9

-592.3

7,475.6

3,039.3

4,436.3

24.600

180.34

Centamin

1,589.4

-253.2

1,336.1

913.0

423.2

14.620

28.94

Acacia Mining

880.1

-64.0

816.1

777.6

38.5

27.375

1.41

Avesoro Resources (di)

204.7

120.0

324.7

243.4

81.3

4.218

19.28

Source: Edison Investment Research, Thomson Reuters Datastream. Priced at 6 November 2018.

Investors should note the wide range of values. In addition, a crude interpretation of a negative result for a company is that it is quite likely to be trading below net book value. Nevertheless, the (simple) average of pre-development resource values of those companies with a positive number is US$51.01/oz, which is acceptably close to the same multiple for Endeavour of US$66.00/oz to provide confidence in both this valuation and this methodology.

In our report, Mining overview: Unlocking the price to NPV discount, published in November 2017, we calculated average values for pure in situ resources, differentiated both by the markets in which they were listed and also by category of resources (as well as on a blended average basis). The results of this process for London- and Canada-listed companies (as well as the global average) plus their implications for the valuation of Fetekro are provided in Exhibit 3, below.

Exhibit 3: Fetekro maiden resource valuation range

Resource multiples

Implied Fetekro valuation

Category

Fetekro resource (Moz Au)

London
(US$/oz)

Canada
(US$/oz)

Geometric global mean (US$/oz)

London
(US$m)

Canada
(US$m)

Geometric global mean (US$m)

Measured

0

17.88

47.49

43.70

0.0

0.0

0.0

Indicated

494

10.27

6.92

12.89

5.1

3.4

6.4

Inferred

225

7.33

11.64

11.00

1.6

2.6

2.5

Total

719

10.34

15.68

17.54

7.4

11.3

12.6

Source: Edison Investment Research, Endeavour Mining

On the basis of this analysis, a minimum value for the Fetekro maiden resource is US$6.0m (second last column, 3.4 + 2.6 = 6.0), or US$8.40/oz, or US$0.06/share, derived from applying Canadian resource multiples differentiated by category (including the apparent anomaly that Canadian investors seemingly apply a counterintuitive discount to indicated resources relative to inferred ones). A maximum value for the Fetekro maiden resource (valued purely as an in situ resource) may otherwise be seen to be US$12.6m (or US$0.12/share), derived by applying a geometric, global mean rating of US$17.54/oz to the resource in its entirety. Note that these valuations (particularly at the lower end) accord closely with the reported investment in the drilling programme to define the resource of US$6.0m.

Endeavour valuation (plus Fetekro)

In valuing Endeavour in our initiation note (see From the ground upwards, published on 16 October) we opted to discount potential cash flows back over four years from end-FY18 and then 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) to reflect the fact that Endeavour is a multi-asset company that has shown a willingness and desire to trade assets, maintain production, reduce costs and maximise returns to shareholders (eg the sale of Youga in FY16 and Nzema in FY17). In recognition of the fact that exploration investment would be required to maintain cash flows at its FY22 level, however, we also opted to include it in our cash flow analysis on the grounds that it may be a critical component of ongoing business performance in its ability to continually extend the lives of the company’s assets, instead of excluding it (as would be our normal practice).

Our estimate of Endeavour’s cash flow remains US$3.38 per share in FY22, on which basis our terminal valuation of the company at end-FY22 is US$33.76/share, which (in conjunction with forecast intervening cash flows) discounts back to a value of US$26.32/share at the start of FY18 and US$29.76/share at the start of FY19 (as per our initiation note published on 16 October).

Exhibit 4: Endeavour forecast valuation and cash flow per share, FY18-22e (US$/share)

Source: Edison Investment Research

This underlying valuation remains unchanged, although to be added to it now is our estimate of the potential range of values of US$0.06-0.44/share for the Fetekro maiden resource.


Exhibit 5: Financial summary

US$'000s

2016

2017

2018e

2019e

2020e

December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

566,486

652,079

709,104

762,133

1,002,952

Cost of Sales

(376,794)

(597,528)

(475,041)

(392,688)

(444,552)

Gross Profit

189,692

54,551

234,063

369,445

558,400

EBITDA

 

 

213,916

201,166

247,258

369,445

558,400

Operating Profit (before amort. and except.)

127,981

70,379

71,062

186,634

361,902

Intangible Amortisation

0

0

0

0

0

Exceptionals

(36,272)

(149,942)

(13,676)

0

0

Other

(1,989)

(2,242)

(983)

0

0

Operating Profit

89,720

(81,805)

56,403

186,634

361,902

Net Interest

(24,593)

(18,789)

(21,681)

(30,413)

(27,315)

Profit Before Tax (norm)

 

 

103,388

51,590

49,381

156,221

334,587

Profit Before Tax (FRS 3)

 

 

65,127

(100,594)

34,722

156,221

334,587

Tax

(27,643)

(32,945)

(34,242)

(53,071)

(91,957)

Profit After Tax (norm)

73,756

16,403

14,156

103,150

242,630

Profit After Tax (FRS 3)

37,484

(133,539)

480

103,150

242,630

Average Number of Shares Outstanding (m)

80.6

98.5

107.7

107.7

107.7

EPS - normalised (c)

 

 

(37.8)

(6.5)

(30.6)

70.2

178.6

EPS - normalised and fully diluted (c)

 

(37.5)

(6.5)

(30.0)

68.7

174.8

EPS - (IFRS) (c)

 

 

28.8

(114.5)

(10.2)

70.2

178.6

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

33.5

8.4

33.0

48.5

55.7

EBITDA Margin (%)

37.8

30.8

34.9

48.5

55.7

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

22.6

10.8

10.0

24.5

36.1

BALANCE SHEET

Fixed Assets

 

 

1,073,562

1,331,745

1,312,582

1,360,304

1,349,739

Intangible Assets

29,978

6,267

6,267

6,267

6,267

Tangible Assets

1,039,529

1,317,952

1,298,789

1,346,511

1,335,946

Investments

4,055

7,526

7,526

7,526

7,526

Current Assets

 

 

283,536

361,766

284,821

330,978

630,073

Stocks

110,404

141,898

144,715

155,537

204,684

Debtors

36,572

95,212

102,797

107,155

126,948

Cash

124,294

122,702

35,387

66,364

296,519

Other

12,266

1,954

1,922

1,922

1,922

Current Liabilities

 

 

(149,626)

(241,185)

(213,258)

(180,043)

(202,000)

Creditors

(145,311)

(223,527)

(195,600)

(162,385)

(184,342)

Short term borrowings

(4,315)

(17,658)

(17,658)

(17,658)

(17,658)

Long Term Liabilities

 

 

(246,811)

(451,705)

(393,991)

(393,991)

(393,991)

Long term borrowings

(146,651)

(323,184)

(323,184)

(323,184)

(323,184)

Other long term liabilities

(100,160)

(128,521)

(70,807)

(70,807)

(70,807)

Net Assets

 

 

960,661

1,000,621

990,154

1,117,248

1,383,822

CASH FLOW

Operating Cash Flow

 

 

164,522

244,092

196,999

344,994

535,360

Net Interest

(19,626)

(15,212)

(21,681)

(30,413)

(27,315)

Tax

(10,625)

(22,301)

(34,691)

(53,071)

(91,957)

Capex

(212,275)

(441,396)

(287,942)

(230,533)

(185,934)

Acquisitions/disposals

32,098

(37,332)

60,000

0

0

Financing

174,702

116,536

0

0

0

Dividends

(2,612)

(5,177)

0

0

0

Net Cash Flow

126,184

(160,790)

(87,315)

30,976

230,155

Opening net debt/(cash)

 

 

152,856

26,672

218,140

305,455

274,478

HP finance leases initiated

0

0

0

0

0

Other

0

(30,678)

0

0

0

Closing net debt/(cash)

 

 

26,672

218,140

305,455

274,478

44,323

Source: Company sources, Edison Investment Research. Note: Includes discontinued operations; excludes restricted cash.

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Sydney +61 (0)2 8249 8342

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95 Pitt Street, Sydney

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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