Pumping it

Endeavour Mining 19 December 2018 Update
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Endeavour Mining

Pumping it

Kari Pump maiden resource

Metals & mining

 

19 December 2018

Price

C$19.93

Market cap

C$2,147m

C$1.3355/US$

Net debt (US$m) at 30 September 2018

509.2

Shares in issue (000s)

107,752

Free float

70.1%

Code

EDV

Primary exchange

TSX

Secondary exchange

US OTC

Share price performance

%

1m

3m

12m

Abs

8.8

1.0

(18.9)

Rel (local)

14.4

13.4

(9.3)

52-week high/low

C$26.6

C$16.4

Business description

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

Next events

Kalana updated resource and feasibility study

Q418 and H119

Q418/FY18 results

March 2019

Ity CIL production

Early Q219

Analyst

Charles Gibson

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

For the second time in less than a month, Endeavour has announced the delineation of a c 1Moz maiden resource – in this case, at Kari Pump, 7km west of the Houndé processing plant in Burkina Faso. As at Fetekro, the majority (98.0%) of the resource has been classified into the indicated category of resources. More significantly, the average grade of the maiden Kari Pump resource is at a 31.8% premium to the average of the pre-existing Houndé resource and a 44.3% premium to the average of the pre-existing Endeavour resource, with further potential upside in the region.

Year end

Revenue (US$m)

EBITDA (US$m)

PBT* (US$m)

Operating cash flow per share (US$)

Capex (US$m)

Net debt** (US$m)

12/16

566.5

213.9

103.4

1.91

212.3

21.4

12/17

652.1

201.2

51.6

2.25

441.4

216.8

12/18e

720.5

261.0

74.8

1.53

456.5

475.4

12/19e

762.1

372.1

153.3

2.77

81.4

305.9

Note: *PBT is normalised, excluding amortisation of acquired intangibles, discontinued operations and exceptional items; **includes restricted cash.

On track for achieving five-year exploration target

Kari Pump’s 1,007koz maiden resource equates to 5.4% of Endeavour’s prior, global resource (on a 100% basis), or 5.7% on an attributable basis. However, it equates to 6.7-10.1% of Endeavour’s five-year exploration target of 10-15Moz and was achieved at a discovery cost of US$9/oz (cf US$15/oz budgeted). Taken together with Fetekro, Endeavour can thus be seen to have achieved 11.5-17.3% of its five-year target in under a year.

Kari Pump valuation range US$1.09-2.16/share

At Endeavour’s (pre-Kari Pump) resource multiple of US$129.09 per attributable resource oz, Kari Pump’s resource would have a value of US$130.0m or US$117.0m (or US$1.09/share) attributable to Endeavour. On the basis of it being processed through the Houndé mill however, at costs comparable to the existing operation (see pages 3-4 for detailed assumptions), we estimate that it has a fundamental value somewhere between US$232.6m, or US$2.16/share, based on mining the total resource from FY21, and US$125.7m, or US$1.17/share, based on mining our estimate of its potential reserve from FY26.

Valuation: US$30.74/sh plus Kari Pump and Fetekro

In valuing Endeavour, we have opted to discount potential cash flows back over four years from end-FY18 and then to apply an ex-growth, terminal multiple of 10x (consistent with a discount rate of 10%) to forecast cash flows in FY22. In the case of Endeavour, our estimate of cash flow in FY22 is US$3.36 per share (including exploration expenditure), in which case our terminal value for the company at end-FY22 is US$33.63/share, which (in conjunction with forecast intervening cash flows) discounts back to a value of US$30.74/share at the start of FY19. This valuation remains unchanged since our last note, although to it may now be added our estimate of the potential value of Kari Pump, in the range US$1.09-2.16/share, as well as that for Fetekro, in the range US$0.06-0.44/share.

Kari Pump maiden resource

For the second time in less than a month, Endeavour has announced the delineation of a c 1Moz maiden resource – in this case, at Kari Pump, 7km west of the Houndé processing plant in Burkina Faso. Owing to the intensive in-fill nature of the exploration programme to define the resource, which was based on a 40m x 40m drilling grid, even more so than at Fetekro, the majority (98.0%) of the resource has been classified into the indicated resource category (see Exhibit 1).

Generally, the mineralisation at Kari Pump is reported to exhibit excellent continuity over 1.3km and to display its typical pinch and swell characteristics with, very often, high grade quartz veining systems over significant thickness alternating with thinner intercepts associated with more moderate grades. The average drill hole intercept was 6.54m at 3.01g/t Au (uncapped) and over 84% of the diamond and reverse circulation (RC) holes drilled into the deposit were reported to have encountered at least one interval of mineralisation of 0.5g/t Au with a minimum width of more than two metres. Overall, the average grade of the maiden Kari Pump resource is at a 31.8% premium to the average of the pre-existing Houndé resource and a 44.3% premium to the most recently published global average Endeavour resource (dating from 31 December 2017) plus Fetekro. What is more, the mineralisation starts at surface and is amenable to open pit mining and approximately 45% of the Indicated resource is located within the oxide and transition zones (and is therefore typically less costly to process than the equivalent sulphide resource). A summary of the Kari Pump maiden resource, including an estimate of its potential reserve (assuming the same resource:reserve conversion ratio as at the main Houndé operation is as follows):

Exhibit 1: Kari Pump maiden resource and Edison estimate of pro-rata reserve

Category

Resource

Category

Reserve

Reserve:Resource (%)

Attributable

Mt

Grade

(g/t)

koz

Mt

Grade

(g/t)

koz

Tonnes

Grade

Contained gold

EDV interest

(%)

Resource

(koz)

Reserves

(koz)

Measured

0.0

0.00

0

Proven

0.0

0.00

0

100.0

0.0

93.8

90

0.0

0.0

Indicated

11.3

2.71

987

Probable

8.9

2.68

767

78.6

99.1

77.7

90

887.9

690.2

Inferred

0.3

2.21

20

Possible

0.0

0.00

0

0.0

0.0

0.0

90

18.3

0.0

Total

11.6

2.70

1,007

Total

8.9

2.68

767

76.6

99.4

76.2

90

906.2

690.2

Source: Endeavour Mining, Edison Investment Research

Kari Pump’s 1,007koz maiden resource equates to 5.4% of Endeavour’s prior, global resource (on a 100% basis), or 5.7% on an attributable basis. However, it equates to a rather more significant 6.7-10.1% of Endeavour’s 10-15.0Moz exploration target over the course of the next five years and was achieved at a below average discovery cost of US$9/oz (implying an aggregate exploration cost of US$9.1m in total). Taken together with Fetekro, Endeavour can thus be seen to have achieved 11.5-17.3% of its five-year target in under a year.

Within the context of Houndé, the Kari Pump resource represents 28.6-40.0% of Endeavour’s five-year exploration target of 2.5-3.5Moz for 20.2% of its total budget (see our initiation report, From the ground upwards, published on 16 October 2018). The discovery cost of US$9/oz compares with a budgeted cost of US$15/oz. It increases resources in the measured and indicated categories at Houndé by 40.1% and, at its current milling rate of c 3.6Mtpa, could support operations there for 2.5 years based on Edison’s estimate of potential reserves (see Exhibit 1, above), 3.1 years based on indicated resources only and 3.2 years based on total resources including those in the inferred category.

Regional context

The Kari Pump resource covers an area of 1.3km x 0.8km. To define it, a total of 2,237 holes (majority air core) have been drilled over the course of the past 18 months covering 203,900m (average 91m per hole), of which over 71,000m has been drilled to extend and in-fill the mineralisation within the past six months. Nevertheless, the deposit remains open to the east, north, northwest and southwest. Moreover, it represents only 35% of the wider Kari gold-in-soil anomaly, which covers an area of 6.0km x 2.5km and includes the two other high grade discoveries of Kari Center (1.2km x 0.2km) and Kari West (1.0km x 0.5km), at which resources are expected to be delineated in 2019. Note that the Kari area is located only 7km west of the processing plant and in proximity to an existing haul road that will be used to transport ore from Bouéré.

Potential Kari Pump valuation

At Endeavour’s existing resource multiple of US$129.09 per attributable resource oz, Kari Pump’s resource would have a value of US$130.0m or US$117.0m (or US$1.09/share) attributable to Endeavour. Given that Kari Pump is within 7km, and is thus within easy ore trucking distance, of the Houndé processing plant (in contrast to Fetekro), this valuation approach is appropriate given that the profile of Kari Pump’s resource ounces is similar to that of the majority of those within the group.

Alternatively, looked at from the perspective of a potential mining operation, at a milling rate of 3.6Mtpa (drawn from the existing Houndé operation), an assumed stripping ratio of 13:1, an economic interest of 90%, assumed capex of US$5m, mining losses of 5%, mining dilution of 15%, metallurgical recoveries of 94%, a royalty rate of 6%, transport and refining costs of US$3.35/oz and a mining cost of US$3.50/t ore and US$2.15/t waste, Edison offers the following mine schedule – and, thus, potential fundamental valuation – of the delineated Kari Pump resource at the current time (NB see pages 5-6 for valuation based on reserves):

Exhibit 2: Kari Pump resource potential valuation

2019e

2020e

2021e

2022e

2023e

2024e

Tonnes milled (kt)

3,600

3,600

3,600

1,906

Diluted grade (g/t)

2.29

2.29

2.29

2.29

Contained gold (oz)

265,607

265,607

265,607

140,615

Metallurgical recovery (%)

94.0

94.0

94.0

94.0

Recovered gold (oz)

249,671

249,671

249,671

132,179

Gold price (US$/oz)

1,437

1,304

1,303

1,264

Revenue (US$m)

358,803

325,471

325,225

167,074

Royalty rate (%)

6.0

6.0

6.0

6.0

Royalty (US$000s)

21,528

19,528

19,514

10,024

Transport and refining costs (US$/oz)

3.35

3.35

3.35

3.35

Transport and refining costs (US$000s)

12,020

10,903

10,895

5,597

Net revenue (US$000s)

325,255

295,040

294,817

151,453

Ore mining cost (US$/t)

3.50

3.50

3.50

3.50

Waste mining cost (US$/t)

1.85

2.08

2.53

1.92

Processing costs (US$/t)

14.49

14.21

14.49

13.22

G&A cost (US$/t)

3.28

3.28

3.28

3.28

Total (US$/t)

46.90

50.14

57.30

17.08

Mining cost (US$000s)

116,682

129,346

154,122

7,366

Processing and G&A costs (US$000s)

52,164

51,164

52,164

25,189

Total (US$000s)

168,846

180,509

206,286

32,555

Total cash costs (US$/oz)

676

723

826

246

AISC (US$/oz)

811

845

948

364

Gross profit (US$000s)

156,408

114,530

88,530

118,898

Depreciation (US$000s)

1,417

1,417

1,417

750

EBIT (US$000s)

154,992

113,114

87,114

118,148

Net interest (US$000s)

Pre-tax profit (US$000s)

154,992

113,114

87,114

118,148

Tax (US$000s)

27,124

19,795

15,245

20,676

Marginal tax rate (%)

17.5

17.5

17.5

17.5

PAT (US$000s)

127,868

93,319

71,869

97,472

Minority interest (US$000s)

12,787

9,332

7,187

9,747

Minority interest (%)

10.0

10.0

10.0

10.0

Attributable profit (US$000s)

115,081

83,987

64,682

87,725

Capex (US$000s)

1,667

2,500

833

Attributable cash-flow (US$000s)

-1,667

-2,500

115,665

85,404

66,099

88,475

NPV10 (US$000's)

232,635

Do. per oz (US$/oz)

231.05

Do. per share (US$/sh)

2.16

Source: Edison Investment Research

Note that the above analysis values the Kari Pump resource as though it is brought into production at the earliest possible moment in FY21 which, in Edison’s opinion, is relatively unlikely. At the other extreme, bringing it into production at the latest possible moment (which we estimate to be FY26), our valuation falls to US$144.4m (cf US$232.6m in Exhibit 2, above), or US$143.46 per resource ounce (cf US$231.05/oz, above), or US$1.34/share (cf US$2.16/share).

Performing exactly the same analysis as the above, but on the basis of Edison’s reserve estimate as per Exhibit 1, our valuation is US$202.4m, or US$263.89 per reserve ounce, or US$1.88/share, if Kari Pump is brought into production at the earliest possible opportunity, in FY21, or US$125.7m, or US$163.86 per reserve ounce, or US$1.17/share, if it is brought into production at the latest opportunity, in FY26.

Endeavour valuation (plus Kari Pump plus Fetekro)

In common with past practice, in valuing Endeavour, Edison has opted to discount potential cash flows back over four years from end-FY18 and then to apply an ex-growth terminal multiple of 10x (consistent with using a standardised discount rate of 10% ad infinitum) to forecast cash flows in that year (ie FY22) to reflect the fact that Endeavour is a multi-asset company that has shown a willingness and desire to trade assets in order to maintain production, reduce costs and to maximise returns to shareholders (eg the sale of Youga and Nzema in FY16 and FY17, respectively). In recognition of the fact that exploration investment will be required to maintain cash flows at their FY22 level however, we have also opted to include it in our cash flow analysis on the grounds that it may be a critical component of ongoing business performance in its ability to continually extend the lives of the company’s assets, instead of excluding it (as would be our normal practice).

At the time of our last note, (Materially ahead of expectations, published on 3 December 2018), our estimate of Endeavour’s cash flow was US$3.36 per share in FY22, on which basis our terminal valuation of the company at end-FY22 was US$33.63/share, which (in conjunction with forecast intervening cash flows) discounted back to a value of US$30.74/share at the start of FY19:

Exhibit 3: Endeavour forecast valuation and cash flow per share, FY18–FY22

Source: Edison Investment Research

This valuation remains unchanged, although to it may now be added our estimate of the potential range of values of US$1.09-2.16 /share for the Kari Pump maiden resource (see above) and US$0.06-0.44/share for our estimate of the potential range of values for the Fetekro maiden resource (see our note, Maiden resource paves way for potential project, published on 9 November 2018).

Exhibit 4: Financial summary

US$'000s

2016

2017

2018e

2019e

2020e

December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

566,486

652,079

720,514

762,133

1,002,952

Cost of Sales

(376,794)

(597,528)

(458,343)

(390,076)

(441,940)

Gross Profit

189,692

54,551

262,171

372,057

561,012

EBITDA

 

 

213,916

201,166

261,042

372,057

561,012

Operating Profit (before amort. and except.)

127,981

70,379

101,302

200,811

377,829

Intangible Amortisation

0

0

0

0

0

Exceptionals

(36,272)

(149,942)

25,403

0

0

Other

(1,989)

(2,242)

(1,156)

0

0

Operating Profit

89,720

(81,805)

125,549

200,811

377,829

Net Interest

(24,593)

(18,789)

(26,467)

(47,540)

(30,592)

Profit Before Tax (norm)

 

 

103,388

51,590

74,835

153,271

347,237

Profit Before Tax (FRS 3)

 

 

65,127

(100,594)

99,082

153,271

347,237

Tax

(27,643)

(32,945)

(48,394)

(55,962)

(95,285)

Profit After Tax (norm)

73,756

16,403

25,285

97,309

251,952

Profit After Tax (FRS 3)

37,484

(133,539)

50,688

97,309

251,952

Average Number of Shares Outstanding (m)

80.6

98.5

107.7

107.8

107.8

EPS - normalised (c)

 

 

(37.8)

(6.5)

(43.9)

63.5

185.9

EPS - normalised and fully diluted (c)

 

(37.5)

(6.5)

(42.9)

62.2

181.8

EPS - (IFRS) (c)

 

 

28.8

(114.5)

34.7

63.5

185.9

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

33.5

8.4

36.4

48.8

55.9

EBITDA Margin (%)

37.8

30.8

36.2

48.8

55.9

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

22.6

10.8

14.1

26.3

37.7

BALANCE SHEET

Fixed Assets

 

 

1,073,562

1,331,745

1,477,848

1,387,960

1,390,711

Intangible Assets

29,978

6,267

6,267

6,267

6,267

Tangible Assets

1,039,529

1,317,952

1,464,055

1,374,167

1,376,918

Investments

4,055

7,526

7,526

7,526

7,526

Current Assets

 

 

283,536

361,766

279,462

324,970

614,291

Stocks

110,404

141,898

147,044

155,537

204,684

Debtors

36,572

95,212

103,734

107,155

126,948

Cash

124,294

122,702

0

33,594

253,974

Other

12,266

1,954

28,684

28,684

28,684

Current Liabilities

 

 

(149,626)

(241,185)

(213,632)

(186,496)

(205,283)

Creditors

(145,311)

(223,527)

(195,974)

(168,838)

(187,625)

Short term borrowings

(4,315)

(17,658)

(17,658)

(17,658)

(17,658)

Long Term Liabilities

 

 

(246,811)

(451,705)

(527,778)

(391,894)

(391,894)

Long term borrowings

(146,651)

(323,184)

(459,068)

(323,184)

(323,184)

Other long term liabilities

(100,160)

(128,521)

(68,710)

(68,710)

(68,710)

Net Assets

 

 

960,661

1,000,621

1,015,900

1,134,540

1,407,824

CASH FLOW

Operating Cash Flow

 

 

164,522

244,092

185,719

354,338

532,191

Net Interest

(19,626)

(15,212)

(26,467)

(47,540)

(30,592)

Tax

(10,625)

(22,301)

(21,357)

(55,962)

(95,285)

Capex

(212,275)

(441,396)

(456,481)

(81,358)

(185,934)

Acquisitions/disposals

32,098

(37,332)

60,000

0

0

Financing

174,702

116,536

0

0

0

Dividends

(2,612)

(5,177)

0

0

0

Net Cash Flow

126,184

(160,790)

(258,586)

169,478

220,380

Opening net debt/(cash)

 

 

152,856

26,672

218,140

476,726

307,248

HP finance leases initiated

0

0

0

0

0

Other

0

(30,678)

0

0

0

Closing net debt/(cash)

 

 

26,672

218,140

476,726

307,248

86,868

Source: Company sources, Edison Investment Research

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

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280 High Holborn

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United Kingdom

New York +1 646 653 7026

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US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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United Kingdom

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

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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