Strong Q2 tees up strong H2

Endeavour Mining 21 August 2020 Update
Download PDF

Endeavour Mining

Strong Q2 tees up strong H2

Q220 results

Metals & mining

21 August 2020

Price

C$35.80

Market cap

C$5,835m

C$1.3206/US$

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

472.6

*Pre-acquisition, excludes convertible premium.

Shares in issue

163.0m

Free float

75.2%

Code

EDV

Primary exchange

TSX

Secondary exchange

US OTC

Share price performance

%

1m

3m

12m

Abs

10.0

11.7

36.0

Rel (local)

6.9

0.3

33.8

52-week high/low

C$37.03

C$20.01

Business description

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

Next events

Kari West, Center & Gap maiden reserve

Q320

Updated Le Plaque reserve

Q320

Updated Fetekro PEA

Q420

Kalana updated feasibility study

H220

Analyst

Charles Gibson

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

Endeavour’s Q220 results were materially ahead of both Edison and consensus estimates. Adjusted EBITDA of US$120.2m was within 7.5% of the first quarter’s record, while adjusted net earnings reached a new recent record of US$52.8m, or 47.6c/share. At least as importantly, all operations were reported to be continuing to operate at near-normal levels, despite COVID-19. As a result, we have upgraded our FY20 forecasts materially, driven by sharply increased production in Q4 in particular, combined with a materially higher gold price. Given its current rate of deleveraging, we calculate that Endeavour could be net debt free early in FY21, at which point it is likely to transition to dividend payments and a focus on shareholder returns at the same time as developing new projects, such as Fetekro (currently valued at US$1.68/share – see page 12).

Year end

Revenue (US$m)

EBITDA (US$m)

PBT*
(US$m)

Operating cash flow
per share (US$)

Capex (US$m)

Net debt**
(US$m)

12/18

1,048.6

378.9

75.8

2.31

689.5

***518.6

12/19

1,362.1

618.4

220.4

3.30

401.2

525.2

12/20e

1,816.0

1,002.4

639.8

4.98

352.5

29.9

12/21e

2,034.0

1,027.0

668.3

5.19

191.5

(503.8)

Note: Pro forma basis. *PBT is normalised, excluding amortisation of acquired intangibles and exceptional items. **Excludes restricted cash. ***Pre-acquisition basis.

Elimination of net debt and new listing beckon

The integration of Mana and Boungou into Endeavour’s well established West African operating model has now been almost completed only a month after the SEMAFO acquisition. In the wake of La Mancha’s 3 July injection of US$100m into the enlarged group, pro forma net debt has fallen to just US$309m, which equates to a gearing (net debt/equity) ratio of c 20.4% and a leverage (net debt/[net debt+equity]) ratio of c 16.9%. Perhaps more significantly, given the much stronger performance that we expect from the enlarged group’s six mines in H220, coupled with a stronger gold price environment, we believe that Endeavour could be net debt free as early as the beginning of FY21, at which point it will be in a position to make dividend distributions to shareholders. In the meantime, its exploration programme continues apace, with the company having successfully achieved 83% of its five-year target of discovering 10–15Moz by the end of FY21. Finally, in recognition of its achievements, management has confirmed that it is pursuing a secondary listing in either London or New York in the near future.

Valuation: US$43.34/share plus US$1.68/share

Since 29 June, our forecasts and valuation have reflected Endeavour’s acquisition of SEMAFO. Within this context, our terminal valuation of the combined entity at end-FY22 is now US$51.74/share – little changed from our previous valuation – which (in conjunction with forecast intervening cash flows) discounts back to a value of US$43.34/share in FY20, to which a further US$1.68/share may also be added for the Fetekro PEA (see page 12). In the meantime, on a relative basis, the enlarged Endeavour remains materially cheaper than the ranks of the world’s major gold producers on at least 88% (32 out of 36) of common valuation measures regardless of whether Edison or consensus forecasts are used (see Exhibit 9).

Endeavour Q220 results (pre-acquisition)

Results in the first quarter of the year at Endeavour were characterised by record revenue, record adjusted EBITDA and record operating cash flow. Whereas we had expected a moderation in performance in Q220 on account of the disruption occasioned to maintenance schedules by the coronavirus pandemic, in fact adjusted EBITDA of US$120.2m was within 7.5% of the previous quarter’s record, while net adjusted earnings exceeded those of the previous quarter by 57.5% and – not for the first time – vastly outperformed both Edison and consensus expectations (see Exhibit 1).

In general, production was very close to our expectations, albeit with a positive variance at Houndé offsetting moderated production levels at both Ity and Karma. Although revenue was close to our prior forecast in percentage terms therefore (+2.8%), it translated into a more material US$6.9m increase in absolute terms. At the same time, cash costs were well controlled, leading to a positive 3.9% variance in operating expenses, albeit this again translated into a more material US$4.2m in absolute terms, which added to a US$7.6m positive variance in depreciation after an unexpectedly low depreciation charge at Houndé. At the same time, there was a positive US$6.9m variance in corporate costs, relative to our prior expectations, which we had expected to have been augmented by a US$6.0m expense related to coronavirus costs, and a US$7.4m positive variance in acquisition costs, which were materially lower than the US$10m that we had expected in respect of the SEMAFO acquisition. The sum of these positive variances, of US$33.0m, accounts for the vast majority of the total US$35.5m variance recorded between Edison’s prior forecast of Q2 net adjusted earnings and the actual outcome.

Otherwise, the other major feature of the company’s Q220 results was a large, US$71.9m loss on financial instruments. These are not typically forecast by Edison, although we had pre-figured the potential for a loss of up to US$32.2m from its gold revenue protection programme in our last note on Endeavour (see Maiden fully consolidated valuation (EDV+SFO), published on 29 June 2020). In the event, the loss from this item actually amounted to a relatively modest US$10.2m. However, this was augmented by a large US$63.9m unrealised loss on the company’s convertible senior bond derivative. This (albeit non-cash) item arose as the company’s share price has increased and, in doing so, caused an increase in the market price of its convertible bond, which has consequently begun to mirror the price of its equity, rather than behaving as a pure bond (see Risks and sensitivities – Gains or losses on financial instruments, below). While this item is little more than a notional accounting entry and is inevitably excluded from both net adjusted income and analysts’ forecasts, it nevertheless distorts the appearance of the headline numbers in Exhibit 1.

Otherwise, Endeavour also benefited from an unusually low current tax charge (not least as a consequence of a tax rebate at Karma) partially – but only partially – offset by a deferred tax charge, such that the overall marginal tax rate amounted to just 11.5% of the aggregate pre-tax profits of its four mining operations (cf an apparent rate of -91.1% of the group’s pre-tax profit – see Exhibit 1, below).

A detailed analysis of Endeavour’s Q2 performance relative to both the prior quarter’s performance and also Edison’s and consensus expectations is provided in Exhibit 1, below. In addition, Edison has also provided its best estimate of Endeavour’s pro forma Q220 income statement for the combined EDV-SFO group, based on the information provided about SEMAFO’s two producing assets, Mana and Boungou.

Exhibit 1: Endeavour Mining earnings, by quarter, Q419–Q220

(US$000s unless otherwise

Q419

Q419

Q120

Q220e

Q2e

Q2a

Q2/Q1

*Q2a/Q2e

*Q2a/Q2e

Q220e

Indicated)

(underlying)

(consensus)

Change
(%)

Variance

(%)

Variance

(units)

(pro forma)

Houndé production (koz)

55.0

55.0

55.9

50.6

57.4

2.7

13.4

6.8

50.6

Agbaou production (koz)

35.0

35.0

27.5

23.5

24.4

-11.3

3.8

0.9

23.5

Karma production (koz)

27.2

27.2

27.6

24.0

20.3

-26.4

-15.4

-3.7

24.0

Ity production (koz)

60.4

60.4

61.0

50.2

46.8

-23.3

-6.8

-3.4

50.2

Boungou production (koz)

31.1

Mana production (koz)

47.5

Total gold produced (koz)

177.6

177.6

171.9

148.3

145.8

149.0

-13.3

0.5

0.7

227.6

Total gold sold (koz)

171.9

171.9

174.6

148.3

140.2

149.8

-14.2

1.0

1.5

217.6

Gold price (US$/oz)

1,445

1,445

1,581

1,706

1,687

1,689

6.8

-1.0

-17

1,697

Mine level cash costs (US$/oz)

678

678

661

725

725

675

2.1

-6.9

-50

697

Group level AISC (US$/oz)

819

819

899

1,076

939

4.4

-12.7

-137

979

Revenue

 

– Gold revenue

248,398

248,398

269,902

246,211

248,000

253,084

-6.2

2.8

6,873

369,167

Cost of sales

 

– Operating expenses

124,707

124,707

114,403

107,512

103,308

-9.7

-3.9

-4,204

153,925

– Royalties

13,638

13,638

17,452

16,105

17,771

1.8

10.3

1,666

24,236

Gross profit

110,053

110,053

138,047

122,593

132,005

-4.4

7.7

9,412

191,006

Depreciation

(54,608)

(54,608)

(52,529)

(51,328)

(51,328)

(43,760)

-16.7

-14.7

7,568

(75,796)

Expenses

 

– Corporate costs

(3,250)

(3,250)

(5,231)

(11,957)

(5,049)

-3.5

-57.8

6,908

(9,772)

– Impairments

(127,380)

0

0

0

0

N/A

N/A

0

0

– Acquisition etc costs

(4,552)

(4,552)

(4,330)

(10,000)

(2,589)

-40.2

-74.1

7,411

(2,589)

– Share based compensation

(8,819)

(8,819)

(1,623)

(5,333)

(4,942)

204.5

-7.3

391

(6,516)

– Exploration costs

0

0

(1,333)

(2,750)

(1,796)

34.7

-34.7

954

(1,796)

Total expenses

(144,001)

(16,621)

(12,517)

(30,040)

(14,376)

14.9

-52.1

15,664

(20,673)

Earnings from operations

(88,556)

38,824

73,001

41,225

41,200

73,869

1.2

79.2

32,644

94,537

Interest income

0

 0

0

N/A

N/A

0

452

Interest expense

(11,591)

(11,591)

(11,662)

(9,056)

(11,982)

2.7

32.3

-2,926

(14,778)

Net interest

(11,591)

(11,591)

(11,662)

(9,056)

(11,982)

2.7

32.3

-2,926

(14,326)

Loss on financial instruments

2,194

2,194

(3,492)

 

(71,931)

1,959.9

N/A

-71,931

(71,931)

Other expenses

(12,219)

(12,219)

1,935

(1,791)

-192.6

N/A

-1,791

(1,791)

Profit before tax

(110,172)

17,208

59,782

32,169

32,200

(11,835)

-119.8

-136.8

-44,004

6,489

Current income tax

29,661

29,661

23,699

16,008

2,313

-90.2

-85.6

-13,695

7,142

Deferred income tax

(31,151)

(9,446)

620

0

8,468

1,265.8

N/A

8,468

8,468

Total tax

(1,490)

20,215

24,319

16,008

10,781

-55.7

-32.7

-5,227

15,610

Effective tax rate (%)

1.4

117.5

40.7

49.8

(91.1)

-323.8

-282.9

-140.9

240.6

Profit after tax

(108,682)

(3,007)

35,463

16,161

(22,616)

-163.8

-239.9

-38,777

(9,121)

Net profit from discontinued ops.

(4,394)

(4,394)

0

0

0

N/A

N/A

0

0

Total net and comprehensive income

(113,076)

(7,401)

35,463

16,161

(22,616)

-163.8

-239.9

-38,777

(9,121)

Minority interest

4,487

4,487

9,465

7,307

14,613

54.4

100.0

7,306

17,639

Minority interest (%)

(4.0)

(60.6)

26.7

45.2

(64.6)

-341.9

-242.9

-109.8

(193.4)

Profit attributable to shareholders

(117,563)

(11,888)

25,998

8,855

27,830

(37,229)

-243.2

-520.4

-46,084

(26,760)

 

Basic EPS from continuing ops (US$)

(1.030)

(0.068)

0.235

0.080

-0.335

-242.6

-518.8

-0.415

(0.169)

Diluted EPS from continuing ops (US$)

(0.999)

(0.066)

0.235

0.076

0.108

-0.335

-242.6

-540.8

-0.411

(0.162)

Basic EPS (US$)

(1.069)

(0.108)

0.235

0.080

-0.335

-242.6

-518.8

-0.415

(0.169)

Diluted EPS (US$)

(1.038)

(0.105)

0.235

0.076

0.108

-0.335

-242.6

-540.8

-0.411

(0.162)

Normalised basic EPS from continuing operations (US$)

0.151

(0.047)

0.306

0.170

0.336

9.8

97.6

0.166

0.301

Normalised diluted EPS from continuing operations (US$)

0.146

(0.045)

0.306

0.162

0.336

9.8

107.4

0.174

0.290

Adjusted net earnings attributable (US$000s)

36,890

36,890

33,517

17,256

16,550

52,793

57.5

205.9

35,537

64,483

Adj net EPS from continuing ops (US$)

0.336

0.336

0.303

0.155

0.115

0.476

57.1

207.1

0.321

0.407

Source: Endeavour Mining, Edison Investment Research, Refinitiv (consensus estimates), Bloomberg. Note: Company reported basis; *Compares Q220 actual figure with Q220 Edison estimate.

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).

In general, all four of Endeavour’s mines recorded lower stripping ratios in Q2 than Edison had forecast. In addition, there was evidence of a close control in costs in the fact that capital expenditure (either sustaining or non-sustaining, or both) was also lower at all four mines. A full explanation and description of the factors and forces affecting operations in Q220 cf Q120 is provided in Endeavour’s press release accompanying its results and also its management discussion and analysis (MD&A). However, a brief summary of each of its mines’ performances during the quarter is as follows:

Exhibit 2: Endeavour Mining operations’ performance in Q220

Mine

Mining and processing

Costs

Grade

Recovery

Ity

Operated at close to normal levels, despite COVID-19, but focused on accelerated waste extraction and a tailings storage facility (TSF) raise in order to provide increased future operational flexibility. Pre-stripping commenced on the Colline Sud pit.

Unit mining costs increased with higher drill and blast and equipment maintenance costs associated with mining a higher proportion of fresh ore. Processing unit costs broadly flat despite increased downtime and lower mill throughput.

Processed grade declined 2.5% as mill feed was supplemented by lower-grade oxide stockpiles as mining focused on waste extraction.

Recovery rates declined 7pp, as a result of processing greater quantities of transitional and fresh ore from Daapleu.

Houndé

Operated at near-normal levels, despite COVID-19. Stripping ratio decreased as scheduled waste capitalisation deferred to later in the year and mining focused on the lower strip Vindaloo Central and Bouéré pits.

Mining costs declined as a result of lower drill and blast activity required for mining oxidised ore at Vindaloo Central. Processing costs increased on account of higher reagent costs. Non-sustaining capital up reflecting compensation and resettlement for the Kari Pump area as well as a TSF raise.

Processed grades increased as waste capitalisation in Q120 resulted in access to higher-grade ore. Also, less material from low-grade stockpiles used to supplement mill feed.

Recovery rates improved 1pp in Q220 (cf Q120 when recoveries declined as proportion of material from Bouéré increased).

Agbaou

Operated at near-normal levels despite COVID-19. Tonnes mined decreased owing to focus on the deeper elevations of the North and South pits plus higher rainfall and lower equipment productivity as mining concentrated on the fresh material horizons, which also depressed tonnes milled. Lower overall stripping ratio.

Mining costs increased as a result of the increase in the proportion of fresh material mined from deeper elevations in the North and South pits. Processing costs increased on account of a greater proportion of fresh ore in the blend. Sustaining capex declined owing to lower capitalised waste. AISC flat overall.

Processed grades declined as a result of higher tonnage from the lower-grade South pit and the use of low-grade stockpiles to supplement the plant feed.

Recovery flat after Q120 decline when the percentage of fresh ore increased.

Karma

Operated at near-normal levels despite COVID-19. Total tonnes mined remained relatively flat cf Q120, albeit a higher proportion of ore was sourced from the lower-grade GG1 pit. In the meantime, a waste stripping campaign commenced at the Kao North pit. Ore tonnes stacked increased owing to the benefit of the recently completed conveyor and stacking system upgrades. Mining operations successfully transferred to a local contractor on 8 June.

After increasing in Q120 on account of higher load and haul costs from the GG1 pit and the mining of lower elevations in the Kao North pit, mining costs remained flat in Q2.

Processing costs increased owing to the higher use of cyanide and cement associated with the lower-grade GG1 material stacked.

Sustaining capital costs increased owing to increased capitalised waste at Kao North. Non-sustaining capital costs increased owing to security and process plant upgrades.

Stacked grade decreased as lower-grade ore sourced from GG1 pit (cf Q120 when grade increased as high-grade ore was mined from the Kao North pit).

Recovery declined owing to stacking of transitional material and an increase in gold locked in the heap, which is expected to be recovered in future quarters.

Source: Endeavour Mining, Edison Investment Research

FY20 guidance vs forecasts

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

A summary of our outlook for each of Endeavour’s operations for the remainder of the year is provided in Exhibit 3, below:

Exhibit 3: Endeavour Mining’s operations’ outlook, Q3–Q420

Mine

Outlook

Ity

Plant feed will continue to be sourced from the Daapleu and Bakatouo pits supplemented by material from the old heap leach dumps. In general, more fresh ore will be mined as the pits deepen. Mined and processed ore grades are anticipated to be approximately flat for the remainder of the year. Having declined in Q2, metallurgical recoveries are expected to recover in Q3 and Q4. Carbon-in-leach (CIL) plant should naturally be less affected by the Q3 rainy season than the historical heap leach operation.

Houndé

The focus of mining operations at Houndé in FY20 will be waste mining and removal. After low-grade stockpiles continued to contribute to processed ore into Q220, in H220 both mined tonnages and grades are expected to improve, although waste extraction will remain high in order to access high-grade material. Endeavour has recently received a mining permit for Kari Pump, which we expect will contribute to mill feed in Q4. Sustaining capex in H2 is anticipated by slightly less cf H1 as sums deferred from the earlier period relating to waste removal are expended, but is expected to remain approximately unchanged for the full year (relative to our prior expectations). The mill is expected to continue to perform at or above nameplate capacity.

Agbaou

Mining at Agbaou in 2020 will continue from the North and South pits but will cease at the West pit in H2. Throughput and recovery will decline in H2 as a greater proportion of hard, fresh ore is mined and processed. However, grades are now expected to improve in H220 relative to our earlier forecasts.

Karma

Mining at Karma in 2020 will continue from the Kao North and GG1 pits. Having declined in Q2, as the grade in the Kao North pit declined, processed grades are expected to increase back up to Q419 and Q120 levels once again by Q420. In the meantime, Karma will continue to benefit from the installation of its new stacker system.

Mana

Siou open pit mining activities are expected to be completed in H2, after which activity will focus solely on Wona. In the meantime, underground mining activity is anticipated to increase. Sustaining and non-sustaining capital expenditure for FY20 is presumed to remain unchanged compared to SEMAFO’s published guidance, amounting to US$70.0m and US$2.0m, respectively.

Boungou

Boungou is expected to recommence mining activities in Q420, once a new mining contract has been awarded, the airstrip has been built and the necessary security protocols have been implemented within Endeavour’s operating model. In the meantime, processed grades and recovery rates are anticipated be on a declining trend as higher quality ore stockpiles are processed as a priority. Sustaining and non-sustaining capital expenditure expectations remain unchanged cf SEMAFO’s published guidance at US$10m and US$3m, respectively.

Mine

Ity

Houndé

Agbaou

Karma

Mana

Boungou

Outlook

Plant feed will continue to be sourced from the Daapleu and Bakatouo pits supplemented by material from the old heap leach dumps. In general, more fresh ore will be mined as the pits deepen. Mined and processed ore grades are anticipated to be approximately flat for the remainder of the year. Having declined in Q2, metallurgical recoveries are expected to recover in Q3 and Q4. Carbon-in-leach (CIL) plant should naturally be less affected by the Q3 rainy season than the historical heap leach operation.

The focus of mining operations at Houndé in FY20 will be waste mining and removal. After low-grade stockpiles continued to contribute to processed ore into Q220, in H220 both mined tonnages and grades are expected to improve, although waste extraction will remain high in order to access high-grade material. Endeavour has recently received a mining permit for Kari Pump, which we expect will contribute to mill feed in Q4. Sustaining capex in H2 is anticipated by slightly less cf H1 as sums deferred from the earlier period relating to waste removal are expended, but is expected to remain approximately unchanged for the full year (relative to our prior expectations). The mill is expected to continue to perform at or above nameplate capacity.

Mining at Agbaou in 2020 will continue from the North and South pits but will cease at the West pit in H2. Throughput and recovery will decline in H2 as a greater proportion of hard, fresh ore is mined and processed. However, grades are now expected to improve in H220 relative to our earlier forecasts.

Mining at Karma in 2020 will continue from the Kao North and GG1 pits. Having declined in Q2, as the grade in the Kao North pit declined, processed grades are expected to increase back up to Q419 and Q120 levels once again by Q420. In the meantime, Karma will continue to benefit from the installation of its new stacker system.

Siou open pit mining activities are expected to be completed in H2, after which activity will focus solely on Wona. In the meantime, underground mining activity is anticipated to increase. Sustaining and non-sustaining capital expenditure for FY20 is presumed to remain unchanged compared to SEMAFO’s published guidance, amounting to US$70.0m and US$2.0m, respectively.

Boungou is expected to recommence mining activities in Q420, once a new mining contract has been awarded, the airstrip has been built and the necessary security protocols have been implemented within Endeavour’s operating model. In the meantime, processed grades and recovery rates are anticipated be on a declining trend as higher quality ore stockpiles are processed as a priority. Sustaining and non-sustaining capital expenditure expectations remain unchanged cf SEMAFO’s published guidance at US$10m and US$3m, respectively.

Source: Endeavour Mining, Edison Investment Research

In the wake of Q220 results, Endeavour’s production and cost guidance for FY20 remains unchanged and compares with Edison’s updated forecasts as follows:

Exhibit 4: Endeavour production cost and AISC guidance, by mine, FY20 vs Edison forecast

Production (koz)

AISC (US$/oz)

Mine

FY20e guidance
(koz)

Current Edison FY20e forecast (koz)

Previous Edison FY20e forecast (koz)

FY20e guidance (US$/oz)

Current Edison FY20e forecast (US$/oz)

Previous Edison FY20e forecast (US$/oz)

Houndé

230–250

250.8

244.0

865–895

877

936

Agbaou

115–125

114.0

113.1

940–990

979

1,021

Karma

100–110

100.2

103.9

980–1,050

975

1,027

Ity CIL

235–255

235.8

231.3

630–675

673

808

EDV assets’ total

680–740

700.9

692.3

*845–895

*874

*965

Mana

185–205

202.0

1,050–1,120

1,098

Boungou

130–150

132.0

680–725

689

SFO assets’ total

315–355

334.0

895–960

938

New EDV total

995–1,095

1,034.9

865–915

870

Source: Endeavour Mining, Edison Investment Research. Note: *Includes corporate general and administrative costs.


EDV FY20 estimates (pre-acquisition and pro forma)

While Endeavour was not entirely unaffected by the coronavirus pandemic in Q220, it is clear that the effects on its operations were limited to little more than maintenance schedules as a result of travel restrictions on technical and engineering consultants. Significantly, there was little or no effect on costs, which were particularly well restrained at both Houndé and Ity (Endeavour’s two most consequential mines). In the meantime, Endeavour has insured itself as far as possible against the unexpected in H2 by both setting itself up to operate under Level 2 COVID-19 restrictions (see COVID-19, below) and also preparing multiple different levels in its pits, from which to produce as well as de-watering and resupplying ahead of the traditional Q3 rains.

As a result, Edison has left its forecasts and assumptions relatively unchanged for H220, with the exception of:

Selected costs, which have been revised downwards in the light of Endeavour’s robust cost control in Q220.

The gold price, which has risen from c US$1,760/oz at the time of our last note (see Maiden fully consolidated valuation (EDV+SFO), published on 29 June 2020) to over US$1,900/oz at the time of writing.

Royalty rates to reflect the new gold price.

Estimates of sustaining and non-sustaining capital expenditure, which have been revised in line with Endeavour’s updated guidance in the wake of its Q2 results (see both Endeavour’s news release and its management discussion and analysis).

We have shifted some of the advisory fees relating to the SEMAFO acquisition that we had expected in Q220 into Q320.

In the light of these changes, our updated forecasts for Endeavour (on both a pre-acquisition and a pro forma basis) for the remainder of the year are as follows in Exhibit 5, overleaf. Readers wishing to compare the updated forecasts with our prior forecasts may do so by comparing the numbers in Exhibit 5 with those in Exhibit 1 of our last note.

Exhibit 5: Endeavour Mining FY20 earnings forecasts, by quarter

US$000s (unless otherwise indicated)

Pre-acquisition basis

Pro forma (EDV+SFO) basis

Reported FY20e

Q120

Q220

Q320e

Q420e

Est Q120

Est Q220

Q320e

Q420e

FY20e

Houndé production (koz)

55.9

57.4

56.2

81.3

55.9

57.4

56.2

81.3

250.8

250.8

Agbaou production (koz)

27.5

24.4

26.6

35.5

27.5

24.4

26.6

35.5

114.0

114.0

Karma production (koz)

27.6

20.3

20.2

32.2

27.6

20.3

20.2

32.2

100.2

100.2

Ity production (koz)

61.0

46.8

53.7

74.3

61.0

46.8

53.7

74.3

235.8

235.8

Boungou production (koz)

32.0

31.1

19.3

52.1

132.0

71.4

Mana production (koz)

49.9

47.5

52.1

52.5

202.0

104.6

Total gold produced (koz)

171.9

149.0

156.7

223.3

253.8

227.5

228.1

328.0

1,034.9

876.9

Total gold sold (koz)

174.6

149.8

156.7

223.3

251.4

217.5

228.1

328.0

1,025.0

880.4

Gold price (US$/oz)

*1,581

*1,689

1,912

1,930

*1,644

*1,697

*1,879

*1,906

*1,772

*1,791

Mine level cash costs (US$/oz)

661

675

608

518

661

697

621

496

601

591

Mine level AISC (US$/oz)

870

939

853

759

867

979

911

789

870

857

Revenue

– Gold revenue

269,902

253,084

291,977

423,250

393,113

369,167

428,482

625,239

1,816,000

1,576,707

Cost of sales

– Operating expenses

114,403

103,308

95,196

115,692

160,064

153,925

141,643

162,507

618,139

521,861

– Royalties

17,452

17,771

20,156

29,604

23,956

24,236

27,860

41,859

117,911

104,942

Gross profit

138,047

132,005

176,626

277,954

209,093

191,006

258,979

420,873

1,079,950

949,904

Depreciation

(52,529)

(43,760)

(38,222)

(47,503)

(84,061)

(75,796)

(70,257)

(79,539)

(309,653)

(246,085)

Expenses

– Corporate costs

(5,231)

(5,049)

(6,277)

(8,369)

(9,954)

(9,772)

(11,000)

(14,667)

(45,393)

(35,947)

– Impairments

0

0

0

0

0

0

0

0

0

0

– Acquisition etc costs

(4,330)

(2,589)

(7,411)

0

(4,330)

(2,589)

(7,411)

0

(14,330)

(14,330)

– Share based compensation

(1,623)

(4,942)

(5,333)

(5,333)

(3,197)

(6,516)

(6,907)

(6,907)

(23,527)

(20,379)

– Exploration costs

(1,333)

(1,796)

(2,750)

(2,750)

(1,333)

(1,796)

(2,750)

(2,750)

(8,629)

(8,629)

Total expenses

(12,517)

(14,376)

(21,771)

(16,452)

(18,814)

(20,673)

(28,068)

(24,324)

(91,879)

(79,285)

Earnings from operations

73.001

73,869

116,633

213,999

106,218

94,537

160,654

317,010

678,419

624,534

Interest income

0

452

452

452

452

1,808

904

Interest expense

(11,662)

(11,982)

(10,398)

(7,463)

(14,458)

(14,778)

(13,194)

(10,259)

(52,689)

(47,097)

Net interest

(11,662)

(11,982)

(10,398)

(7,463)

(14,006)

(14,326)

(12,742)

(9,807)

(50,881)

(46,193)

Loss on financial instruments

(3,492)

(71,931)

 

 

(3,492)

(71,931)

0

0

(75,423)

(75,423)

Other expenses

1,935

(1,791)

0

0

(231)

(1,791)

0

0

(2,022)

144

Profit before tax

59,782

(11,835)

106,235

206,536

88,489

6,489

147,911

307,203

550,093

503,062

Current income tax

23,699

2,313

30,381

48,873

27,040

7,142

39,297

68,388

141,866

133,696

Deferred income tax

620

8,468

0

0

9,323

8,468

0

0

17,791

9,088

Total tax

24,319

10,781

30,381

48,873

36,363

15,610

39,297

68,388

159,657

142,784

Effective tax rate (%)

40.7

(91.1)

28.6

23.7

41.1

240.6

26.6

22.3

29.0

28.4

Profit after tax

35,463

(22,616)

75,854

157,662

52,126

(9,121)

108,615

238,816

390,436

360,277

Net profit from discontinued ops.

0

0

0

0

0

0

0

0

0

0

Total net and comprehensive income

35,463

(22,616)

75,854

157,662

52,126

(9,121)

108,615

238,816

390,436

360,277

Minority interest

9,465

14,613

13,892

22,442

12,062

17,639

21,461

35,640

86,802

81,179

Minority interest (%)

26.7

(64.6)

18.3

14.2

23.1

(193.4)

19.8

14.9

22.2

22.5

Profit attributable to shareholders

25,998

(37,229)

61,962

135,221

40,064

(26,760)

87,153

203,176

303,633

279,098

Basic EPS from continuing ops (US$)

0.235

(0.335)

0.558

1.218

0.253

(0.169)

0.537

1.251

1.892

2.043

Diluted EPS from continuing ops (US$)

0.235

(0.335)

0.538

1.175

0.243

(0.162)

0.517

1.204

1.821

1.997

Basic EPS (US$)

0.235

(0.335)

0.558

1.218

0.253

(0.169)

0.537

1.251

1.892

2.043

Diluted EPS (US$)

0.235

(0.335)

0.538

1.175

0.243

(0.162)

0.517

1.204

1.821

1.997

Norm. basic EPS from continuing ops (US$)

0.306

0.336

0.625

1.218

0.302

0.301

0.582

1.251

2.451

2.700

Norm. diluted EPS from continuing ops (US$)

0.306

0.336

0.603

1.175

0.291

0.290

0.561

1.204

2.359

2.640

Adj net earnings attributable (US$000s)

33,517

52,793

72,372

139,795

54,310

64,483

98,774

209,068

426,635

394,151

Adj net EPS from continuing ops (US$)

0.303

0.476

0.652

1.259

0.343

0.407

0.608

1.287

2.658

2.885

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

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

Notwithstanding the detailed appearance of our forecasts, readers are nevertheless cautioned that forecasting on a quarterly basis is prone to large variations between actual and forecast numbers (eg as demonstrated by difference between Q220a and Q220e in Exhibit 1). To this end, it is worth noting that the top end of Endeavour’s (pro forma) production guidance is 60.1koz gold (5.8%) above our forecast for the year, which is worth c US$99.6m in additional revenue to the company (net of royalties) and therefore has the ability to increase our (pro forma) estimate of Endeavour’s FY20 profit before tax by c 5.9% (all other things being equal). As such, the exhibit above should be regarded as indicative, rather than prescriptive, particularly with respect to individual quarters. Within that context, a comparison between Edison’s FY20 adjusted net EPS from continuing operations estimates and consensus estimates, by quarter, is as follows:

Exhibit 6: Edison adjusted net EPS from continuing operations estimates vs consensus, FY20, by quarter (US$)

(US$/share)

Pre-SFO acquisition

Post-SFO acquisition

Q1a

Q2a

Q3e

Q4e

FY20e

Edison forecast*

0.343

0.476

0.608

1.287

2.658

Mean consensus forecast

0.343

0.476

0.580

1.010

2.180

High consensus forecast

0.343

0.476

0.940

1.460

3.220

Low consensus forecast

0.343

0.476

0.290

0.720

1.270

Source: Refinitiv, Edison Investment Research. Note: *As per Exhibit 5 on a pro forma basis. Consensus priced 20 August 2020.

Longer-term refinements

In addition to our short-term performance adjustments, we have also refined our longer-term financial model of Endeavour to reflect, in particular:

Longer-term adjustments to the Houndé mine to reflect updated scheduling regarding the incorporation of ore from Kari Pump into the mine plan – among other things, increasing the life of the operation by three years.

Refinements to the Ity mine plan to reflect both recent exploration success and the expansion of the plant from a throughput rate of 4Mtpa to one of 5Mtpa, forecasts in relation to which have hitherto been based solely on an assumed acceleration by Edison of the 4Mtpa scenario (see our note Forecasts up; valuation up, published on 11 November 2019).

A brief summary of the effects of these refinements over the life of each mine’s operations is as follows:

Exhibit 7: Effect of refinements to long-term Ity and Houndé life of mine plans

Houndé

Ity

Gold produced (koz)

+451.9

+225.9

Revenue (US$m)

+684.6

+322.2

Cash costs (US$m)

+332.7

+80.0

Waste stripping (US$m)

+148.9

+116.1

Source: Edison Investment Research, Endeavour Mining.

Absolute Endeavour valuation (pro forma)

Endeavour is a multi-asset company that has shown a willingness and desire to trade assets to maintain production, reduce costs and maximise returns to shareholders (eg the sale of Youga in FY16, Nzema in FY17 and Tabakoto in FY18 and the acquisition of SEMAFO in FY20). Rather than our customary method of discounting maximum potential dividends over the life of operations back to FY20, therefore, we have opted to discount potential cash flows back over three years from FY20 and then to apply an ex-growth terminal multiple of 10x (consistent with using a standardised discount rate of 10%) to forecast cash flows in that year (ie FY22). In the normal course of events, exploration expenditure would be excluded from such a calculation on the basis that it is an investment. In the case of Endeavour, however, we have included it in our estimate of FY22 cash flows on the grounds that it may be a critical component of ongoing business performance in its ability to continually expand and extend the lives of the company’s assets. Note that, in the aftermath of the acquisition, the combined entity’s immediate strategic imperatives will be the continuation of exploration at Ity and Houndé plus investigating the potential to extend the mine lives of Mana and Boungou.

In the aftermath of Q220 results, and given the longer-term refinements summarised above, our estimate of Endeavour’s cash flow in FY22 is US$5.17 per share (cf US$5.39 per share previously – the decline being almost exclusively attributable to our assumption of higher long-term royalty rates). On this basis, our terminal valuation of the company at end-FY22 is US$51.74/share (cf US$53.89/share previously), which (in conjunction with forecast intervening cash flows) discounts back to a value of US$43.34/share at the start of FY20 (cf US$44.90/share previously).

Exhibit 8: Endeavour forecast valuation and cash flow per share, FY20–22e (US$/share)

Source: Edison Investment Research

Relative Endeavour valuation

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

Exhibit 9: Endeavour valuation relative to peers

Company

Ticker

Price/cash flow (x)

EV/EBITDA (x)

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Endeavour (Edison)*

EDV

5.4

5.2

5.0

4.9

**4.3

**3.7

Endeavour (consensus)

EDV

5.8

4.6

4.9

6.4

4.3

5.0

Majors

 

Barrick

ABX

11.2

9.8

10.1

10.2

8.9

9.8

Newmont

NEM

12.8

9.6

10.4

10.2

7.6

8.4

Newcrest

NCM AU

10.6

11.8

13.6

9.0

10.2

11.2

Kinross

K

6.7

5.8

5.7

6.1

5.2

5.3

Agnico-Eagle

AEM

17.3

11.6

12.0

14.5

9.9

10.4

Eldorado

ELD

4.7

5.1

5.0

4.2

4.6

4.8

Average

 

10.5

8.9

9.5

9.0

7.7

8.3

Source: Edison Investment Research, Refinitiv. Note: *Pro forma basis. **Forecast EV. Consensus and peers priced at 20 August 2020.

Of note is the fact that Endeavour’s valuation is materially cheaper than the averages of the majors on all six measures shown in Exhibit 9, regardless of whether Edison or consensus forecasts are used. On an individual basis, it is cheaper than the majors on 32 out of 36 (88.9%) valuation measures, again, regardless of whether Edison or consensus forecasts are used.

Financials

Endeavour had US$472.6m net debt on its balance sheet at end-Q220 (cf US$476.6m at end-Q120), giving it a gearing (net debt/equity) ratio of 66.4% and a leverage (net debt/[net debt+equity]) ratio of 39.9%. Note that this net debt figure of US$472.6m excludes the US$92.7m value of the conversion option inherent in its convertible bond. The notes are convertible at a rate of 41.84 common shares per US$1,000 nominal (or an equivalent conversion price of US$23.90 per share – ie below Endeavour’s current share price) and mature on 15 February 2023. Among other things, the rise in the value of the conversion option (ostensibly as a result of Endeavour’s share price increasing) gave rise to an albeit unrealised loss of US$63.9m for the three-month period to end-June 2020 (see Risks and sensitivities – Gains or losses on financial instruments, below).

On a pro forma basis however (and including the 3 July US$100m cash investment from its major shareholder, La Mancha), the enlarged group’s net debt was US$309m (cf US$515.3m at end-Q419). Relative to our estimate of the enlarged Endeavour’s pro forma balance sheet as at 31 December 2019, this level of net debt equated to a gearing (net debt/equity) ratio of 20.4% and a leverage (net debt/[net debt + equity]) ratio of 16.9%. Perhaps more significantly, an underlying reduction in net debt of US$116m in six months would suggest the elimination of net debt at Endeavour in 16 months’ time (on a pro rata basis). Given the much stronger performance that we expect from the enlarged Endeavour’s six mines in H220 however, coupled with a stronger gold price environment and an absence of capex commitments, we believe that the company could in fact be net debt free as early as the beginning of the next financial year, at which point it would be in a position to make a dividend distribution to shareholders.

Post balance sheet events – Fetekro

On 18 August, Endeavour announced both an upgraded mineral resource estimate (of 2.5Moz) at, and an initial preliminary economic assessment (PEA) on, its Lafigué deposit at Fetekro in central Côte d’Ivoire (albeit the PEA was based on the previous resource estimate of 1.2Moz).

Updated Lafigué mineral resource estimate

The Lafigué deposit is hosted by a deformed Birimian volcanic complex and intruded into by granodioritic bodies and quartz-porphyry dykes. The mineralisation is mainly controlled by an ENE-trending brittle-ductile thrust fault, with shear bands located at the edges of the granodioritic intrusive or at a basalt/gabbro interface. Mineralisation at Lafigué has been recognised over 2km along an ENE axis and, to date, the down dip extension has been demonstrated over 1km. A summary of the updated resource, relative to its size as at 31 August 2019 (see Endeavour’s announcement: Endeavour increases indicated resources at Fetekro by 141% to 1.2Moz, dated 3 September 2019) is as follows:

Exhibit 10: Lafigué updated mineral resource estimate (31 July 2020)

Updated

Previous

Change (units)

Change (%)

Category

Mt

g/t

koz

Mt

g/t

koz

Mt

g/t

koz

%

%

%

Measured

0.0

0.00

0

0.0

0.00

0

0.0

N/A

0

N/A

N/A

N/A

Indicated

32.0

2.40

2,471

14.6

2.54

1,190

17.4

2.29

1,281

119.2

(5.5)

107.6

Inferred

0.8

2.52

66

0.9

2.17

60

(0.1)

(1.87)

6

(11.1)

16.1

10.1

Total

32.8

2.41

2,537

15.5

2.51

1,250

17.3

2.31

1,287

111.6

(4.1)

102.9

Source: Endeavour Mining, Edison Investment Research. Note: Resources were constrained by pit shell and based on a cut-off of 0.5/gt Au.

Resources were constrained by a pit shell at a gold price of US$1,500/oz, but are relatively invariant to changes in this gold price (eg ±<4% for a ±13.3%, or US$200/oz, change in the gold price for resources in the indicated category) consistent with their being contained within relatively discreet geological units. Otherwise, the deposit is characterised by relatively straightforward metallurgy (see below) and high gold recoveries as well as being located close to existing infrastructure.

Mineralisation remains open at depth as well as along strike and Endeavour expects to initiate a 10,000m drilling campaign in Q4 to test Target 2, to the east, and Targets 1 & 4, to the south, of Lafigué. In addition, the strong gold in-soil anomalies (>500ppb) located in the central area and Target 12 will be investigated via reverse circulation reconnaissance drilling. The western targets identified in the 2018–19 campaign will also be further explored in a dedicated exploration programme in FY21.

Preliminary economic assessment (PEA)

An initial PEA based on the previously announced 1.2Moz resource (see Exhibit 10) has now been completed by Endeavour in conjunction with consultants Lycopodium (cost estimates and project implementation), Snowden (mining) and Knight Piésold (infrastructure, water management and tailings).

Metallurgical test-work demonstrated that the gold is free milling with very high gravity/leach extractions, while a mineralogical investigation indicated that much of the gold occurs as free grains. The test-work also showed that there were few deleterious elements for gold leaching with low levels of base metals and arsenic. Leaching was reported to be rapid, for all grind sizes following gravity gold recovery, with the bulk of the gold dissolution occurring within four to eight hours. Put together, these results suggested a conventional gravity/carbon-in-leach processing route, which was duly adopted for the purposes of the PEA. A summary of the results of the initial PEA is provided in the table below:

Exhibit 11: Fetekro project preliminary economic assessment results

Measure

Value

Operation type

Mine type

Open pit

Mill type

1.5Mtpa gravity/CIL plant

Life of mine production

Mine life (years)

8

Stripping ratio (waste/ore)

7.35

Tonnes processed (Mt)

13.14

Grade processed (g/t)

2.38

Gold contained, processed (Moz)

1.00

Average metallurgical recovery (%)

95

Gold production (Moz)

0.95

Average annual production (koz pa)

119

Operating costs

Cash costs (US$/oz)

592

AISC (US$/oz)

697

Capital cost

Initial capital expenditure (US$m)

268

Capital intensity (US$/total ounce produced)

282

Capital intensity (US$/average annual oz of production)

2,252

Economics*

Pre-tax internal rate of return (%)

37

Post-tax net present value at 5% discount rate (US$m)

272

Payback period (years)

1.80

Measure

Operation type

Mine type

Mill type

Life of mine production

Mine life (years)

Stripping ratio (waste/ore)

Tonnes processed (Mt)

Grade processed (g/t)

Gold contained, processed (Moz)

Average metallurgical recovery (%)

Gold production (Moz)

Average annual production (koz pa)

Operating costs

Cash costs (US$/oz)

AISC (US$/oz)

Capital cost

Initial capital expenditure (US$m)

Capital intensity (US$/total ounce produced)

Capital intensity (US$/average annual oz of production)

Economics*

Pre-tax internal rate of return (%)

Post-tax net present value at 5% discount rate (US$m)

Payback period (years)

Value

Open pit

1.5Mtpa gravity/CIL plant

8

7.35

13.14

2.38

1.00

95

0.95

119

592

697

268

282

2,252

37

272

1.80

Source: Endeavour Mining, Edison Investment Research. Note: *Based on a US$1,500/oz gold price.

Operating costs were estimated to be US$2.82/t for open pit mining and re-handling, US$16.37/t for processing and US$4.88/t (processed) for general & administrative costs. Capital costs include a 15km all-weather unsealed road plus 9km of on-site roads, an overhead power line and grid connection, a full back-up power station on-site, costs for water harvesting and storage, accommodation for 220 employees and security personnel, tailings and fuel storage. In addition, no major village relocation is required.

At present, Fetekro’s post-tax NPV5 of US$272m equates to a value of US$1.68 per share (post-acquisition basis). An updated PEA, based on the updated 2.5Moz resource (see Exhibit 10) is currently underway and expected to be published in Q4. In due course, Endeavour believes that Fetekro has the potential to be its highest grade operation, with >2.0Moz at grades above 3.50g/t (based on a cut-off of 1.5g/t).


Exhibit 12: Financial summary

US$'000s

2018

2019

2020e

2021e

2022e

December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,048,636

1,362,121

1,816,000

2,033,958

1,931,101

Cost of Sales

(669,719)

(884,869)

(827,929)

(1,021,299)

(890,918)

Gross Profit

378,917

477,252

988,072

1,012,658

1,040,184

EBITDA

 

 

378,917

618,443

1,002,402

1,026,988

1,040,184

Operating Profit (before amort. and except.)

106,090

281,400

692,749

670,241

783,075

Intangible Amortisation

0

0

0

0

0

Exceptionals

8,035

(199,159)

(89,753)

(14,330)

0

Other

(3,171)

(9,392)

(2,022)

0

0

Operating Profit

110,954

72,849

600,974

655,911

783,075

Net Interest

(27,110)

(51,607)

(50,881)

(1,989)

5,138

Profit Before Tax (norm)

 

 

75,809

220,401

639,846

668,253

788,213

Profit Before Tax (FRS 3)

 

 

83,844

21,242

550,093

653,923

788,213

Tax

(73,637)

(97,253)

(159,657)

(156,818)

(151,237)

Profit After Tax (norm)

2,172

123,148

480,189

511,434

636,976

Profit After Tax (FRS 3)

10,207

(76,011)

390,436

497,104

636,976

Net loss from discontinued operations

(154,795)

(4,394)

0

0

0

Minority interests

8,460

33,126

86,802

88,521

104,788

Net profit

(144,588)

(80,405)

390,436

497,104

636,976

Net attrib. to shareholders contg. businesses (norm)

(16,292)

90,022

393,386

422,914

532,188

Net attrib.to shareholders contg. businesses

(8,257)

(109,137)

303,633

408,584

532,188

Average Number of Shares Outstanding (m)

155.3

157.4

160.4

162.2

162.2

EPS - normalised ($)

 

 

(0.10)

0.57

2.45

2.61

3.28

EPS - normalised and fully diluted ($)

 

(0.10)

0.57

2.36

2.51

3.16

EPS - (IFRS) ($)

 

 

(0.99)

(0.72)

1.89

2.52

3.28

Dividend per share (p)

0.0

0.0

0.0

58.1

154.6

Gross Margin (%)

36.1

35.0

54.4

49.8

53.9

EBITDA Margin (%)

36.1

45.4

55.2

50.5

53.9

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

10.1

20.7

38.1

33.0

40.6

BALANCE SHEET

Fixed Assets

 

 

1,594,202

2,330,033

2,372,920

2,207,633

1,997,454

Intangible Assets

4,186

5,498

5,498

5,498

5,498

Tangible Assets

1,543,842

2,254,476

2,297,363

2,132,076

1,921,897

Investments

46,174

70,059

70,059

70,059

70,059

Current Assets

 

 

327,841

652,871

1,181,778

1,834,497

2,345,543

Stocks

126,353

266,451

349,231

391,146

371,366

Debtors

74,757

83,836

110,017

187,138

178,684

Cash

124,022

288,186

783,555

1,317,239

1,856,518

Other

2,709

14,398

(61,025)

(61,025)

(61,025)

Current Liabilities

 

 

(248,420)

(354,931)

(412,762)

(494,244)

(458,257)

Creditors

(224,386)

(312,427)

(370,258)

(451,740)

(415,753)

Short term borrowings

(24,034)

(42,504)

(42,504)

(42,504)

(42,504)

Long Term Liabilities

 

 

(729,290)

(963,736)

(963,736)

(963,736)

(963,736)

Long term borrowings

(618,595)

(770,902)

(770,902)

(770,902)

(770,902)

Other long term liabilities

(110,695)

(192,834)

(192,834)

(192,834)

(192,834)

Net Assets

 

 

944,333

1,664,237

2,178,200

2,584,150

2,921,004

CASH FLOW

Operating Cash Flow

 

 

394,984

628,617

940,656

998,631

1,032,431

Net Interest

(26,734)

(35,413)

(50,881)

(1,989)

5,138

Tax

(36,140)

(109,494)

(141,866)

(156,818)

(151,237)

Capex

(689,469)

(401,227)

(352,540)

(191,460)

(46,930)

Acquisitions/disposals

33,179

3,654

0

0

0

Financing

(7,820)

2,402

100,000

0

0

Dividends

(1,956)

(6,154)

0

(114,681)

(300,122)

Net Cash Flow

(333,956)

82,385

495,369

533,683

539,280

Opening net debt/(cash)

 

 

218,140

518,607

525,220

29,851

(503,833)

HP finance leases initiated

0

0

0

0

0

Other

33,489

(88,998)

0

0

0

Closing net debt/(cash)

 

 

518,607

525,220

29,851

(503,833)

(1,043,112)

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

Appendix

Risks and sensitivities

Gains or losses on financial instruments

Gains/losses on financial instruments are usually of a non-cash nature and invariably excluded from analysts’ forecasts. In the recent past, they have arisen from two sources at Endeavour: 1) its gold revenue protection programme (which has now been discontinued); and 2) unrealised gains/losses on its convertible senior bond derivative, which is a notional accounting entry, ironically, reflecting rises in Endeavour’s share price (see Exhibit 14). As such, they are both of an ‘exceptional’ nature and ignored by most (if not all) investors. A discussion of each of these items is conducted here for no other reason than to make readers aware of the potential for gains/losses in the future – despite the fact that they will almost certainly be of a non-cash nature relating to the derivative notionally assumed to be embedded in the convertible – and the magnitude of these, albeit paper, losses.

During the year ended 31 December 2019, Endeavour put in place a gold revenue protection programme in order to maximise cash flow certainty during its debt reimbursement phase. Similar to the strategy it put in place during its recent construction phases, this comprises a deferred premium collar strategy using written (sold) call options and bought put options to (effectively) create a synthetic short position. The programme began on 1 July 2019 and ended on 30 June 2020 and covered a total of 360,000oz, with a floor price of US$1,358/oz and a ceiling price of US$1,500/oz. As at 31 March, 120,000oz remained outstanding under the collar derivative liability, implying (among other things) that contracts over this number of ounces were exercised in Q220, which we estimated at the time of our last note could have resulted in a net loss of US$33.6m, but which, in fact, only gave rise to a US$10.171m loss (see Exhibit 13).

Exhibit 13: Gain/loss on gold revenue protection programme (US$000s)

US$000s (unless otherwise indicated)

Q220e

Q220

Q120

Q419

Q319

Q219

Realised gain/(loss) on gold revenue protection strategy programme

(4,426)

(1,633)

Unrealised gain/(loss) on gold price protection strategy

7,229

(6,505)

Reported Gain/(loss) on gold revenue protection programme

(10,171)

(10,985)

2,803

(8,138)

Gold price at end of period (US$/oz)

1,764

1,780

1,608

1,514

1,485

1,409

Gold price change during period (%)

+9.7

+10.7

+6.2

+2.0

+5.4

Maximum gold price during period (US$/oz)

1,768

1,780

1,683

1,517

1,546

Gold price difference relative to US$1,500/oz (US$/oz)

*268

*280

*183

*17

*46

Estimated ounces in programme exercised (oz)

120,000

120,000

90,000

75,000

75,000

Estimated potential realised gain/(loss)

(32,160)

(33,600)

(16,470)

(1,275)

(3,450)

Source: Endeavour Mining, Edison Investment Research. Note: *Based on maximum gold price during period.

In Q2 however, this loss was overshadowed by the US$63.9m (unrealised) loss on the convertible senior note derivative referred to in the ‘Financials’ section of this note (above) and which is similarly analysed below with respect to Endeavour’s share price:

Exhibit 14: Endeavour gain/(loss) on financial instruments, Q319–Q220 (US$000s)

Item

Q220

Q120

Q419

Q319

Q219

Gain/(loss) on other financial instruments

535

55

(982)

(1,307)

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

(175)

(132)

35

(22,389)

Realised gain on forward contract

0

6,686

0

0

Gain/(loss) on gold revenue protection programme

(10,171)

(10,985)

2,803

(8,138)

Unrealised gain/(loss) on convertible senior bond derivative

(63,893)

2,675

3,930

(14,168)

Gain/(loss) on foreign exchange

1,773

(1,751)

(3,592)

(3,526)

Total gain/(loss) on financial instruments

(71,931)

(3,492)

2,194

(49,528)

EDV share price at period end (US$)

24.12

14.11

18.90

19.12

24.12

Share price change in period (US$)

+10.01

-4.79

-0.22

-5.00

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

6.4

0.6

17.9

(2.8)

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

At first glance, a US$10 appreciation in Endeavour’s shares giving rise to a US$63.4m loss on its convertible would suggest a loss of US$6.4m per US$1 by which Endeavour’s shares appreciate. In fact, as at end-Q220, Endeavour’s share price was very slightly above its conversion price of US$23.90 – hence the Q2 loss is likely to have been close to its maximum possible, given that both the intrinsic value of the presumed embedded option will have been increasing rapidly at the same time as its option value. Beyond this level, while the intrinsic value of the embedded option will continue to increase, the option value should moderate. Given the number of shares into which the bond is convertible, we estimate that for each US$1 appreciation in the price of its shares beyond US$23.90, Endeavour should record a loss of no more than US$13.8m. As before however, given the inherent uncertainties surrounding gains (or losses) from financial instruments, they have been excluded from our forecasts in Exhibits 5 and 12 and are anyway excluded from the calculation of adjusted net earnings and analysts’ forecasts.

COVID-19

National and regional response

Since the onset of the pandemic, governments in West Africa have acted decisively to implement appropriate response measures, using (where appropriate) their recent experience in dealing with Ebola in the region as a precedent. Out of three states of alert, West Africa is currently at a ‘Level 1’ state of readiness (ie that the virus remains predominantly outside West Africa), with the potential to escalate this to ‘Level 2’. In practice, this means that both Burkina Faso and the Ivory Coast have closed their borders and commercial flights both into and out of the countries have been suspended. Within this framework however, ‘key industries’ are allowed to remain operating and, in both countries, ministers are reported to be very keen that gold mining should continue. For their own protection therefore, mines have been isolated from the rest of the country.

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

Company response

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

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

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

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

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

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

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

To ensure that it has access to substantial liquidity and financial flexibility to operate under various stress-test scenarios, Endeavour drew down the entirety of its available revolving credit facility (RCF) in Q120, albeit it has now commenced repaying the RCF and expects to continue to reduce the drawn amount throughout Q320 and Q420.

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

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

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

From a financial perspective, Endeavour calculates its cash-burn rate to be of the order of c US$70m per month (for its four pre-acquisition mines), with the potential to reduce to US$25–30m per month (including paying all salaries) in the event that its mines are put on care and maintenance. As such, its (pre-acquisition) cash balance of US$352m equates to approximately five months’ worth of costs at current rates of operation or approximately one year’s worth at reduced rates.

General disclaimer and copyright

This report has been commissioned by Endeavour Mining and prepared and issued by Edison, in consideration of a fee payable by Endeavour Mining. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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

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

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

General disclaimer and copyright

This report has been commissioned by Endeavour Mining and prepared and issued by Edison, in consideration of a fee payable by Endeavour Mining. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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

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

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

Share this with friends and colleagues