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New senior gold major looking to join FTSE 100

Endeavour Mining 17 December 2020 Update
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Endeavour Mining

New senior gold major looking to join FTSE 100

Acquisition, Q3, Q4e, maiden dividend, London listing

Metals & mining

17 December 2020

Price

C$29.51

Market cap

C$4,811m

C$1.2733/US$

Net debt (US$m) at end September 2020*

181.7

*Excludes convertible premium.

Shares in issue

163.0m

Free float

75.2%

Code

EDV

Primary exchange

TSX

Secondary exchange

US OTC

Share price performance

%

1m

3m

12m

Abs

(3.4)

(21.9)

25.1

Rel (local)

(7.1)

(27.6)

21.4

52-week high/low

C$38.85

C$20.01

Business description

Following its acquisition of SEMAFO, Endeavour joins the ranks of the major gold producers, with two mines in Côte d’Ivoire (Agbaou and Ity) and four in Burkina Faso (Houndé, Karma, Mana and Boungou) plus three major development projects, all in the West African Birimian greenstone belt.

Next events

Maiden dividend paid

Q121

Kari Center/Gap/South/Pump maiden reserve

Q121

Updated Fetekro PFS

Q121

Kalana updated feasibility study

H220

Analyst

Charles Gibson

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

On 16 November, Endeavour (EDV) announced the all-paper acquisition of Teranga at a price of 0.47 EDV shares per TGZ share, reflecting a minimal premium. Teranga will contribute a new cornerstone asset to the group. It is expected to produce c 533koz Au pa over the next five years at an average AISC of US$785/oz and will underpin the combined entity’s production at 1.5Moz pa at a target AISC of US$800/oz, simultaneously projecting the new Endeavour into the ranks of the world’s top 10 gold producers and securing its position fourth from bottom of the cost curve (see Exhibit 4). After a US$200m equity infusion from La Mancha, we estimate that new Endeavour’s net debt after the combination will still only be US$185.5m. In the wake of the Teranga acquisition, EDV is seeking a secondary London listing, targeting FTSE 100 inclusion.

Year end

Revenue (US$m)

EBITDA (US$m)

PBT*
(US$m)

Operating cash flow
per share (US$)

DPS

(c)

Yield

(%)

12/18

1,048.6

378.9

75.8

2.31

0

N/A

12/19

1,362.1

618.4

220.4

3.30

0

N/A

12/20e

1,793.5

927.3

440.9

4.83

37

1.6

12/21e

2,016.0

1,060.9

511.0

5.15

39

1.7

Note: Pro forma basis. *PBT is normalised, excluding amortisation of acquired intangibles and exceptional items.

A strong Q3 with more to come

Q320 was the first quarter in which Endeavour reported its results consolidated with those of SEMAFO. Despite coinciding with the annual seasonal rains, Endeavour reported record operating cash flow before working capital of US$1.37/share and, had it not been for an unexpected accounting treatment, would also have once again materially outperformed our expectations. A strong Q3 has now set the scene for a record Q4 including the restart of Boungou, in recognition of which EDV has declared a maiden dividend that puts its shares on a yield above the average of six of its peers for at least the next three years (Edison estimate).

Houndé and Ity promote exploration oz to production

As part of its Q320 results, Endeavour provided updated mine plans for Houndé and Ity to reflect recent exploration success. Now integrated into the mines’ plans, these newly discovered ounces will achieve Endeavour’s key goal of maintaining production at each above 250koz pa until at least 2028 at AISC of c US$820/oz.

Valuation: US$45.32/share plus US$1.67/share

In the wake of Q320 results, our terminal valuation of the combined Endeavour-SEMAFO entity at end-FY22 has remained steady at US$49.46/share, which (in conjunction with forecast intervening cash flows) discounts back to a value of US$45.32/share in FY21, to which a further US$1.67/share may also be added for Fetekro. In the meantime, on a relative basis, the enlarged Endeavour is trading at approximately only half the level of its peers on a range of common valuation measures regardless of whether Edison or consensus forecasts are used (see Exhibit 15), thus exhibiting the potential for a share price re-rating of c 75%.

Teranga acquisition

On 16 November, Endeavour announced that it had entered into a definitive agreement with Teranga Gold (TGZ), whereby Endeavour will acquire all of the issued and outstanding securities of Teranga by way of a Plan of Arrangement under the Canada Business Corporations Act. Under the terms of the agreement, Endeavour will pay 0.47 shares for each Teranga common share, resulting in the issuance of an additional 78.8m shares (cf 163.0m currently in issue). Based on the 20-day volume weighted average prices of each company until 13 November, these terms represented a 9.4% price premium for Teranga shareholders. Based on the closing prices of each company’s shares on 13 November, they represented a 5.1% premium for Teranga shareholders and (at currently prevailing prices) imply an equity value for Teranga of c US$1.9bn. In the aftermath of the transaction, existing Endeavour and Teranga shareholders will own approximately 66% and 34% of the enlarged entity, respectively, which will produce c 1.5Moz gold per year and which we estimate will generate in excess of US$1.0bn in operating cash flows in FY20 on a pro forma basis (see Exhibits 16 and 17).

As with its SEMAFO acquisition earlier in the year, Endeavour’s principal investor, La Mancha, has committed to invest US$200m into the combined entity (cf US$100m for the SEMAFO transaction) to provide for a larger free float and greater stock liquidity, and both sets of board of directors have unanimously approved the transaction.

Pursuant to the rules of the TSX, the transaction will require approval by a simple majority of the votes cast by Endeavour’s shareholders and a two-thirds majority of votes cast by Teranga shareholders. In addition, Endeavour shareholders will be asked to approve the issuance of US$200m Endeavour ordinary shares to La Mancha by a simple majority.

La Mancha (which currently controls c 24% of the outstanding shares of Endeavour), the officers and directors of Endeavour, Tablo and Barrick (which together control c 33% of the outstanding shares of Teranga) and the officers and directors of Teranga have all stated their support for the transaction. In addition to shareholder and court approvals, the transaction is subject to applicable regulatory approvals including TSX approval and the satisfaction of certain other customary closing conditions. The agreement includes customary provisions including non-solicitation provisions, a right to match any superior proposal and reciprocal termination fees of US$40m payable either way depending on circumstances.

It is anticipated that the transaction will close in Q121.

Endeavour: A specialist West African gold miner

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

Teranga: Also a specialist West African gold miner

Similarly focused on West Africa, Teranga currently operates two mines – one each in Senegal and Burkina Faso – with two advanced exploration assets. Details of all of Teranga’s assets are available on its website. However, a very brief description of each is provided below.

Production assets

Sabodala-Massawa (Senegal, 90% ownership)

Located in the south-east of Senegal, near the Mali border, Sabodala comprises a 611km2 mine licence and a 915km2 combined exploration land package. Mining is conducted in multiple open pits carried out by a conventional owner-operated, truck and shovel fleet. The central carbon-in-leach plant has a capacity of up to 4.5Mtpa (with a further 1.2Mtpa BIOX extension planned) and achieves a metallurgical recovery in the order of 90%.

In March 2020, Teranga completed the acquisition of the Massawa gold project from Barrick (previously Randgold). Massawa is one of the highest-grade, undeveloped open-pit gold projects in Africa and is located within 30km of Sabodala’s mill. Results from an NI 43–101 compliant preliminary feasibility study incorporating a base case combined Sabodala-Massawa mine plan demonstrate that combining the two assets creates a top-tier mine with a long-life reserve base, low costs and strong cash flows. Plant modifications are currently in progress, with a target completion in 2021, to further increase production capability and efficiencies for processing Massawa’s high-grade oxide ore. Based on the results of the Sabodala-Massawa preliminary feasibility study, a separate refractory ore treatment (ROT) plant using bacterial oxidation (BIOX) technology is expected to be installed parallel to the existing plant to create a second processing stream. The ROT design would increase capacity by 1.2 Mtpa and allow for the processing of Massawa's refractory ore, which is expected to begin in 2023.

For further information on Sabodala's current mining and mineral processing activities, readers should refer the NI 43101 technical report for Sabodala filed in August 2019. For further information on the anticipated plant modifications and the processing of Massawa ore, please refer to the Sabodala-Massawa preliminary feasibility study press release dated 26 July 2020. 

Technical work, trade-off studies and exploration drilling are continuing to further de-risk and improve the project economics of an integrated Sabodala-Massawa operation ahead of a definitive feasibility study and a mineral resource and reserves update, which is anticipated in 2021. In the meantime, mining and the processing of Massawa free-milling high-grade ore through Sabodala’s existing plant is underway.

Wahgnion (Burkina Faso, 90% ownership)

Wahgnion is located in south-west Burkina Faso, approximately 510km from the country’s capital, Ouagadougou, and declared commercial production on 1 November 2019.

Like Sabodala-Massawa, Wahgnion mines multiple deposits that feed a central mill. Mining is conducted via conventional, owner-operator truck and shovel open-pit mining. The mine plan for Wahgnion focuses on four initial gold deposits within the mine lease. The Nogbele, Fourkoura and Stinger deposits fall into the Nogbele land tenement, while the Samavogo deposit is in the Dierisso tenement. The Wahgnion processing plant is sited adjacent to the Nogbele deposit, which contains approximately 50% of total mineral reserves. The Fourkoura, Stinger and Samavogo deposits are located within 25km of the plant. Plant design is based on a conventional carbon-in-leach (CIL) gold process flowsheet comprising primary crushing, semi-autogenous grinding and ball milling with a pebble crusher, CIL gold extraction, elution, electro-winning and smelting to produce gold doré on site. Throughput is designed within the range 3.0–3.2Mtpa, depending on the blend of soft and hard ore. The average predicted plant gold recovery is 92%, ranging up to as high as 95% for soft (oxide) material.

Further information on Wahgnion may be found in Teranga’s NI 43101 technical report filed in July 2019.

Updated mine plan

Since commercial production was declared, the processing plant has performed c 25% above nameplate capacity, resulting in higher than planned production. As a result, Teranga has now updated the mine plan to accommodate higher plant throughput capability, increasing Wahgnion’s average annual production by c 25% and reducing its mine life to 10 years.

Concurrently, a multi-year drilling and exploration campaign is underway around three of the existing deposit areas and at more than a dozen promising targets with the intention of increasing the mine’s life back up to c 15 years.

For further information on the updated mine plan, readers should refer to Teranga’s announcement of 6 August 2020.

FY20 production guidance

A summary of Teranga’s production guidance for Sabodala-Massawa and Wahgnion for FY20 is as follows:

Exhibit 1: Teranga FY20 production and cost guidance

Sabodala-Massawa

Wahgnion

Group total

Production (koz)

225–235

150–165

375–400

AISC (US$/oz)*

875–950

900–1,000

975–1,100

Source: Teranga. *Including cash/non-cash inventory movements and amortised advanced royalty costs.

Exploration assets

Golden Hill

Golden Hill was acquired by Teranga as an early-stage exploration project in 2016 as part of its acquisition of Gryphon Minerals. It comprises three exploration permits covering 468km2 in close proximity and along strike to a number of other deposits within the highly mineralised Houndé greenstone belt, such as Siou, Houndé and Yaramoko, and within trucking distance of the Houndé mine itself.

Formerly part of a joint venture, Golden Hill is now 100% wholly owned by Teranga and has produced a series of excellent exploration results both near surface and at depth. Currently there are over a dozen prospects and deposits, the majority of which are located within 10km of the centre of the property. Following an 18-month exploration programme, Teranga announced a maiden mineral resource estimate in 2019 and an updated mineral resource in October 2020 after a 27,000m programme returned a range of high-grade gold intercepts at several targets and also in numerous step-out holes. The campaign also uncovered a new discovery, denoted the Ma Jonction prospect, located between Ma Main and Ma North.

In light of these results, Teranga has commenced a new exploration and drilling programme to continue to evaluate the numerous prospects and deposits identified to date and to expand drilling outwards to new areas of interest. It is also continuing with early-stage engineering studies, metallurgical test work and environmental and social assessments as it progresses towards a technical update at the same time as submitting a request to the Burkina Faso government for the conversion of the Golden Hill exploration permits into a mine licence.

Afema

Afema is a promising (and rapidly advancing) exploration project in the Ivory Coast, with strong exploration results anticipated to be announced in forthcoming weeks, as well as a maiden resource in Q121.

Reserves and resources

A comparison of Teranga’s and Endeavour’s global resources and reserves is as follows:

Exhibit 2: Teranga and Endeavour gold resources and reserves*

Resources

Reserves

Asset

Tonnes

(Mt)

Grade (g/t)

Contained gold (koz)

Life

(years)

Tonnes

(Mt)

Grade

(g/t)

Contained gold (koz)

Life

(years)

Ownership

(%)

Sabodala-Massawa

130.9

2.08

8,737

29.1

75.8

1.98

4,819

16.8

90

Wahgnion

54.9

1.48

2,610

17.7

30.3

1.59

1,550

9.8

90

Golden Hill

24.1

1.83

1,419

N/A

0.0

0.00

0

N/A

100

Teranga total

209.9

1.89

12,766

27.6

106.1

1.87

6,370

14.0

90–100

Endeavour total

459.1

1.97

29,018

23.7

162.9

2.09

10,938

8.4

65–100

EDV+TGZ total

669.0

1.94

41,783

24.8

269.1

2.00

17,308

10.0

65–100

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

Regardless of whether considering gross or attributable resources and reserves, Endeavour is contributing approximately 68–70% of the resources to the enlarged group and 62–64% of the reserves (albeit at a higher average grade).

Rationale for the acquisition

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

It will create a top 10 senior gold producer, with average annual production in excess of 1.5Moz per annum, with relatively low production costs.

The enlarged company will be diversified across six core operating mines in three countries and will be the largest gold producer in each of Senegal, Cote d’Ivoire and Burkina Faso.

The combination will augment the newly created entity’s development pipeline to include six greenfield projects (Fetekro, Golden Hill, Afema, Kalana, Bantou and Nabanga) and the largest exploration portfolio across the West African Birimian Greenstone Belt.

From a financial perspective, the combination will allow for the usual cost savings in general and administrative costs. In addition, as part of the combination, a refinancing has been negotiated, which will offer a clean and simple debt structure and materially lower financing costs. Including existing Endeavour debt, as well as higher-cost Teranga debt, this refinancing is expected to save the combined entity c US$40m per annum over the next several years (Endeavour calculation).

A top 10 senior gold producer

Teranga is expected to produce c 533koz of gold per year over the next five years at an average AISC of US$785/oz. The combination of Endeavour and Teranga, two companies that specialise in gold mining in West Africa, will create a global top 10 producer and will consolidate its position as the largest, single producer of gold in a region that (by Endeavour’s estimation) ranks number one in the world in terms of exploration success and number four in the world in terms of production over the past 10 years:

Exhibit 3: Combination creates a top 10 senior gold producer

Source: Endeavour Mining

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

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

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

Critical mass

The acquisition of Teranga will immediately add Sabodala-Massawa and Wahgnion to the combined company’s portfolio of producing mines and Golden Hill and Afema to its portfolio of near-term developments. As such, it will have five mines (Houndé, Ity, Mana, Boungou and Sabodala-Massawa) with the ability to produce in the order of 200koz annually (see Exhibits 1 and 11), underpinning group production of c 1.5Moz per annum from eight mines (including Karma, Agbaou and Wahgnion) at an immediate AISC below US$900/oz and a targeted AISC of US$800/oz and certainly within the bottom third of the global cost curve.

Exhibit 4: Senior gold producers’ all-in sustaining costs (US$/oz)

Source: Endeavour Mining

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

Capital markets profile

At the same time as being the largest regional producer of gold in West Africa, the combination of Endeavour and Teranga will project the group from the bottom of the top 15 gold producing companies in the world into the top 10, as measured by both gold output and market capitalisation.

At present, management estimates the combined group has a pro-forma US$500m in liquidity immediately available to it via its various banking arrangements. From a practical perspective, the new company’s enhanced scale should make it a natural partner of choice for governments looking to develop their gold mining industries in the region.

Price of the acquisition

At the time of writing, the relative valuations of Endeavour and of Teranga are as follows:

Exhibit 5: Endeavour valuation relative to Teranga

Company

Ticker

Price/cash flow (x)

EV/EBITDA (x)

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Endeavour (Edison)

EDV

4.8

4.5

4.1

4.2

3.7

3.3

Endeavour (consensus)

EDV

4.8

3.8

3.9

5.2

3.0

3.4

Teranga

6.9

3.4

4.0

6.7

3.5

3.9

Source: Edison Investment Research, Refinitiv. Note: Priced at 14 December 2020.

Notwithstanding the higher current year multiples for Teranga relative to Endeavour in year 1 of the above table, readers’ attention is drawn to the confluence of those measures over the course of the next two years, suggesting that Endeavour has both recognised and is prepared to pay for Teranga’s relatively higher growth in cash flow and EBITDA over the period. Nevertheless, readers should note also that, whatever the relative valuation distinctions between Endeavour and Teranga on an individual basis (and therefore also the combined entity under the terms of the combination), both trade at material discounts to their peers, as demonstrated in Exhibit 15, below.

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

Nevertheless, since the acquisition was announced on 16 November, we have been able to generate an estimate of Teranga’s financial statements for FY20, which are considered in the section below (Endeavour-Teranga pro-forma FY20 results). A summary of the valuations of the geological assets of both companies plus Edison’s estimate of the valuation of the consolidated group based on the companies’ respective reserves and resources (assuming imminent closure of the transaction), is as follows:

Exhibit 6: Endeavour and Teranga’s geological assets’ valuations

Company

Current

Enterprise value*

(US$000s)

Attributable resources (koz)

Attributable reserves (koz)

EV per resource oz (US$/oz)

EV per reserve oz (US$/oz)

Endeavour

3,918

25,170

9,517

155.67

411.71

Teranga

2,054

11,632

5,733

176.61

358.30

Combined group

5,987

36,802

15,250

162.68

392.57

Source: Edison Investment Research (underlying data Endeavour Mining, Teranga, Bloomberg). Note: *Estimated as at end-December 2020. Totals may not add up owing to rounding.

Of note, within the context of the analysis in Exhibit 6, is the fact of Endeavour’s slightly higher (pre-acquisition) valuation per attributable reserve ounce, demonstrating one further measure in which the combination may be said to be accretive.

Endeavour Q320 results

Endeavour’s Q320 results were the first to incorporate SEMAFO on a consolidated basis. In general, production was 6.8% higher than Edison had forecast (see Exhibit 7), driven by positive variances at Mana and Boungou in particular, but also Houndé and, to a lesser extent, Karma, which was an impressive achievement, given that the third quarter is the one in which Endeavour’s mines experience the most disruption on account of West Africa’s seasonal rains. In addition, the group sold 18.0koz (7.4%) more gold than it produced during the quarter – effectively selling gold out of inventory – which resulted in a 12.4% (or US$53.1m) positive variance in reported revenue, albeit this was largely offset by a US$38.4m increase in operating expenses to result in a gross profit that was within 4.0% of our expectations.

Once again, Endeavour recorded a loss on financial instruments that was largely attributable to its rising share price in the form of an unrealised loss on its convertible senior bond derivative, although note that EDV has now exited its gold revenue protection programme. In this particular quarter, however, EDV’s loss on financial instruments was, coincidentally, almost exactly balanced by ‘other’ income, in this case, in the form of a reimbursement received from the mining contractor at Karma for equipment previously capitalised as part of the mine’s plant. Corporate costs were also materially better than our expectations and also the sum of Endeavour and SEMAFO’s aggregate corporate costs of US$10.0m in Q1 – supporting Endeavour’s target of achieving US$35–40m in annual synergies from the combination of the two companies – albeit there remained US$19.3m in costs relating to the acquisition of SEMAFO, which came through in the quarter. Otherwise, the current corporate income tax rate was high, albeit demonstrating no more variability than is usual on a quarterly basis. Moreover, it was largely offset by a deferred tax rebate, such that the effective tax rate was broadly in line with our expectations.

However, the one major variance in actual reported results related to Endeavour’s depreciation charge, which was US$64.5m above our prior expectations as a result of a purchase price adjustment on the SEMAFO transaction as a consequence of a rise in the latter’s share price at the closing date relative to the announcement date, which gave rise to a higher valuation and therefore more subsequent depreciation of the SEMAFO assets (note the implication here that goodwill arising from the transaction was not written off against reserves). As a matter of interest, readers should note that, had the depreciation charge been in line with our prior expectations and had the effective tax rate remained at 22.9% (see Exhibit 7), then we forecast that basic EPS would have been 66.8c (cf 36.3c actual), normalised EPS would have been 93.5c (cf 63.0c) and adjusted EPS would have been 74.9c (cf 44.4c) and would have, once again, materially outperformed our prior forecast of 60.8c.

A detailed analysis of Endeavour’s Q3 performance relative to both the prior quarter’s (estimated pro forma) results and also Edison’s and consensus expectations is provided in Exhibit 7, below.

Exhibit 7: Endeavour Mining earnings, by quarter, Q419–Q320

(US$000s unless otherwise

Indicated)

Q419

Q120

Q220

Q220e

Q320e

Q320e

Q320

*Q3/Q2

**Q3a/Q3e

**Q3a/Q3e

underlying

pro forma

consensus

Change
(%)

Variance

(%)

Variance

(units)

Houndé production (koz)

55.0

55.9

57.4

57.4

56.2

62.0

8.0

10.3

5.8

Agbaou production (koz)

35.0

27.5

24.4

24.4

26.6

24.8

1.6

-6.8

-1.8

Karma production (koz)

27.2

27.6

20.3

20.3

20.2

22.4

10.3

10.9

2.2

Ity production (koz)

60.4

61.0

46.8

46.8

53.7

44.5

-4.9

-17.1

-9.2

Boungou production (koz)

31.1

19.3

30.2

-2.9

56.5

10.9

Mana production (koz)

47.5

52.1

59.7

25.7

14.6

7.6

Total gold produced (koz)

177.6

171.9

149.0

227.5

228.1

229.0

243.6

7.1

6.8

15.5

Total gold sold (koz)

171.9

174.6

149.8

217.5

228.1

228.6

261.6

20.3

14.7

33.5

Gold price (US$/oz)

1,445

1,581

1,689

***1,697

***1,879

1,800

***1,841

8.5

-2.0

-38.0

Mine level cash costs (US$/oz)

678

661

675

697

621

662

685

-1.7

10.3

64.0

Group level AISC (US$/oz)

819

899

939

979

911

1,028

906

-7.5

-0.5

-5.0

Revenue

 

 

 

 

– Gold revenue

248,398

269,902

253,084

369,167

428,482

426,400

481,561

30.4

12.4

53,079

Cost of sales

 

 

 

 

– Operating expenses

124,707

114,403

103,308

153,925

141,643

180,057

17.0

27.1

38,414

– Royalties

13,638

17,452

17,771

24,236

27,860

32,713

35.0

17.4

4,853

Gross profit

110,053

138,047

132,005

191,006

258,979

268,791

40.7

3.8

9,812

Depreciation

(54,608)

(52,529)

(43,760)

(75,796)

(70,257)

(134,795)

77.8

91.9

-64,538

Expenses

 

 

 

0

– Corporate costs

(3,250)

(5,231)

(5,049)

(9,772)

(11,000)

(5,101)

-47.8

-53.6

5,899

– Impairments

0

0

0

0

0

0

N/A

N/A

0

– Acquisition etc costs

(4,552)

(4,330)

(2,589)

(2,589)

(7,411)

(19,336)

646.9

160.9

-11,925

– Share based compensation

(8,819)

(1,623)

(4,942)

(6,516)

(6,907)

(7,117)

9.2

3.0

-210

– Exploration costs

0

(1,333)

(1,796)

(1,796)

(2,750)

(900)

-49.9

-67.3

1,850

Total expenses

(16,621)

(12,517)

(14,376)

(20,673)

(28,068)

(32,454)

57.0

15.6

-4,386

Earnings from operations

38,824

73,001

73,869

94,537

160,654

101,542

7.4

-36.8

-59,112

Interest income

 0

0

452

452

0

-100.0

-100.0

-452

Interest expense

(11,591)

(11,662)

(11,982)

(14,778)

(13,194)

(12,143)

-17.8

-8.0

1,051

Net interest

(11,591)

(11,662)

(11,982)

(14,326)

(12,742)

(12,143)

-15.2

-4.7

599

Loss on financial instruments

2,194

(3,492)

(71,931)

(71,931)

0

(24,268)

-66.3

N/A

-24,268

Other expenses

(12,219)

1,935

(1,791)

(1,791)

0

23,089

-1,389.2

N/A

23,089

Profit before tax

17,208

59,782

(11,835)

6,489

147,911

106,240

88,220

1,259.5

-40.4

-59,691

Current income tax

29,661

23,699

2,313

7,142

39,297

68,134

854.0

73.4

28,837

Deferred income tax

(9,446)

620

8,468

8,468

0

(47,962)

-666.4

N/A

-47,962

Total tax

20,215

24,319

10,781

15,610

39,297

20,172

29.2

-48.7

-19,125

Effective tax rate (%)

117.5

40.7

(91.1)

240.6

26.6

22.9

-90.5

-13.9

-3.7

Profit after tax

(3,007)

35,463

(22,616)

(9,121)

108,615

68,048

-846.1

-37.3

-40,567

Net profit from discontinued ops.

(4,394)

0

0

0

0

0

N/A

N/A

0

Total net and comprehensive income

(7,401)

35,463

(22,616)

(9,121)

108,615

68,048

-846.1

-37.3

-40,567

Minority interest

4,487

9,465

14,613

16,889

21,461

8,920

-47.2

-58.4

-12,541

Minority interest (%)

(60.6)

26.7

(64.6)

(185.2)

19.8

13.1

-107.1

-33.8

-6.7

Profit attributable to shareholders

(11,888)

25,998

(37,229)

(26,010)

87,153

59,128

-327.3

-32.2

-28,025

 

 

 

 

Basic EPS from continuing ops (US$)

(0.068)

0.235

(0.335)

(0.164)

0.537

0.363

-321.3

-32.4

-0.174

Diluted EPS from continuing ops (US$)

(0.066)

0.235

(0.335)

(0.158)

0.517

0.363

-329.7

-29.8

-0.154

Basic EPS (US$)

(0.108)

0.235

(0.335)

(0.164)

0.537

0.363

-321.3

-32.4

-0.174

Diluted EPS (US$)

(0.105)

0.235

(0.335)

(0.158)

0.517

0.363

-329.7

-29.8

-0.154

Normalised basic EPS from continuing operations (US$)

(0.047)

0.306

0.336

0.306

0.582

0.630

105.9

8.2

0.048

Normalised diluted EPS from continuing operations (US$)

(0.045)

0.306

0.336

0.294

0.561

0.630

114.3

12.3

0.069

Adjusted net earnings attributable (US$000s)

36,890

33,517

52,793

65,320

98,774

91,000

72,405

10.8

-26.7

-26,369

Adj net EPS from continuing ops (US$)

0.336

0.303

0.476

0.412

0.608

0.620

0.444

7.8

-27.0

-0.164

Source: Endeavour Mining, Edison Investment Research, Refinitiv (consensus estimates). Note: Company reported basis; *Compares Q320a with Q220e (pro-forma). **Compares Q320 actual figure with Q320 Edison estimate. ***Includes adjustment for Karma stream.

Items included in the reconciliation between adjusted net earnings attributable and total net and comprehensive earnings are losses from discontinued operations, deferred income tax effects, gains/losses on financial instruments, other income/expenses, share-based compensation and acquisition costs (all shown independently in the table above), plus the tax impact of adjusting items, non-cash and other adjustments and the minority interest attributable to the adjusting items (not shown independently).

A full explanation and description of the factors and forces affecting operations in Q320 cf Q220 is provided in Endeavour’s press release accompanying its results and also its management discussion and analysis (MD&A) filed on Sedar. However, a very brief summary of each of its mines’ performances relative to our expectations during the quarter is provided in the table below:

Exhibit 8: Endeavour Mining operations’ performance in Q320 cf Edison expectations

Mine

Tonnes processed

Costs

Grade

Metallurgical recovery

Outperformed

Agbaou

Karma

Boungou

Agbaou

Karma

Houndé

Mana

Boungou

Mana

Boungou

Agbaou

Underperformed

Ity

Houndé

Agbaou

Karma

Ity

Source: Edison Investment Research

FY20 guidance vs forecasts

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

A summary of our outlook for each of Endeavour’s operations for the remainder of the year is provided in Exhibit 9, below:

Exhibit 9: Endeavour Mining’s operations’ outlook, Q420

Mine

Outlook

Ity

Plant feed in Q4 will continue to be sourced from the Daapleu pit supplemented by material from the old heap leach dumps. In general, more fresh ore will be mined as the pit deepens. As a result, mined and processed ore grades are anticipated to increase in Q4, although throughput and recovery will probably decline in line with the metallurgical characteristics of the Daapleu sulphide ore. Mining in Q3 focused on pit cut-backs at the higher-grade Ity and Bakatouo deposits. In the longer term, once these cut-backs are completed, the mine will be in a better position to source ore from several large deposits to optimise the plant feed based on the metallurgical characteristics of the ore, rather than being necessarily dependent on Daapleu. In addition, several plant optimisation initiatives have been identified to increase plant capacity from 5.0Mtpa to 5.6Mtpa for negligible incremental capex. Production for the full year is now expected to be below the original guidance range of 235–255koz at an AISC above the guidance range of US$630–675/oz.

Houndé

The focus of mining operations at Houndé in FY20 has been waste mining and removal. After low-grade stockpiles contributed to processed ore into H120 however, in H220 both mined tonnages and grades should improve as higher-grade ore from Vindaloo Main and Central is processed, supplemented by material from Kari Pump. Waste extraction will remain high as Kari Pump ramps up and as delayed stripping at Vindaloo is conducted. As a result, non-sustaining capex will be c US$15m higher than originally anticipated, although this will be approximately balanced by a decline in sustaining capex of approximately the same order of magnitude. Production for the full year is now expected to be at the ‘top end’ of its original guidance range of 230–250koz and the mid-range of its AISC guidance range of US$865–895/oz.

Agbaou

Overall, Agbaou is expected to achieve the bottom end of its guidance range at 115–125koz at an AISC of US$940–990/oz. Mining is continuing from the North and South pits but has ceased at the West pit. Throughput should increase in Q4 cf Q3, while recovery is likely to decline owing to a greater proportion of hard, fresh ore mined and processed.

Karma

Mining at Karma in 2020 is continuing from the Kao North and GG1 pits. Grade in Q4 is expected to be consistent with Q3 as low-grade stockpiles continue to supplement the stacked ore. Nevertheless, despite an increase in stacked tonnage in Q4 following the end of the rainy season, production is now expected to be ‘slightly below’ the original guidance range of 100–110koz, albeit all-in sustaining costs are still expected to be in the middle of the US$980–1,050/oz FY20 guidance range.

Mana

Production is expected to moderate in Q4 as throughput and recoveries decline after the completion of the Siou open pit and the consequent change in the ore blend with a higher proportion of ore now being derived from Wona. Sustaining capex is expected to increase ‘slightly’ in Q4 owing to a greater focus on non-sustaining underground development and pre-stripping at Wona, and is therefore expected to be ‘significantly below’ the initially guided FY20 amount of US$70.0m. In contrast, non-sustaining capex is expected to be c US$25.0m (cf SEMAFO’s initial guidance of US$2.0m).

Boungou

Boungou has now recommenced mining. Mining, drilling and blasting have ramped up and are expected to reach the targeted amount of c 2.0Mtpa in the current quarter, such that Boungou is expected to achieve the top half of its FY20 pro forma production range of 130–150koz at an AISC in the bottom half of the previously guided US$680–725/oz range.

Mine

Ity

Houndé

Agbaou

Karma

Mana

Boungou

Outlook

Plant feed in Q4 will continue to be sourced from the Daapleu pit supplemented by material from the old heap leach dumps. In general, more fresh ore will be mined as the pit deepens. As a result, mined and processed ore grades are anticipated to increase in Q4, although throughput and recovery will probably decline in line with the metallurgical characteristics of the Daapleu sulphide ore. Mining in Q3 focused on pit cut-backs at the higher-grade Ity and Bakatouo deposits. In the longer term, once these cut-backs are completed, the mine will be in a better position to source ore from several large deposits to optimise the plant feed based on the metallurgical characteristics of the ore, rather than being necessarily dependent on Daapleu. In addition, several plant optimisation initiatives have been identified to increase plant capacity from 5.0Mtpa to 5.6Mtpa for negligible incremental capex. Production for the full year is now expected to be below the original guidance range of 235–255koz at an AISC above the guidance range of US$630–675/oz.

The focus of mining operations at Houndé in FY20 has been waste mining and removal. After low-grade stockpiles contributed to processed ore into H120 however, in H220 both mined tonnages and grades should improve as higher-grade ore from Vindaloo Main and Central is processed, supplemented by material from Kari Pump. Waste extraction will remain high as Kari Pump ramps up and as delayed stripping at Vindaloo is conducted. As a result, non-sustaining capex will be c US$15m higher than originally anticipated, although this will be approximately balanced by a decline in sustaining capex of approximately the same order of magnitude. Production for the full year is now expected to be at the ‘top end’ of its original guidance range of 230–250koz and the mid-range of its AISC guidance range of US$865–895/oz.

Overall, Agbaou is expected to achieve the bottom end of its guidance range at 115–125koz at an AISC of US$940–990/oz. Mining is continuing from the North and South pits but has ceased at the West pit. Throughput should increase in Q4 cf Q3, while recovery is likely to decline owing to a greater proportion of hard, fresh ore mined and processed.

Mining at Karma in 2020 is continuing from the Kao North and GG1 pits. Grade in Q4 is expected to be consistent with Q3 as low-grade stockpiles continue to supplement the stacked ore. Nevertheless, despite an increase in stacked tonnage in Q4 following the end of the rainy season, production is now expected to be ‘slightly below’ the original guidance range of 100–110koz, albeit all-in sustaining costs are still expected to be in the middle of the US$980–1,050/oz FY20 guidance range.

Production is expected to moderate in Q4 as throughput and recoveries decline after the completion of the Siou open pit and the consequent change in the ore blend with a higher proportion of ore now being derived from Wona. Sustaining capex is expected to increase ‘slightly’ in Q4 owing to a greater focus on non-sustaining underground development and pre-stripping at Wona, and is therefore expected to be ‘significantly below’ the initially guided FY20 amount of US$70.0m. In contrast, non-sustaining capex is expected to be c US$25.0m (cf SEMAFO’s initial guidance of US$2.0m).

Boungou has now recommenced mining. Mining, drilling and blasting have ramped up and are expected to reach the targeted amount of c 2.0Mtpa in the current quarter, such that Boungou is expected to achieve the top half of its FY20 pro forma production range of 130–150koz at an AISC in the bottom half of the previously guided US$680–725/oz range.

Source: Endeavour Mining, Edison Investment Research

In the wake of Q320 results, Endeavour’s consolidated group production and cost guidance for FY20 remains unchanged (albeit the individual components may have changed slightly – see Exhibits 9, above, and 10, below) and compares with Edison’s updated forecasts as follows:

Exhibit 10: Endeavour production cost and AISC guidance, by mine, FY20 vs Edison forecast

Production (koz)

AISC (US$/oz)

Mine

Original FY20e guidance

Current Edison FY20e forecast

Previous Edison FY20e forecast (koz)

Original FY20e guidance

Current Edison FY20e forecast

Previous Edison FY20e forecast

Houndé

230–250

250.0

250.8

865–895

880

877

Agbaou

115–125

118.1

114.0

940–990

975

979

Karma

100–110

92.1

100.2

980–1,050

1,012

975

Ity CIL

235–255

209.4

235.8

630–675

838

673

Mana

185–205

205.0

202.0

1,050–1,120

1,095

1,098

Boungou

130–150

146.5

132.0

680–725

680

689

New EDV total

995–1,095

1,021.2

1,034.9

865–915

911

870

Source: Endeavour Mining, Edison Investment Research. Note: Edison AISC forecasts exclude corporate general and administrative costs.

FY20 dividend and future dividend policy

In addition to its results, Endeavour declared a maiden dividend for FY20, totalling US$60m (US$0.37/share, or c C$0.47/share) and payable in early Q121. Following payment of this first dividend, Endeavour expects to declare future dividends on a semi-annual basis with the aim of maintaining an approximate dividend yield of 1.6% until it has reached a targeted net cash position of c US$250m (NB around the end of FY21 according to Edison estimates on a pre-Teranga acquisition basis), whereupon it will re-assess its capital allocation priorities, which may include augmenting its shareholder return programme.

EDV FY20 estimates

To date, the effect of COVID-19 on Endeavour’s operations in West Africa has been negligible. Nevertheless, Endeavour has insured itself as far as possible against the unexpected in H220 by both setting itself up to operate under Level 2 COVID-19 restrictions (see COVID-19 appendix) and preparing multiple different levels in its pits from which to produce.

In the light of Q3 results and Endeavour’s updated guidance, our updated financial forecasts for Endeavour for the remainder of the year are as follows in Exhibit 11, overleaf. Readers wishing to compare the updated forecasts with our prior forecasts may do so by comparing the numbers in Exhibit 11 with those in Exhibit 5 in our last note (see Strong Q2 tees up strong H2, published on 21 August 2020).

Exhibit 11: Endeavour Mining FY20 earnings forecasts, by quarter

US$000s (unless otherwise indicated)

Pre-acquisition basis

Pro forma (EDV+SFO) basis

Reported

FY20e

Q120

Q220

Est Q120

Est Q220

Q320

Q420e

FY20e

Houndé production (koz)

55.9

57.4

55.9

57.4

62.0

74.7

250.0

250.0

Agbaou production (koz)

27.5

24.4

27.5

24.4

24.8

41.4

118.1

118.1

Karma production (koz)

27.6

20.3

27.6

20.3

22.4

21.8

92.1

92.1

Ity production (koz)

61.0

46.8

61.0

46.8

44.5

57.1

209.4

209.4

Boungou production (koz)

32.0

31.1

30.2

47.9

146.5

78.1

Mana production (koz)

49.9

47.5

59.7

55.7

205.0

115.4

Total gold produced (koz)

171.9

149.0

253.8

227.5

243.6

298.7

1,021.2

863.2

Total gold sold (koz)

174.6

149.8

251.4

217.5

261.6

298.7

1,029.3

884.7

Gold price (US$/oz)

*1,581

*1,689

*1,644

*1,697

*1,841

1,865

*1,743

*1,757

Mine level cash costs (US$/oz)

661

675

661

697

685

635

661

662

Mine level AISC (US$/oz)

870

939

867

979

886

941

911

905

Revenue

– Gold revenue

269,902

253,084

393,113

369,167

481,561

549,686

1,793,527

1,554,233

Cost of sales

– Operating expenses

114,403

103,308

160,064

153,925

180,057

189,712

683,758

587,480

– Royalties

17,452

17,771

23,956

24,236

32,713

37,925

118,830

105,861

Gross profit

138,047

132,005

209,093

191,006

268,791

322,049

990,938

860,892

Depreciation

(52,529)

(43,760)

(84,061)

(75,796)

(134,795)

(160,993)

(455,645)

(392,077)

Expenses

– Corporate costs

(5,231)

(5,049)

(9,954)

(9,772)

(5,101)

(8,276)

(33,103)

(23,657)

– Impairments

0

0

0

0

0

0

0

0

– Acquisition etc costs

(4,330)

(2,589)

(4,330)

(2,589)

(19,336)

0

(26,255)

(26,255)

– Share based compensation

(1,623)

(4,942)

(3,197)

(6,516)

(7,117)

(6,907)

(23,737)

(20,589)

– Exploration costs

(1,333)

(1,796)

(1,333)

(1,796)

(900)

(2,750)

(6,779)

(6,779)

Total expenses

(12,517)

(14,376)

(18,814)

(20,673)

(32,454)

(17,933)

(89,874)

(77,280)

Earnings from operations

73.001

73,869

106,218

94,537

101,542

143,123

445,420

391,535

Interest income

0

452

452

0

0

904

0

Interest expense

(11,662)

(11,982)

(14,458)

(14,778)

(12,143)

(11,384)

(52,763)

(47,171)

Net interest

(11,662)

(11,982)

(14,006)

(14,326)

(12,143)

(11,384)

(51,859)

(47,171)

Loss on financial instruments

(3,492)

(71,931)

(3,492)

(71,931)

(24,268)

0

(99,691)

(99,691)

Other expenses

1,935

(1,791)

(231)

(1,791)

23,089

0

21,067

23,233

Profit before tax

59,782

(11,835)

88,489

6,489

88,220

131,739

314,937

267,906

Current income tax

23,699

2,313

27,040

7,142

68,134

33,902

136,218

128,048

Deferred income tax

620

8,468

9,323

8,468

(47,962)

0

(30,171)

(38,874)

Total tax

24,319

10,781

36,363

15,610

20,172

33,902

106,047

89,174

Effective tax rate (%)

40.7

(91.1)

41.1

240.6

22.9

25.7

33.7

33.3

Profit after tax

35,463

(22,616)

52,126

(9,121)

68,048

97,836

208,890

178,731

Net profit from discontinued ops.

0

0

0

0

0

0

0

0

Total net and comprehensive income

35,463

(22,616)

52,126

(9,121)

68,048

97,836

208,890

178,731

Minority interest

9,465

14,613

12,062

16,889

8,920

15,095

52,967

48,093

Minority interest (%)

26.7

(64.6)

23.1

(185.2)

13.1

15.4

25.4

26.9

Profit attributable to shareholders

25,998

(37,229)

40,064

(26,010)

59,128

82,741

155,923

130,638

Basic EPS from continuing ops (US$)

0.235

(0.335)

0.253

(0.164)

0.363

0.508

0.970

0.954

Diluted EPS from continuing ops (US$)

0.235

(0.335)

0.243

(0.158)

0.363

0.497

0.946

0.948

Basic EPS (US$)

0.235

(0.335)

0.253

(0.164)

0.363

0.508

0.970

0.954

Diluted EPS (US$)

0.235

(0.335)

0.243

(0.158)

0.363

0.497

0.946

0.948

Norm. basic EPS from continuing ops (US$)

0.306

0.336

0.302

0.306

0.630

0.508

1.753

1.874

Norm. diluted EPS from continuing ops (US$)

0.306

0.336

0.291

0.294

0.630

0.497

1.711

1.863

Adj net earnings attributable (US$000s)

33,517

52,793

54,310

65,320

72,405

88,582

280,618

247,297

Adj net EPS from continuing ops (US$)

0.303

0.476

0.343

0.412

0.444

0.543

1.745

1.806

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

Items included in the reconciliation between adjusted net earnings attributable and total net and comprehensive earnings are losses from discontinued operations, deferred income tax effects, gains/losses on financial instruments, other expenses, share-based compensation and acquisition costs (all shown independently in the table above), plus the tax impact of adjusting items, non-cash and other adjustments and the minority interest attributable to the adjusting items (not shown independently).

Notwithstanding the detailed appearance of our forecasts, readers are cautioned that forecasting on a quarterly basis is prone to large variations between actual and forecast numbers. As such, the exhibit above should be regarded as indicative, rather than prescriptive, particularly with respect to individual quarters. Within that context, a comparison between Edison’s FY20 adjusted net EPS from continuing operations estimates and consensus estimates, by quarter, is as follows:

Exhibit 12: Edison adjusted net EPS from continuing operations estimates vs consensus FY20 by quarter (US$)

(US$/share)

Pre-SFO acquisition

Post-SFO acquisition

Q1a

Q2a

Q3a

Q4e

FY20e

Edison forecast*

0.343

0.476

0.444

0.543

1.745

Mean consensus forecast

0.343

0.476

0.444

0.910

2.200

High consensus forecast

0.343

0.476

0.444

1.180

2.560

Low consensus forecast

0.343

0.476

0.444

0.720

1.350

Source: Refinitiv, Edison Investment Research. Note: *As per Exhibit 11 on a pro forma basis. Consensus priced 14 December 2020.

Longer-term refinements

In addition to its Q320 results, Endeavour provided updated mine plans for Houndé and Ity to reflect its recent exploration success at Kari Pump and Kari West and Le Plaque. Now fully integrated into Houndé’s and Ity’s mine plans, these incremental ounces were discovered at a cost below US$25/oz on average and will result in production at Houndé and Ity that is 106koz pa and 170koz pa higher than that set out in their respective optimisation studies prior to development (although the increase relative to Edison expectations was smaller, given that we had already assumed some contribution from these assets in earlier reports). It also achieves Endeavour’s key goal of maintaining production at each above 250koz pa for an extended period of time, now until 2028 for Houndé and until 2029 at Ity. Full details of the updated mine plans have been provided by Endeavour in its announcement of 16 November, entitled Endeavour extends mine life and increases production outlook at its Ity and Houndé flagship assets. A summary of the consequences of the new plans over each of the lives of the mines relative to our prior expectations is provided in Exhibit 13, below:

Exhibit 13: Effect of refinements to long-term Ity and Houndé life of mine plans

Houndé

Ity

Gold produced (koz)

+668.0

+193.6

Revenue (US$m)

+981.0

+298.8

Cash costs (US$m)

+217.1

-96.3

Royalties (US$m)

+85.7

+28.5

Sustaining capex (US$m)

+260.7

+138.1

Non-sustaining capex (US$m)

+60.0

+157.0

Source: Endeavour Mining, Edison Investment Research

Of note is the fact that the combined AISC of the two mines over the next five years will be below US$850/oz (Endeavour calculation). According to Edison’s calculation, AISC, on the basis of the new mine plans, will remain within US$60/oz of US$820/oz for the next nine years. Notwithstanding these increases, Endeavour believes that sufficient exploration potential exists at each of the mines to sustain production at 250koz pa beyond the current life of mine plans.

Absolute Endeavour valuation (pro forma and pre-TGZ)

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 and the acquisition of SEMAFO in FY20). Rather than our customary method of discounting maximum potential dividends over the life of operations back to FY21, therefore, we have opted to discount potential cash flows back over two years from the start of FY21 and then to apply an ex-growth terminal multiple of 10x (consistent with using a standardised discount rate of 10%) to forecast cash flows in that year (ie FY22). In the normal course of events, exploration expenditure would be excluded from such a calculation on the basis that it is an investment. In the case of Endeavour, however, we have included it in our estimate of FY22 cash flows on the grounds that it may be a critical component of ongoing business performance in its ability to continually expand and extend the lives of the company’s assets. Note that, in the aftermath of the SEMAFO acquisition, the combined entity’s immediate strategic imperatives will be the continuation of exploration at Ity and Houndé plus investigating the potential to extend the mine lives of Mana and Boungou.

In the aftermath of Q320 results, and given the longer-term refinements summarised above, our estimate of Endeavour’s cash flow in FY22 is US$4.95 per share (cf US$5.17 per share previously). On this basis, our terminal valuation of the company at end-FY22 is US$49.46/share (cf US$51.74/share previously), which (in conjunction with forecast intervening cash flows) discounts back to a value of US$45.32/share at the start of FY21 (cf US$43.34/share at the start of FY20 previously). Although our valuation remains largely unchanged compared with that in our last note (given that Edison had largely anticipated the changes to the Houndé and Ity mine plans), it can now be stated with much greater confidence given that Endeavour has already been successful in extending the lives of these two mines at the targeted production level of 250koz per mine per annum and at the targeted cost level of c US$850/oz AISC and may well be similarly successful in extending them again in the future (not to mention its other mines).

Exhibit 14: Endeavour forecast valuation and cash flow per share, FY20–22e (US$/share)

Source: Edison Investment Research

Relative Endeavour valuation

Endeavour’s valuation on a series of commonly used measures, relative to a selection of gold mining majors (the ranks of which it has now joined since its takeover of SEMAFO has been completed), is as follows:

Exhibit 15: Endeavour valuation relative to peers

Company

Ticker

Price/cash flow (x)

EV/EBITDA (x)

Yield (%)

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Endeavour (Edison)*

EDV

4.8

4.5

4.1

**4.2

**3.7

**3.3

1.6

1.7

4.4

Endeavour (consensus)

EDV

4.8

3.8

3.9

5.2

3.0

3.4

0.0

2.2

4.1

Majors

 

 

Barrick

ABX

7.9

6.7

7.4

7.7

6.7

7.2

1.3

1.4

1.4

Newmont

NEM

10.4

7.5

7.9

8.7

6.4

6.4

2.1

3.0

2.8

Newcrest

NCM AU

8.7

9.7

10.2

7.0

7.8

8.1

1.3

1.1

1.1

Kinross

K

5.1

4.1

3.7

4.6

3.8

3.3

0.4

1.3

1.3

Agnico-Eagle

AEM

13.9

8.7

8.8

11.6

7.4

7.3

1.3

1.9

1.8

Eldorado

ELD

5.1

5.2

5.3

4.3

4.5

4.7

0.0

0.0

0.0

Average

 

8.5

7.0

7.2

7.3

6.1

6.1

1.1

1.4

1.4

Source: Edison Investment Research, Refinitiv. Note: *Pro forma EDV+SFO basis (excludes TGZ). **Forecast EV. Consensus and peers priced at 14 December 2020.

Of note is the fact that Endeavour’s valuation is materially cheaper than the averages of the majors on all nine measures shown in Exhibit 15, regardless of whether Edison or consensus forecasts are used. On an individual basis, it is cheaper than the majors on at least 45 out of 54 (83%) of valuation measures, again, regardless of whether Edison or consensus forecasts are used.

Financials

Endeavour had US$181.7m net debt on its balance sheet at end-Q320 (cf US$472.6m at end-Q220 and US$476.6m at end-Q120), giving it a gearing (net debt/equity) ratio of just 14.3% (cf 66.4% at end-Q220) and a leverage (net debt/[net debt+equity]) ratio of 12.5% (cf 39.9% at end-Q220). Note that this net debt figure of US$181.7m excludes the US$107.9m (cf US$92.7m at end-Q220) value of the conversion option inherent in its convertible bond. The notes are convertible at a rate of 41.84 common shares per US$1,000 nominal (or an equivalent conversion price of US$23.90 per share – ie approximately at Endeavour’s current share price) and mature on 15 February 2023. Among other things, the rise in the value of the conversion option (ostensibly as a result of Endeavour’s share price increasing) gave rise to an – albeit unrealised – loss of US$15.3m for the three-month period to end-June 2020 (see Risks and sensitivities – Gains or losses on financial instruments, below).

Perhaps more significantly, on a like-for-like basis, net debt decreased by US$127.3m over the three-month period as a result of organic cash flows. At this rate of decrease, Endeavour may expect to be net debt-free in the space of 1.4 quarters from end-September 2020 (all other things being equal), ie sometime during Q121.

Endeavour-Teranga pro-forma FY20 results

While Edison has provided research and analysis on Endeavour since at least October 2018 (see our initiation note From the ground upwards, published on 16 October 2018), we have never formally followed Teranga. As a result, we have not yet undertaken any forward-looking analysis or forecasts of the combined group. Since the announcement of the acquisition however, we have developed a short-term production and financial model for the company, from which we have been able to calculate the following forecast pro forma income, balance sheet and cash flow statements for FY20 (note that the year-end for each company before the merger was 31 December):

Exhibit 16: Estimated pro-forma FY20 Endeavour-Teranga results (US$000s unless otherwise indicated)

Income statement

2020

Cash flow statement

2020

Balance sheet

2020

Revenue

Profit before taxation

393,136

Assets

- Gold revenue

2,510,222

Add back

Current assets

Cost of sales

- Depreciation

575,825

Cash and cash equivalents

767,138

- Operating expenses

957,974

- Financing costs

86,407

Restricted cash

9,964

- Royalties

161,812

- Share based payments

35,333

Receivables

115,128

Gross profit

1,390,436

- Financial instruments

89,601

Prepayments

19,963

Depreciation

(581,084)

- Impairments

(31,690)

Stocks

459,967

Expenses

- Cash paid on settlement of PSUs* etc.

0

Income taxes receivable

34,605

- Corporate costs

(59,951)

- Income taxes paid

(121,527)

Derivative financial assets

(92,492)

- Impairments

0

- Payment of gold collar premium

10,324

Total current assets

1,314,273

- Acquisition etc costs

(26,255)

- Net non-cash inventory adjustments

0

- Share-based compensation

(36,737)

- Foreign exchange loss

0

Non-current assets

- Exploration costs

(28,888)

- Other

45,289

Mining interests

3,571,803

Total expenses

(151,831)

Operating cash-flow before working cap.

1,082,698

Deferred income taxes

10,575

Earnings from operations

657,522

Change in working capital

(101,426)

Other long-term assets

158,490

Net interest

(94,321)

Other

0

Goodwill

955,232

Loss on financial instruments

(99,691)

Net cash generated from operating activities

981,272

Total non-current assets

4,696,100

Other expenses

(3,268)

Profit before tax

460,242

Cash-flows from investing activities

Total assets

6,010,373

Current income tax

203,324

Mining interests’ capex

(477,475)

Deferred income tax

(30,171)

Cash paid for Massawa interest

(306,134)

Liabilities

Total tax

173,153

Cash acquired on acquisitions

0

Current liabilities

Effective tax rate

37.6

Net proceeds from sales

0

Trade and payables

402,721

Profit after tax

287,089

Other

103,593

Finance leases

45,277

Profit from discontinued operations

0

Net cash from investing activities

(680,016)

Derivative liabilities

58,236

Total net and comprehensive loss

287,089

Income taxes payable

74,932

Minority interest

67,669

Cash-flows from financing activities

Short-term borrowings

31,875

Ditto (%)

23.6

Gross proceeds from issue of shares etc

145,925

Other

39,094

Profit attributable to shareholders

219,420

Payment of financing and other fees

(3,534)

Total current liabilities

652,135

Dividend

60,323

Cash settlement of hedge programmes

(5,245)

Retained earnings

159,096

Payment of financing and other fees

(27,020)

Long-term liabilities

Interest paid

(75,473)

Finance leases

77,538

Basic EPS (US$)

0.907

Proceeds of long-term debt

229,625

Borrowings

1,007,891

Repayment of long-term debt

(30,532)

Other

306,198

Average no shares in issue (000's)

241,803

Repayment of finance leases

(3,209)

Deferred tax

131,018

Deposit re reclamation liability bond

0

Total long-term liabilities

1,522,645

Adjusted EBITDA

1,276,006

Other

350

Adjusted net earnings attributable

389,864

Net cash from financing activities

230,887

Total liabilities

2,174,780

Adjusted net EPS (US$)

1.612

Net increase in cash

532,142

Net assets

3,835,594

Cash and at start of year

317,903

Minority interest

274,772

Effects of forex changes

(2,092)

Net assets attributable

3,560,822

Cash before dividend

847,953

Dividends to minorities

80,815

Cash at year end

767,138

Contributed equity

Issued share capital

4,876,398

Equity reserve

72,487

Accumulated profit

(1,033,193)

Other

(354,870)

Shareholders’ funds

3,560,822

Shares in issue (000s)

241,803

Net debt

385,479

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

With reference to Edison’s forecast Teranga financials, readers should note that, almost without exception, Edison’s forecasts are close to the consensus forecast for the company for both Q420 and FY20 and within the range of consensus forecasts. However, note that, for illustrative purposes, we have applied the enlarged number of shares for the group across the full year in respect of our consolidated earnings forecasts in Exhibit 16, above, ie as if the equity raising to finance Teranga’s acquisition of Massawa had occurred at the start of Q120, rather than during Q220.

On the basis of the above analysis therefore, we would expect new Endeavour’s net debt to equate to US$385.5m (including US$10.0m of restricted cash and finance leases – see Exhibit 16) as at end-FY20, which would, all other things being equal, equate to a gearing (net debt/equity) ratio of 10.8% and a leverage (net debt/(net debt+equity)) ratio of 9.8%. However, readers should note that this is stated before the US$200m equity investment committed by La Mancha once the Teranga deal has completed. Including this, we estimate that Endeavour’s net debt will decline to US$185.5m and its gearing and leverage ratios to 5.2% and 5.0%, respectively. Following the completion of the combination and its investment, La Mancha’s shareholding in the enlarged group will fall from c 24% to c 19%. In so doing, it will increase Endeavour’s free float, improve available liquidity and aid the company in preserving its planned capital returns strategy. The placement is subject to TSX approval. However, it is expected to occur after the closing of the combination and will be priced at the US dollar equivalent of a 5% discount to the five-day volume weighted average price of Endeavour’s ordinary shares on the TSX as of 23 November 2020, which we estimate was US$20.50/share. On this basis, investors may expect an additional 9.8m shares (or 4.0%) to be issued to take the total to 251.6m.

Within the context of the above analysis, readers’ attention is also drawn to the inclusion of US$955m of estimated ‘goodwill’ arising from the Teranga acquisition. It remains to be seen whether this will be written off against reserves or amortised against earnings over time in Endeavour’s future accounting treatment.

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

Exhibit 17: Estimated individual Endeavour and Teranga contributions to FY20 pro-forma income and cash-flow statements (US$000s unless otherwise indicated)

Income statement

EDV

TGZ

Estimated pro-forma FY20

Cash flow statement

EDV

TGZ

Estimated pro-forma FY20

Revenue

Profit before taxation

314,937

145,304

460,241

- Gold revenue

1,793,527

716,695

2,510,222

Add back

Cost of sales

- Depreciation

455,645

120,180

575,825

- Operating costs

683,758

274,215

957,974

- Financing costs

51,859

34,548

86,407

- Royalties

118,830

42,982

161,812

- Share based payment expense

23,737

11,596

35,333

Gross profit

990,938

399,498

1,390,436

- Financial instruments

99,691

(10,090)

89,601

Depreciation

(455,645)

(125,439)

(581,084)

- Impairment of mining interests

0

(31,690)

(31,690)

Expenses

- Cash paid on settlement PSUs etc.

0

0

0

- Corporate costs

(33,103)

(26,848)

(59,951)

- Income taxes paid

(136,218)

(52,414)

(188,632)

- Impairments

0

0

0

- Payment of gold collar premium

0

10,324

10,324

- Restructuring etc costs

(26,255)

0

(26,255)

- Net non-cash inventory adjustments

0

0

0

- Share-based compensation

(23,737)

(13,000)

(36,737)

- Foreign exchange loss

0

0

0

- Exploration costs

(6,779)

(22,109)

(28,888)

- Other

0

45,289

45,289

Total expenses

(89,874)

(61,957)

(151,831)

Operating cash-flows before non-cash working capital

809,651

273,047

1,082,698

Earnings/(loss) from operations

445,420

212,102

657,522

Change in working capital

(33,641)

(67,785)

(101,426)

Net interest

(51,859)

(42,462)

(94,321)

Other

0

0

0

Loss on financial instruments

(99,691)

0

(99,691)

Net cash from operating activities

776,010

205,262

981,272

Other expenses

21,067

(24,335)

(3,268)

Profit before tax

314,937

145,305

460,242

Cash-flows from investing activities

Current income tax

136,218

67,105

203,324

Capex (continuing operations)

(370,323)

(107,152)

(477,475)

Deferred tax

(30,171)

0

(30,171)

Cash paid for Massawa

0

(306,134)

(306,134)

Total tax

106,047

67,105

173,153

Cash acquired on acquisitions

0

0

0

Mean tax rate (%)

33.7

46.2

37.6

Net proceeds from mining interest sales

0

103,593

103,593

Profit after tax

208,890

78,199

287,089

Other

0

0

0

Net profit from discontinued ops

0

0

0

Net cash from investing activities

(370,323)

(309,693)

(680,016)

Total net and comprehensive loss

208,890

78,199

287,089

Minority interest

52,967

14,703

67,669

Cash-flows from financing activities

Ditto (%)

25.4

18.8

23.6

Gross proceeds from share issues etc.

100,000

45,925

145,925

Attributable profit

155,923

63,497

219,420

Payment of financing and other fees

(3,534)

(3,534)

Cash settlement of hedge programmes

(5,245)

(5,245)

Adjusted EBITDA

927,320

348,686

1,276,006

Payment of financing and other fees

(27,020)

(27,020)

Adjusted net earnings attributable

280,618

109,247

389,864

Interest paid

(51,859)

(23,614)

(75,473)

Adjusted net EPS (US$)

1.612

Proceeds of long-term debt

0

229,625

229,625

Repayment of long term debt

0

(30,532)

(30,532)

Repayment of finance lease obligation

0

(3,209)

(3,209)

Other

0

350

350

Net cash from financing activities

48,141

182,746

230,887

Net increase/(decrease) in cash

453,827

78,315

532,142

Cash at start of the financial year

288,186

29,717

317,903

Forex effects

0

(2,092)

(2,092)

Cash at year-end (before dividend)

742,013

105,940

847,953

Dividend

80,815

0

80,815

Cash at year-end

661,198

105,940

767,138

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

Exhibit 18: Financial summary

US$'000s

2018

2019

2020e

2021e

2022e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,048,636

1,362,121

1,793,527

2,015,989

1,918,759

Cost of Sales

(669,719)

(884,869)

(892,462)

(969,405)

(836,254)

Gross Profit

378,917

477,252

901,065

1,046,584

1,082,505

EBITDA

 

 

378,917

618,443

927,320

1,060,914

1,082,505

Operating Profit (before amort. and except.)

 

106,090

281,400

471,675

525,222

666,533

Intangible Amortisation

0

0

0

0

0

Exceptionals

8,035

(199,159)

(125,946)

(14,330)

0

Other

(3,171)

(9,392)

21,067

0

0

Operating Profit

110,954

72,849

366,796

510,892

666,533

Net Interest

(27,110)

(51,607)

(51,859)

(14,224)

2,522

Profit Before Tax (norm)

 

 

75,809

220,401

440,883

510,998

669,055

Profit Before Tax (FRS 3)

 

 

83,844

21,242

314,937

496,668

669,055

Tax

(73,637)

(97,253)

(106,047)

(136,855)

(145,495)

Profit After Tax (norm)

2,172

123,148

334,836

374,143

523,560

Profit After Tax (FRS 3)

10,207

(76,011)

208,890

359,813

523,560

Net loss from discontinued operations

(154,795)

(4,394)

0

0

0

Minority interests

8,460

33,126

52,967

74,047

94,260

Net profit

(144,588)

(80,405)

208,890

359,813

523,560

Net attrib. to shareholders contg. businesses (norm)

(16,292)

90,022

281,869

300,096

429,300

Net attrib.to shareholders contg. businesses

(8,257)

(109,137)

155,923

285,766

429,300

Average Number of Shares Outstanding (m)

155.3

157.4

160.8

163.0

163.0

EPS - normalised ($)

 

 

(0.10)

0.57

1.75

1.84

2.63

EPS - normalised and fully diluted ($)

 

 

(0.10)

0.57

1.72

1.80

2.58

EPS - (IFRS) ($)

 

 

(0.99)

(0.72)

0.97

1.75

2.63

Dividend per share (p)

0

0

37

39

101

Gross Margin (%)

36.1

35.0

50.2

51.9

56.4

EBITDA Margin (%)

36.1

45.4

51.7

52.6

56.4

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

10.1

20.7

26.3

26.1

34.7

BALANCE SHEET

Fixed Assets

 

 

1,594,202

2,330,033

2,244,712

2,059,828

1,766,757

Intangible Assets

4,186

5,498

5,498

5,498

5,498

Tangible Assets

1,543,842

2,254,476

2,169,155

1,984,271

1,691,200

Investments

46,174

70,059

70,059

70,059

70,059

Current Assets

 

 

327,841

652,871

1,059,887

1,573,842

2,152,548

Stocks

126,353

266,451

344,909

387,690

368,992

Debtors

74,757

83,836

108,902

185,661

177,669

Cash

124,022

288,186

661,198

1,055,613

1,661,009

Other

2,709

14,398

(55,122)

(55,122)

(55,122)

Current Liabilities

 

 

(248,420)

(354,931)

(424,815)

(451,361)

(414,410)

Creditors

(224,386)

(312,427)

(382,311)

(408,857)

(371,906)

Short term borrowings

(24,034)

(42,504)

(42,504)

(42,504)

(42,504)

Long Term Liabilities

 

 

(729,290)

(963,736)

(963,736)

(963,736)

(963,736)

Long term borrowings

(618,595)

(770,902)

(770,902)

(770,902)

(770,902)

Other long term liabilities

(110,695)

(192,834)

(192,834)

(192,834)

(192,834)

Net Assets

 

 

944,333

1,664,237

1,916,048

2,218,573

2,541,159

CASH FLOW

Operating Cash Flow

 

 

394,984

628,617

912,228

977,117

1,072,243

Net Interest

(26,734)

(35,413)

(51,859)

(14,224)

2,522

Tax

(36,140)

(109,494)

(136,218)

(136,855)

(145,495)

Capex

(689,469)

(401,227)

(370,323)

(350,808)

(122,900)

Acquisitions/disposals

33,179

3,654

0

0

0

Financing

(7,820)

2,402

100,000

0

0

Dividends

(1,956)

(6,154)

(80,815)

(80,815)

(200,974)

Net Cash Flow

(333,956)

82,385

373,012

394,415

605,396

Opening net debt/(cash)*

 

 

218,140

518,607

525,220

152,208

(242,207)

HP finance leases initiated

0

0

0

0

0

Other

33,489

(88,998)

0

0

0

Closing net debt/(cash)*

 

 

518,607

525,220

152,208

(242,207)

(847,603)

Source: Company sources, Edison Investment Research. Note: Presented on pro forma basis including SEMAFO (except FY18 balance sheet). EPS normalised from 2018 to reflect continuing business only. *Excludes restricted cash.

Appendix

Risks and sensitivities

Gains or losses on financial instruments

Gains/losses on financial instruments are usually of a non-cash nature and invariably excluded from analysts’ forecasts. In the recent past, they have arisen from two sources at Endeavour: 1) its gold revenue protection programme (which has now been discontinued); and 2) unrealised gains/losses on its convertible senior bond derivative, which is a notional accounting entry, ironically, reflecting rises in Endeavour’s share price (see Exhibits 19 and 7). As such, they are both of an ‘exceptional’ nature and ignored by most (if not all) investors. A discussion of each of these items is conducted here for no other reason than to make readers aware of the potential for gains/losses in the future – despite the fact that such gains/losses are of a non-cash nature relating to the derivative notionally assumed to be embedded in the convertible – and the magnitude of these, albeit paper, losses.

Endeavour’s gold revenue protection programme came to an end on 30 June 2020. In Q3 however, it did record a loss of US$15.3m (unrealised) on the convertible senior note derivative referred to in the ‘Financials’ section of this note (above) and which is analysed below with respect to Endeavour’s share price:

Exhibit 19: Endeavour gain/(loss) on financial instruments, Q319–Q320 (US$000s)

Item

Q320

Q220

Q120

Q419

Q319

Q219

Gain/(loss) on other financial instruments

(226)

535

55

(982)

(1,307)

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

0

(175)

(132)

35

(22,389)

Realised gain on forward contract

0

0

6,686

0

0

Gain/(loss) on gold revenue protection programme

0

(10,171)

(10,985)

2,803

(8,138)

Unrealised gain/(loss) on convertible senior bond derivative

(15,286)

(63,893)

2,675

3,930

(14,168)

Gain/(loss) on foreign exchange

(8,756)

1,773

(1,751)

(3,592)

(3,526)

Total gain/(loss) on financial instruments

(24,268)

(71,931)

(3,492)

2,194

(49,528)

EDV share price at period end (US$)

24.90

24.12

14.11

18.90

19.12

24.12

Share price change in period (US$)

+0.78

+10.01

-4.79

-0.22

-5.00

(Profit)/loss per US$1 of share price movement (US$m)

19.6

6.4

0.6

17.9

(2.8)

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

At first glance, a US$0.78 appreciation in Endeavour’s shares giving rise to a US$15.3m loss on its convertible would suggest a loss of US$19.6m for every US$1 by which Endeavour’s shares appreciate. However, as at end-Q320 (and end-Q220), Endeavour’s share price was very close to its conversion price of US$23.90, which is the price at which the value of the embedded derivative changes rapidly, given that the intrinsic value and the option value of the presumed embedded option both increase rapidly in value at this point. Much above this level and while the intrinsic value of the embedded option will continue to increase, increases in the option value of the derivative should moderate. Given the number of shares into which the bond is convertible, we estimate that for each US$1 appreciation in the price of its shares beyond US$23.90, Endeavour should record a loss in the order of US$13.8m in purely intrinsic terms. As before however, given the inherent uncertainties surrounding gains (or losses) from financial instruments, they have been excluded from our forecasts in Exhibit 11 and are anyway excluded from the calculation of adjusted net earnings and analysts’ forecasts.

COVID-19

National and regional response

Since the onset of the pandemic, governments in West Africa have acted decisively to implement appropriate response measures, using (where appropriate) their recent experience in dealing with Ebola in the region as a precedent. Out of three states of alert, West Africa is currently at a ‘Level 1’ state of readiness (ie that the virus remains predominantly outside West Africa), with the potential to escalate this to ‘Level 2’. In practice, this means that both Burkina Faso and the Ivory Coast require proof of a negative COVID-19 test upon arrival and 14 days of either quarantine or strongly encouraged self-isolation, respectively. Within this framework however, ‘key industries’ have been allowed to remain operating and, in both countries, ministers are reported to be very keen that gold mining should continue. As much for their own protection as anybody else’s, mines have been variously isolated from the rest of the country.

Whether as a direct result of these measures or not, of all of the (populated) continents in the world, Africa to date appears to have been the least affected by COVID-19, albeit this may, in part, reflect Africa’s relatively youthful population dynamic (the median age in Africa being just 19.7 years).

Company response

Endeavour has been supporting the national response in close collaboration with the health authorities in its host countries. In addition, it has mobilised and dispatched an expert medical response team to the region to provide it with an on-hand unit to respond rapidly to any infections that might arise at its mines.

In early March 2020, Endeavour put in place a business continuity plan to mitigate the risks and potential impact of the global COVID-19 pandemic, which has three levels of response:

Level 1 (which the group is currently operating under) involves a range of preventative measures including temperature checks, restricted access to sites, social distancing, increased hygiene standards and mandatory quarantine periods for employees arriving in-country, while otherwise continuing operations as normal.

Level 2 is designed to be initiated should COVID-19 become more prevalent in the countries in which the group operates and involves comprehensive restrictions on movement into and out of the mines. Under these circumstances, Endeavour’s mines would be isolated, but mining operations and the shipment of gold would continue.

Level 3 involves the full or partial suspension of mining and processing operations.

To date, the group is operating under Level 1 restrictions only. In addition, the group has also taken a number of pro-active steps, including:

Assessing its supply chains with a focus on ensuring continuity of supply in a range of scenarios. In this case, Endeavour’s shift to national suppliers located within host countries over the past 12 months has mitigated the impact of closed borders.

To ensure that it has access to substantial liquidity and financial flexibility to operate under various stress-test scenarios, Endeavour drew down the entirety of its available revolving credit facility (RCF) in Q120, albeit it has now commenced repaying the RCF and expects to continue to reduce the drawn amount into Q420.

It has assessed its ability to curtail its operations to selectively mine higher-grade ore at low stripping ratios should mining activity need to be reduced in response to an increase in COVID-19 prevention measures.

At the current time, each of the company’s operations are continuing to manage and respond to COVID-19 within the framework of the company’s incident management and response plan, which was activated at the outbreak of pandemic and has been validated by an epidemiologist special advisor to the company. As part of the response, a business continuity programme has been put in place to protect employees while ensuring the safe operation of the company and its mines. Since early March, access to all mine sites has been strictly controlled with health screening in place for visitors, employees and contractors, and all non-essential travel has been cancelled. Endeavour has also asked any employee or contractor who is feeling unwell to stay at home and office workers have been asked to work from home. Subsequently, it further augmented its preventive measures by introducing a mandatory 14-day quarantine period for any employees or contractors arriving in West Africa.

Consequently, Endeavour states that it has not witnessed any impact to production or operations at any of its mines or exploration activities as a result of COVID-19. In the meantime, suppliers have confirmed that placed and forecast orders are intact and the company has stated a readiness to charter its own planes, if necessary, to keep its operations supplied.

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