gold flake

Showing its mettle as well as its metal

Endeavour Mining 28 May 2021 Update
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Endeavour Mining

Showing its mettle as well as its metal

Q121 results analysis

Metals & mining

28 May 2021

Price

C$28.89

Market cap

C$7,297m

C$1.2045/US$

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

173.9

*Excludes convertible premium

Shares in issue (000s)

252,568

Free float

75.2%

Code

EDV

Primary exchange

TSX

Secondary exchange

US OTC

Share price performance

%

1m

3m

12m

Abs

7.8

18.7

(4.7)

Rel (local)

4.5

8.4

(26.4)

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

Capital Markets Day

7 June 2021

LSE listing

c 14 June 2021

Afema maiden resource

H121

Sabodala-Massawa DFS

Q421

Fetekro DFS

Q421

Analyst

Charles Gibson

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

Endeavour’s Q121 financial results exceeded our expectations and were towards the top end of the range of analysts’ forecasts. In summary, Endeavour produced c 20% more gold than we expected during the quarter and sold c 30% more. This (positive) variance was then partially offset by a fractionally higher (negative) variance in operating expenses (albeit these were artificially inflated by US$22.6m of non-cash operating expenses) to give rise to a positive variance in adjusted net earnings attributable to shareholders from continuing operations of 16.6% relative to our prior expectations (see Exhibit 1). Perhaps more significantly, the results demonstrate that the integration of the Teranga assets into Endeavour’s portfolio is progressing smoothly (as expected) ahead of the latter’s London listing next month.

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

1.5

12/21e

2,758.1

1,386.6

788.1

3.65

37

1.5

12/22e

2,495.1

1,417.3

931.0

4.78

250**

10.2

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

Four factors behind outperformance

While a number of factors can be invoked to explain both the operational and financial outperformance of Endeavour’s mines, in general it may be reduced to four main factors: higher ore tonnes mined, generally; higher tonnes milled, stacked and/or processed (with the single exception of Agbaou); higher average head grade at Boungou; and well controlled unit costs across the portfolio (again, with the only real exception being those recorded at Agbaou).

Valuation: US$35.66/share or C$42.95/share

Based on the average multiples of its peers, we estimate a valuation for Endeavour of US$35.11, or C$42.29, per share, implying the potential for its shares to appreciate 46.4% from their current level. By contrast, an absolute valuation methodology, whereby we discount back six years of cash flow and then apply an ex-growth, ad infinitum multiple of 10x to steady-state terminal cash flows in FY26 (consistent with using a standardised discount rate of 10%), implies a terminal valuation of US$39.96/share. This (in conjunction with forecast intervening cash flows) discounts back to a current valuation of US$35.66 (C$42.95) per share at the start of FY21 (cf US$35.98 and C$45.08 previously – albeit the decline in the Canadian dollar valuation arises solely from the appreciation of the C$ cf the US$), implying the potential for the share price to appreciate by 48.7% from its current level. Alternatively, applying the same methodology, but using a CAPM-derived discount rate of 6.7% (still conservative, but arguably more appropriate) implies a terminal valuation of US$60.05/share and a current valuation of US$55.39/share, implying 130.9% appreciation potential. In the meantime, Endeavour is trading at a discount to the average multiples of its peers on almost all common valuation measures (see Exhibit 8).

Investment summary

A full analysis of Endeavour’s Q121 results relative to our prior forecasts is provided below:

Exhibit 1: Endeavour Mining Q121a cf prior forecasts (as reported and estimated pro forma)

US$000s (unless otherwise indicated)

Prior estimates (Q121e)

Actual

Variance

Est Q121a

Variance

Reported

Pro forma

Agbaou

Reported
ex-Agbaou

Q121a

(%)

(units)

(pro forma)

(%)

(units)

Houndé production (koz)

56.2

56.2

56.2

66.1

17.5

9.9

66.1

17.5

9.9

Agbaou production (koz)

16.7

16.7

16.7

0.0

N/A

0.0

12.6

-24.6

-4.1

Karma production (koz)

17.3

17.3

17.3

21.6

24.7

4.3

21.6

24.7

4.3

Ity production (koz)

51.2

51.2

51.2

70.9

38.4

19.7

70.9

38.4

19.7

Boungou production (koz)

42.2

42.2

42.2

59.7

41.6

17.5

59.7

41.6

17.5

Mana production (koz)

43.6

43.6

43.6

52.4

20.2

8.8

52.4

20.2

8.8

Sabodala-Massawa

43.4

80.7

43.4

38.9

-10.3

-4.5

75.0

-7.1

-5.7

Wahgnion

22.4

41.7

22.4

24.7

10.1

2.3

43.0

3.1

1.3

Total gold produced (koz)

293.1

349.6

276.3

334.3

21.0

58.0

401.2

14.7

51.6

Total gold sold (koz)

293.1

349.6

276.4

363.5

31.5

87.1

432.0

23.6

82.4

Gold price (US$/oz)

1,768

1,772

1,768

*1,749

-1.1

-19

1,763

-0.5

-9.0

Mine level cash costs (US$/oz)

693

683

693

**794

N/A

N/A

643

-5.9

-40.0

Mine level AISC (US$/oz)

979

956

979

837

-14.5

-142

818

-14.4

-138.0

Revenue

– Gold revenue

518,302

619,558

29,980

488,322

635,792

30.2

147,470

761,448

22.9

141,890

Cost of sales

– Operating expenses

203,147

238,839

15,478

187,669

251,112

33.8

63,443

300,140

25.7

61,301

– Royalties

34,276

40,201

1,709

32,567

44,366

36.2

11,799

51,280

27.6

11,079

Gross profit

280,879

340,518

12,793

268,086

340,314

26.9

72,228

410,028

20.4

69,510

Depreciation

(92,030)

(107,875)

(6,522)

(85,508)

(122,611)

43.4

(37,103)

(141,190)

30.9

-33,315

Expenses

– Corporate costs

(9,833)

(11,168)

(9,833)

(11,409)

16.0

(1,576)

(12,726)

14.0

-1,558

– Impairments

0

0

0

N/A

0

0

N/A

0

– Acquisition etc costs

0

0

0

(12,160)

N/A

(12,160)

(12,160)

N/A

-12,160

– Share based compensation

(8,657)

(10,157)

(8,657)

(7,955)

-8.1

702

(9,436)

-7.1

721

– Exploration costs

(5,625)

(5,625)

(5,625)

(9,810)

74.4

(4,185)

(9,810)

74.4

-4,185

Total expenses

(24,115)

(26,950)

(24,115)

(41,334)

71.4

(17,219)

(44,132)

63.8

-17,182

Earnings from operations

164,733

205,693

6,271

158,462

176,369

11.3

17,907

224,707

9.2

19,014

Interest income

0

0

Interest expense

(14,829)

(14,829)

(14,829)

(12,318)

-16.9

2,511

(16,841)

13.6

-2,012

Net interest

(14,829)

(14,829)

(14,829)

(12,318)

-16.9

2,511

(16,841)

13.6

-2,012

Loss on financial instruments

0

42,077

N/A

42,077

42,077

N/A

42,077

Other expenses

0

(6,290)

N/A

(6,290)

(19,750)

N/A

-19,750

Profit before tax

149,904

190,864

6,271

143,633

199,838

39.1

56,205

230,192

20.6

39,328

Current income tax

45,286

58,886

1,568

43,718

72,148

65.0

28,430

81,321

38.1

22,435

Deferred income tax

0

0

0

0

8,688

N/A

8,688

8,688

N/A

8,688

Total tax

45,286

58,886

1,568

43,718

80,836

84.9

37,118

90,009

52.9

31,123

Effective tax rate (%)

30.2

30.9

25.0

30.4

40.5

32.9

10.0

39.1

26.5

8.2

Profit after tax

104,618

131,978

4,703

99,915

119,002

19.1

19,087

140,183

6.2

8,205

Net profit from discontinued ops.

0

0

4,703

(3,702)

-178.7

-8,405

0

N/A

0

Total net and comprehensive income

104,618

131,978

4,703

104,618

115,300

10.2

10,682

140,183

6.2

8,205

Minority interest

18,032

22,636

705

18,032

25,733

42.7

7,701

29,919

32.2

7,283

Minority interest (%)

17.2

17.2

15.0

17.2

22.3

29.5

5.1

21.3

24.1

4.1

Profit attributable to shareholders

86,586

109,342

3,997

86,586

89,567

3.4

2,981

110,264

0.8

922

Basic EPS from continuing ops (US$)

0.421

0.434

0.016

0.405

0.455

12.5

0.050

0.437

0.6

0.003

Diluted EPS from continuing ops (US$)

0.415

0.428

0.016

0.399

0.453

13.5

0.054

0.434

1.5

0.006

Basic EPS (US$)

0.421

0.434

0.016

0.421

0.431

2.3

0.010

0.437

0.6

0.003

Diluted EPS (US$)

0.415

0.428

0.016

0.415

0.428

3.2

0.013

0.434

1.5

0.006

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

0.421

0.434

0.016

0.405

0.318

-26.7

-0.116

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

0.415

0.428

0.016

0.399

0.317

-26.0

-0.111

Adj net earnings attributable (US$000s)

93,751

117,757

3,997

89,754

104,686

16.6

14,932

135,156

14.8

17,399

Adj net EPS from continuing ops (US$)

0.456

0.467

0.016

0.437

0.503

15.2

0.066

0.535

14.6

0.068

Source: Endeavour Mining, Edison Investment Research. Note: *Includes adjustment for Karma stream. **Includes royalty payments.

In addition to Endeavour’s actual reported Q121 results (in the ‘Actual Q121a’ column), we have also provided our best estimate regarding the equivalent pro forma results for Q121, in the event that the takeover of Teranga had occurred on 31 December 2020 and Sabodala-Massawa and Wahgnion had therefore contributed to its 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, we have 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 also existed in the period from 1 January – that is, 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 entire 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 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-month period. For earnings per share calculations, we assumed the quarter-end number of shares in issue of 252.6m shares prevailed over the entire period. All of this is shown in the Est Q121a pro forma column in Exhibit 1. We have also provided our prior estimates with Agbaou both fully consolidated and deconsolidated and shown as a separate line item.

In general, however, regardless of whether ‘as reported’ or ‘pro forma’ results are used, Endeavour produced c 20% more gold than our expectations in Q121 and sold c 30% more, giving rise to a positive variance in revenue of approximately 22.9–30.2%. This rise was then offset by a fractionally higher variance in operating expenses relative to our forecasts; however, it is worth noting that operating expenses, in both cases, were inflated by US$22.6m of non-cash operating expenses relating ‘to the reversal…of the fair value adjustment of inventory on hand’ at Sabodala-Massawa and Wahgnion in particular at the date of their acquisition. If these costs are excluded from the calculation, then the variance in operating expenses relative to our prior forecasts, in both cases, is less than the variance in associated revenues (note, these costs are automatically excluded in the calculation of adjusted net earnings from continuing operations attributable to shareholders). The variance in royalties, depreciation and exploration expenses was also greater than the variance in revenues and production. In the case of royalties, this reflected both higher royalty rates (in part, reflecting the gold price) as well as higher production. In the case of depreciation, this reflected both higher production (since Endeavour depreciates on a ‘units of production’ basis) and a normalisation of depreciation rates at Mana and Boungou in particular, after both were depressed in Q420 by the decision to retrospectively recognise goodwill in Endeavour’s acquisition of SEMAFO and to treat it separately from the depreciation of the underlying assets. All of the above gave rise to a positive variance of 9.2–11.3% in earnings from operations relative to our prior forecasts. Endeavour’s effective tax rate too was also higher than our prior expectations. In this case, however, much of the variance could be attributed to the inclusion of a deferred tax charge. If this too is excluded (as well as one-off, non-recurring and exceptional costs), it can be seen that the (positive) variance in adjusted net earnings attributable to shareholders relative to our prior expectations is 16.6% in the case of the ‘as reported’ numbers (ie with Sabodala-Massawa and Wahgnion included only since the date of their acquisition on 10 February) and 14.8% in the case of our estimate of Endeavour’s pro forma results (ie with Sabodala-Massawa and Wahgnion included for the full three-month period).

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 the balance of 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).

As well as exceeding our forecast, at US$0.503/share, actual adjusted net EPS for the quarter were well to the top end of the range of analysts’ expectations:

Exhibit 2: Actual Q121 adjusted net EPS from continuing operations vs prior consensus estimate (US$/share)

(US$/share)

Q121e

Q121a

Actual

N/A

0.50

Mean consensus forecast

0.42

N/A

High consensus forecast

0.53

N/A

Low consensus forecast

0.28

N/A

Source: Refinitiv, Edison Investment Research. Note: Consensus priced 12 May 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 Agbaou and (by a fraction) Sabodala-Massawa. Financially, each of them performed in line with, or outperformed, our expectations, with the exceptions of Sabodala-Massawa and Wahgnion – although both experienced material, exceptional costs in the form of ‘the reversal…of the fair value adjustment of inventory on hand’ at the date of their acquisitions. Agbaou outperformed on an underlying basis, if a US$13.5m loss on disposal is excluded from its results. 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 ore tonnes mined

Higher tonnes milled/stacked/processed

Higher average head grade at Boungou

A 30koz (9.0%) over-sale of gold relative to production

Well controlled unit costs across the portfolio (with the only real exception being those recorded at Agbaou)

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 3.

Exhibit 3: 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 4: 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 it now being classified as ‘non-core’). With these provisos, our updated forecasts for Endeavour for the remainder of FY21 and in the wake of Q121 results, by quarter, on both an ‘as reported’ and ‘pro forma’ basis are as follows:

Exhibit 5: Endeavour Mining FY21 earnings forecasts, by quarter

US$000s (unless otherwise indicated)

Q121e

(reported)

Pro-forma (EDV+TGZ) basis

FY21e

(reported)

Est Q121a

Q221e

Q321e

Q421e

FY21e

Houndé production (koz)

66.1

66.1

57.7

57.7

74.5

256.0

256.0

Agbaou production (koz)

-

12.6

0

0

0

12.6

-

Karma production (koz)

21.6

21.6

20.0

16.4

23.6

81.6

81.6

Ity production (koz)

70.9

70.9

48.8

48.9

74.7

243.3

243.3

Boungou production (koz)

59.7

59.7

39.8

40.8

51.5

191.9

191.9

Mana production (koz)

52.4

52.4

43.6

41.8

49.0

186.8

186.8

Sabodala-Massawa

38.9

75.0

87.1

81.0

101.9

345.0

308.9

Wahgnion

24.7

43.0

38.0

39.9

39.7

160.6

142.3

Total gold produced (koz)

334.3

401.2

335.1

326.5

415.0

1,477.8

1,410.9

Total gold sold (koz)

363.5

432.0

335.1

326.5

415.0

1,508.5

1,440.1

Gold price (US$/oz)

*1,749

1,763

1,825

1,868

1,868

*1,828

*1,828

Mine level cash costs (US$/oz)

**794

643

716

794

689

704

714

Mine level AISC (US$/oz)

837

818

998

1,091

910

942

965

Revenue

– Gold revenue

635,792

761,448

611,471

609,976

775,206

2,758,101

2,632,445

Cost of sales

– Operating expenses

251,112

300,140

239,928

259,313

285,787

1,085,168

1,036,140

– Royalties

44,366

51,280

42,279

42,172

53,336

189,067

182,153

Gross profit

340,314

410,028

329,264

308,490

436,084

1,483,866

1,414,152

Depreciation

(122,611)

(141,190)

-128,254

-126,920

-153,885

-550,250

-531,671

Expenses

– Corporate costs

(11,409)

(12,726)

-11,168

-8,276

-8,276

-40,446

-39,129

– Impairments

0

0

0

0

0

0

– Acquisition etc costs

(12,160)

(12,160)

0

0

0

-12,160

-12,160

– Share based compensation

(7,955)

(9,436)

-6,907

-6,907

-6,907

-30,157

-28,676

– Exploration costs

(9,810)

(9,810)

-5,625

-5,625

-5,625

-26,685

-26,685

Total expenses

(41,334)

(44,132)

-23,700

-20,808

-20,808

-109,448

-106,650

Earnings from operations

176,369

224,707

177,310

160,762

261,390

824,168

775,831

Interest income

0

0

Interest expense

(12,318)

(16,841)

-9,469

-3,420

1,229

-28,502

-23,979

Net interest

(12,318)

(16,841)

-9,469

-3,420

1,229

-28,502

-23,979

Loss on financial instruments

42,077

42,077

42,077

42,077

Other expenses

(6,290)

(19,750)

-19,750

-6,290

Profit before tax

199,838

230,192

167,840

157,342

262,619

817,993

787,639

Current income tax

72,148

81,321

42,842

38,271

60,614

223,048

213,875

Deferred income tax

8,688

8,688

0

0

0

8,688

8,688

Total tax

80,836

90,009

42,842

38,271

60,614

231,736

222,563

Effective tax rate (%)

40.5

39.1

25.5

24.3

23.1

28.3

28.3

Profit after tax

119,002

140,183

124,998

119,070

202,005

586,257

565,076

Net profit from discontinued ops.

(3,702)

0

0

0

0

0

-3,702

Total net and comprehensive income

115,300

140,183

124,998

119,070

202,005

586,257

561,374

Minority interest

25,733

29,919

17,422

15,675

24,948

87,964

83,778

Minority interest (%)

22.3

21.3

13.9

13.2

12.4

15.0

14.9

Profit attributable to shareholders

89,567

110,264

107,577

103,395

177,057

498,293

477,596

Basic EPS from continuing ops (US$)

0.455

0.437

0.426

0.409

0.701

1.973

2.000

Diluted EPS from continuing ops (US$)

0.453

0.434

0.424

0.407

0.698

1.963

1.990

Basic EPS (US$)

0.431

0.437

0.426

0.409

0.701

1.973

1.978

Diluted EPS (US$)

0.428

0.434

0.424

0.407

0.698

1.963

1.968

Norm. basic EPS from continuing ops (US$)

0.318

0.426

0.409

0.701

1.854

1.870

Norm. diluted EPS from continuing ops (US$)

0.317

0.424

0.407

0.698

1.846

1.860

Adj net earnings attributable (US$000s)

104,686

135,156

113,521

109,393

183,111

541,181

510,711

Adj net EPS from continuing ops (US$)

0.503

0.535

0.449

0.433

0.725

2.143

2.115

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).

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

(US$/share)

As reported

Pro forma

Q121a

Q221e

Q321e

Q421e

Sum Q1-Q421e

FY21e

Edison forecast*

*0.535

0.449

0.433

0.725

2.142

2.143

Mean consensus forecast

0.503

0.560

0.670

0.860

2.593

2.390

High consensus forecast

0.503

0.640

0.800

1.070

3.013

3.710

Low consensus forecast

0.503

0.470

0.550

0.630

2.153

1.160

Source: Refinitiv, Edison Investment Research. Note: *As per Exhibits 1 and 5 on a pro forma basis. Consensus priced 12 May 2021.

Self-evidently, one of the main assumptions behind Edison’s 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 proven 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 US$4.00/share, giving rise to a terminal valuation of the company at end-FY26 of US$39.96/share (cf US$39.92/share previously), which (in conjunction with forecast intervening cash flows) then discounts back to a valuation of US$35.66/share (cf US$35.98/share previously) at the start of FY21, as shown in the graph below.

Exhibit 7: 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 expecting 2.2% inflation. These two measures imply an expected real equity return of 6.7% (1.09/1.022) and applying this to our forecast cash flows would imply a terminal valuation for Endeavour of US$60.05/share (cf US$59.99/`share previously) and a current valuation of US$55.39/share (cf US$55.70/share previously). Readers should note that, given its beta of 0.66 (source: Refinitiv, 15 March 2021), even this (real) discount rate of 6.7% is likely to prove conservative.

In the meantime, Endeavour’s valuation remains at a material discount to those of its newly acquired peer group, as shown in Exhibit 8, 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 8: 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

6.6

5.0

5.0

4.6

4.2

4.2

1.5

10.2

12.2

Endeavour (consensus)

EDV

4.9

4.5

5.1

4.6

4.3

5.1

1.5

5.3

4.5

Majors

Barrick

ABX

8.4

8.3

8.3

7.6

7.3

7.3

2.5

1.4

1.7

Newmont

NEM

11.1

10.2

11.7

8.7

8.2

9.2

2.8

2.9

2.7

Newcrest

NCM AU

9.5

9.7

9.7

8.0

8.0

8.2

1.4

1.4

1.6

Kinross

K

6.4

4.7

4.7

5.5

4.2

4.0

1.6

1.6

1.5

Agnico-Eagle

AEM

10.9

9.9

10.2

9.6

8.3

8.6

2.0

2.0

2.0

Eldorado

ELD

5.9

5.2

5.1

4.8

4.4

4.3

0.0

0.0

0.0

Average

 

8.7

8.0

8.3

7.4

6.7

6.9

1.7

1.5

1.6

Implied EDV share price (US$)

31.70

38.27

39.31

40.41

37.57

36.97

21.63

N/A

N/A

Implied EDV share price (C$)

38.18

46.10

47.34

48.68

45.25

44.53

26.05

N/A

N/A

Source: Edison Investment Research, Refinitiv. Note: *Forecast EV. Consensus and peers priced at 26 May 2021.

Of note is the fact that Endeavour’s valuation is materially cheaper than the averages of the majors in all but one of the measures shown in Exhibit 8, regardless of whether consensus or Edison forecasts are used. On an individual basis, it is cheaper than the majors on at least 44 out of 54 (81%) of valuation measures if Edison forecasts are used or 45 out of 54 (83%) if consensus forecasts are used. Reverse engineered, the average valuation measures of its peers imply an average share price for Endeavour of US$35.12, or C$42.31 per share.

Readers should note that Edison’s forecast dividend yield in year 2 and year 3 (FY22 and FY23) is notional. When it declared its maiden dividend of US$0.37/share for FY20 in November, Endeavour announced a policy of declaring future dividends on a semi-annual basis with the aim of maintaining an approximate dividend yield of 1.6% until it has reached a targeted net cash position of c US$250m (note, in H122 according to Edison’s updated estimates). Thereupon, it will re-assess its capital allocation priorities, which may include augmenting its shareholder return programme. Endeavour’s share price is at approximately the same level that it was in November implying, all other things being equal, its FY21 dividend should also be of the same order of magnitude to maintain a yield of 1.6%. However, it could increase to the extent that its share price appreciates above US$23.13, or C$27.85 (being US$0.37/0.016). Given we have no more information than this, however, our dividend ‘forecast’ for FY22 and FY23 therefore shows the maximum that we estimate Endeavour could distribute to retain a net cash position of US$250m on its balance sheet. This we believe to be unlikely in practice. However, it does indicate that, all other things being equal, Endeavour has plenty of scope to increase dividend distributions to shareholders into the foreseeable future.

Share buyback programme

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$28.89 (US$23.99), the NCIB is worth c US$293m and compares extremely favourably with its FY20 dividend payout of US$60.3m and its forecast US$93.5m payout in FY21. Combined, the NCIB and FY21e dividend distribution together represent c US$386.5m in aggregate returns to shareholders – equivalent to a dividend yield of 5.3% – 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 9, below, but only historical ones. To date in FY21, Endeavour has repurchased a total of 0.6m shares at an average price of C$27.42 resulting in total cash outflows of C$16.2m, or US$13.0m.

Financials

According to its Q121 balance sheet, Endeavour had net debt of US$220.2m post the acquisition of Teranga and the injection of US$200m by La Mancha. This compares with net debt of US$43.3m as at end-FY20 (pre the Teranga acquisition). This figure of US$220.2m includes lease liabilities of US$43.6m and an option premium of US$46.3m. Excluding the latter results in a net debt position of US$173.9m or just 4.3% of the company’s balance sheet equity of US$4,007.7m at end-Q121. Note that it differs slightly from the figure of US$161.8m quoted elsewhere in Endeavour’s announcements in that the latter excludes US$43.6m in lease liabilities and owing to the discounting, variously, of certain committed future payments to present value.

Note that, for the purposes of its financial modelling (see Exhibit 9, 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 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.

Exhibit 9: Financial summary

US$'000s

2018

2019

2020

2021e

2022e

2023e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,048,636

1,362,121

1,847,894

2,758,101

2,495,073

2,384,441

Cost of Sales

(669,719)

(884,869)

(1,061,891)

(1,383,683)

(1,077,784)

(1,034,014)

Gross Profit

378,917

477,252

786,003

1,374,418

1,417,289

1,350,427

EBITDA

 

 

378,917

618,443

910,295

1,386,578

1,417,289

1,350,427

Operating Profit (before amort. and except.)

 

106,090

281,400

546,072

836,328

930,000

920,276

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

8,035

(199,159)

(201,532)

29,917

0

0

Other

(3,171)

(9,392)

8,886

(19,750)

0

0

Operating Profit

110,954

72,849

353,426

846,495

930,000

920,276

Net Interest

(27,110)

(51,607)

(53,774)

(28,502)

978

2,500

Profit Before Tax (norm)

 

 

75,809

220,401

501,184

788,076

930,978

922,776

Profit Before Tax (FRS 3)

 

 

83,844

21,242

299,652

817,993

930,978

922,776

Tax

(73,637)

(97,253)

(158,466)

(231,736)

(178,048)

(168,831)

Profit After Tax (norm)

2,172

123,148

342,718

556,340

752,930

753,946

Profit After Tax (FRS 3)

10,207

(76,011)

141,186

586,257

752,930

753,946

Net loss from discontinued operations

(154,795)

(4,394)

0

0

0

0

Minority interests

8,460

33,126

44,719

87,964

110,447

109,000

Net profit

(144,588)

(80,405)

141,186

586,257

752,930

753,946

Net attrib. to shareholders contg. businesses (norm)

(16,292)

90,022

297,998

468,376

642,483

644,946

Net attrib.to shareholders contg. businesses

(8,257)

(109,137)

96,466

498,293

642,483

644,946

Average Number of Shares Outstanding (m)

155.3

157.4

160.8

252.6

252.6

252.6

EPS - normalised ($)

 

 

(0.10)

0.57

1.85

1.85

2.54

2.55

EPS - normalised and fully diluted ($)

 

 

(0.10)

0.57

1.82

1.83

2.51

2.52

EPS - (IFRS) ($)

 

 

(0.99)

(0.72)

0.60

1.97

2.54

2.55

Dividend per share (c)

0

0

37

37

245

287

Gross Margin (%)

36.1

35.0

42.5

49.8

56.8

56.6

EBITDA Margin (%)

36.1

45.4

49.3

50.3

56.8

56.6

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

10.1

20.7

29.6

30.3

37.3

38.6

BALANCE SHEET

Fixed Assets

 

 

1,594,202

2,330,033

5,093,409

5,111,622

4,996,160

4,918,676

Intangible Assets

4,186

5,498

24,851

24,851

24,851

24,851

Tangible Assets

1,543,842

2,254,476

3,968,746

3,986,959

3,871,498

3,794,014

Investments

46,174

70,059

1,099,812

1,099,812

1,099,812

1,099,812

Current Assets

 

 

327,841

652,871

1,168,382

2,004,370

2,084,362

2,053,994

Stocks

126,353

266,451

305,075

530,404

479,822

458,546

Debtors

74,757

83,836

104,545

252,237

230,619

221,525

Cash

124,022

288,186

751,563

1,172,453

1,324,646

1,324,646

Other

2,709

14,398

7,199

49,276

49,276

49,276

Current Liabilities

 

 

(248,420)

(354,931)

(661,171)

(801,905)

(698,496)

(683,580)

Creditors

(224,386)

(312,427)

(612,862)

(753,596)

(650,187)

(635,271)

Short term borrowings

(24,034)

(42,504)

(48,309)

(48,309)

(48,309)

(48,309)

Long Term Liabilities

 

 

(729,290)

(963,736)

(1,647,799)

(1,647,799)

(1,647,799)

(1,647,799)

Long term borrowings

(618,595)

(770,902)

(1,026,337)

(1,026,337)

(1,026,337)

(1,026,337)

Other long term liabilities

(110,695)

(192,834)

(621,462)

(621,462)

(621,462)

(621,462)

Net Assets

 

 

944,333

1,664,237

3,952,821

4,666,288

4,734,227

4,641,291

CASH FLOW

Operating Cash Flow

 

 

394,984

628,617

1,046,370

1,143,850

1,386,081

1,365,879

Net Interest

(26,734)

(35,413)

(53,774)

(28,502)

978

2,500

Tax

(36,140)

(109,494)

(186,332)

(223,048)

(178,048)

(168,831)

Capex

(689,469)

(401,227)

(335,599)

(568,463)

(371,828)

(352,667)

Acquisitions/disposals

33,179

3,654

(19,000)

20,000

40,000

0

Financing

(7,820)

2,402

100,000

187,000

0

0

Dividends

(1,956)

(6,154)

(88,288)

(109,947)

(724,991)

(846,882)

Net Cash Flow

(333,956)

82,385

463,377

420,890

152,193

0

Opening net debt/(cash)

 

 

218,140

518,607

525,220

323,083

(97,807)

(250,000)

HP finance leases initiated

0

0

0

0

0

0

Other

33,489

(88,998)

(261,240)

0

0

0

Closing net debt/(cash)

 

 

518,607

525,220

323,083

(97,807)

(250,000)

(250,000)

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 2018 to reflect continuing business only. *Excludes restricted cash.

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

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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