gold flake

Yield hits 4%

Endeavour Mining 8 August 2022 Update
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Endeavour Mining

Yield hits 4%

Q222 results analysis

Metals and mining

8 August 2022

Price

1660p

Market cap

£4,124m

C$1.2858/US$, US$1.2064/£

Net cash (US$m) at end-June 2022, excludes lease liabilities, option premium and restricted cash

232.6

Shares in issue

248.4m

Free float

75.2%

Code

EDV

Primary exchange

LSE

Secondary exchange

TSX, USOTC

Share price performance

%

1m

3m

12m

Abs

2.9

(16.5)

(5.4)

Rel (local)

(3.3)

(15.8)

(5.9)

52-week high/low

2,100p

1,510p

Business description

Following its acquisitions of SEMAFO and Teranga, Endeavour Mining has become one of the top 10 major gold producers globally, with six 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

Lafigue DFS

Q322

Sabodala-Massawa Phase 2 construction launch

Mid-2022

Wona underground production

Q322

H122 dividend paid

28 September 2022

Analyst

Lord Ashbourne

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

Endeavour’s Q222 results were better than our expectations. Production for the quarter was 345koz (cf our expectation of 322koz) at an all-in sustaining cost (AISC) of US$954/oz (cf US$995/oz) to result in revenue of US$629.6m (cf US$600.8m), adjusted EBITDA of US$329m (cf US$305m) and adjusted EPS of 45c/share (cf 38c/share). Given that Edison’s expectations were close to consensus, it similarly outperformed the consensus. As a result of its strong H122 performance (702koz produced from continuing operations at an AISC of US$900/oz), the company increased its interim dividend by 43% to US$100m (or US$0.40/share) and increased its minimum FY22 committed dividend by US$50m (or 33%), from US$150m to US$200m (or US$0.80/share) to put the company on a prospective dividend yield of 4.0% with additional shareholder gains available in the form of its share buyback programme.

Year end

Revenue (US$m)

EBITDA (US$m)

PBT*
(US$m)

Op. cash flow per share (US$)

DPS
(c)

Yield
(%)

12/20

1,847.9

910.3

501.2

5.35

37

1.8

12/21

2,903.8

1,517.3

756.5

4.83

56

2.8

12/22e

2,492.8

1,326.6

644.1

4.86

80

4.0

12/23e

2,219.0

1,223.2

764.4

3.86

82

4.1

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

On track to hit guidance

Most of Endeavour’s outperformance could be attributed to higher production at Ity, Hounde and Mana and lower corporate costs. After producing, 702koz at an AISC of US$900/oz in H122, Endeavour reiterated its guidance for FY22 of production of 1,315–1,400koz at an AISC of US$890–930/oz. Higher quarterly costs could generally be attributed to increased proportions of fresh rock mining at deeper horizons at Boungou, Sabodala-Massawa and Wahgnion and stripping and scheduling ahead of West Africa’s rainy season in Q3. Countering this, Endeavour benefited from in-country fuel pricing mechanisms, long-term supply contracts and local currency weakness versus the US dollar.

Valuation: Holding steady at US$35.54/share

Using an absolute valuation methodology, whereby we discount back five years of cash flows and then apply an ex-growth, ad infinitum multiple to steady-state terminal cash flows in FY26, implies a present valuation for the company of US$35.54 (C$45.70 or £29.46) per share if performed using a 10% discount rate (cf US$35.88 previously) or US$57.15 (C$73.48 or £47.37) per share if performed using a CAPM-derived (real) discount rate of 6.59% (based on inflation expectations of 2.26% derived from US 30-year break-evens). To these valuations a further US$4.30–7.45/share may be added to reflect the value of Endeavour’s five-year exploration programme (see The second five-year plan, published on 20 October 2021). Otherwise, Endeavour is trading at a discount to the average multiples of its peers on at least 57% of common valuation measures, regardless of whether Edison or consensus forecasts are used, despite being the largest premium LSE-listed pure gold producer in the FTSE 100 Index.

Q222 results and analysis

A summary of Endeavour’s Q222 results is provided in the table below, showing both its headline results and its underlying results, excluding most of the major adjusting items:

Exhibit 1: Endeavour Mining Q222 results cf prior expectations and Q122

US$000s (unless otherwise indicated)

Q421a
(underlying)

Q122a

Q122a
(underlying)

Q222e

Q222

Q222a

(underlying)

Change
***(%)

Variance
****(%)

Variance
****(units)

Houndé production (koz)

77.3

73.1

73.1

76.4

87.0

87

19.0

13.9

10.6

Karma production (koz)

20.5

0.0

10.2

0.0

0.0

0

-100.0

0.0

0.0

Ity production (koz)

60.0

72.4

72.4

67.8

76.9

76.9

6.2

13.4

9.1

Boungou production (koz)

34.9

33.8

33.8

26.0

27.0

27

-20.1

3.8

1.0

Mana production (koz)

53.8

52.6

52.6

49.3

54.8

54.8

4.2

11.2

5.5

Sabodala-Massawa

104.6

96.3

96.3

75.4

72.9

72.9

-24.3

-3.3

-2.5

Wahgnion

47.2

28.9

28.9

27.5

26.5

26.5

-8.3

-3.6

-1.0

Total gold produced (koz)

398.3

357.1

367.3

322.3

345.1

345.1

-6.0

7.1

22.8

Total gold sold (koz)

391.0

359.1

369.2

322.3

343.7

343.7

-6.9

6.6

21.4

Gold price (US$/oz)

1,783*

1,911

1,904*

1,873

*1,832

*1,832

-3.8

-2.2

-41

Mine level cash costs (US$/oz)**

639

609

629

722

713

713

13.4

-1.2

-9

Mine level AISC (US$/oz)

865

809

828

995

934

934

12.8

-6.1

-61

Revenue

– Gold revenue

697,174

686,200

703,400

600,831

629,600

629,600

-10.5

4.8

28,769

Cost of sales

– Operating expenses

249,921

217,500

232,200

232,879

251,200

251,200

8.2

7.9

18,321

– Royalties

44,917

41,000

42,700

36,657

38,100

38,100

-10.8

3.9

1,443

Gross profit

402,336

427,700

428,500

331,295

340,300

340,300

-20.6

2.7

9,005

Depreciation

(201,668)

(152,000)

(153,900)

(136,452)

(139,800)

(139,800)

-9.2

2.5

-3,348

Expenses

– Corporate costs

(20,000)

(14,000)

(14,000)

(15,000)

(6,800)

(6,800)

-51.4

-54.7

8,200

– Impairments

0

0

0

N/A

0.0

0

– Acquisition etc costs

(992)

(200)

(1,300)

N/A

0.0

0

– Share based compensation

(7,425)

(7,700)

(7,700)

(6,607)

(3,100)

(3,100)

-59.7

-53.1

3,507

– Exploration costs

(5,061)

(7,100)

(7,100)

(5,000)

(8,000)

(8,000)

12.7

60.0

-3,000

Total expenses

(33,478)

(29,000)

(28,800)

(26,607)

(19,200)

(17,900)

-37.8

-32.7

8,707

Earnings from operations

167,190

246,700

245,800

168,237

181,300

182,600

-25.7

8.5

14,363

Interest income

N/A

N/A

0

Interest expense

(25,392)

(15,200)

(15,200)

(14,373)

(16,500)

(16,500)

8.6

14.8

-2,127

Net interest

(25,392)

(15,200)

(15,200)

(14,373)

(16,500)

(16,500)

8.6

14.8

-2,127

Loss on financial instruments

15,642

(178,800)

106,800

N/A

N/A

0

Other expenses

(2,051)

(2,000)

(10,600)

N/A

N/A

0

Profit before tax

155,389

50,700

230,600

153,864

261,000

166,100

-28.0

8.0

12,236

Current income tax

39,394

74,700

77,800

42,260

64,700

64,700

-16.8

53.1

22,440

Deferred income tax

(34,000)

11,200

11,200

0

(8,200)

(8,200)

-173.2

N/A

-8,200

Total tax

5,394

85,900

89,000

42,260

56,500

56,500

-36.5

33.7

14,240

Effective tax rate (%)

3.5

(169.4)

38.6

27.5

21.6

34.0

-11.9

23.7

6.5

Profit after tax

149,995

(35,200)

141,600

111,604

204,500

109,600

-22.6

-1.8

-2,004

Net profit from discontinued ops.

0

14,800

0

0

0

N/A

N/A

0

Total net and comprehensive income

149,995

(20,400)

141,600

111,604

204,500

109,600

-22.6

-1.8

-2,004

Minority interest

(6,559)

21,800

22,600

17,580

15,100

15,100

-33.2

-14.1

-2,480

Minority interest (%)

(4.4)

(106.9)

16.0

15.8

7.4

13.8

-13.9

-12.8

-2.0

Profit attributable to shareholders

156,554

(42,200)

119,000

94,023

189,400

94,500

-20.6

0.5

477

Basic EPS from continuing ops (US$)

0.628

(0.23)

0.48

0.378

0.76

0.38

-20.8

0.6

0.002

Diluted EPS from continuing ops (US$)

0.623

(0.23)

0.48

0.376

0.76

0.38

-21.0

0.9

0.003

Basic EPS (US$)

0.628

(0.17)

0.48

0.378

0.76

0.38

-20.8

0.6

0.002

Diluted EPS (US$)

0.623

(0.17)

0.48

0.376

0.76

0.38

-21.0

0.9

0.003

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

0.569

0.49

0.48

0.378

0.34

0.38

-20.8

0.6

0.002

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

0.565

0.49

0.48

0.376

0.34

0.38

-21.0

0.9

0.003

Adj net earnings attributable (US$000s)

118,770

122,300

122,300

94,023

111,300

111,300

-9.0

18.4

17,277

Adj net EPS from continuing ops (US$)

0.477

0.49

0.49

0.378

0.45

0.45

-8.2

19.0

0.072

Source: Endeavour Mining, Edison Investment Research. Note: *Includes Karma and Sabodala-Massawa streams. **Excludes royalty costs. ***Q222 (underlying) cf Q122 (underlying). ****Q222 (underlying) cf Q222e.

Items included in the reconciliation between adjusted net earnings attributable and total net and comprehensive earnings are losses from discontinued operations, gains/losses on financial instruments, other expenses 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 the case of Q222, Endeavour’s results were distorted by an exceptional gain on financial instruments of US$106.8m (largely unrealised gains on forward contracts) and an increase in ‘other’ expenses to US$10.6m. For the purposes of like-for-like comparison, therefore, these two items have been excluded from the column entitled ‘Q222 (underlying)’ in Exhibit 1, above.

Within this context, gold produced and sold was 7% ahead of our forecasts (as in Q122), with the outperformance accounted for by Hounde, Ity and Mana. This outperformance in production led to a positive variance of US$28.8m (or 4.8%) in revenue, relative to our prior expectations, that was partially offset by a US$19.7m (or 7.3%) negative variation in costs and royalties to result in a gross profit that was US$9.0m (or 2.7%) ahead of our prior forecast. This was augmented by lower corporate costs, such that the variance had become US$12.2m (positive) at the pre-tax level, but was then largely negated by a US$14.2m negative variation in the tax charge to result in post-tax profits that were within US$2m of our forecasts and (after a lower minority interest) earnings that were within US$0.5m (or 0.5%) of them. The 19.0% outperformance of adjusted net earnings was then attributable to ‘non-cash, tax and other adjustments’ and the minority interest therein.

A comparison between Endeavour’s actual results and both our and the market’s prior forecasts for the quarter is as follows:

Exhibit 2: Edison adjusted net EPS from continuing operations estimates cf consensus FY22 by quarter

(US$/share)

Q122

Q222e

Q222

Variance
(%)

Edison

0.49

0.378

0.45

+19.0

Mean consensus forecast

0.49

0.39

0.45

+15.4

High consensus forecast

0.49

0.44

0.45

+2.3

Low consensus forecast

0.49

0.33

0.45

+36.4

Source: Refinitiv, Edison Investment Research. Note: Consensus as at 2 August 2022.

Readers are reminded that Endeavour changed its definition of cash costs in Q420 to include royalties. The decision was made so that Endeavour may be more consistent in reporting within the context of its peer group. For reasons of comparability with past results, however, as well as ease of forecasting (given that royalties are reported as a discrete item distinct from operating expenses), we are continuing to calculate total cash costs in Exhibits 1 and 3 excluding royalties.

FY22 forecasts

Endeavour maintained its production and cost guidance for FY22 (made in the aftermath of its sale of the Karma mine in February) of 1,315–1,400koz at an AISC of US$890–930/oz. In addition to incorporating its Q222 actual results into our full-year forecasts, in recognition of recent metals price moves, we have also reduced our gold price forecast for the remainder of the year, from US$1,812/oz previously to US$1,776/oz currently (the prevailing price at the time of writing). As a result (and with the usual caveat around quarterly estimates), our updated forecast for adjusted net earnings attributable to shareholders for FY22 for Endeavour in the wake of its Q222 results is now as follows:

Exhibit 3: Endeavour Mining FY22 forecasts, by quarter

US$000s (unless otherwise indicated)

Q122

Q222

Q322e
(prior)

Q322e

Q422e
(prior)

Q422

FY22e

FY22e
(prior)

Houndé production (koz)

73.1

87.0

68.8

68.8

57.3

57.3

286.1

275.5

Karma production (koz)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Ity production (koz)

72.4

76.9

63.2

63.2

63.2

63.2

275.6

266.5

Boungou production (koz)

33.8

27.0

29.9

29.9

30.4

30.4

121.1

120.1

Mana production (koz)

52.6

54.8

40.6

40.6

43.1

43.1

191.0

185.6

Sabodala-Massawa

96.3

72.9

98.2

98.2

98.2

98.2

365.5

368.0

Wahgnion

28.9

26.5

33.4

33.4

43.1

43.1

131.9

132.9

Total gold produced (koz)

357.1

345.1

334.0

334.0

335.1

335.1

***1,381.6

***1,358.8

Total gold sold (koz)

359.1

343.7

334.0

334.0

335.1

335.1

***1,382.0

***1,360.6

Gold price (US$/oz)

1,911

*1,832

1,812

1,763

1,812

1,776

*1,816

*1,844

Mine level cash costs (US$/oz)**

609

713

643

661

655

672

668

661

Mine level AISC (US$/oz)

809

934

888

925

855

893

893

889

Revenue

– Gold revenue

686,200

629,600

601,626

585,515

603,488

591,498

2,492,813

2,492,144

Cost of sales

– Operating expenses

217,500

251,200

214,932

220,798

219,448

225,314

914,812

884,759

– Royalties

41,000

38,100

36,420

36,082

36,434

36,362

151,544

150,511

Gross profit

427,700

340,300

350,273

328,635

347,605

329,822

1,426,457

1,456,874

Depreciation

(152,000)

(139,800)

(152,725)

(155,267)

(160,934)

(164,341)

(611,408)

(602,111)

Expenses

– Corporate costs

(14,000)

(6,800)

(15,000)

(15,000)

(15,000)

(15,000)

(50,800)

(59,000)

– Impairments

0

0

0

– Acquisition etc costs

(200)

(1,300)

(1,500)

(200)

– Share based compensation

(7,700)

(3,100)

(6,999)

(6,507)

(6,999)

(6,635)

(23,941)

(28,304)

– Exploration costs

(7,100)

(8,000)

(5,000)

(5,000)

(5,000)

(5,000)

(25,100)

(22,100)

Total expenses

(29,000)

(19,200)

(26,999)

(26,507)

(26,999)

(26,635)

(101,341)

(109,604)

Earnings from operations

246,700

181,300

170,550

146,861

159,673

138,847

713,708

745,159

Interest income

0

0

Interest expense

(15,200)

(16,500)

(13,036)

(13,579)

(11,411)

(13,253)

(58,532)

(54,019)

Net interest

(15,200)

(16,500)

(13,036)

(13,579)

(11,411)

(13,253)

(58,532)

(54,019)

Loss on financial instruments

(178,800)

106,800

(72,000)

(178,800)

Other expenses

(2,000)

(10,600)

(12,600)

(2,000)

Profit before tax

50,700

261,000

157,514

133,282

148,262

125,593

570,575

510,340

Current income tax

74,700

64,700

43,296

38,004

41,079

36,452

213,855

201,335

Deferred income tax

11,200

(8,200)

0

0

0

0

3,000

11,200

Total tax

85,900

56,500

43,296

38,004

41,079

36,452

216,855

212,535

Effective tax rate (%)

(169.4)

21.6

27.5

28.5

27.7

29.0

38.0

41.6

Profit after tax

(35,200)

204,500

114,218

95,278

107,183

89,142

353,720

297,805

Net profit from discontinued ops.

14,800

0

0

0

0

0

14,800

14,800

Total net and comprehensive income

(20,400)

204,500

114,218

95,278

107,183

89,142

368,520

312,605

Minority interest

21,800

15,100

17,347

15,437

16,435

14,786

67,124

73,162

Minority interest (%)

(106.9)

7.4

15.2

16.2

15.3

16.6

18.2

23.4

Profit attributable to shareholders

(42,200)

189,400

96,872

79,841

90,748

74,356

301,397

239,443

Basic EPS from continuing ops (US$)

(0.23)

0.76

0.390

0.321

0.365

0.299

1.154

0.904

Diluted EPS from continuing ops (US$)

(0.23)

0.76

0.388

0.321

0.363

0.299

1.151

0.899

Basic EPS (US$)

(0.17)

0.76

0.390

0.321

0.365

0.299

1.213

0.964

Diluted EPS (US$)

(0.17)

0.76

0.388

0.321

0.363

0.299

1.210

0.959

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

0.49

0.34

0.390

0.321

0.365

0.299

1.450

1.625

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

0.49

0.34

0.388

0.321

0.363

0.299

1.446

1.616

Adj net earnings attributable (US$000s)

122,300

111,300

96,872

79,841

90,748

74,356

387,797

403,943

Adj net EPS from continuing ops (US$)

0.49

0.45

0.390

0.321

0.365

0.299

1.561

1.626

Source: Endeavour Mining, Edison Investment Research. Note: *Includes Karma and Sabodala-Massawa streams. **Excludes royalty costs. ***Includes 10.2koz produced and 10.1koz sold from Karma in Q122.

As before, items included in the reconciliation between adjusted net earnings attributable and total net and comprehensive earnings are losses from discontinued operations, gains/losses on financial instruments, other expenses 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). As noted previously, Endeavour has now changed its definition of adjusted net earnings attributable, such that deferred tax effects and share-based payments are no longer included in the adjustments to total net and comprehensive earnings, and this is now the manner in which our FY22 forecasts are presented.

Within this context, a comparison between our quarterly and full-year forecast and consensus forecasts for FY22 net adjusted EPS is as follows:

Exhibit 4: Edison adjusted net EPS from continuing operations estimates cf consensus FY22 by quarter

(US$/share)

Q122

Q222

Q322e

Q422e

Sum Q1–Q422e

FY22e

Edison

0.493

0.448

0.321

0.299

1.561

1.561

Mean consensus forecast

0.49

0.45

0.41

0.46

1.81

1.71

High consensus forecast

0.49

0.45

0.54

0.69

2.17

2.05

Low consensus forecast

0.49

0.45

0.24

0.36

1.54

1.03

Source: Refinitiv, Edison Investment Research. Note: Consensus at 8 August 2022.

Although we are forecasting a decline in profitability in Q3 (being the quarter historically most susceptible to disruption from the seasonal rains in West Africa), in this case, the decline may be attributed to recent moves in the gold price, rather than production, as we are expecting a material increase in production at Sabodala-Massawa in Q322 and H222. Mining activities commenced at both the Massawa Central Zone and Massawa North Zone pits in H122 and are expected to continue for the remainder of the year, with supplemental mining from the Sofia North and Sabodala pits. At the same time, the Bambaraya satellite pit is being accelerated to provide an additional ore source in the latter part of H222, while there is a greater focus on waste extraction at the Massawa Central and North Zones pits. As a result, mined and processed grades are therefore expected to increase in the second half of the year, while mill throughput and recovery rates are expected to remain fairly constant.

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. We also assume no collateral escalation of war between Russia and Ukraine into West Africa. To date, the effect of COVID-19 on Endeavour’s operations in West Africa has been negligible and is expected to remain so, as the company has now been able to vaccinate more than 50% of its workforce in an ongoing programme of pandemic mitigation. In addition, Endeavour has further mitigated future risks as far as possible by 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 by preparing multiple different levels in its pits from which to produce, thereby affording it maximum operational flexibility in the future.

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, Agbaou in FY20 and Karma in FY22, 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 FY22, in the case of Endeavour, we have instead opted to discount five years of forecast cash flows in FY22–26 back to the start of FY22 and then to apply an ex-growth terminal multiple of 10x (consistent with using a standardised discount rate of 10%) to forecast cash flows in that year (ie FY26). In the normal course of events, exploration expenditure would have been excluded from such a calculation on the basis that it is an investment. In the case of Endeavour, however, it was included on the grounds that it was a critical component of ongoing business performance in its ability to continually expand and extend the lives of its mines.

In the wake of Q222 results, our estimate of cash flows in FY26 has remained almost unchanged at US$4.27/share (cf US$4.28/share previously), which implies a terminal valuation of the company at end-FY26 of US$42.75/share (cf US$42.78/share previously) if calculated using a discount rate of 10%. In conjunction with forecast intervening cash flows, this terminal valuation then discounts back to a present valuation of US$35.54/share (cf US$35.96/share previously) at the start of FY22, as follows:

Exhibit 5: Endeavour forecast valuation and cash flow per share, FY22–26e (US$/share)

Source: Edison Investment Research

Given its elevation into the ranks of the world’s foremost producers of gold, however, we believe Endeavour can increasingly attract lower-cost finance and, as such, a CAPM-derived WACC can also be considered. In this case, long-term nominal equity returns have been 9% and 30-year break-evens are expecting an inflation rate of 2.2625% (source: Bloomberg, 5 August) cf 2.2757% previously. These two measures imply an expected real equity return of 6.59% (1.09/1.022757) and applying this to our forecast cash flows would imply a terminal valuation for Endeavour of US$64.88/share (cf US$65.06/share previously) and a current valuation of US$57.15/share (cf US$57.64/share previously).

In the meantime, Endeavour’s valuation remains at a material discount to those of its peer group, as shown in Exhibit 6, below.

Relative Endeavour valuation

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

Exhibit 6: 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

4.3

6.0

4.6

3.7

4.1

4.0

4.0

4.1

4.7

Endeavour (consensus)

EDV

4.4

4.8

4.5

4.1

4.4

4.2

3.1

3.4

3.5

Majors

Barrick

ABX

6.6

6.0

5.9

6.0

5.6

5.4

4.5

5.7

5.6

Newmont

NEM

8.1

8.1

8.2

6.8

6.6

6.6

5.0

4.9

4.5

Newcrest

NCM AU

9.4

6.7

7.2

6.2

5.3

5.9

1.8

1.7

1.9

Kinross

K

3.4

3.1

3.4

4.2

3.6

4.0

3.6

3.5

3.6

Agnico-Eagle

AEM

7.8

7.6

7.9

7.1

6.8

6.9

3.7

3.7

3.7

Eldorado

ELD

3.8

2.8

2.6

3.2

2.8

2.5

0.0

0.0

0.0

Average

 

6.5

5.7

5.8

5.6

5.1

5.2

3.1

3.2

3.2

Implied EDV share price (US$)

30.72

21.63

25.45

30.79

26.65

28.19

25.99

25.23

29.48

Implied EDV share price (C$)

39.50

27.82

32.73

39.59

34.26

36.24

33.42

32.45

37.91

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 8 August 2022.

Of note is the fact that, almost without exception, Endeavour’s valuation is materially cheaper than the averages of the majors on all of the measures shown in Exhibit 6 regardless of whether Edison or consensus forecasts are used. On an individual basis, it is cheaper than its senior gold mining peers on at least 37 out of 54 (68%) valuation measures if Edison forecasts are used and 31 out of 54 (57%) valuation measures if consensus forecasts are used. Reverse engineered, the average valuation measures of its peers imply an average share price for Endeavour of US$27.13, or C$34.88 (or £22.49), per share.

Financials: Net cash of US$0.653/share

According to its Q222 balance sheet, Endeavour had net cash of US$162.1m as at end-June, after US$6.7m in share repurchases during the quarter. This net cash figure compares with net cash and debt figures at the end of recent, comparable quarters as follows:

Exhibit 7: Endeavour Mining net cash/(debt)*

Q420

Q121

Q221

Q321

Q421

Q122

Q222

Total

Net cash/(debt) (US$m)

(43.3)

(220.2)

(147.6)

(143.6)

13.2

82.7

162.1

Change (US$m)

(176.9)

72.6

4.0

156.8

69.5

79.4

Dividends paid (US$m)

60.0

69.9

69.3

199.2

Minority dividends paid (US$m)

29.9

29.9

Share buybacks (US$m)

59.5

34.6

43.9

31.1

6.7

175.8

Underlying net cash/(debt) change pre-shareholder returns (US$m)

(116.9)

132.1

138.4

200.7

169.9

86.1

Comment

Pre-Teranga acquisition

Post-Teranga acquisition

Source: Endeavour Mining, Edison Investment Research. Note: *As per reported balance sheet.

This figure of US$162.1m includes lease liabilities of US$49.6m and an option premium of US$20.9m, which, if excluded, would result in an alternative net cash position of US$232.6m. This is equivalent to, but differs slightly from, the US$216.8m net cash figure calculated by Endeavour and quoted in its announcements owing to the discounting, variously, of certain committed future payments to present value. It also excludes US$33.9m held in the form of ‘restricted cash’ and US$40.0m in shares of Allied Gold received as consideration for the sale of Agbaou, both held in ‘non-current other financial assets’.

Note that, for the purposes of our financial modelling in Exhibit 8 and for simplicity’s sake, we have assumed that the consolidation of Endeavour’s and Teranga’s balance sheets took place retrospectively on 31 December 2020. In this case, we estimate 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 that 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%.

Exhibit 8: Financial summary

US$'000s

2019

2020

2021

2022e

2023e

2024e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,362,121

1,847,894

2,903,756

2,492,813

2,218,986

2,235,703

Cost of Sales

(884,869)

(1,061,891)

(1,675,393)

(1,167,697)

(995,810)

(1,007,684)

Gross Profit

477,252

786,003

1,228,363

1,325,116

1,223,175

1,228,019

EBITDA

 

 

618,443

910,295

1,517,263

1,326,616

1,223,175

1,228,019

Operating Profit (before amort. and except.)

 

281,400

546,072

859,409

715,208

761,714

707,316

Exceptionals

(199,159)

(201,532)

(266,000)

(73,500)

0

0

Other

(9,392)

8,886

(32,263)

(12,600)

0

0

Operating Profit

72,849

353,426

561,146

629,108

761,714

707,316

Net Interest

(51,607)

(53,774)

(70,623)

(58,532)

2,725

3,890

Profit Before Tax (norm)

 

 

220,401

501,184

756,523

644,075

764,439

711,207

Profit Before Tax (FRS 3)

 

 

21,242

299,652

490,523

570,575

764,439

711,207

Tax

(97,253)

(158,466)

(178,253)

(216,855)

(216,607)

(149,734)

Profit After Tax (norm)

123,148

342,718

578,270

427,220

547,833

561,473

Profit After Tax (FRS 3)

(76,011)

141,186

312,270

353,720

547,833

561,473

Net loss from discontinued operations

(4,394)

0

0

14,800

0

0

Minority interests

33,126

44,719

64,486

67,124

89,696

88,338

Net profit

(80,405)

141,186

312,270

368,520

547,833

561,473

Net attrib. to shareholders contg. businesses (norm)

90,022

297,998

513,784

360,097

458,137

473,135

Net attrib.to shareholders contg. businesses

(109,137)

96,466

247,784

286,597

458,137

473,135

Average Number of Shares Outstanding (m)

157.4

160.8

250.7

248.4

248.4

248.4

EPS - normalised (c)

 

 

57.20

185.34

204.95

144.97

184.44

190.48

EPS - normalised fully diluted (c)

 

 

56.95

181.51

203.21

144.31

183.60

189.61

EPS - (IFRS) ($)

 

 

(0.72)

0.60

0.99

1.21

1.84

1.90

Dividend per share (c)

0

37

56

80

82

94

Gross Margin (%)

35.0

42.5

42.3

53.2

55.1

54.9

EBITDA Margin (%)

45.4

49.3

52.3

53.2

55.1

54.9

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

20.7

29.6

29.6

28.7

34.3

31.6

BALANCE SHEET

Fixed Assets

 

 

2,330,033

5,093,409

5,404,900

5,324,581

5,454,964

5,552,938

Intangible Assets

5,498

24,851

10,000

10,000

10,000

10,000

Tangible Assets

2,254,476

3,968,746

4,980,200

4,899,881

5,030,264

5,128,238

Investments

70,059

1,099,812

414,700

414,700

414,700

414,700

Current Assets

 

 

652,871

1,168,382

1,366,000

1,585,416

1,713,479

1,904,665

Stocks

266,451

305,075

311,300

311,602

277,373

279,463

Debtors

83,836

104,545

139,900

171,693

217,482

218,856

Cash

288,186

751,563

906,200

1,165,522

1,282,024

1,469,746

Other

14,398

7,199

8,600

(63,400)

(63,400)

(63,400)

Current Liabilities

 

 

(354,931)

(661,171)

(567,100)

(635,151)

(583,731)

(589,961)

Creditors

(312,427)

(612,862)

(552,700)

(620,751)

(569,331)

(575,561)

Short term borrowings

(42,504)

(48,309)

(14,400)

(14,400)

(14,400)

(14,400)

Long Term Liabilities

 

 

(963,736)

(1,647,799)

(1,818,100)

(1,818,100)

(1,818,100)

(1,818,100)

Long term borrowings

(770,902)

(1,026,337)

(878,600)

(878,600)

(878,600)

(878,600)

Other long term liabilities

(192,834)

(621,462)

(939,500)

(939,500)

(939,500)

(939,500)

Net Assets

 

 

1,664,237

3,952,821

4,385,700

4,456,745

4,766,612

5,049,542

CASH FLOW

Operating Cash Flow

 

 

628,617

1,046,370

1,415,306

1,384,215

1,160,193

1,230,786

Net Interest

(35,413)

(53,774)

(26,900)

(58,532)

2,725

3,890

Tax

(109,494)

(186,332)

(205,573)

(213,855)

(216,607)

(149,734)

Capex

(401,227)

(335,599)

(587,496)

(531,089)

(591,844)

(618,678)

Acquisitions/disposals

3,654

(19,000)

(4,700)

15,000

5,000

0

Financing

2,402

100,000

(89,400)

(93,450)

0

0

Dividends

(6,154)

(88,288)

(159,800)

(242,966)

(242,966)

(278,543)

Net Cash Flow

82,385

463,377

341,437

259,322

116,502

187,722

Opening net debt/(cash)

 

 

518,607

525,220

323,083

(13,200)

(272,522)

(389,024)

Other

(88,998)

(261,240)

(5,154)

0

0

0

Closing net debt/(cash)

 

 

525,220

323,083

(13,200)

(272,522)

(389,024)

(576,746)

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


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This 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 £60,000 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 2022 Edison Investment Research Limited (Edison).

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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 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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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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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