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The second five-year plan

Endeavour Mining 20 October 2021 Update
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Endeavour Mining

The second five-year plan

Exploration update, refinancing, Q3 preview

Metals & mining

20 October 2021

Price

C$31.49

Market cap

C$7,842m

C$1.2346/US$, US$1.3727/£

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

52.3

*Excludes lease liabilities, option premium & restricted cash.

Shares in issue (thousands)

249,016

Free float

75.2%

Code

EDV

Primary exchange

LSE

Secondary exchange

TSX, US OTC

Share price performance

%

1m

3m

12m

Abs

6.5

11.6

(8.4)

Rel (local)

3.5

4.4

(29.3)

52-week high/low

C$35.66

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

Q321 results

11 November 2021

Sabodala-Massawa Phase 2 DFS

Q421

Fetekro DFS

Q421

Q421/FY21 results

February/March 2021

Analyst

Charles Gibson

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited.

Endeavour will announce its Q321 results on the morning of 11 November and, post quarter end, we are largely reiterating our forecasts for Q321, with the exception of a minute adjustment to the gold price (from US$1,792/oz to US$1,790/oz – see Exhibit 5). In the meantime, Endeavour has announced an ambitious five-year exploration programme to discover 15.0–20.0Moz in the indicated category of resources, while also refinancing its credit lines.

Year end

Revenue (US$m)

EBITDA (US$m)

PBT*
(US$m)

Operating 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

2,711.5

1,363.5

693.2

3.64

56

2.2

12/22e

2,495.1

1,424.0

885.1

4.88

60

2.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Exploration could add net US$2.69–5.84/share in value

A pro rata performance relative to its first five-year exploration plan would result in Endeavour discovering c 12.75Moz by October 2026, with the expectation that it would discover a further 3.75Moz by the end of that year to take the total to 16.5Moz (ie 10% above the lower exploration target boundary limit). At an upper limit cost of US$400m (US$80m pa over five years) or US$1.61/share, we estimate that this could add US$1,070–1,354m (or US$4.30–7.45/share) in value to Endeavour’s shares (gross of costs – see pages 2–3 for details and methodology).

Debt refinanced

On 1 October, Endeavour announced the launch of a US$500m bond as well as a new US$500m revolving credit facility (RCF), among other things, in order to extend its debt maturities relative to existing arrangements (see page 4).

Valuation: At least US$32.50 plus exploration

Our ‘base case’ valuation of Endeavour remains broadly unchanged relative to our last note (Q2 outperforms ahead of likely Q3 index inclusion, published on 18 August 2021). Based on the average multiples of its gold major peers, we estimate a valuation for Endeavour of US$32.50 (C$40.13 or £23.68) per share. By contrast, using an absolute valuation methodology, whereby we discount back six years of cash flow and then apply an ex-growth, ad infinitum multiple to steady-state terminal cash flows in FY26, implies a valuation of US$34.62 (C$42.74 or £25.22) per share if performed using a standardised discount rate of 10% or US$55.84 (C$68.94 or £40.68) per share if performed using a CAPM-derived (real) discount rate of 6.47%. Note that to all of these valuations, a further US$4.30–7.45/share may also be added to reflect the value that we ultimately expect to be imparted to Endeavour via its most recent five-year exploration programme (see above). Otherwise, it is trading at a discount to the average multiples of its peers on at least 68% of common valuation measures despite being the largest premium LSE-listed pure gold producer, included in the FTSE 250 index (see Exhibit 9).

Exploration’s second five-year plan

On 30 September, Endeavour announced a new five-year exploration discovery target of 15.0–20.0Moz of gold in the indicated category of resources at an average cost of less than $25/oz. Full details of Endeavour’s announcement are included in its news release. A summary of the target, on a mine by mine basis, is as follows:

Exhibit 1: Endeavour Mining five-year measured & indicated (M&I) resource discovery target

Mine

FY21e milled grade

(g/t)

Measured & Indicated resources*

5yr M&I resource discovery target

Percentage increase/uplift

Tonnage

(Mt)

Grade

(g/t)

Contained gold (Moz)

Tonnage

(Mt)

Grade

(g/t)

Contained gold (Moz)

Tonnage

(%)

Grade

(%)

Contained gold (%)

Ity

1.64

77.1

1.52

3.8

47.0–54.0

2.00–3.00

3.5–4.5

61.0–70.0

31.6–97.4

92.1–118.4

Houndé

2.04

82.0

1.74

4.6

25.0–67.0

1.40–5.00

3.0–4.0

30.5–81.7

-19.5–187.4

65.2–87.0

Sabodala-Massawa

2.90

102.1

2.02

6.6

24.0–48.0

1.50–3.50

2.3–2.7

23.5–47.0

-25.7–73.3

34.8–40.9

Wahgnion

1.47

44.2

1.51

2.2

21.0–39.0

1.20–3.00

1.5–2.0

47.5–88.2

-20.5–98.7

68.2–90.9

Fetekro

N/A

32.0

2.40

2.5

21.0–28.0

1.80–2.00

1.2–1.8

65.6–87.5

-25.0--16.7

48.0–72.0

Boungou

4.58

14.4

3.32

1.5

19.0–21.0

1.50–2.50

1.0–1.5

131.9–145.8

-54.8--24.7

66.7–100.0

Mana

2.57

45.2

2.07

3.0

12.0–24.0

1.30–4.00

1.0–1.5

26.5–53.1

-37.2–93.2

33.3–50.0

Sub-total

397.0

1.90

24.2

169.0–281.0

1.49–3.31

13.5–18.0

42.6–70.8

-21.2–74.7

55.8–74.4

Greenfield properties

-

-

 -

18.0–49.0

0.95–3.50

1.5–2.0

N/A

N/A

N/A

Total

397.0

1.90

24.2

187.0–330.0

1.41–3.33

15.0–20.0

47.1–83.1

-25.4–75.5

62.0–82.6

Source: Endeavour Mining, Edison Investment Research. Note: *Resources are shown inclusive of reserves on a 100% basis as at 31 December 2020.

In general, Endeavour’s aims remain to continue to extend the lives of its core assets beyond its 10-year target. In addition, it is targeting the discovery of at least one more new standalone project via greenfields exploration. It also confirmed that it expects to discover at least another 2.5Moz of indicated resources in the remainder of FY21 (which forms part of its 2016–21 target of discovering an additional 10.0–15.0Moz gold) to add to the 8.5Moz already discovered.

By their nature, the targets outlined in Endeavour’s announcement are conceptual and there is no guarantee that exploration will delineate resources of this size. Nevertheless, a number of features of the table are noteworthy:

The overall target of 15.0–20.0Moz was generated from a multi-screened and filtered estimate of 70 targets on the basis of a statistical probability of occurrence (PoO) analysis of a type more typically associated with the oil and gas, rather than the mining, industry.

If successful, the five-year exploration target would effectively deliver Endeavour’s ancillary target of proving a >10Moz resource endowment (inclusive of historical production) at its flagship mines of Sabodala-Massawa, Houndé and Ity, thereby confirming them as Tier 1 assets.

For the majority of mines, the lower boundary of the targeted grade is below the equivalent existing grade and the upper boundary is above the equivalent existing grade. For the two highest grade mines however (Fetekro and Boungou), both the upper and lower targeted boundaries are below the equivalent existing grade, possibly indicating that management perceives the potential to develop these as higher volume, lower grade, lower cost operations relative to their current configuration.

In all but one case (the exception being Boungou), the targeted discovery grade range encompasses – or is above (in the case of Ity) – the grade of material currently being processed at the mines (as defined by the ‘FY21e milled grade’ column in the table).

Partly as a result of its targeted discovery grade range being above that of the material currently being milled at the mine, Ity (as measured by the size of the exploration target) is perceived by Endeavour as offering the greatest prospectivity of all of its mines and the greatest potential to increase resources in both absolute (ie ounces) and percentage terms.

To date, in its FY16–21 exploration plan, Endeavour has discovered 8.5Moz out of a target of 10.0–15.0Moz and expects to announce a further 2.5Moz discovered by the end of the year. A pro rata performance (relative to the lower limit of the exploration target) in the FY16–21 exploration plan would see it having discovered c 12.75Moz by October 2026, with the expectation that it would discover a further 3.75Moz by the end of 2026 to take the total to 16.5Moz (ie 10% above the lower exploration target boundary limit).

Potential value of exploration target

Three methods present themselves to determine the value (or potential value) of Endeavour’s five-year exploration programme:

Value at cost of discovery

At its most simple, the valuation of the resources discovered could be deemed to be the same as the investment required to discover them. In this case, Endeavour is looking to discover 15.0–20.0Moz in the indicated category at a cost of discovery of less than US$25/oz, implying a valuation for the programme of US$375–400m before costs depending on the ultimate level of investment and the final level of resources discovered.

Pre-investment value of average Endeavour resources

Endeavour’s current enterprise value is US$6.5bn, which implies a market-based valuation per attributable resource ounce of US$199.49/oz. To achieve that valuation however, the company was required to make an investment of US$3.9bn (Edison estimate, end-FY21) or US$106.79 into each of its ounces – implying, among other things, a pre-investment valuation of Endeavour’s resources of US$92.70/oz. On this basis (which may be appropriate, given that the vast majority of Endeavour’s targeted resources are near-mine and therefore comparable to existing resources), we would calculate a value for the company’s exploration programme of US$1,391–1,854m, or US$5.59–7.45/share (cf a cost of US$375–400m, or US$1.51–1.61/share, to achieve).

Comparison with first five-year plan

To date, in Endeavour’s 2016–2021 exploration plan, it has delineated 8.5Moz of new resources with a further 2.5Moz anticipated to be discovered by the company before the year end. Of these 8.5Moz, 7.4Moz (or 87%) have been at three assets, where it has been possible to rapidly integrate a portion of the resources into mine plans, from which it is possible to make an estimate of the tangible value added to Endeavour, as follows:

Exhibit 2: Tangible value derived to date from 2016–2021 exploration programme

Asset

Resource delineated to date (Moz)

Resources added to mine plan (koz)

Resources added as % of resources delineated

Value added*
(US$m)

Value added per resource ounce delineated (US$/oz)

Value added per ounce mined (US$/oz)

Houndé

2.6

668

25.7

155.5

59.81

232.78

Ity

2.3

194

8.4

85.4

37.13

440.21

Fetekro

2.5

1,986

78.3

383.2

151.10

193.00

Totals

7.4

2,847

38.3

624.1

83.94

219.21

Source: Edison Investment Research, Endeavour Mining. *Post-tax, attributable (Edison estimate) with the exception of Fetekro which is attributable percentage of NPV5 of US$479m.

Pro rata to this performance, in its second five-year exploration plan, we may expect Endeavour to have delineated 12.75Moz by October 2026, with the expectation that it would discover a further 3.75Moz by the end of the year to take the total to 16.5Moz (ie 10% above the lower exploration target boundary limit). Of these 12.75Moz, we might expect 38.3%, or 4.88Moz to be rapidly incorporated into existing mine plans and to add US$1,070m (or US$4.30/share) in attributable value to the company cf a cost to achieve this value of US$375–400m (ie a value uplift of US$670–695m, or US$2.69–2.79/share).

Note that, in this particular scenario, valuation upside continues to exist in the form of additional ounces being discovered and/or additional ounces being rapidly incorporated into Endeavour’s mines’ mine plans.

Debt refinancing

On 1 October, Endeavour announced the launch of a US$500m offering of fixed rate senior notes as well as a new US$500m revolving credit facility (RCF). Interest on the notes is to be paid semi-annually at a rate equal to 5.00% per annum and the notes will mature on 14 October 2026. The proceeds will be used to (i) repay all amounts outstanding under the group’s US$370m bridge term loan facility (currently attracting interest at a rate of 2.25%), which was used to retire higher cost debt facilities acquired with Teranga; (ii) repay the US$130m drawn under the group’s existing revolving credit facility (Libor + 2.95–3.95%); and (iii) pay fees and expenses etc.

As part of the bond process, Endeavour sought issuer ratings from S&P and Fitch, who filed their issuer ratings as follows:

S&P rating: BB- stable

Fitch rating: BB stable

In the meantime, the new RCF was reported to have received strong support from the syndicate of banks involved. The aggregate coupon rate of the new RCF will be between 2.40–3.40% depending on Endeavour’s leverage. However, the company expects the facility to remain undrawn as of the issue date (albeit with a commitment fee payable on the undrawn portion of 0.84%).

In addition to repaying the existing bridge facility and drawn portion of the RCF, the new financing arrangements will:

Diversify Endeavour’s funding sources and unlock a new investor base,

Extend the maturities of its existing debt structure from 2023 to 2025 for the RCF and 2026 for the bond, and

Enhance its capital markets profile as a first entry into the ratings space and the bond market.

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. Currently, Endeavour’s production and cost guidance for each of its mines for FY21 is as follows:

Exhibit 3: Endeavour’s 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 (which was sold by Endeavour in Q121) 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 its now being classified as ‘non-core’). With these provisos, our updated forecasts for Endeavour for the remainder of FY21 and in the wake of the end of the Q321 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)

Q121
(reported)

Est Q121
(pro forma)

Q221a

Q321e
(prior)

Q321e
(current)

Q421e
(prior)

Q421e
(current)

FY21
(pro forma)

FY21e
(reported)

Houndé production (koz)

66.1

66.1

79.6

57.9

57.9

55.9

55.9

259.5

259.5

Agbaou production (koz)

-

12.6

0

0

0

0

0

12.6

-

Karma production (koz)

21.6

21.6

25.1

16.8

16.8

18.3

18.3

81.7

81.7

Ity production (koz)

70.9

70.9

79.5

50.4

50.4

51.6

51.6

252.3

252.3

Boungou production (koz)

59.7

59.7

38.8

42.8

42.8

44.3

44.3

185.7

185.7

Mana production (koz)

52.4

52.4

49.2

43.2

43.2

45.3

45.3

190.2

190.2

Sabodala-Massawa

38.9

75.0

95.9

83.0

83.0

85.8

85.8

339.7

303.6

Wahgnion

24.7

43.0

41.0

34.0

34.0

43.3

43.3

161.3

143.0

Total gold produced (koz)

334.3

401.2

409.0

328.2

328.2

344.6

344.6

1,483.0

1,416.1

Total gold sold (koz)

363.5

432.0

420.8

328.2

328.2

344.6

344.6

1,525.5

1,457.1

Gold price (US$/oz)

1,749*

1,763

1,791*

1,792

1790

1,787

1,768

1,777*

1,774*

Mine level cash costs (US$/oz)

794**

643

625

737

737

738

738

680

678

Mine level AISC (US$/oz)

837

818

828

1,017

1,017

989

988

902

911

Revenue

– Gold revenue

635,792

761,448

753,427

588,154

587,523

615,745

609,142

2,711,540

2,585,884

Cost of sales

– Operating expenses

251,112

300,140

278,161

241,929

241,929

254,215

254,215

1,074,445

1,025,417

– Royalties

44,366

51,280

43,908

35,947

35,909

37,682

37,278

168,375

161,461

Gross profit

340,314

410,028

431,358

310,278

309,685

323,848

317,649

1,468,721

1,399,006

Depreciation

(122,611)

(141,190)

(158,382)

(142,633)

(142,619)

(152,971)

(152,817)

(595,008)

(576,429)

Expenses

– Corporate costs

(11,409)

(12,726)

(15,890)

(8,276)

(8,276)

(8,276)

(8,276)

(45,168)

(43,851)

– Impairments

0

0

0

0

0

0

0

0

– Acquisition etc costs

(12,160)

(12,160)

(14,544)

0

0

0

0

(26,704)

(26,704)

– Share based compensation

(7,955)

(9,436)

(9,839)

(6,907)

(6,907)

(6,907)

(6,907)

(33,089)

(31,608)

– Exploration costs

(9,810)

(9,810)

(5,874)

(5,625)

(5,625)

(5,625)

(5,625)

(26,934)

(26,934)

Total expenses

(41,334)

(44,132)

(46,147)

(20,808)

(20,808)

(20,808)

(20,808)

(131,895)

(129,097)

Earnings from operations

176,369

224,707

226,829

146,837

146,258

150,069

144,024

741,818

693,480

Interest income

0

0

Interest expense

(12,318)

(16,841)

(13,694)

(9,152)

(9,152)

(1,633)

(8,773)

(48,460)

(43,937)

Net interest

(12,318)

(16,841)

(13,694)

(9,152)

(9,152)

(1,633)

(8,773)

(48,460)

(43,937)

Loss on financial instruments

42,077

42,077

(14,807)

27,270

27,270

Other expenses

(6,290)

(19,750)

(7082)

(26,832)

(13,372)

Profit before tax

199,838

230,192

191,246

137,686

137,106

148,436

135,251

693,796

663,441

Current income tax

72,148

81,321

44,463

36,611

36,497

36,351

35,162

197,442

188,270

Deferred income tax

8,688

8,688

(2,166)

0

0

0

0

6,522

6,522

Total tax

80,836

90,009

42,297

36,611

36,497

36,351

35,162

203,964

194,792

Effective tax rate (%)

40.5

39.1

22.1

26.6

26.6

24.5

26.0

29.4

29.4

Profit after tax

119,002

140,183

148,949

101,075

100,610

112,084

100,089

489,831

468,650

Net profit from discontinued ops.

(3,702)

0

0

0

0

0

0

0

(3,702)

Total net and comprehensive income

115,300

140,183

148,949

101,075

100,610

112,084

100,089

489,831

464,948

Minority interest

25,733

29,919

22,170

14,368

14,319

14,722

14,201

80,609

76,423

Minority interest (%)

22.3

21.3

14.9

14.2

14.2

13.1

14.2

16.5

16.4

Profit attributable to shareholders

89,567

110,264

126,779

86,706

86,291

97,362

85,887

409,222

388,525

Basic EPS from continuing ops (US$)

0.455

0.437

0.504

0.347

0.346

0.390

0.345

1.634

1.644

Diluted EPS from continuing ops (US$)

0.453

0.434

0.500

0.345

0.344

0.387

0.343

1.623

1.632

Basic EPS (US$)

0.431

0.437

0.504

0.347

0.346

0.390

0.345

1.634

1.622

Diluted EPS (US$)

0.428

0.434

0.500

0.345

0.344

0.387

0.343

1.623

1.611

Norm. basic EPS from continuing ops (US$)

0.318

0.620

0.347

0.346

0.390

0.345

1.632

1.635

Norm. diluted EPS from continuing ops (US$)

0.317

0.616

0.345

0.344

0.387

0.343

1.621

1.624

Adj net earnings attributable (US$000s)

104,686

135,156

183,147

92,631

92,215

103,362

91,814

502,333

471,863

Adj net EPS from continuing ops (US$)

0.503

0.535

0.727

0.371

0.370

0.414

0.369

2.006

1.970

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 for mining companies in general 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 (especially in relation to deferred tax and the minority interest), 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

Q221a

Q321e

Q421e

Sum Q1–Q421e

FY21e

Edison forecast*

*0.535

0.727

0.370

0.369

2.001

2.006

Mean consensus forecast

0.503

0.727

0.44

0.57

2.24

2.26

High consensus forecast

0.503

0.727

0.50

0.77

2.50

2.65

Low consensus forecast

0.503

0.727

0.37

0.43

2.03

1.67

Source: Refinitiv, Edison Investment Research. Note: *As per Exhibit 5 on a pro forma basis. Consensus priced 15 October 2021.

Self-evidently, one of the main assumptions behind our forecasts is that there are no major deleterious effects to ongoing operations as a result of the COVID-19 pandemic. To date, the effect of COVID-19 on Endeavour’s operations in West Africa has proved to be negligible and is expected to remain so. Nevertheless, Endeavour has mitigated future risks as far as possible by both setting itself up to operate under level 2 COVID-19 restrictions (see our note, New senior gold major looking to join FTSE 100, published on 17 December 2020) and also by preparing multiple different levels in its pits from which to produce, thereby affording it operational flexibility in the 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 be excluded from such a calculation on the basis that it is an investment. In the case of Endeavour, however, it has been included on the grounds that it is a critical component of ongoing business performance in its ability to continually expand and extend resources and, ultimately, reserves and, thereby, the lives of its mines.

In this case, our estimate of cash flows in FY26 has fallen by 2.5% to US$3.97/share (cf US$4.07/share previously), albeit almost exclusively as a consequence of an assumed increase in Endeavour’s exploration budget from c US$35–40m originally in its first five-year exploration programme (to discover 10.0–15.0Moz at a cost of c US$15/oz) to US$80m pa in its second (see above). This estimated cash flow of US$3.97/share gives rise to a terminal valuation of the company at end-FY26 of US$39.70/share (cf US$40.67/share previously), which (in conjunction with forecast intervening cash flows) then discounts back to a valuation of US$34.62/share (cf US$35.46/share previously) at the start of FY21, as shown in the graph below (albeit with the proviso that the additional exploration expenditure could/should, for a cost of US$400m, or US$1.61/share, add c US$4.30–7.45/share in value to Endeavour’s shares).

Exhibit 7: Endeavour current forecast valuation and cash flow per share, FY21–26e (US$/share)

Source: Edison Investment Research

Given its elevation into the ranks of the world’s foremost producers of gold, however, we believe that Endeavour can increasingly attract lower cost finance and, as such, a CAPM-derived WACC can also be considered (as discussed in our February 2021 initiation on Newmont Corporation). Long-term nominal equity returns have been 9% and 30-year break-evens are currently expecting 2.3727% inflation (cf 2.2069% previously). These two measures imply an expected real equity return of 6.47% (1.09/1.023727) and applying this to our forecast cash flows would imply a terminal valuation for Endeavour of US$61.33/share (cf US$61.19/share previously) and a current valuation of US$55.84/share (cf US$55.59/share previously). Readers should note that, given its beta of 0.54 (source: Refinitiv, 18 October 2021), even this (real) discount rate of 6.47% is likely to be conservative.

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

7.0

5.2

4.8

4.8

*4.6

*3.4

2.2

2.4

3.0

Endeavour (consensus)

EDV

5.6

5.0

5.1

4.9

4.6

5.1

2.1

2.4

2.2

Majors

Barrick

ABX

7.1

6.7

6.6

6.5

6.1

6.1

3.7

1.7

2.2

Newmont

NEM

9.2

8.7

9.4

7.2

7.0

7.6

3.8

3.9

3.8

Newcrest

NCM AU

9.2

8.5

9.7

7.2

6.9

7.9

1.5

1.5

1.3

Kinross

K

6.1

3.8

3.6

5.4

3.5

3.1

2.0

2.0

1.9

Agnico-Eagle

AEM

8.5

8.1

8.3

7.8

6.6

6.5

2.5

2.5

2.5

Eldorado

ELD

5.6

4.6

4.5

4.6

3.9

3.8

0.0

0.0

0.0

Average

 

7.6

6.7

7.0

6.4

5.7

5.8

2.2

1.9

1.9

Implied EDV share price (US$)

27.76

32.81

34.15

34.72

34.47

36.52

24.82

31.10

36.17

Implied EDV share price (C$)

34.28

40.50

42.17

42.86

42.56

45.09

30.64

38.39

44.65

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

Of note is the fact that Endeavour’s valuation is materially cheaper than the averages of the majors on all but one of the measures shown in Exhibit 8 regardless of whether Edison or consensus forecasts are used (the exception being year 1 yield). On an individual basis, it is cheaper than its senior gold mining peers on at least 38 out of 54 (70% of) valuation measures if Edison forecasts are used and, similarly, 37 out of 54 (68%) if consensus forecasts are used. Reverse engineered, the average valuation measures of its peers imply an average share price for Endeavour of US$32.50, or C$40.13 per share.

Financials

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

Note that, for the purposes of our financial modelling (see Exhibit 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 at end-December). As such, on a pro forma basis, we estimate Endeavour would have had US$323.1m in net debt on its balance sheet at end-FY20, which we calculate would have equated to a gearing (net debt/equity) ratio of just 8.8% and a leverage (net debt/[net debt+equity]) ratio of 8.1% on the group’s enlarged equity base (see Exhibit 9, below).

Exhibit 9: Financial summary

US$'000s

2019

2020

2021e

2022e

2023e

December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,362,121

1,847,894

2,711,540

2,495,073

2,384,441

Cost of Sales

(884,869)

(1,061,891)

(1,374,715)

(1,071,099)

(1,027,329)

Gross Profit

477,252

786,003

1,336,826

1,423,974

1,357,112

EBITDA

 

 

618,443

910,295

1,363,530

1,423,974

1,357,112

Operating Profit (before amort. and except.)

 

 

281,400

546,072

768,522

898,210

883,558

Exceptionals

(199,159)

(201,532)

566

0

0

Other

(9,392)

8,886

(26,832)

0

0

Operating Profit

72,849

353,426

742,256

898,210

883,558

Net Interest

(51,607)

(53,774)

(48,460)

(13,107)

5,643

Profit Before Tax (norm)

 

 

220,401

501,184

693,230

885,102

889,202

Profit Before Tax (FRS 3)

 

 

21,242

299,652

693,796

885,102

889,202

Tax

(97,253)

(158,466)

(203,964)

(169,039)

(158,380)

Profit After Tax (norm)

123,148

342,718

489,265

716,063

730,821

Profit After Tax (FRS 3)

(76,011)

141,186

489,831

716,063

730,821

Net loss from discontinued operations

(4,394)

0

0

0

0

Minority interests

33,126

44,719

80,609

107,500

105,620

Net profit

(80,405)

141,186

489,831

716,063

730,821

Net attrib. to shareholders contg. businesses (norm)

90,022

297,998

408,656

608,563

625,201

Net attrib.to shareholders contg. businesses

(109,137)

96,466

409,222

608,563

625,201

Average Number of Shares Outstanding (m)

157.4

160.8

250.5

249.0

249.0

EPS - normalised (c)

 

 

57.20

185.34

163.15

244.39

251.07

EPS - normalised fully diluted (c)

 

 

56.95

181.51

162.09

237.06

243.54

EPS - (IFRS) ($)

 

 

(0.72)

0.60

1.63

2.44

2.51

Dividend per share (c)

0

37

56

60

70

Gross Margin (%)

35.0

42.5

49.3

57.1

56.9

EBITDA Margin (%)

45.4

49.3

50.3

57.1

56.9

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

20.7

29.6

28.3

36.0

37.1

BALANCE SHEET

Fixed Assets

 

 

2,330,033

5,093,409

5,072,408

4,917,425

4,796,538

Intangible Assets

5,498

24,851

24,851

24,851

24,851

Tangible Assets

2,254,476

3,968,746

3,947,745

3,792,762

3,671,875

Investments

70,059

1,099,812

1,099,812

1,099,812

1,099,812

Current Assets

 

 

652,871

1,168,382

1,656,129

2,292,116

2,923,724

Stocks

266,451

305,075

521,450

479,822

458,546

Debtors

83,836

104,545

248,410

230,619

221,525

Cash

288,186

751,563

851,799

1,547,206

2,209,183

Other

14,398

7,199

34,469

34,469

34,469

Current Liabilities

 

 

(354,931)

(661,171)

(745,128)

(646,595)

(631,679)

Creditors

(312,427)

(612,862)

(696,819)

(598,286)

(583,370)

Short term borrowings

(42,504)

(48,309)

(48,309)

(48,309)

(48,309)

Long Term Liabilities

 

 

(963,736)

(1,647,799)

(1,556,027)

(1,556,027)

(1,556,027)

Long term borrowings

(770,902)

(1,026,337)

(934,565)

(934,565)

(934,565)

Other long term liabilities

(192,834)

(621,462)

(621,462)

(621,462)

(621,462)

Net Assets

 

 

1,664,237

3,952,821

4,427,382

5,006,918

5,532,556

CASH FLOW

Operating Cash Flow

 

 

628,617

1,046,370

1,110,011

1,384,862

1,372,564

Net Interest

(35,413)

(53,774)

(48,460)

(13,107)

5,643

Tax

(109,494)

(186,332)

(197,442)

(169,039)

(158,380)

Capex

(401,227)

(335,599)

(574,007)

(370,782)

(352,667)

Acquisitions/disposals

3,654

(19,000)

20,000

40,000

0

Financing

2,402

100,000

47,604

0

0

Dividends

(6,154)

(88,288)

(165,697)

(176,527)

(205,183)

Net Cash Flow

82,385

463,377

192,008

695,407

661,977

Opening net debt/(cash)*

 

 

518,607

525,220

323,083

131,075

(564,332)

Other

(88,998)

(261,240)

0

0

0

Closing net debt/(cash)*

 

 

525,220

323,083

131,074

(564,332)

(1,226,309)

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


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 research department of Edison 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 2021 Edison Investment Research Limited (Edison).

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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.

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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.

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

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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 research department of Edison 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 2021 Edison Investment Research Limited (Edison).

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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.

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United Kingdom

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

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

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

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95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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