gold flake

Ninth successive year of outperformance

Endeavour Mining 28 March 2022 Update
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Endeavour Mining

Ninth successive year of outperformance

Q421/FY21 results

Metals & mining

28 March 2022

Price

1,918p

Market cap

£4,769m

C$1.2582/US$, US$1.3253/GB£

Net cash (US$m) at end-December 2021, excludes lease liabilities, option premium and restricted cash

98.9

Shares in issue

248.7m

Free float

75.2%

Code

EDV

Primary exchange

LSE

Secondary exchange

TSX, USOTC

Share price performance

%

1m

3m

12m

Abs

(2.9)

16.5

N/A

Rel (local)

(2.8)

17.3

N/A

52-week high/low

2,100p

1,510p

Business description

Following its acquisitions of SEMAFO and Teranga, Endeavour has become one of the top 10 major gold producers globally, with seven mines in Côte d’Ivoire, Burkina Faso and Senegal plus a portfolio of development projects, all in the West African Birimian greenstone belt.

Next events

Sabodala-Massawa Phase 2 DFS

Q122

Lafigue DFS

Late Q122/early Q222

Sabodala-Massawa Phase 2 construction launch

Q222

Wona underground production

Q322

Analyst

Lord Ashbourne

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

Endeavour Mining’s Q421/FY21 results on 17 March were reported in the context of known cost and production, which had been reported to the market on 24 January. Despite a 6.9% upgrade to our forecasts at the time, Endeavour’s actual underlying adjusted net earnings, when they were released, were nevertheless still US$10.8m (or 10.0% or US$0.041/share) better than our prior (upgraded) expectations for the quarter.

Year end

Revenue (US$m)

EBITDA (US$m)

PBT*
(US$m)

Op. cash flow
per share (US$)

DPS
(c)

Yield
(%)

12/20

1,847.9

910.3

501.2

5.35

37

1.5

12/21

2,903.8

1,517.3

756.5

4.83

56

2.2

12/22e

2,589.1

1,446.2

902.7

5.13

63

2.5

12/23e

2,384.4

1,357.1

868.9

4.33

70

2.8

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

Karma sale

On 11 March, Endeavour announced that it had concluded the sale of its 90% interest in its non-core Karma mine to Néré Mining for a total consideration of US$20m (±US$5m depending on the gold price) plus a 2.5% net smelter royalty over Karma’s ongoing production. The transaction is negligible relative to Endeavour’s other business assets. Relative to our estimate of Karma’s FY21 year-end reserves and resources, however, we nevertheless calculate that consideration of US$20m (US$22.2m on a 100% basis) equates to a value of US$9.08 per Karma resource oz of gold and US$766 per reserve oz.

Promotion to FTSE 100 index achieved

Since 21 March, Endeavour has been an active constituent of the FTSE 100 Index. According to observers of FTSE trading patterns, the promotion could result in additional demand of up to 1–2% of Endeavour’s outstanding shares, with more expected from active and passive trackers.

Valuation: In excess of £30

Based on the average multiples of its gold major peers, we estimate a value for Endeavour of US$40.48 (C$50.93 or £30.54) per share. By contrast, using an absolute valuation methodology, whereby we discount back five years of cash flow then apply an ex-growth, ad infinitum multiple to steady-state terminal cash flows in FY26, implies a valuation of US$36.57 (C$46.01 or £27.59) per share if performed using a standardised discount rate of 10% or US$59.78 (C$75.22 or £45.11) per share if performed using a CAPM-derived (real) discount rate of 6.28%. Note that to all of these valuations, a further US$4.30–7.45/share may also be added to reflect the value that we ultimately expect to be imparted to Endeavour via its most recent five-year exploration programme (see The second five-year plan, published on 20 October 2021). Otherwise, it is trading at a discount to the average multiples of its peers on at least 70% of common valuation measures (Exhibit 9) despite its being the largest premium LSE-listed pure gold producer in the FTSE 100 Index (since 21 March).

Investment summary

Endeavour’s Q421/FY21 results were reported on 17 March, within the context of known production and known all-in sustaining costs (AISC) since, on 24 January, Endeavour had provided a production and cost update for its mines, the highlights of which were:

Strong Q421 production of 398koz, up 4% relative to Q321, while AISC remained stable at c US$900/oz.

Record FY21 production of 1,536koz, beating the annual guidance range of 1,365–1,495koz, at an AISC of c US$880/oz (cf guidance of US$850–900/oz).

As such, FY21 was the ninth consecutive year in which Endeavour has either met or exceeded its annual guidance, with all seven of its mines exceeding our prior production expectations. We updated our financial forecasts in the light of Endeavour’s 24 January announcement (see our note, Forecasts ahead of St Patrick’s day results, published on 7 March), which resulted in a 6.9% increase in our estimate of adjusted net earnings attributable to shareholders for the quarter and a 1.2% increase for the year. In the event, Endeavour’s actual underlying adjusted net earnings were approximately US$10.8m (or 10.0% or US$0.041/share) better than our updated expectations for the quarter.

Like-for-like comparison between actual results for Q421/FY21 was rendered difficult by three factors:

A US$259.4m impairment, of which US$246.3m (95%) related to Boungou. While its reserves increased by 110koz during the year, the impairment test net asset value decreased since it was rebased mainly on reserves, while the previous plan included a resource to reserve conversion assumption and exploration upside. This change was required as a consequence of the limited exploration activities undertaken on the high-grade targets during the year owing to the security situation.

Endeavour’s decision to exclude share-based payment effects and deferred taxation effects from its calculation of adjusted net earnings in order to improve its reporting, to align itself with premium listed reporting standards and to bring itself in line with the better financial reporting standards of some of its peers.

A number of ex post facto adjustments (mainly relating to non-cash fair value adjustments to inventory associated with the purchase price allocation of SEMAFO and Teranga as well as the listing fees associated with listing on the London Stock Exchange).

Endeavour’s actual results within the context of our prior expectations for both the quarter and the full year (both on an ‘as reported’ and a ‘pro forma’ basis) are provided in the table below. In this case, for the purposes of easier comparison, calculation of Endeavour’s adjusted net earnings attributable has been translated back into its previous format (ie excluding share-based payments and deferred tax effects). In future, however – and for the purposes of our forecasting – we will conform to the new protocol (eg in Exhibit 6). In addition, we have introduced an additional column for each set of results, excluding the impairment, denoted ‘underlying’. On this basis, it may be seen that adjusted net earnings exceeded our prior forecast for Q421 by US$10.8m (US$118.8m cf US$108.0m). In general, depreciation exceeded our prior estimate by US$21.1m (or 11.7%), while interest expenses exceeded our prior estimate by US$13.8m and increased on the prior quarter, which was a surprise given that Endeavour achieved a net cash position during the quarter. Nevertheless, as a consequence, our estimate of adjusted net earnings for the full year on a pro forma basis (ie assuming the acquisition of Teranga on 31 December 2020 rather than 10 February 2021) also exceeded our prior forecast by the same amount – albeit this translated into a much smaller percentage variance of just 1.9% (cf 10.0% for the quarter). Endeavour’s reported full year earnings were affected by an implied adjustment upwards to costs of US$26.2m and an adjustment upwards to depreciation of US$9.4m – that is to say, costs and depreciation were higher by those amounts than the sums of their individual quarters. However, these two restatements were largely offset by an almost identical in magnitude US$37.3m upwards adjustment to ‘non-cash and other’ items plus smaller adjustments to corporate costs and ‘other’ expenses to result in adjusted net earnings attributable for the full year – on an ‘as reported’ basis – that were US$9.1m (or 1.7%) above our prior expectation (US$557.9m cf US$548.8m) on a like-for-like basis.

Note that, with share-based payments and deferred tax not excluded from the calculation, adjusted net earnings attributable to shareholders for the quarter would have been US$145.4m (or US$0.58/share) and US$577.2m (US$2.40/share) for the full year, on an ‘as reported’ basis – as calculated by Endeavour.

Exhibit 1: Endeavour Mining FY21 earnings forecasts, by quarter

US$000s (unless otherwise indicated)

Q421e

Q421a

Q421a
(underlying)

FY21e
(pro forma)

Est FY21a
(pro forma)

Est FY21a
(pro forma)
(underlying)

FY21e
(reported)

FY21a

FY21a
(underlying)

Houndé production (koz)

77.0

77.3

77.3

292.9

293.2

293.2

292.9

293.2

293.2

Agbaou production (koz)

0

0

0

12.6

12.6

12.6

0.0

0

0

Karma production (koz)

19.8

20.5

20.5

87.0

87.7

87.7

87.0

87.7

87.7

Ity production (koz)

60.3

60.0

60.0

272.2

271.8

271.8

272.2

271.8

271.8

Boungou production (koz)

35.0

34.9

34.9

174.4

174.3

174.3

174.4

174.3

174.3

Mana production (koz)

53.5

53.8

53.8

204.2

204.5

204.5

204.2

204.5

204.5

Sabodala-Massawa

105.0

104.6

104.6

381.7

381.3

381.3

345.6

345.3

345.3

Wahgnion

46.5

47.2

47.2

164.7

165.4

165.4

146.4

147.0

147.0

Total gold produced (koz)

397.1

398.3

398.3

1,589.6

1,590.8

1,590.8

1,522.7

1,523.8

1,523.8

Total gold sold (koz)

390.0

391.0

391.0

1,635.2

1,636.2

1,636.2

1,566.7

1,566.8

1,566.8

Gold price (US$/oz)

1,796

1,783*

1,783*

1,778*

1,775*

1,775*

1,775*

1,773*

1,773*

Mine level cash costs (US$/oz)

644

639

639

636

635

635

633

632

632

Mine level AISC (US$/oz)

869

865

865

855

854

854

854

853

853

Revenue

– Gold revenue

700,506

697,174

697,174

2,907,089

2,903,756

2,903,756

2,781,432

2,778,100

2,778,100

Cost of sales

– Operating expenses

251,049

249,921

249,921

1,086,820

1,085,692

1,085,692

1,037,792

1,062,900

1,062,900

– Royalties

44,254

44,917

44,917

181,951

182,614

182,614

175,037

175,700

175,700

Gross profit

405,204

402,336

402,336

1,638,318

1,635,450

1,635,450

1,568,604

1,539,500

1,539,500

Depreciation

(180,525)

(201,668)

(201,668)

(636,711)

(657,854)

(657,854)

(618,132)

(648,700)

(648,700)

Expenses

– Corporate costs

(24,998)

(20,000)

(20,000)

(65,604)

(60,606)

(60,606)

(64,287)

(62,500)

(62,500)

– Impairments

0

(259,400)

0

0

(259,400)

-

0

(259,400)

-

– Acquisition etc costs

0

(992)

(992)

(28,508)

(29,500)

(29,500)

(28,508)

(29,500)

(29,500)

– Share based compensation

(1,574)

(7,425)

(7,425)

(28,130)

(33,981)

(33,981)

(26,649)

(32,500)

(32,500)

– Exploration costs

(5,625)

(5,061)

(5,061)

(24,164)

(23,600)

(23,600)

(24,164)

(23,600)

(23,600)

Total expenses

(32,197)

(292,878)

(33,478)

(146,406)

(407,087)

(147,687)

(143,608)

(407,500)

(148,100)

Earnings from operations

192,482

(92,210)

167,190

855,201

570,509

829,909

806,864

483,300

742,700

Interest income

0

0

0

0

0

0

Interest expense

(11,631)

(25,392)

(25,392)

(56,863)

(70,623)

(70,623)

(52,339)

(66,100)

(66,100)

Net interest

(11,631)

(25,392)

(25,392)

(56,863)

(70,623)

(70,623)

(52,339)

(66,100)

(66,100)

Loss on financial instruments

15,642

15,642

7,258

22,900

22,900

7,258

22,900

22,900

Other expenses

(2,051)

(2,051)

(30,212)

(32,263)

(32,263)

(16,752)

(16,000)

(16,000)

Profit before tax

180,851

(104,011)

155,389

775,385

490,523

749,923

745,031

424,100

683,500

Current income tax

53,174

39,394

39,394

219,352

205,573

205,573

210,180

196,400

196,400

Deferred income tax

0

(34,000)

(34,000)

6,680

(27,320)

(27,320)

6,680

(51,800)

(51,800)

Total tax

53,174

5,394

5,394

226,032

178,253

178,253

216,860

144,600

144,600

Effective tax rate (%)

29.4

(5.2)

3.5

29.2

36.3

29.1

34.1

21.2

Profit after tax

127,677

(109,405)

149,995

549,352

312,270

571,670

528,171

279,500

538,900

Net profit from discontinued ops.

0

0

0

0

0

(3,702)

(3,702)

(3,702)

Total net and comprehensive income

127,677

(109,405)

149,995

549,352

312,270

571,670

524,469

275,798

535,198

Minority interest

20,974

(6,559)

(6,559)

92,019

64,486

64,486

87,833

60,300

60,300

Minority interest (%)

16.4

6.0

(4.4)

16.8

20.7

16.7

21.9

11.3

Profit attributable to shareholders

106,703

(102,846)

156,554

457,333

247,784

507,184

436,636

215,498

474,898

Basic EPS from continuing ops (US$)

0.431

-0.413

0.628

1.827

0.988

2.023

1.846

0.92

1.909

Diluted EPS from continuing ops (US$)

0.427

-0.409

0.623

1.812

0.980

2.006

1.829

0.91

1.893

Basic EPS (US$)

0.431

-0.413

0.628

1.827

0.988

2.023

1.824

0.90

1.894

Diluted EPS (US$)

0.427

-0.409

0.623

1.812

0.980

2.006

1.808

0.89

1.878

Norm. basic EPS from continuing ops (US$)

0.431

0.569

0.569

1.912

2.050

2.050

1.928

1.935

1.935

Norm. diluted EPS from continuing ops (US$)

0.427

0.565

0.565

1.896

2.032

2.032

1.911

1.919

1.919

Adj net earnings attributable (US$000s)

108,018

118,770

118,770

579,285

590,036

590,036

548,815

557,900

557,900

Adj net EPS from continuing ops (US$)

0.436

0.477

0.477

2.314

2.354

2.354

2.293

2.225

2.225

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).

On the previous basis (ie including share-based payments and deferred tax effects), Endeavour’s results were well within the range of analysts’ expectations both for the quarter and for the full year:

Exhibit 2: Edison adjusted net EPS from continuing operations estimates versus consensus FY21 by quarter

(US$/share)

As reported

FY21e

Q121

Q221

Q321

Q421

Sum Q1–Q421e

Actual

0.503

0.727

0.612

0.477

2.319

2.225

Edison forecast

0.436

2.278

2.293

Mean consensus forecast

0.510

2.352

2.340

High consensus forecast

0.640

2.482

2.480

Low consensus forecast

0.400

2.242

2.090

Source: Refinitiv, Edison Investment Research. Note: Consensus priced 3 March 2022.

Karma sale

On 11 March, Endeavour announced that it had concluded the sale of its 90% interest in its non-core Karma mine to Néré Mining (a Burkina Faso-based consortium led by Elie Ouedraogo – a board member of both Karma and Mana and a prominent local businessman – who owns 29% of Néré).

Under the terms of the agreement, the total consideration of the transaction of US$25m will be apportioned as follows:

US$10m was received prior to closing in the form of a reimbursement of historical shareholder loans.

A deferred cash payment of US$5m to be paid six months after closing.

A contingent payment of up to US$10m, payable 12 months after closing, depending on the price of gold, as follows:

No payment if the gold price is below US$1,700/oz

A US$5m payment if the gold price is in the range US$1,701–1,950/oz

An US$8m payment if the gold price is in the range US$1,951–2,049/oz

A US$10m payment if the gold price is in above US$2,050/oz

A 2.5% net smelter royalty on all ounces produced in excess of 160koz of recovered gold from 1 January 2022.

Consideration of up to US$25m compares with a simplified version of Karma’s balance sheet as at 31 December, as follows:

Exhibit 3: Simplified Karma balance sheet (31 December 2021)

Item

US$m

Current assets

32.9

Mining interests

25.0

Other long-term assets

13.7

Total assets

71.6

Current liabilities

24.4

Other long-term liabilities

16.8

Total liabilities

41.2

Net assets

30.4

Pro rata minority interest (10%)

3.0

Net assets attributable to Endeavour

27.4

Item

Current assets

Mining interests

Other long-term assets

Total assets

Current liabilities

Other long-term liabilities

Total liabilities

Net assets

Pro rata minority interest (10%)

Net assets attributable to Endeavour

US$m

32.9

25.0

13.7

71.6

24.4

16.8

41.2

30.4

3.0

27.4

Source: Endeavour Mining

On this basis (and depending on the gold price and the valuation of Endeavour’s 2.5% net smelter royalty), we infer that Endeavour may record a small loss in the order of US$7.4m on disposal in Q122 (based on the gold price at the time of writing). However, note that this item is not included in our estimates in Exhibit 6, below, on the basis that it is a) insignificant within the context of Endeavour’s broader accounts and b) non-recurring.

Nevertheless, consideration of up to US$25m also compares with Karma’s reserves and resources statement as at end-FY20 and our forecast of its statement as at end-FY21 (net of depletion) as follows:

Exhibit 4: Karma reserves & resources statement, FY20 and estimated FY21

Resources

Reserves

Tonnage
(Mt)

Grade
(g/t)

Contained gold (koz)

Tonnage
(Mt)

Grade
(g/t)

Contained gold (koz)

End-FY20

Measured

0.3

0.40

4

Proven

0.3

0.40

4

Indicated

47.7

1.24

1,894

Probable

5.2

0.93

154

Inferred

16.2

1.30

679

Possible

0

Total

64.2

1.25

2,577

Total

5.5

0.89

157

Estimated depletion FY21

5.1

0.78

129

5.1

0.78

129

Estimated end-FY21

Measured

0.0

0.00

0

Proven

0.0

0.00

0

Indicated

42.9

1.28

1,769

Probable

0.4

2.25

29

Inferred

16.2

1.30

679

Possible

0

Total

59.1

1.29

2,448

Total

0.4

2.25

29

Source: Endeavour Mining, Edison Investment Research

On this basis, consideration of US$20m (US$22.2m on a 100% basis) values Karma at US$9.08 per resource oz of gold and US$766 per reserve oz of gold.

FY22 forecasts

In the light of its sale of Karma, Endeavour updated its production and cost guidance for FY22 as follows:

Exhibit 5: Endeavour Mining updated production and cost guidance, FY22

Previous guidance

Updated guidance

Change

Gold production (koz)

1,400–1,500

1,315–1,400

(85)–(100)

All-in sustaining costs (US$/oz)

890–940

880–930

(10)–(10)

Source: Endeavour Mining

In addition, we have also increased our gold price forecast for the remainder of the year, from US$1,890/oz previously to US$1,926/oz currently (the prevailing price at the time of writing). Note that, apart from this, our longer-term gold price forecasts remain unchanged.

As a result (and with the usual caveat around quarterly estimates), our forecast for adjusted net earnings attributable to shareholders for FY22 has decreased by 1.3%, as shown below:

Exhibit 6: Endeavour Mining FY22 forecasts

US$000s (unless otherwise indicated)

Q122e
(prior)

Q121e

Q222e
(prior)

Q222e

Q322e
(prior)

Q322e

Q422e
(prior)

Q422

FY22e

FY22e
(prior)

Houndé production (koz)

59.2

59.2

76.4

76.4

68.8

68.8

57.3

57.3

261.6

261.6

Agbaou production (koz)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Karma production (koz)

13.4

10.3

17.5

0.0

22.6

0.0

28.0

0.0

10.3

81.5

Ity production (koz)

63.6

63.6

63.6

63.6

63.2

63.2

63.2

63.2

253.5

253.5

Boungou production (koz)

36.3

36.3

35.3

35.3

28.9

28.9

30.4

30.4

130.9

130.9

Mana production (koz)

51.5

51.5

49.3

49.3

40.6

40.6

43.1

43.1

184.6

184.6

Sabodala-Massawa

85.9

85.9

85.9

85.9

98.2

98.2

98.2

98.2

368.1

368.1

Wahgnion

34.8

34.8

32.8

32.8

33.4

33.4

43.1

43.1

144.1

144.1

Total gold produced (koz)

344.8

341.7

360.9

343.4

355.6

333.0

363.1

335.1

1,353.1

1,424.3

Total gold sold (koz)

344.8

341.7

360.9

343.4

355.6

333.0

363.1

335.1

1,353.1

1,424.3

Gold price (US$/oz)

1,855

1,877

1,890

1,926

1,890

1,926

1,890

1,926

1,914

1,882

Mine level cash costs (US$/oz)*

782

722

685

697

711

659

738

666

686

702

Mine level AISC (US$/oz)

910

975

796

955

808

908

839

877

929

939

Revenue

– Gold revenue

639,671

641,133

682,101

661,326

671,991

641,306

686,269

645,344

2,589,109

2,680,032

Cost of sales

– Operating expenses

251,521

246,616

260,952

239,384

241,568

219,450

245,891

223,223

928,673

999,932

– Royalties

40,004

40,364

43,145

41,305

42,415

39,632

43,503

39,845

161,146

169,067

Gross profit

348,147

354,153

378,004

380,637

388,008

382,224

396,875

382,277

1,499,291

1,511,033

Depreciation

(143,658)

-158,177

(151,050)

-157,638

(152,361)

-154,856

(161,562)

-160,258

-630,929

(608,631)

Expenses

– Corporate costs

(8,276)

-8,276

(8,276)

-8,276

(8,276)

-8,276

(8,276)

-8,276

-33,104

(33,104)

– Impairments

0

0

– Acquisition etc costs

0

0

– Share based compensation

0

0

– Exploration costs

(5,000)

-5,000

(5,000)

-5,000

(5,000)

-5,000

(5,000)

-5,000

-20,000

(20,000)

Total expenses

(13,276)

-13,276

(13,276)

-13,276

(13,276)

-13,276

(13,276)

-13,276

-53,104

(53,104)

Earnings from operations

191,213

182,700

213,678

209,723

222,371

214,093

222,037

208,742

815,258

849,298

Interest income

0

0

Interest expense

(214)

3,987

10,231

14,041

24,186

27,829

38,624

41,608

87,465

72,827

Net interest

(214)

3,987

10,231

14,041

24,186

27,829

38,624

41,608

87,465

72,827

Loss on financial instruments

0

0

Other expenses

0

0

Profit before tax

190,999

186,687

223,909

223,764

246,557

241,922

260,661

250,350

902,723

922,126

Current income tax

46,474

44,519

49,934

48,917

52,128

50,648

52,018

49,650

193,735

200,554

Deferred income tax

0

0

0

0

0

0

0

0

0

0

Total tax

46,474

44,519

49,934

48,917

52,128

50,648

52,018

49,650

193,735

200,554

Effective tax rate (%)

24.3

23.8

22.3

21.9

21.1

20.9

20.0

19.8

21.5

21.7

Profit after tax

144,525

142,168

173,976

174,847

194,429

191,273

208,643

200,700

708,988

721,572

Net profit from discontinued ops.

0

0

0

0

0

0

0

0

0

0

Total net and comprehensive income

144,525

142,168

173,976

174,847

194,429

191,273

208,643

200,700

708,988

721,572

Minority interest

18,136

17,607

20,093

19,944

20,678

20,134

20,638

19,675

77,361

79,544

Minority interest (%)

12.5

12.4

11.5

11.4

10.6

10.5

9.9

9.8

10.9

11.0

Profit attributable to shareholders

126,389

124,561

153,883

154,903

173,750

171,139

188,005

181,025

631,627

642,027

Basic EPS from continuing ops (US$)

0.512

0.502

0.624

0.623

0.705

0.688

0.762

0.728

2.541

2.602

Diluted EPS from continuing ops (US$)

0.507

0.497

0.619

0.618

0.698

0.682

0.756

0.722

2.519

2.580

Basic EPS (US$)

0.512

0.502

0.624

0.623

0.705

0.688

0.762

0.728

2.541

2.602

Diluted EPS (US$)

0.507

0.497

0.619

0.618

0.698

0.682

0.756

0.722

2.519

2.580

Norm. basic EPS from cont. ops (US$)

0.512

0.502

0.624

0.623

0.705

0.688

0.762

0.728

2.541

2.602

Norm. diluted EPS from cont. ops (US$)

0.507

0.497

0.619

0.618

0.698

0.682

0.756

0.722

2.519

2.580

Adj net earnings attributable (US$000s)

126,389

124,561

153,883

154,903

173,750

171,139

188,005

181,025

631,627

642,027

Adj net EPS from continuing ops (US$)

0.512

0.502

0.624

0.623

0.705

0.688

0.762

0.728

2.541

2.602

Source: Endeavour Mining, Edison Investment Research. Note: *Excludes royalty costs.

As before, items included in the reconciliation between adjusted net earnings attributable and total net and comprehensive earnings are losses from discontinued operations, gains/losses on financial instruments, other expenses 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). As noted previously, Endeavour has now changed its definition of adjusted net earnings attributable, such that deferred tax effects and share-based payments are no longer included in the adjustments to total net and comprehensive earnings, and this is now the manner in which our FY22 forecasts (above) are presented. Readers are also reminded that Endeavour changed its definition of cash costs in Q420 to include royalties. The decision was made so that Endeavour may be more consistent in reporting within the context of its peer group. For reasons of comparability with past results, however, as well as ease of forecasting (given that royalties are reported as a discreet item distinct from operating expenses), we are continuing to show total cash costs excluding royalties.

A comparison between our quarterly and full-year forecast and consensus forecasts for FY22 is as follows:

Exhibit 7: Edison adjusted net EPS from continuing operations estimates versus consensus FY22 by quarter

(US$/share)

Q122a

Q222a

Q322a

Q422e

Sum Q1–Q422

FY22e

Edison

0.502

0.623

0.688

0.728

2.541

2.541

Mean consensus forecast

0.47

0.52

0.47

0.49

1.95

1.91

High consensus forecast

0.58

0.62

0.70

0.76

2.66

2.60

Low consensus forecast

0.31

0.26

0.24

0.23

1.04

1.05

Source: Refinitiv, Edison Investment Research. Note: Consensus at 22 March 2022.

Of particular note, within the context of our financial and operating forecasts for the individual quarters, is the absence of any material decline in either production or profitability in Q3 (being the quarter historically most susceptible to disruption from the seasonal rains in West Africa). In this case, however, we are expecting a material increase in production at Sabodala-Massawa in Q322 and H222. Ore at Sabodala-Massawa will be primarily sourced from the Sofia North pit, supplemented by lower-grade feed from the Sabodala pit, in H122, whereas it is intended to be sourced from the higher-grade Massawa Central and Massawa North in H222. Note that, in the case of FY22, we have not (yet) attempted to forecast any tax instalment payments, which typically inflate Endeavour’s tax charge in the second quarter of any particular financial year.

Self-evidently, one of the main assumptions behind our forecasts is there are no major deleterious effects to ongoing operations as a result of the COVID-19 pandemic. It also assumes no collateral escalation of war between Russia and Ukraine into West Africa. To date, the effect of COVID-19 on Endeavour’s operations in West Africa has been negligible and is expected to remain so, as the company has now been able to vaccinate more than 50% of its workforce in an ongoing programme of pandemic mitigation. In addition, Endeavour has further mitigated future risks as far as possible by setting itself up to operate under level 2 COVID-19 restrictions (see our note, New senior gold major looking to join FTSE 100, published on 17 December 2020) and by preparing multiple different levels in its pits from which to produce, thereby affording it greater operational flexibility if there are disruptions.

Valuation

Endeavour is a multi-asset company that has shown a willingness and desire to trade assets to maintain production, reduce costs and maximise returns to shareholders (eg the sale of Youga in FY16, Nzema in FY17, Tabakoto in FY18, Agbaou in FY20 and Karma in FY22, and the acquisition of SEMAFO in FY20 and Teranga in FY21). Historically, rather than our customary method of discounting maximum potential dividends over the life of operations back to FY22, in the case of Endeavour, we have instead opted to discount five years (previously six) of forecast cash flows in FY22–26 back to the start of FY22 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 FY26). In the normal course of events, exploration expenditure would have been excluded from such a calculation on the basis that it is an investment. In the case of Endeavour, however, it was included on the grounds that it was a critical component of ongoing business performance in its ability to continually expand and extend the lives of its mines.

In this case, our estimate of cash flows in FY26 has remained, to all intents and purposes, unchanged at US$3.96/share (cf US$4.00/share previously), giving rise to a terminal valuation of the company at end-FY26 of US$39.65/share (cf US$40.00/share previously), which (in conjunction with forecast intervening cash flows) then discounts back to a valuation of US$36.57/share as at the start of FY22 (cf US$37.16/share previously):

Exhibit 8: Endeavour forecast valuation and cash flow per share, FY20–26e (US$/share)

Source: Edison Investment Research

Given its elevation into the ranks of the world’s foremost producers of gold, however, we believe Endeavour can increasingly attract lower-cost finance and, as such, a CAPM-derived WACC can also be considered (as discussed in our February 2021 initiation on Newmont Corporation). Long-term nominal equity returns have been 9% and 30-year break-evens are expecting an inflation rate of 2.5623% (source: Bloomberg, 22 March) cf 2.3365% previously. These two measures imply an expected real equity return of 6.28% (1.09/1.025623) and applying this to our forecast cash flows would imply a terminal valuation for Endeavour of US$63.17/share (cf US$61.43/share previously) and a current valuation of US$59.78/share (cf US$58.30/share previously).

In the meantime, Endeavour’s valuation remains at a material discount to those of its peer group, as shown in Exhibit 9, below.

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 takeovers of SEMAFO and Teranga have been completed), is as follows:

Exhibit 9: 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

5.0

5.4

5.9

4.4

4.6

5.1

2.5

2.8

3.1

Endeavour (consensus)

EDV

5.5

5.5

5.5

5.1

5.1

5.1

2.4

2.2

3.2

Majors

Barrick

ABX

9.4

8.8

9.2

8.2

7.7

8.2

2.7

3.9

3.7

Newmont

NEM

12.6

13.0

13.0

9.6

9.9

10.2

2.8

2.8

2.8

Newcrest

NCM AU

13.3

8.7

9.8

8.4

6.9

8.0

1.1

1.7

1.3

Kinross

K

4.8

4.7

5.9

4.2

4.1

5.0

2.1

2.1

2.2

Agnico-Eagle

AEM

10.5

10.7

11.2

9.9

9.7

10.8

2.4

2.4

2.9

Eldorado

ELD

5.8

5.2

4.8

5.2

4.6

4.3

0.0

0.0

0.0

Average

 

9.4

8.5

9.0

7.6

7.1

7.8

1.9

2.1

2.1

Implied EDV share price (US$)

48.28

36.79

38.80

47.25

44.15

44.83

34.06

32.73

37.41

Implied EDV share price (C$)

60.74

46.29

48.81

59.45

55.55

56.40

42.86

41.18

47.07

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 22 March 2022.

Of note is that Endeavour’s valuation is materially cheaper than the averages of the majors on all of the measures shown in Exhibit 9 regardless of whether Edison or consensus forecasts are used. On an individual basis, it is cheaper than its senior gold mining peers on at least 39 out of 54 (72%) of valuation measures if Edison forecasts are used and 38 out of 54 (70%) valuation measures if consensus forecasts are used. Reverse engineered, the average valuation measures of its peers imply an average share price for Endeavour of US$40.48, or C$50.93 (or £30.54) per share.

Financials

According to its Q421/FY21 balance sheet, Endeavour had net cash of US$13.2m at end-December, despite making US$43.9m in share repurchases during the quarter. This compares with net debt of US$143.6m at end-Q321, US$147.6m at end-Q221, US$220.2m at end-Q121 (after the completion of the Teranga acquisition and the injection of US$200m by La Mancha) and US$43.3m at end-FY20 (before the Teranga acquisition). This figure of US$13.2m also includes lease liabilities of US$51.1m and an option premium of US$34.6m. Excluding these two items results in a net cash position of US$98.9m. This figure also excludes US$30.6m held in the form of ‘restricted cash’ and US$40.0m in shares of Allied Gold received as consideration for the sale of Agbaou, both held in ‘other financial assets’. It also differs slightly from the US$76.2m net cash figure calculated by Endeavour and quoted in its announcements owing to the discounting, variously, of certain committed future payments to present value.

Note that, for the purposes of our financial modelling in Exhibit 10 and for simplicity’s sake, we have assumed that the consolidation of Endeavour’s and Teranga’s balance sheets took place retrospectively on 31 December 2020. In this case, we estimate Endeavour would have consolidated c US$242.6m in net debt on its balance sheet and c US$349.2m in gross debt as a consequence of its Teranga acquisition (as at end-December). As such, on a pro forma basis, we estimate that Endeavour would have had US$323.1m in net debt on its balance sheet at end-FY20, which we calculate would have equated to a gearing (net debt/equity) ratio of just 8.8% and a leverage (net debt/[net debt+equity]) ratio of 8.1% on the group’s enlarged equity base.

Exhibit 10: Financial summary

US$'000s

2019

2020

2021

2022e

2023e

2024e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,362,121

1,847,894

2,903,756

2,589,109

2,384,441

2,223,575

Cost of Sales

(884,869)

(1,061,891)

(1,675,393)

(1,142,922)

(1,027,329)

(990,738)

Gross Profit

477,252

786,003

1,228,363

1,446,187

1,357,112

1,232,838

EBITDA

 

 

618,443

910,295

1,517,263

1,446,187

1,357,112

1,232,838

Operating Profit (before amort. and except.)

 

 

281,400

546,072

859,409

815,258

861,136

749,634

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

(199,159)

(201,532)

(266,000)

0

0

0

Other

(9,392)

8,886

(32,263)

0

0

0

Operating Profit

72,849

353,426

561,146

815,258

861,136

749,634

Net Interest

(51,607)

(53,774)

(70,623)

87,465

7,762

12,807

Profit Before Tax (norm)

 

 

220,401

501,184

756,523

902,723

868,898

762,441

Profit Before Tax (FRS 3)

 

 

21,242

299,652

490,523

902,723

868,898

762,441

Tax

(97,253)

(158,466)

(178,253)

(193,735)

(203,596)

(180,659)

Profit After Tax (norm)

123,148

342,718

578,270

708,988

665,303

581,782

Profit After Tax (FRS 3)

(76,011)

141,186

312,270

708,988

665,303

581,782

Net loss from discontinued operations

(4,394)

0

0

0

0

0

Minority interests

33,126

44,719

64,486

77,361

99,670

86,568

Net profit

(80,405)

141,186

312,270

708,988

665,303

581,782

Net attrib. to shareholders contg. businesses (norm)

90,022

297,998

513,784

631,627

565,633

495,215

Net attrib.to shareholders contg. businesses

(109,137)

96,466

247,784

631,627

565,633

495,215

Average Number of Shares Outstanding (m)

157.4

160.8

250.7

248.4

248.7

248.7

EPS - normalised (c)

 

 

57.20

185.34

204.95

254.32

227.46

199.14

EPS - normalised fully diluted (c)

 

 

56.95

181.51

203.21

252.72

226.03

197.89

EPS - (IFRS) ($)

 

 

(0.72)

0.60

0.99

2.54

2.27

1.99

Dividend per share (c)

0

37

56

63

70

80

Gross Margin (%)

35.0

42.5

42.3

55.9

56.9

55.4

EBITDA Margin (%)

45.4

49.3

52.3

55.9

56.9

55.4

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

20.7

29.6

29.6

31.5

36.1

33.7

BALANCE SHEET

Fixed Assets

 

 

2,330,033

5,093,409

5,404,900

5,173,219

5,058,087

5,123,561

Intangible Assets

5,498

24,851

10,000

10,000

10,000

10,000

Tangible Assets

2,254,476

3,968,746

4,980,200

4,748,519

4,633,387

4,698,861

Investments

70,059

1,099,812

414,700

414,700

414,700

414,700

Current Assets

 

 

652,871

1,168,382

1,366,000

2,178,377

2,711,475

2,982,133

Stocks

266,451

305,075

311,300

323,639

298,055

277,947

Debtors

83,836

104,545

139,900

176,969

231,081

217,860

Cash

288,186

751,563

906,200

1,669,169

2,173,738

2,477,727

Other

14,398

7,199

8,600

8,600

8,600

8,600

Current Liabilities

 

 

(354,931)

(661,171)

(567,100)

(638,455)

(591,303)

(579,530)

Creditors

(312,427)

(612,862)

(552,700)

(624,055)

(576,903)

(565,130)

Short term borrowings

(42,504)

(48,309)

(14,400)

(14,400)

(14,400)

(14,400)

Long Term Liabilities

 

 

(963,736)

(1,647,799)

(1,818,100)

(1,818,100)

(1,818,100)

(1,818,100)

Long term borrowings

(770,902)

(1,026,337)

(878,600)

(878,600)

(878,600)

(878,600)

Other long-term liabilities

(192,834)

(621,462)

(939,500)

(939,500)

(939,500)

(939,500)

Net Assets

 

 

1,664,237

3,952,821

4,385,700

4,895,040

5,360,159

5,708,065

CASH FLOW

Operating Cash Flow

 

 

628,617

1,046,370

1,415,306

1,468,134

1,281,430

1,254,395

Net Interest

(35,413)

(53,774)

(26,900)

87,465

7,762

12,807

Tax

(109,494)

(186,332)

(205,573)

(193,735)

(203,596)

(180,659)

Capex

(401,227)

(335,599)

(587,496)

(399,248)

(380,844)

(548,678)

Acquisitions/disposals

3,654

(19,000)

(4,700)

15,000

5,000

0

Financing

2,402

100,000

(89,400)

(38,122)

0

0

Dividends

(6,154)

(88,288)

(159,800)

(176,527)

(205,183)

(233,877)

Net Cash Flow

82,385

463,377

341,437

762,969

504,569

303,989

Opening net debt/(cash)*

 

 

518,607

525,220

323,083

(13,200)

(776,169)

(1,280,738)

Other

(88,998)

(261,240)

(5,154)

0

(0)

0

Closing net debt/(cash)*

 

 

525,220

323,083

(13,200)

(776,169)

(1,280,738)

(1,584,727)

Source: Company sources, Edison Investment Research. Note: Presented on a pro forma basis including SEMAFO from FY18 balance sheet and Teranga from FY20 balance sheet. EPS normalised from FY18 to reflect continuing business only. *Excludes restricted cash.


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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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United Kingdom

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1185 Avenue of the Americas

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United States of America

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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