gold flake

Q2 outperforms ahead of likely Q3 index inclusion

Endeavour Mining 18 August 2021 Update
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Endeavour Mining

Q2 outperforms ahead of likely Q3 index inclusion

Q221 results

Metals & mining

18 August 2021

Price

C$29.32

Market cap

C$7,321m

C$1.2611/US$, US$1.3750/£

Net debt (US$m) at end-June 2021*

52.3

*Excludes lease liabilities, option premium & restricted cash.

Shares in issue

249.7m

Free float

75.2%

Code

EDV

Primary exchange

LSE

Secondary exchange

TSX, US OTC

Share price performance

%

1m

3m

12m

Abs

2.6

2.1

(19.7)

Rel (local)

0.7

(2.3)

(34.3)

52-week high/low

C$38.85

C$23.58

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

Updated five-year exploration strategy

Q321

Potential FTSE index inclusion

20 September 2021

Sabodala-Massawa Phase 2 DFS

Q421

Fetekro DFS

Q421

Analyst

Charles Gibson

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

At US$0.727/share, Endeavour’s net adjusted EPS, released on 4 August, was unequivocally above both Edison’s and the top end of the range of analysts’ forecasts (of US$0.43–0.65/share) for Q221 (source: Refinitiv, 3 August 2021). Teranga’s assets were reported to have integrated well into the group structure and all seven of its operating mines hit their stride together, as a result of which the company is on target to achieve the top end of its production guidance range of 1,350–1,475koz for the year (see Exhibit 4). An above par interim dividend also suggests a full-year payout above the minimum guided level. Results in Q321 will almost inevitably be adversely affected by the seasonal rains in West Africa. We have now adjusted our forecasts for Endeavour for the remainder of the year in the light of Q221 results (see Exhibit 6), ahead of likely FTSE and MSCI index inclusion in September after MSCI Russell confirmed that it had passed liquidity tests for a company listed in its country of incorporation.

Year end

Revenue (US$m)

EBITDA (US$m)

PBT*
(US$m)

Op. cash flow
per share (US$)

DPS
(c)

Yield
(%)

12/19

1,362.1

618.4

220.4

3.30

0

N/A

12/20

1,847.9

910.3

501.2

5.35

37

1.6

12/21e

2,718.8

1,370.3

707.0

3.65

56

2.4

12/22e

2,495.1

1,417.0

881.2

4.85

60

2.6

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

Operational outperformance; subdued cost pressures

Five reasons could be invoked to explain Endeavour’s Q221 outperformance, namely 1) higher open pit ore tonnes mined at generally lower stripping ratios, 2) higher tonnes processed, 3) appreciably higher gold grades processed at Houndé, Karma and Ity, 4) lower than expected sustaining capex and 5) lower royalty rates at Houndé, Karma and Mana. Having delineating 84% of its five-year target of 10–15Moz resources after only four years, Endeavour expects to announce a further 2.5Moz resources in the indicated category in the near future. In the meantime, it reports few or no inflationary pressures in its cost base (not least owing to the renegotiation of contracts on the takeovers of Teranga and SEMAFO).

Valuation: Solid at a 53% premium to the share price

Our valuation of Endeavour remains substantially unchanged relative to our last note (Picking up the crown, published on 14 June 2021). Based on the average multiples of its gold major peers, we estimate a valuation for Endeavour of US$31.60 (C$39.85 or £22.98) per share. By contrast, using an absolute valuation methodology, whereby we discount back six years of cash flow and then apply an ex-growth, ad infinitum multiple to steady-state terminal cash flows in FY26, implies a valuation of US$35.46 (C$44.72 or £25.79) per share if performed using a standardised discount rate of 10% or US$55.59 (C$70.10 or £40.43) per share if performed using a CAPM-derived discount rate of 6.65%. Otherwise, it is trading at a discount to the average multiples of its peers on at least 70% of common valuation measures (see Exhibit 9) despite being the largest premium LSE-listed pure gold producer, probably eligible for FTSE index inclusion later this year.

Q221 results

A full analysis of Endeavour’s Q221 results relative to our prior forecasts is provided below:

Exhibit 1: Endeavour Mining Q221a cf prior forecasts (as reported and estimated pro forma)

US$000s (unless otherwise indicated)

Actual

Est Q121a

Q221e

Q221a

Change*

Variance**

Q121a

(pro forma)

(%)

(units)

(%)

(units)

Houndé production (koz)

66.1

66.1

57.7

79.6

20.4

13.5

38.0

21.9

Agbaou production (koz)

12.6

0

0

-100.0

-12.6

0.0

0.0

Karma production (koz)

21.6

21.6

20.0

25.1

16.2

3.5

25.5

5.1

Ity production (koz)

70.9

70.9

48.8

79.5

12.1

8.6

62.9

30.7

Boungou production (koz)

59.7

59.7

39.8

38.8

-35.0

-20.9

-2.5

-1.0

Mana production (koz)

52.4

52.4

43.6

49.2

-6.1

-3.2

12.8

5.6

Sabodala-Massawa

38.9

75.0

87.1

95.9

27.9

20.9

10.1

8.8

Wahgnion

24.7

43.0

38.0

41.0

-4.7

-2.0

7.9

3.0

Total gold produced (koz)

334.3

401.2

335.1

409.0

1.9

7.8

22.1

73.9

Total gold sold (koz)

363.5

432.0

335.1

420.8

-2.6

-11.2

25.6

85.7

Gold price (US$/oz)

1,749***

1,763***

1,825

1,791***

1.6

28

-1.9

-34

Mine level cash costs (US$/oz)

794****

643

716

625

-2.8

-18

-12.7

-91

Mine level AISC (US$/oz)

837

818

998

828

1.2

10

-17.0

-170

Revenue

– Gold revenue

635,792

761,448

611,471

753,427

-1.1

-8,021

23.2

141,956

Cost of sales

– Operating expenses

251,112

300,140

239,928

278,161

-7.3

-21,979

15.9

38,233

– Royalties

44,366

51,280

42,279

43,908

-14.4

-7,372

3.9

1,629

Gross profit

340,314

410,028

329,264

431,358

5.2

21,330

31.0

102,094

Depreciation

(122,611)

(141,190)

(128,254)

(158,382)

12.2

-17,192

23.5

-30,128

Expenses

– Corporate costs

(11,409)

(12,726)

(11,168)

(15,890)

24.9

-3,164

42.3

-4,722

– Impairments

0

0

0

0

0

0

0

– Acquisition etc costs

(12,160)

(12,160)

0

(14,544)

19.6

-2,384

N/A

-14,544

– Share based compensation

(7,955)

(9,436)

(6,907)

(9,839)

4.3

-403

42.4

-2,932

– Exploration costs

(9,810)

(9,810)

(5,625)

(5,874)

-40.1

3,936

4.4

-249

Total expenses

(41,334)

(44,132)

(23,700)

(46,147)

4.6

-2,015

94.7

-22,447

Earnings from operations

176,369

224,707

177,310

226,829

0.9

2,122

27.9

49,519

Interest income

Interest expense

(12,318)

(16,841)

(9,469)

(13,694)

-18.7

3,147

44.6

-4,225

Net interest

(12,318)

(16,841)

(9,469)

(13,694)

-18.7

3,147

44.6

-4,225

Loss on financial instruments

42,077

42,077

(14,807)

-135.2

-56,884

N/A

-14,807

Other expenses

(6,290)

(19,750)

(7082)

-64.1

12,668

N/A

-7,082

Profit before tax

199,838

230,192

167,840

191,246

-16.9

-38,946

13.9

23,406

Current income tax

72,148

81,321

42,842

44,463

-45.3

-36,858

3.8

1,621

Deferred income tax

8,688

8,688

0

(2,166)

-124.9

-10,854

N/A

-2,166

Total tax

80,836

90,009

42,842

42,297

-53.0

-47,712

-1.3

-545

Effective tax rate (%)

40.5

39.1

25.5

22.1

-43.5

-17.0

-13.3

-3.4

Profit after tax

119,002

140,183

124,998

148,949

6.3

8,766

19.2

23,951

Net profit from discontinued ops.

(3,702)

0

0

0

0

0

0

0

Total net and comprehensive income

115,300

140,183

124,998

148,949

6.3

8,766

19.2

23,951

Minority interest

25,733

29,919

17,422

22,170

-25.9

-7,749

27.3

4,748

Minority interest (%)

22.3

21.3

13.9

14.9

-30.0

-6.4

7.2

1.0

Profit attributable to shareholders

89,567

110,264

107,577

126,779

15.0

16,515

17.8

19,202

Basic EPS from continuing ops (US$)

0.455

0.437

0.426

0.504

15.3

0.067

18.3

0.078

Diluted EPS from continuing ops (US$)

0.453

0.434

0.424

0.500

15.2

0.066

17.9

0.076

Basic EPS (US$)

0.431

0.437

0.426

0.504

15.3

0.067

18.3

0.078

Diluted EPS (US$)

0.428

0.434

0.424

0.500

15.2

0.066

17.9

0.076

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

0.318

0.426

0.620

95.0

0.302

45.5

0.194

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

0.317

0.424

0.616

94.3

0.299

45.3

0.192

Adj net earnings attributable (US$000s)

104,686

135,156

113,521

183,147

35.5

47,991

61.3

69,626

Adj net EPS from continuing ops (US$)

0.503

0.535

0.449

0.727

35.9

0.192

61.9

0.278

Source: Endeavour Mining, Edison Investment Research. Note: Q121 results as reported. *Q221a cf Est Q121a (pro forma). **Q221a cf Q221e. ***Includes adjustment for Karma stream. ****Includes royalty payments.

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). Readers are reminded that Endeavour changed its definition of cash costs in Q420 to include royalties. The decision was made so 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 (at least for the moment) are continuing to show total cash costs excluding royalties unless specifically indicated otherwise (eg the ‘Actual’ Q121a column in Exhibit 1, above).

Quarter-on-quarter comparisons for Endeavour’s results in Q220 are inevitably exaggerated by the fact that the company had completed neither its acquisition of SEMAFO at the start of Q220 nor its acquisition of Teranga at the start of Q121. In addition to Endeavour’s actual reported Q121 results (in the ‘Actual Q121a’ column), therefore, we have also attempted to provide our best estimate for Q121 results on a pro forma basis (ie on the assumption that the takeover of Teranga had occurred on 31 December 2020 and that Sabodala-Massawa and Wahgnion had therefore contributed to Endeavour’s profit & loss account for the full three-month period, rather than merely the part-period since 10 February). To construct these notional pro forma Q121 results estimates, we made a number of assumptions, chief among them being that the over-sale of gold relative to production occurring in the period since 10 February was also presumed to exist in the period from 1 January – that is to say, there was no corresponding under-sale from 1 January until 10 February. Otherwise, we assumed the unit costs that prevailed from 10 February until 31 March also prevailed during the full three-month period and that both sustaining capital and non-sustaining capital costs were incurred in the entire period pro rata to the costs incurred in the 10 February to 31 March one. Finally, we treated taxation independently for both Sabodala-Massawa and Wahgnion and added what we believed to have been the tax payable in the period from 1 January to 10 February for both mines to what was otherwise disclosed as paid by the group for the three months. For earnings per share calculations, we assumed the quarter-end number of shares in issue of 252.6m shares prevailed over the entire period. The results of this process are provided in the column entitled ‘Est Q121a pro forma’ in Exhibit 1.

On a pro forma basis, therefore, it can be seen that Endeavour’s actual operational performance in Q221 was similar to our estimate of its performance in Q121 (column marked ‘Est Q121a pro forma in Exhibit 1, above). Production and revenue in both periods were broadly the same. While headline profit after tax in Q221 was only 6.3% higher than in ‘Est Q121a pro forma’, however, Endeavour’s underlying performance was materially better, with the adjusted net EPS level increasing by 35.9% as a result of a decline in earnings attributable to minority interests from 20.8% to 12.1% and after adjustment for more one-off, exceptional losses incurred in Q221 (eg losses on financial instruments).

Relative to our prior expectations for Q221, however, Endeavour’s results were significantly better. Whereas we had expected Endeavour’s overall performance to moderate in Q221, gold produced and sold was more than 20% higher than our prior forecast at the same time as unit costs (expressed in US dollars per ounce sold) declined. Whereas revenues were 23.2% higher than our prior forecast therefore, operating expenses were only 15.9% higher, leading to a 31.0% positive variance in gross profits. Moreover, US$15.3m of the US$38.2m variance in operating expenses could be attributed to non-cash operating expenses relating to the reversal in the period of the fair value adjustment of inventory on hand at the acquisition date, especially at Sabodala-Massawa (note: these costs are automatically excluded in the calculation of adjusted net earnings from continuing operations attributable to shareholders). Depreciation was higher than our expectations as well. In part, this mirrored the extent to which production was also greater (given that Endeavour depreciates on a ‘units of production’ basis). However, there were also notably higher than expected depreciation charges relating to Sabodala-Massawa and Wahgnion (ie the assets acquired with Teranga) as well. Corporate costs were also higher, albeit these were artificially inflated by a US$5.4m charge relating to the expenses of Endeavour’s LSE listing. Had these been excluded (as they are in the calculation of adjusted net earnings), then underlying corporate costs were also actually lower than our prior expectations, at US$10.5m. As a result of the inclusion of certain one-off exceptional items, such as losses from financial instruments (which Edison anyway declines to attempt to forecast), the positive variance in actual results relative to our prior expectations was constrained to 13.9%. If these one-off, exceptional losses are excluded, however, then the variance in actual compared to expected results increases to a material 61.9% (adjusted net EPS from continuing operations). Readers should note that this performance follows a first quarter in which Endeavour also produced c 20% more gold than we had expected and sold c 30% more, which similarly drove a positive variance of 14.8% in adjusted net earnings attributable to shareholders on a pro forma basis (see our note Endeavour Mining: Showing its mettle as well as its metal, published on 28 May 2021).

As well as exceeding our forecast, at US$0.727/share, actual adjusted net EPS for the quarter also comfortably outperformed the consensus analysts’ forecast of US$0.54/share as well as the top end of the range of expectations, of US$0.65/share:

Exhibit 2: Actual Q221 adjusted net EPS from continuing operations vs prior consensus estimate (US$/share)

(US$/share)

Q121a

Q221a

Actual

0.50

0.73

Mean consensus forecast

N/A

0.54

High consensus forecast

N/A

0.65

Low consensus forecast

N/A

0.43

Source: Refinitiv, Edison Investment Research. Note: Consensus priced 3 August 2021.

Full details of each mine’s operational performance and outlook are available in Endeavour’s press release. As per Exhibit 1, output from each of the company’s nine mines exceeded our expectations, with the exception of Boungou by a small amount. Financially, each of them performed in line with, or outperformed, our expectations, with the exceptions of Boungou and, again by a small amount, Sabodala-Massawa and Wahgnion – although these last two both experienced material non-cash operating expenses relating to the reversal in the period of the fair value adjustment of inventory on hand at the acquisition date, without which they would have outperformed our expectations, financially speaking.

Exhibit 3: EDV assets’ actual cf forecast earnings from mine operations, by mine (US$m)

Mine

Actual

Prior forecast

Variance

(US$m)

(US$m)

(%)

US$m

Houndé

68.3

44.6

+53.1

+23.7

Karma

4.0

1.8

+122.2

+2.2

Ity

70.8

35.6

+98.9

+35.2

Boungou

15.8

19.5

-19.0

-3.7

Mana

29.8

13.9

+114.4

+15.9

Sabodala-Massawa

68.3

69.0

-1.0

-0.7

Wahgnion

19.0

19.2

-1.0

-0.2

Total

276.0

203.6

+35.6

+72.4

Source: Edison Investment Research, Endeavour Mining.

While a number of factors can be invoked to explain both the operational and financial outperformance of Endeavour’s mines relative to our prior expectations, in general, it may be reduced to five main factors:

higher open pit ore tonnes mined at generally lower stripping ratios;

higher tonnes milled/stacked/processed (except, by a fraction, at Sabodala-Massawa);

markedly higher average gold grades milled/stacked/processed at Houndé, Karma and Ity;

lower than expected sustaining capex (except at Boungou); and

selectively lower royalty rates at Houndé, Karma and Mana.

Shareholder returns

Dividend

As disclosed on 7 June 2021, Endeavour has implemented a shareholder returns programme that is composed of a minimum progressive dividend that may be supplemented with additional dividends and buybacks, providing the prevailing gold price remains above US$1,500/oz and Endeavour’s net debt/adjusted EBITDA ratio remains below 0.5. The minimum progressive dividend policy has a target of distributing at least US$500m to shareholders over the next three years. To date, minimum dividends have been indicated at US$125m, US$150m and US$175m for FY21, FY22, and FY23, respectively, payable semi-annually (cf a maiden FY20 dividend of US$60m). At the half-year stage, however, Endeavour has declared an interim dividend of US$70m (or US$0.28/share) – ie 12% above the level that might be expected pro rata with its minimum guided level of US$125m for the full year), causing us, among other things, to increase our forecast dividend for the full year, from US$0.50/share to US$0.56/share. The ex-dividend date for the interim dividend will be 9 September 2021 and the record date will be 10 September 2021. The dividend will be paid on or about 28 September 2021.

Share buyback

In tandem with its FY20 results, on 18 March 2021, Endeavour announced a normal course issuer bid (NCIB) or share buyback programme to supplement its policy of augmenting shareholder returns. The NCIB commenced on 22 March and will end on 21 March 2022 and will allow Endeavour to buy up to 12.2m ordinary shares, or approximately 5% of its total issued and outstanding ordinary shares at the time of the announcement, whereupon the purchased shares will be cancelled. At Endeavour’s current share price of C$29.32 (US$23.25), the NCIB is worth, in total, c US$280m and compares extremely favourably with its FY20 dividend payout of US$60.3m and our forecast of its payout in FY21 of US$139.1m. Combined, the NCIB and FY21e dividend distribution together represent c US$419.3m in aggregate returns to shareholders – equivalent to a dividend yield of 7.2% – in FY21.

Note that, owing to the inherent uncertainty surrounding whether purchases are made and at what price under the NCIB, we have not attempted to include potential future share buybacks in our financial forecasts in Exhibit 10, below, but only historical ones. To date in FY21, we estimate that Endeavour has repurchased a total of 3.4m shares at an average price of US$22.27 (C$28.08), resulting in total cash outflows of C$97.8m, or US$77.5m.

FY21 guidance versus forecasts

Historically, Endeavour has a good record of meeting its production and cost guidance targets and FY20 was the eighth year in succession in which the company achieved its production cost and AISC targets.

In the wake of Q121 results, Endeavour reiterated production and cost guidance for each of its mines for FY21, as shown in Exhibit 4.

Exhibit 4: Endeavour production cost and AISC guidance, by mine, FY21

Production (koz)

AISC (US$/oz)

Mine

FY21e guidance

FY21e guidance

Houndé

240–260

855-905

Karma

80–90

1,220-1,300

Ity CIL

230–250

800-850

Mana

170–190

975-1,050

Boungou

180–200

690-740

Sabodala-Massawa

310-330

690-740

Wahgnion

140-155

940-990

Continuing operations

1,350–1,475

840-890

Agbaou

15-20

1,050-1,125

Group production

1,365-1,495

850-900

Source: Endeavour Mining, Edison Investment Research

Readers should note that Endeavour’s guidance includes production from Sabodala-Massawa and Wahgnion from 10 February onwards only. They should also note that, for the purposes of our forecasts (below) we have left Agbaou fully consolidated into Endeavour’s ‘pro forma’ accounts. For those who wish to deconsolidate it, Agbaou’s profit and loss for the period in which it was under Endeavour ownership in Q121 is reproduced below. All told, however, we would note that its contribution to Endeavour’s bottom line was, to all intents and purposes, immaterial during this period.

Exhibit 5: Agbaou profit and loss, Q121 (US$000s unless otherwise indicated)

Q121

Revenue

25,426

Operating costs

(14,250)

Depreciation & depletion

0

Royalties

(1,418)

Other income/(expenses)

80

Loss on disposal

(13,540)

Earnings/(loss) before tax

(3,702)

Deferred and current income tax expense

0

Net comprehensive earnings/(loss)

(3,702)

Minority interest

1,466

Comprehensive earnings attributable to EDV shareholders

(5,168)

Basic EPS (US$/share)

(0.025)

Diluted EPS (US$/share)

(0.025)

Revenue

Operating costs

Depreciation & depletion

Royalties

Other income/(expenses)

Loss on disposal

Earnings/(loss) before tax

Deferred and current income tax expense

Net comprehensive earnings/(loss)

Minority interest

Comprehensive earnings attributable to EDV shareholders

Basic EPS (US$/share)

Diluted EPS (US$/share)

Q121

25,426

(14,250)

0

(1,418)

80

(13,540)

(3,702)

0

(3,702)

1,466

(5,168)

(0.025)

(0.025)

Source: Endeavour Mining

In the meantime, we understand it is not Endeavour’s intention, at least for the time being, to reflect Karma as an asset held for sale (despite its now being classified as ‘non-core’). With these provisos, our updated forecasts for Endeavour for the remainder of FY21 and in the wake of Q221 results, by quarter, on both an ‘as reported’ and ‘pro forma’ basis are as follows:

Exhibit 6: Endeavour Mining FY21 earnings forecasts, by quarter

US$000s (unless otherwise indicated)

Q121
(reported)

Est Q121a
(pro forma)

Q221a

Q321e
(prior)

Q321e
(current)

Q421e
(prior)

Q421e
(current)

FY21
(pro forma)

FY21e
(reported)

Houndé production (koz)

66.1

66.1

79.6

57.7

57.9

74.5

55.9

259.5

259.5

Agbaou production (koz)

-

12.6

0

0

0

0

0

12.6

-

Karma production (koz)

21.6

21.6

25.1

16.4

16.8

23.6

18.3

81.7

81.7

Ity production (koz)

70.9

70.9

79.5

48.9

50.4

74.7

51.6

252.3

252.3

Boungou production (koz)

59.7

59.7

38.8

40.8

42.8

51.5

44.3

185.7

185.7

Mana production (koz)

52.4

52.4

49.2

41.8

43.2

49.0

45.3

190.2

190.2

Sabodala-Massawa

38.9

75.0

95.9

81.0

83.0

101.9

85.8

339.7

303.6

Wahgnion

24.7

43.0

41.0

39.9

34.0

39.7

43.3

161.3

143.0

Total gold produced (koz)

334.3

401.2

409.0

326.5

328.2

415.0

344.6

1,483.0

1,416.1

Total gold sold (koz)

363.5

432.0

420.8

326.5

328.2

415.0

344.6

1,525.5

1,457.1

Gold price (US$/oz)

1,749*

1,763

1,791*

1,868

1,792

1,868

1,787

*1,782

*1,779

Mine level cash costs (US$/oz)

**794

643

625

794

737

689

738

680

678

Mine level AISC (US$/oz)

837

818

828

1,091

1,017

910

989

902

911

Revenue

– Gold revenue

635,792

761,448

753,427

609,976

588,154

775,206

615,745

2,718,774

2,593,118

Cost of sales

– Operating expenses

251,112

300,140

278,161

259,313

241,929

285,787

254,215

1,074,445

1,025,417

– Royalties

44,366

51,280

43,908

42,172

35,947

53,336

37,682

168,818

161,903

Gross profit

340,314

410,028

431,358

308,490

310,278

436,084

323,848

1,475,512

1,405,798

Depreciation

(122,611)

(141,190)

(158,382)

(126,920)

(142,633)

(153,885)

(152,971)

(595,175)

(576,596)

Expenses

– Corporate costs

(11,409)

(12,726)

(15,890)

(8,276)

(8,276)

(8,276)

(8,276)

(45,168)

(43,851)

– Impairments

0

0

0

0

0

0

0

0

– Acquisition etc costs

(12,160)

(12,160)

(14,544)

0

0

0

0

(26,704)

(26,704)

– Share based compensation

(7,955)

(9,436)

(9,839)

(6,907)

(6,907)

(6,907)

(6,907)

(33,089)

(31,608)

– Exploration costs

(9,810)

(9,810)

(5,874)

(5,625)

(5,625)

(5,625)

(5,625)

(26,934)

(26,934)

Total expenses

(41,334)

(44,132)

(46,147)

(20,808)

(20,808)

(20,808)

(20,808)

(131,895)

(129,097)

Earnings from operations

176,369

224,707

226,829

160,762

146,837

261,390

150,069

748,442

700,104

Interest income

0

0

Interest expense

(12,318)

(16,841)

(13,694)

(3,420)

(9,152)

1,229

(1,633)

(41,320)

(36,797)

Net interest

(12,318)

(16,841)

(13,694)

(3,420)

(9,152)

1,229

(1,633)

(41,320)

(36,797)

Loss on financial instruments

42,077

42,077

(14,807)

27,270

27,270

Other expenses

(6,290)

(19,750)

(7082)

(26,832)

(13,372)

Profit before tax

199,838

230,192

191,246

157,342

137,686

262,619

148,436

707,560

677,205

Current income tax

72,148

81,321

44,463

38,271

36,611

60,614

36,351

198,746

189,573

Deferred income tax

8,688

8,688

(2,166)

0

0

0

0

6,522

6,522

Total tax

80,836

90,009

42,297

38,271

36,611

60,614

36,351

205,268

196,095

Effective tax rate (%)

40.5

39.1

22.1

24.3

26.6

23.1

24.5

29.0

29.0

Profit after tax

119,002

140,183

148,949

119,070

101,075

202,005

112,084

502,291

481,110

Net profit from discontinued ops.

(3,702)

0

0

0

0

0

0

0

(3,702)

Total net and comprehensive income

115,300

140,183

148,949

119,070

101,075

202,005

112,084

502,291

477,408

Minority interest

25,733

29,919

22,170

15,675

14,368

24,948

14,722

81,180

76,994

Minority interest (%)

22.3

21.3

14.9

13.2

14.2

12.4

13.1

16.2

16.1

Profit attributable to shareholders

89,567

110,264

126,779

103,395

86,706

177,057

97,362

421,112

400,414

Basic EPS from continuing ops (US$)

0.455

0.437

0.504

0.409

0.347

0.701

0.390

1.679

1.690

Diluted EPS from continuing ops (US$)

0.453

0.434

0.500

0.407

0.345

0.698

0.387

1.668

1.678

Basic EPS (US$)

0.431

0.437

0.504

0.409

0.347

0.701

0.390

1.679

1.668

Diluted EPS (US$)

0.428

0.434

0.500

0.407

0.345

0.698

0.387

1.668

1.657

Norm. basic EPS from continuing ops (US$)

0.318

0.620

0.409

0.347

0.701

0.390

1.677

1.681

Norm. diluted EPS from continuing ops (US$)

0.317

0.616

0.407

0.345

0.698

0.387

1.666

1.670

Adj net earnings attributable (US$000s)

104,686

135,156

183,147

109,393

92,631

183,111

103,362

514,296

483,826

Adj net EPS from continuing ops (US$)

0.503

0.535

0.727

0.433

0.371

0.725

0.414

2.050

2.015

Source: Endeavour Mining, Edison Investment Research. Note: Company reported basis. *Includes adjustment for Karma stream. **As reported, including royalty payments (Edison calculates US$629/oz excluding royalty payments).

The net result of these changes (including a 4.3% decrease in our forecast gold price for the remainder of the year, from US$1,868/oz to US$1,787/oz) is a modest 4.3% decrease in adjusted net EPS from continuing operations, from US$2.143/share to US$2.050/share (on a pro forma basis – see our notes, Showing its mettle as well as its metal and Picking up the crown, published on 28 May 2021 and 14 June 2021, respectively, for direct comparison) and a similar 4.7% decrease in adjusted net EPS from continuing operations, from US$2.115/share to US$2.015/share (on an ‘as reported’ basis).

As before, 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 exhibits both above and below should be regarded as indicative, rather than prescriptive, particularly with respect to individual quarters. With this caveat, a comparison between our FY21 adjusted net EPS from continuing operations estimates and consensus estimates, by quarter, is as follows:

Exhibit 7: Edison adjusted net EPS from continuing operations estimates vs consensus FY21 by quarter (US$)

(US$/share)

As reported

Pro forma

Q121a

Q221a

Q321e

Q421e

Sum Q1–Q421e

FY21e

Edison forecast*

*0.535

0.727

0.371

0.414

2.047

2.050

Mean consensus forecast

0.503

0.727

0.500

0.620

2.350

2.340

High consensus forecast

0.503

0.727

0.780

1.010

3.020

2.840

Low consensus forecast

0.503

0.727

0.400

0.470

2.100

1.870

Source: Refinitiv, Edison Investment Research. Note: *As per Exhibits 1 and 6 on a pro forma basis. Consensus priced 18 August 2021.

Self-evidently, one of the main assumptions behind our forecasts is that there are no major deleterious effects to ongoing operations as a result of the COVID-19 pandemic. To date, the effect of COVID-19 on Endeavour’s operations in West Africa has proved to be negligible and is expected to remain so. Nevertheless, Endeavour has mitigated future risks as far as possible by both 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 also by preparing multiple different levels in its pits from which to produce, thereby affording it operational flexibility in event of 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 and Agbaou in FY20 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 FY21, in the case of Endeavour, we have instead opted to discount six years of forecast cash flows in FY21–26 back to 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 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 is barely changed at US$4.07/share (cf US$4.03/share previously), giving rise to a terminal valuation of the company at end-FY26 of US$40.67/share (cf US$40.30/share previously), which (in conjunction with forecast intervening cash flows) then discounts back to a valuation of US$35.46/share (cf US$35.88/share previously) at the start of FY21, as shown in the graph below.

Exhibit 8: Endeavour current 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 that 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 currently expecting 2.2069% inflation. These two measures imply an expected real equity return of 6.65% (1.09/1.022069) and applying this to our forecast cash flows would imply a terminal valuation for Endeavour of US$61.19/share (cf US$61.76/share previously) and a current valuation of US$55.59/share (cf US$56.96/share previously). Readers should note that, given its beta of 0.49 (source: Refinitiv, 18 August 2021), even this (real) discount rate of 6.65% is likely to be conservative.

In the meantime, Endeavour’s valuation remains at a material discount to those of its newly acquired 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

6.4

4.8

4.9

4.5

4.2

3.4

2.4

2.6

3.0

Endeavour (consensus)

EDV

5.0

4.5

4.8

4.5

4.2

4.6

2.2

2.6

2.4

Majors

Barrick

ABX

7.2

7.0

6.8

6.5

6.3

6.3

3.7

1.7

2.1

Newmont

NEM

9.2

8.9

9.6

7.2

7.2

7.8

3.7

3.7

3.6

Newcrest

NCM AU

7.6

7.7

7.7

6.6

6.5

6.9

1.9

1.9

1.8

Kinross

K

5.8

3.6

3.5

5.2

3.3

3.1

2.0

2.0

1.9

Agnico-Eagle

AEM

8.6

8.2

8.3

7.9

7.1

7.3

2.4

2.4

2.4

Eldorado

ELD

4.5

3.9

3.8

4.0

3.4

3.3

0.0

0.0

0.0

Average

 

7.2

6.5

6.6

6.2

5.6

5.8

2.3

1.9

2.0

Implied EDV share price (US$)

26.12

31.60

31.93

33.77

34.27

36.11

24.39

30.79

35.46

Implied EDV share price (C$)

32.94

39.85

40.27

42.59

43.21

45.54

30.75

38.83

44.71

Source: Edison Investment Research, Refinitiv. Note: *Forecast EV. Consensus and peers priced at 18 August 2021.

Of note is the fact that Endeavour’s valuation is materially cheaper than the averages of the majors on all but one of the measures shown in Exhibit 9 if consensus forecasts are used and all of them if Edison forecasts are used. On an individual basis, it is cheaper than its senior gold mining peers on at least 38 out of 54 (70%) of valuation measures if Edison forecasts are used and, similarly, 38 out of 54 (70%) if consensus forecasts are used. Reverse engineered, the average valuation measures of its peers imply an average share price for Endeavour of US$31.60, or C$39.86 per share.

Financials

According to its Q221 balance sheet, Endeavour had net debt of US$147.6m. This compares with net debt of US$220.2m as at end-Q121 after the completion of the Teranga acquisition and the injection of US$200m by La Mancha and with net debt of US$43.3m as at end-FY20 (pre the Teranga acquisition). This figure of US$147.6m includes lease liabilities of US$50.7m and an option premium of US$44.6m. Excluding these two results in a net debt position of just US$52.3m or just 1.3% of the company’s balance sheet equity of US$4,441.7m at end-Q221. Note that this figure of US$52.3m also excludes US$29.7m held in the form of ‘restricted cash’ in ‘other financial assets’. It also differs slightly from the figure of US$77.1m quoted elsewhere in Endeavour’s announcements owing to the discounting, variously, of certain committed future payments to present value.

Note that, for the purposes of our financial modelling (see Exhibit 10, below) and for simplicity’s sake, we have assumed the consolidation of Endeavour’s and Teranga’s balance sheets took place retrospectively on 31 December 2020. In this case, we estimate that 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 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 (see Exhibit 10, below).

Exhibit 10: Financial summary

US$'000s

2019

2020

2021e

2022e

2023e

December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,362,121

1,847,894

2,718,774

2,495,073

2,384,441

Cost of Sales

(884,869)

(1,061,891)

(1,375,157)

(1,078,033)

(1,034,263)

Gross Profit

477,252

786,003

1,343,617

1,417,040

1,350,178

EBITDA

 

 

618,443

910,295

1,370,321

1,417,040

1,350,178

Operating Profit (before amort. and except.)

 

 

281,400

546,072

775,146

891,276

876,624

Intangible Amortisation

0

0

0

0

0

Exceptionals

(199,159)

(201,532)

566

0

0

Other

(9,392)

8,886

(26,832)

0

0

Operating Profit

72,849

353,426

748,880

891,276

876,624

Net Interest

(51,607)

(53,774)

(41,320)

(10,068)

5,928

Profit Before Tax (norm)

 

 

220,401

501,184

706,994

881,207

882,553

Profit Before Tax (FRS 3)

 

 

21,242

299,652

707,560

881,207

882,553

Tax

(97,253)

(158,466)

(205,268)

(169,039)

(158,380)

Profit After Tax (norm)

123,148

342,718

501,725

712,168

724,172

Profit After Tax (FRS 3)

(76,011)

141,186

502,291

712,168

724,172

Net loss from discontinued operations

(4,394)

0

0

0

0

Minority interests

33,126

44,719

81,180

107,500

105,620

Net profit

(80,405)

141,186

502,291

712,168

724,172

Net attrib. to shareholders contg. businesses (norm)

90,022

297,998

420,546

604,668

618,552

Net attrib.to shareholders contg. businesses

(109,137)

96,466

421,112

604,668

618,552

Average Number of Shares Outstanding (m)

157.4

160.8

250.8

249.9

249.9

EPS - normalised (c)

 

 

57.20

185.34

167.65

242.01

247.57

EPS - normalised fully diluted (c)

 

 

56.95

181.51

166.56

234.78

240.17

EPS - (IFRS) ($)

 

 

(0.72)

0.60

1.68

2.42

2.48

Dividend per share (c)

0

37

56

60

70

Gross Margin (%)

35.0

42.5

49.4

56.8

56.6

EBITDA Margin (%)

45.4

49.3

50.4

56.8

56.6

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

20.7

29.6

28.5

35.7

36.8

BALANCE SHEET

Fixed Assets

 

 

2,330,033

5,093,409

5,072,240

4,917,257

4,796,371

Intangible Assets

5,498

24,851

24,851

24,851

24,851

Tangible Assets

2,254,476

3,968,746

3,947,578

3,792,595

3,671,708

Investments

70,059

1,099,812

1,099,812

1,099,812

1,099,812

Current Assets

 

 

652,871

1,168,382

1,688,505

2,320,596

2,945,556

Stocks

266,451

305,075

522,841

479,822

458,546

Debtors

83,836

104,545

249,005

230,619

221,525

Cash

288,186

751,563

882,189

1,575,687

2,231,015

Other

14,398

7,199

34,469

34,469

34,469

Current Liabilities

 

 

(354,931)

(661,171)

(745,128)

(646,595)

(631,679)

Creditors

(312,427)

(612,862)

(696,819)

(598,286)

(583,370)

Short term borrowings

(42,504)

(48,309)

(48,309)

(48,309)

(48,309)

Long Term Liabilities

 

 

(963,736)

(1,647,799)

(1,556,027)

(1,556,027)

(1,556,027)

Long term borrowings

(770,902)

(1,026,337)

(934,565)

(934,565)

(934,565)

Other long term liabilities

(192,834)

(621,462)

(621,462)

(621,462)

(621,462)

Net Assets

 

 

1,664,237

3,952,821

4,459,590

5,035,232

5,554,221

CASH FLOW

Operating Cash Flow

 

 

628,617

1,046,370

1,114,817

1,379,914

1,365,630

Net Interest

(35,413)

(53,774)

(41,320)

(10,068)

5,928

Tax

(109,494)

(186,332)

(198,746)

(169,039)

(158,380)

Capex

(401,227)

(335,599)

(574,007)

(370,782)

(352,667)

Acquisitions/disposals

3,654

(19,000)

20,000

40,000

0

Financing

2,402

100,000

67,352

0

0

Dividends

(6,154)

(88,288)

(165,697)

(176,527)

(205,183)

Net Cash Flow

82,385

463,377

222,398

693,498

655,328

Opening net debt/(cash)

 

 

518,607

525,220

323,083

100,685

(592,813)

HP finance leases initiated

0

0

0

0

0

Other

(88,998)

(261,240)

0

0

0

Closing net debt/(cash)

 

 

525,220

323,083

100,684

(592,813)

(1,248,141)

Source: Company sources, Edison Investment Research. Note: Presented on 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

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

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 2021 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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