Tipping point

Endeavour Mining 9 August 2019 Update
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Endeavour Mining

Tipping point

Q2 results

Metals & mining

9 August 2019

Price

C$27.39

Market cap

C$3,011m

C$1.3188/US$

Net debt (US$m) at end March 2019

653.2

Shares in issue

109,925

Free float

70.1%

Code

EDV

Primary exchange

TSX

Secondary exchange

US OTC

Share price performance

%

1m

3m

12m

Abs

27.4

35.6

22.3

Rel (local)

27.9

35.5

21.7

52-week high/low

C$27.74

C$16.40

Business description

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

Next events

Kari West & Center maiden resource

Q419

Q319 results

November 2019

Q419 cost & production results

January 2020

Kalana feasibility study

Q120

Analyst

Charles Gibson

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

Endeavour’s Q219 results were significantly ahead of not only the prior quarter, but also our expectations. In general, grades increased relative to Q1, owing to improved access to higher-grade material and a lower proportion of processed material being derived from low-grade stockpiles. As Endeavour enters H219, the improved gold price environment is coinciding with a sharp reduction in capex and continued improvements to operating conditions, which has caused us to upgrade our FY19 forecasts materially.

Year
end

Revenue (US$m)

EBITDA (US$m)

PBT*
(US$m)

Operating cash flow
per share (US$)

Capex (US$m)

Net debt**
(US$m)

12/17

652.1

201.2

49.3

2.25

441.4

216.8

12/18

752.0

264.8

70.5

2.33

486.5

517.5

12/19e

883.7

391.1

125.3

2.65

233.1

515.9

12/20e

979.2

504.0

246.8

3.73

185.9

343.8

Note: *PBT is normalised, excluding amortisation of acquired intangibles and exceptional items. **Includes restricted cash.

Ity CIL hits the ground running

Of particular note in Q2 was the performance of Ity in its maiden quarter of commercial production. Both mining activity and plant throughput ramped-up quickly, even before debottlenecking initiatives have been put in place. Arguably more significantly, cash costs and all-in sustaining costs were within 1.4% of our prior expectations, at US$537/oz and US$585/oz, respectively.

Exploration success de-risks valuation

On 24 June, Endeavour announced a maiden reserve at Kari Pump of 710koz, which represented a higher conversion of resources into reserves (71%) than at the remainder of the Houndé mine. Following that, on 2 July, it announced that it had extended mineralisation at Houndé at Kari West and Kari Center. Finally, on 8 July, it announced that it had increased its resource at Le Plaque (at Ity) by 397koz gold at an average grade of 3.42g/t almost exclusively within the indicated category. While the additional resources and reserves drilled by Endeavour are not yet sufficient to bring the production profiles at Houndé and Ity up to 250koz per annum for at least 10 years (NB we calculate that the reserves drilled – or implied – to date amount to c 61% and 57% of those required, respectively), they nevertheless materially de-risk our valuation, which is implicitly based on this assumption.

Valuation: Homing in on US$27.66/share

In valuing Endeavour, we have opted to discount potential cash flows back over four years from FY19 then to apply an ex-growth, ad infinitum terminal multiple of 10x (consistent with a discount rate of 10%) to forecast cash flows in that year (FY22). For Endeavour, our estimate of cash flow in FY22 is US$3.24 per share (including exploration expenditure), in which case our terminal valuation of the company at end-FY22 is US$32.38/share, which (in conjunction with forecast intervening cash flows) discounts back to a value of US$27.66/share (cf US$27.58/share previously).

Q219 results summary

Endeavour’s results in Q219 were materially ahead of not only the prior quarter, but also our expectations, which already anticipated a significant quarterly rise in production. In general, grades increased relative to Q1, owing to improved access to higher-grade material as a result of earlier pre-stripping, and a lower proportion of processed material being derived from low-grade stockpiles, partially offset by a higher proportion of transitional/fresh ore relative to oxide ore (NB this was particularly true of Houndé).

On an individual mine basis, all of Endeavour’s mines outperformed our production expectations during the quarter, with the exception of Karma, where a defective elution column allowed a build-up of gold in circuit. From a financial perspective, all of its mines outperformed our expectations, with the exception of Agbaou, which experienced a sharply higher depreciation charge. Of particular note was the performance of Ity in its first quarter of commercial production (which was declared on 8 April). Both mining activity and plant throughput ramped-up quickly, with the former achieving an annualised rate of 5.6Mtpa over the entire quarter and the latter achieving an annualised rate of nearly 5Mtpa (helped by the fact that the ore mined during the quarter was predominantly oxide in nature) in June, even before any debottlenecking initiatives have been put in place. Arguably more significantly, cash costs and all-in sustaining costs were within 1.4% of our expectations, at US$537/oz and US$585/oz, respectively. At US$13.72 per tonne milled, processing costs were approximately 10% higher than feasibility study estimates for the first five years of operation as higher reagent consumption was required to achieve higher recoveries on some ores containing high cyanide soluble copper. This is now reported to have decreased as the blend of ores fed to the mill has stabilised. In addition, mining efficiencies are expected to improve following the end of the rainy season in Q3/Q4, as more, harder ore is exposed, which will enable increased use of larger, rigid body trucks.

In summary, gold production was 41.8% higher than in the previous quarter and 19.4% (27.8koz) above our expectation. This resulted in a positive variance of US$42.4m in revenues relative to our expectations, only partially offset by operating expenses, depreciation and royalties, which were, collectively, US$16.0m higher. In addition, there was an US$11.8m loss on financial instruments, while taxes and the minority interest were US$6.4m and US$3.3m higher, respectively, to result in net earnings that were US$13.6m (or 12.4c per share) ahead of our forecasts. A detailed analysis of Endeavour’s financial and operational performance, relative to both the previous quarter and our prior expectations (as set out in our note, Endeavour Mining: Starting as it means to go on, published on 3 May 2019) is as follows:

Exhibit 1: Endeavour Mining earnings, by quarter, Q218Q219

(US$000s unless otherwise indicated)

Q218

Q318

Q418

Q119

Q219e

Q219a

Q2/Q1

Q2 vs Q2e

Change
(%)

Variance
(%)

Variance (units)

Houndé production (koz)

66.9

60.7

75.8

55.4

46.6

58.2

5.1

24.9

11.6

Agbaou production (koz)

33.7

31.2

44.4

31.8

29.4

34.6

8.8

17.7

5.2

Karma production (koz)

21.0

26.1

33.5

22.1

23.0

21.0

-5.0

-8.7

-2.0

Ity production (koz)

25.0

21.0

20.6

11.5

44.4

57.3

398.3

29.1

12.9

Tabakoto production (koz)

26.8

26.5

29.6

N/A

N/A

N/A

N/A

N/A

N/A

Total gold produced (koz)

147

139

174.2

120.8

143.5

171.3

41.8

19.4

27.8

Total gold sold (koz)

151

134

173.4

120.9

143.5

170.7

41.2

19.0

27.2

Gold price (US$/oz)

1,306

1,161

1,198

1,304

1,283

1,285

-1.5

0.2

2

Mine level cash costs (US$/oz)

608

643

555

659

657

632

-4.1

-3.8

-25

Group level AISC (US$/oz)

768

820

707

877

874

790

-9.9

-9.6

-84

Revenue

 

 

 

– Gold revenue

189,515

155,764

207,784

151,310

176,993

219,371

45.0

23.9

42,378

Cost of sales

 

 

 

– Operating expenses

92,646

86,238

124,832

88,363

94,248

103,318

16.9

9.6

9,070

– Royalties

10,254

8,293

10,338

8,989

8,366

11,032

22.7

31.9

2,666

Gross profit

86,615

61,233

72,614

53,958

74,379

105,021

94.6

41.2

30,642

Depreciation

(43,538)

(35,911)

(50,116)

(36,132)

(47,706)

(51,970)

43.8

8.9

-4,264

Expenses

 

 

 

– Corporate costs

(6,130)

(5,888)

(8,001)

(6,061)

(5,957)

(5,143)

-15.1

-13.7

814

– Impairments

0

0

0

0

0

0

N/A

N/A

0

– Acquisition etc costs

0

0

0

0

0

0

N/A

N/A

0

– Share based compensation

(10,109)

(4,007)

(8,147)

(2,600)

(5,333)

(4,385)

68.7

-17.8

948

– Exploration costs

(2,284)

(2,583)

0

(4,361)

(821)

(1,674)

-61.6

103.9

-853

Total expenses

(18,523)

(12,478)

(16,148)

(13,022)

(12,111)

(11,202)

-14.0

-7.5

909

Earnings from operations

24,554

12,844

6,350

4,804

14,562

41,849

771.1

187.4

27,287

Interest income

0

0

0

0

0

0

N/A

N/A

0

Interest expense

(4,549)

(6,679)

(4,947)

(4,919)

(15,611)

(12,386)

151.8

-20.7

3,225

Net interest

(4,549)

(6,679)

(4,947)

(4,919)

(15,611)

(12,386)

151.8

-20.7

3,225

Loss on financial instruments

10,922

24,755

(16,239)

1,123

-

(11,757)

-1,146.9

N/A

-11,757

Other expenses

(818)

(173)

(402)

(197)

0

4,574

-2,421.8

N/A

4,574

Profit before tax

30,109

30,747

(15,238)

811

(1,050)

22,280

2,647.2

-2,221.9

23,330

Current income tax

17,095

17,443

21,212

13,478

8,980

13,845

2.7

54.2

4,865

Deferred income tax

4,432

(2,007)

(2,551)

(1,224)

0

1,531

-225.1

N/A

1,531

Total tax

21,527

15,436

18,661

12,254

8,980

15,376

25.5

71.2

6,396

Marginal tax rate

71.5

50.2

(122.5)

1,511.0

(855.5)

69.0

N/M

N/M

N/M

Profit after tax

8,582

15,311

(33,899)

(11,443)

(10,030)

6,904

-160.3

-168.8

16,934

Net profit from discontinued ops.

(24,025)

(35,705)

(95,658)

0

0

0

N/A

N/A

0

Total net and comprehensive loss

(15,443)

(20,394)

(129,557)

(11,443)

(10,030)

6,904

-160.3

-168.8

16,934

Minority interest

(132)

(3,619)

(3,695)

3,224

2,860

6,193

92.1

116.5

3,333

Minority interest (%)

0.9

17.7

2.9

(28.2)

(28.5)

89.7

-418.1

-414.7

118

Profit attributable to shareholders

(15,311)

(16,775)

(125,862)

(14,667)

(12,890)

711

-104.8

-105.5

13,601

 

 

 

Basic EPS from continuing ops (US$)

0.037

0.136

(0.292)

(0.136)

(0.118)

0.006

-104.4

-105.1

0.124

Diluted EPS from continuing ops (US$)

0.037

0.136

(0.292)

(0.131)

(0.114)

0.006

-104.6

-105.3

0.120

Basic EPS (US$)

(0.142)

(0.156)

(1.167)

(0.136)

(0.118)

0.006

-104.4

-105.1

0.124

Diluted EPS (US$)

(0.142)

(0.155)

(1.165)

(0.131)

(0.114)

0.006

-104.6

-105.3

0.120

Norm. basic EPS from continuing ops (US$)

(0.064)

(0.094)

(0.142)

(0.146)

(0.118)

0.113

-177.4

-195.8

0.231

Norm. diluted EPS from continuing ops (US$)

(0.064)

(0.094)

(0.141)

(0.141)

(0.114)

0.113

-180.1

-199.1

0.227

Adj net earnings attributable (US$000s)

9,189

(1,408)

16,271

(4,910)

(6,036)

8,519

-273.5

-241.1

14,555

Adj net EPS from continuing ops (US$)

0.085

(0.013)

0.151

(0.045)

(0.055)

0.078

-273.3

-241.8

0.133

Source: Endeavour Mining, Edison Investment Research. Note: Company reported basis.

Once again, it is notable that both the tax charge and the minority interest charge during the quarter were anomalous and not reflective of the realities of Endeavour’s commercial circumstances.


FY19 cost and production guidance and Edison forecasts

Historically, Endeavour has a good record of meeting its production and cost guidance targets. For FY19, these remain unchanged, as follows (cf Edison’s updated forecasts):

Exhibit 2: Current Endeavour production and AISC cost guidance, by mine, FY19 vs FY18 and Edison forecast

Production

All-in sustaining costs (AISC)

Mine

FY19e guidance (koz)

Edison FY19e forecast (koz)

Previous FY19 forecast (koz)

FY19e guidance (US$/oz)

Edison FY19e forecast (US$/oz)

Previous FY19 forecast (US$/oz)

Houndé

230–250

244.0

239.1

720–790

790

739

Agbaou

120–130

128.1

120.0

850–900

851

849

Karma

105–115

105.0

108.4

860–910

872

872

Ity*

160–200

185.1

166.5

525–590

590

566

Group total

615–695

662.2

634.1

**760–810

**801

**788

Source: Endeavour Mining, Edison Investment Research. Note: *Ity production is Ity CIL and residual Ity heap leach operation combined; Ity AISC is CIL only; **Includes corporate general & administrative costs.

In the second half of the financial year, operations at Houndé are expected to benefit from access to high-grade ore from the Bouéré deposit, where pre-stripping was completed in Q219 and from which ore began to be processed early in Q319. While the proportion of fresh ore processed at Houndé is thus anticipated to rise to in excess of 30% (from c 20%) in the interim, it will reduce in Q4, before increasing once again in 2020 as mining at both Vindaloo and Bouéré transition to deeper levels. Given exploration success at Houndé and its increasing reserve and resource profile, management has confirmed that a review of the plant will be conducted during Q319 with a view to increasing capacity. Similarly, operations at Karma will benefit from the stacking of higher-grade oxide ore once again from the Kao North pit, which started in Q219 and is expected to be the main source of ore in H219.

Aside from the changes to production and cost estimates noted in Exhibit 2 above, Edison’s forecasts for FY19 continue to reflect Endeavour’s sustaining and non-sustaining capital cost guidance for each of its mines for the remainder of the year in addition to the assumption that operational performance will, in some cases, be adversely affected by the onset of the rainy season in Q3. Otherwise, compared with our previous forecasts, the most noteworthy change to our ongoing forecasts for Q3–Q419 relates to the assumed gold price in Q3 and Q4, which (in the light of recent moves and its current spot price) is now expected to be US$1,416/oz and US$1,418/oz, respectively (cf US$1,263/oz previously):

Exhibit 3: Endeavour Mining FY19 earnings forecasts, by quarter


(US$000s unless otherwise indicated)

FY18

Q119

Q219

Q319e

(previous)

Q419e

(previous)

Q319e

(current)

Q419e

(current)

FY19e

(current)

FY19e

(previous)

Houndé production (koz)

277.2

55.4

58.2

68.6

68.6

61.8

68.6

244.0

239.1

Agbaou production (koz)

141.3

31.8

34.6

29.4

29.4

32.2

29.5

128.1

120.0

Karma production (koz)

108.7

22.1

21.0

28.3

35.0

25.9

35.9

105.0

108.4

Ity production (koz)

84.8

11.5

57.3

55.3

55.3

60.8

55.3

185.1

166.5

Tabakoto production (koz)

115.2

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Total gold produced (koz)

612.1

120.8

171.3

181.5

188.3

180.8

189.3

662.2

634.1

Total gold sold (koz)

612.1

120.9

170.7

181.5

188.3

180.8

189.3

661.7

634.1

Gold price (US$/oz)

1,199

1,304

1,285

1,263

1,263

1,416

1,418

*1,335

*1,237

Mine level cash costs (US$/oz)

579

659

632

540

521

590

497

587

584

Mine level AISC (US$/oz)

744

827

790

689

667

804

685

763

740

Revenue

– Gold revenue

751,957

151,310

219,371

224,165

232,662

250,344

262,696

883,721

785,130

Cost of sales

– Operating expenses

386,926

88,363

103,318

98,110

98,110

106,651

94,134

392,465

378,831

– Royalties

41,068

8,989

11,032

10,888

11,398

13,759

15,054

48,834

39,640

Gross profit

323,963

53,958

105,021

115,167

123,155

129,934

153,508

442,422

366,659

Depreciation

(169,069)

(36,132)

(51,970)

(58,143)

(62,137)

(63,534)

(66,760)

(218,396)

(204,118)

Expenses

– Corporate costs

(26,573)

(6,061)

(5,143)

(5,957)

(5,957)

(5,957)

(7,943)

(25,104)

(23,932)

– Impairments

0

0

0

0

0

0

0

0

0

– Acquisition etc costs

0

0

0

0

0

0

0

0

0

– Share based compensation

(24,931)

(2,600)

(4,385)

(5,333)

(5,333)

(5,333)

(5,333)

(17,651)

(18,599)

– Exploration costs

(7,621)

(4,361)

(1,674)

(821)

(821)

(1,271)

(1,271)

(8,577)

(6,825)

Total expenses

(59,125)

(13,022)

(11,202)

(12,111)

(12,111)

(12,561)

(14,547)

(51,332)

(49,356)

Earnings from operations

95,769

4,804

41,849

44,913

48,907

53,839

72,202

172,694

113,185

Interest income

0

0

0

0

Interest expense

(23,671)

(4,919)

(12,386)

(15,611)

(15,611)

(17,224)

(17,224)

(51,753)

(51,753)

Net interest

(23,671)

(4,919)

(12,386)

(15,611)

(15,611)

(17,224)

(17,224)

(51,753)

(51,753)

Loss on financial instruments

8,035

1,123

(11,757)

(10,634)

1,123

Other expenses

(1,558)

(197)

4,574

0

0

0

0

4,377

(197)

Profit before tax

78,575

811

22,280

29,301

33,295

36,615

54,978

114,684

62,358

Current income tax

66,522

13,478

13,845

14,042

13,981

17,302

19,766

64,391

50,481

Deferred income tax

(5,007)

(1,224)

1,531

0

0

0

0

307

(1,224)

Total tax

61,515

12,254

15,376

14,042

13,981

17,302

19,766

64,698

49,257

Marginal tax rate

78.3

1,511.0

69.0

47.9

42.0

47.3

36.0

56.4

79.0

Profit after tax

17,060

(11,443)

6,904

15,259

19,315

19,313

35,212

49,986

13,101

Net profit from discontinued ops.

(154,795)

0

0

0

0

0

0

0

0

Total net and comprehensive loss

(137,735)

(11,443)

6,904

15,259

19,315

19,313

35,212

49,986

13,101

Minority interest

7,121

3,224

6,193

5,679

6,076

7,666

9,045

26,128

17,839

Minority interest (%)

(5.2)

(28.2)

89.7

37.2

31.5

39.7

25.7

52.3

136.2

Profit attributable to shareholders

(144,856)

(14,667)

711

9,580

13,239

11,648

26,167

23,858

(4,739)

Basic EPS from continuing ops (US$)

(0.001)

(0.136)

0.006

0.088

0.121

0.106

0.238

0.217

(0.043)

Diluted EPS from continuing ops (US$)

(0.001)

(0.131)

0.006

0.085

0.117

0.102

0.229

0.209

(0.042)

Basic EPS (US$)

(1.344)

(0.136)

0.006

0.088

0.121

0.106

0.238

0.217

(0.043)

Diluted EPS (US$)

(1.342)

(0.131)

0.006

0.085

0.117

0.102

0.229

0.209

(0.042)

Norm. basic EPS from continuing ops (US$)

(0.075)

(0.146)

0.113

0.088

0.121

0.106

0.238

0.314

(0.054)

Norm. diluted EPS from continuing ops (US$)

(0.075)

(0.141)

0.113

0.085

0.117

0.102

0.229

0.302

(0.052)

Adj net earnings attributable (US$000s)

53,132

(5,000)

8,519

12,928

16,895

14,864

30,130

48,602

18,786

Adj net EPS from continuing ops (US$)

0.493

(0.046)

0.078

0.118

0.155

0.135

0.274

0.443

0.172

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

We note that forecasting on a quarterly basis is prone to large variations between actual and forecast numbers (as demonstrated, not least, by the variances observed between Q219a and Q219e in Exhibit 1). To this end, it is worth noting that the top end of Endeavour’s production guidance is 32.8oz gold above our updated forecast for the year, which is worth a material US$47.3m in additional revenue to the company (at the current spot price of gold of US$1,441/oz) and therefore has the ability to increase Endeavour’s full year profit before tax by 41.2% relative to our forecasts above (assuming all other things are equal). As such, the exhibit above should be regarded as more indicative than prescriptive with respect to the individual quarters. Within this context, however, the table above nevertheless demonstrates the effects of a number of anticipated operating developments over the course of the year, including:

production from the higher-grade Bouéré pit at Houndé in H2;

the start of commercial production from the Ity CIL project in Q2; and

the processing of higher-grade ore (cf low-grade stockpiles) at Karma in H2.

By contrast, to date, we have given no credit to Endeavour’s plan to increase the Ity CIL plant nameplate capacity by 1Mtpa to 5Mtpa (which is expected to be completed in Q419). These plant upgrades are expected to be completed during scheduled maintenance shut-downs over the next four months. However, should the process be completed by the end of Q3, then we estimate that it would have the potential to increase quarterly Ity CIL production from 55.3koz to 69.1koz in Q4 and group adjusted net earnings attributable (see Exhibit 3, above) from 27.4c per share to 35.7c per share (all other things being equal) in Q419 and from 44.3c/share to 52.5c/share for FY19.

Exploration success

In addition to its Q2 financial results, towards the end of June and the beginning of July, Endeavour made three announcements relating to its exploration activity at Houndé and Ity:

On 24 June, it announced a maiden reserve at Kari Pump of 710koz. Not only would this be sufficient to extend Houndé’s mine life by two to four years, but it is also capable of doing so at a materially increased grade of 3.01g/t (cf an average grade at the balance of Houndé’s operations of 1.97g/t). Endeavour had already announced a maiden resource at Kari Pump in November 2018. Nevertheless, there was a higher conversion of resources into reserves (70.6% on average) than the remainder of the Houndé deposit (51.2%). Moreover, owing to a higher percentage of oxide and transition ore (53% vs 12%), the company estimated that it could be mined at a low average life of mine production cost of c US$674/oz.

Further to its delineation of a maiden reserve at Kari Pump (over an area 1,300m long by 800m wide, or 1,040,000m2 in total), on 2 July, Endeavour announced that it had extended mineralisation at Houndé at Kari West (over an area 1,000m long by 500m wide, or 500,000m2 in total) and Kari Center, comprising Kari Main (over 1,300m along strike with a width of 300m, or 390,000m2 in total) and Kari South (over 1,000m long by 500m wide, or 500,000m2 in total). Approximately 85% of the holes drilled are reported to have encountered at least one interval of mineralisation of 0.5g/t gold over at least 2m and metallurgical and geotechnical tests are already being conducted at the same time as a dedicated Environmental Impact Assessment over the whole Kari area. Endeavour aims to publish maiden resource and reserve estimates for both Kari West and Kari Center in Q419, after which an updated mine plan and technical report, integrating Kari Pump, Kari Center and Kari West, is also expected to be released.

Finally, on 8 July, Endeavour announced that it had increased its resource at Le Plaque (at Ity) by 397koz gold contained within 3.6Mt of material, at an average grade of 3.42g/t almost exclusively within the indicated category. In line with its strategic objectives, these additional resources were discovered at a cost of only US$15 per indicated resource ounce. At Ity’s erstwhile conversion ratio, we estimate that this resource could convert into approximately 330koz gold, contained within 3.1Mt of material, or slightly less than one year’s processing, albeit at a higher grade of 3.33g/t within the probable category. Note that this 3.33g/t compares to Ity’s erstwhile reserve grade of 1.56g/t – ie it is 113% higher. A follow-up 20,000m drill campaign is expected to begin after the rainy season, which, in conjunction with additional metallurgical and geotechnical tests, is anticipated to give rise to a maiden Le Plaque reserve statement in either late Q419 or early Q120. At the same time, Environmental & Social Impact Assessment (ESIA) studies that were begun in mid-2018 are also expected to be completed later this year. Note that reconnaissance drilling has indicated that Le Plaque represents only 20% of the large anomalous area located in the northern portion of the Floleu licence where at least seven other targets have been identified. Drilling on these targets is also expected to continue into H219 with the intention of delineating maiden resources in FY20.

In the meantime, 37,600m of a c 43,000m campaign has been completed to date at the company’s greenfield Fetekro property, with the aim of delineating additional indicated resources at the Lafigue deposit and testing other nearby targets, with an updated resource expected to be published in late Q319.

Exploration expenditure/investment amounted to US$39m in H119, or approximately 82% of the company’s US$45–50m budgeted total for FY19, to drill 307,124m at an average cost of US$127 per metre. While demonstrably lopsided however, this asymmetry between H119 and (implied) H219 exploration budgets was always expected, as it was Endeavour’s intention to substantially complete exploration drilling prior to the onset of the region’s seasonal rains in Q319.

While the additional resources and reserves drilled by Endeavour are not yet sufficient to bring the production profiles at Houndé and Ity up to 250koz per annum for at least 10 years (NB we calculate that the reserves drilled – or implied – to date amount to c 61% and 57% of those required, respectively), they nevertheless materially de-risk our valuation calculation (see below), which is implicitly based on this assumption.

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 and Tabakoto in FY18). Rather than our customary method of discounting maximum potential dividends over the life of operations back to FY19, therefore, we have opted to discount potential cash flows back over four years from FY19 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.

Within this context, our estimate of Endeavour’s cash flow in FY22 remains largely unchanged at US$3.24 per share (cf US$3.26/share previously), on which basis our terminal valuation of the company at end-FY22 is US$32.38/share (cf US$32.58/share previously), which (in conjunction with forecast intervening cash flows) discounts back to a value of US$27.66/share at the start of FY19 (cf US$27.58/share previously).

Exhibit 4: Endeavour forecast valuation and cash flow per share, FY19–22e (US$/share)

Source: Edison Investment Research

Financials

Endeavour had US$653.2m in net debt (including restricted cash) on its balance sheet at end-Q219 (vs US$615.3m at end-Q119, US$517.5m at end-Q418), after US$66.1m in net capex during the quarter (vs US$103.9m in Q119, US$87.1m in Q418 and US$110.8m in Q318). This level of net debt equates to a gearing (net debt/equity) ratio of 76.5% (vs 72.4% at end Q119, 60.3% at end-Q4 and 52.1% at end-Q3) and leverage (net debt/[net debt + equity]) ratio of 43.3% (vs 42.0% at end-Q119, 37.6% at end-Q4 and 34.3% at end-Q3). Note that US$653.2m accords with Endeavour’s Q219 balance sheet; it differs from the figure of US$660m quoted in some of the company’s other materials because the formal accounting treatment of the finance leases in particular requires future cash flows to be discounted back to present value – whereas the higher figure is quoted on an undiscounted basis.

With capital expenditure relating to the Ity CIL project now having been, to all intents and purposes, completed, Endeavour has no major capex commitments in the future until the development of Kalana. In the new gold price environment, we therefore estimate that cash flows will be strongly positive in H219, such that, overall, we estimate that Endeavour will generate US$1.6m in net cash flow during FY19 (cf US$93.3m in pre-financing cash outflows in H119), such that we are forecasting that the company will have net debt of c US$515.9m as at end-FY19 (cf US$531.9m previously), which will equate to a gearing ratio of 57.4% (cf 61.0% previously) and a leverage ratio of 36.4% (cf 37.9% previously). Thereafter, net debt should decline rapidly such that we estimate the company will be net debt-free early in FY22 (notwithstanding capex related to the Kalana project), at which point it will potentially be able to make dividend distributions to shareholders.

Exhibit 5: Financial summary

US$'000s

2016

2017

2018

2019e

2020e

December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

566,486

652,079

751,957

883,721

979,241

Cost of Sales

(376,794)

(597,528)

(487,119)

(492,631)

(475,231)

Gross Profit

189,692

54,551

264,838

391,090

504,009

EBITDA

 

 

213,916

201,166

264,838

391,090

504,009

Operating Profit (before amort. and except.)

127,981

70,379

95,769

172,694

298,372

Intangible Amortisation

0

0

0

0

0

Exceptionals

(36,272)

(149,942)

8,035

(10,634)

0

Other

(1,989)

(2,242)

(1,558)

4,377

0

Operating Profit

89,720

(81,805)

102,246

166,437

298,372

Net Interest

(24,593)

(18,789)

(23,671)

(51,753)

(51,593)

Profit Before Tax (norm)

 

 

101,399

49,348

70,540

125,318

246,780

Profit Before Tax (FRS 3)

 

 

65,127

(100,594)

78,575

114,684

246,780

Tax

(27,643)

(32,945)

(61,515)

(64,698)

(78,028)

Profit After Tax (norm)

73,756

16,403

9,025

60,620

168,752

Profit After Tax (FRS 3)

37,484

(133,539)

17,060

49,986

168,752

Net loss from discontinued operations

(154,795)

0

0

Minority interests

7,121

26,128

35,616

Net profit

(137,735)

49,986

168,752

Net attrib. to shareholders contg. businesses (norm)

(8,100)

34,492

133,136

Net attrib.to shareholders contg. businesses

(65)

23,858

133,136

Average Number of Shares Outstanding (m)

80.6

98.5

107.7

109.8

109.9

EPS - normalised ($)

 

 

(0.38)

(0.06)

(0.08)

0.31

1.21

EPS - normalised and fully diluted ($)

 

(0.38)

(0.06)

(0.08)

0.30

1.17

EPS - (IFRS) ($)

 

 

(0.83)

(1.59)

(1.34)

0.22

1.21

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

33.5

8.4

35.2

44.3

51.5

EBITDA Margin (%)

37.8

30.8

35.2

44.3

51.5

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

22.6

10.8

12.7

19.5

30.5

BALANCE SHEET

Fixed Assets

 

 

1,073,562

1,331,745

1,594,202

1,613,897

1,594,194

Intangible Assets

29,978

6,267

4,186

4,186

4,186

Tangible Assets

1,039,529

1,317,952

1,543,842

1,563,537

1,543,834

Investments

4,055

7,526

46,174

46,174

46,174

Current Assets

 

 

283,536

361,766

327,841

377,259

575,612

Stocks

110,404

141,898

126,353

169,946

188,316

Debtors

36,572

95,212

74,757

89,610

97,461

Cash

124,294

122,702

124,022

125,628

297,760

Other

12,266

1,954

2,709

(7,925)

(7,925)

Current Liabilities

 

 

(149,626)

(241,185)

(248,420)

(249,896)

(238,461)

Creditors

(145,311)

(223,527)

(224,386)

(225,862)

(214,427)

Short term borrowings

(4,315)

(17,658)

(24,034)

(24,034)

(24,034)

Long Term Liabilities

 

 

(246,811)

(451,705)

(729,290)

(729,290)

(729,290)

Long term borrowings

(146,651)

(323,184)

(618,595)

(618,595)

(618,595)

Other long term liabilities

(100,160)

(128,521)

(110,695)

(110,695)

(110,695)

Net Assets

 

 

960,661

1,000,621

944,333

1,011,970

1,202,054

CASH FLOW

Operating Cash Flow

 

 

164,522

244,092

274,938

355,841

487,686

Net Interest

(19,626)

(15,212)

(26,734)

(51,753)

(51,593)

Tax

(10,625)

(22,301)

(24,018)

(64,391)

(78,028)

Capex

(212,275)

(441,396)

(486,498)

(233,091)

(185,934)

Acquisitions/disposals

32,098

(37,332)

33,179

(5,000)

0

Financing

174,702

116,536

(6,231)

0

0

Dividends

(2,612)

(5,177)

(1,956)

0

0

Net Cash Flow

126,184

(160,790)

(237,320)

1,606

172,132

Opening net debt/(cash)

 

 

152,856

26,672

218,140

518,607

517,001

HP finance leases initiated

0

0

0

0

0

Other

0

(30,678)

(63,147)

0

0

Closing net debt/(cash)

 

 

26,672

218,140

518,607

517,001

344,869

Source: Company sources, Edison Investment Research. Note: *Excludes restricted cash. EPS normalised from 2018 to reflect continuing business only. 2017 is shown as previously reported (ie not restated).


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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.

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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.

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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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