Endeavour Mining — EndAFO a good thing

On 23 March, Endeavour announced that it had entered into a joint, definitive agreement with SEMAFO, whereby it will acquire all of the issued and outstanding securities of SEMAFO by way of a Plan of Arrangement under the Business Corporations Act (Québec). Under the terms of the agreement, Endeavour will pay 0.1422 shares for each SEMAFO common share, resulting in its issuing an additional 47.6m shares (cf 109.9m currently in issue). Based on the 20-day volume weighted average prices of each company until 20 March, these terms represented a 27.2% price premium for SEMAFO shareholders. Based on the closing prices of each company’s shares on 20 March, they represented a 54.7% premium for SEMAFO shareholders and implied an equity value for SEMAFO of c C$1.0bn. In the aftermath of the transaction, existing Endeavour and SEMAFO shareholders will own approximately 70% and 30%, respectively, of an entity producing c 1Moz gold per year and which generated US$121.6m in pre-financing cash flows in FY19 (note full Edison calculated pro-forma accounts for the enlarged company for FY18 and FY19 are provided in Exhibit 10).

Endeavour’s principal investor, La Mancha, has committed to invest US$100m into the combined entity in order to provide for a larger free float and greater stock liquidity, and both sets of board of directors have unanimously approved the transaction.

Pursuant to the rules of the TSX, the transaction will require approval by a simple majority of the votes cast by Endeavour’s shareholders and a two-thirds majority of votes cast by SEMAFO shareholders. In addition, Endeavour shareholders will be asked to approve the issuance of US$100m Endeavour ordinary shares to La Mancha by a simple majority.

La Mancha, the officers and directors of Endeavour (who together control approximately 31.8% of the outstanding shares of Endeavour) and the officers and directors of SEMAFO have all stated their support for the transaction. In addition to shareholder and court approvals, the transaction is subject to applicable regulatory approvals including TSX approval and the satisfaction of certain other customary closing conditions. The agreement includes customary provisions including non-solicitation provisions, a right to match any superior proposal and reciprocal termination fees of US$20m payable either way depending on circumstances.

It is anticipated that the transaction will close in Q220.

Endeavour is an intermediate gold producer, with four mines in Côte d’Ivoire (Agbaou and Ity) and Burkina Faso (Houndé, Karma) and two major development projects (Fetekro and Kalana) in the highly prospective West African Birimian greenstone belt. Although not restricted to a particular geography or mode of operation, Endeavour has a preference for operating in francophone West Africa and for owner-operated (rather than contractor) mining. Its target is for all of its mines to have operational lives (on average) in excess of 10 years at an all-in sustaining cost (AISC) below US$850/oz. A summary of Endeavour’s strategy and assets may be found in our two Outlook notes From the ground upwards, published on 16 October 2018, and Q419 and FY19 results ahead of expectations, published on 20 March 2020.

Similarly focused on West Africa, SEMAFO currently operates two mines, both in Burkina Faso. SEMAFO’s corporate vision is to establish enduring relationships with the countries in which it operates and, via its experience, expertise and financial acumen, create partnerships to responsibly develop their natural resources. Over the past 20 years, it has successfully commissioned three gold mines in several jurisdictions and produced a cumulative c 3Moz gold (NB see Exhibit 1 for current year cost and production guidance). Following its acquisition of 13 Orbis permits in 2015, its property portfolio in Burkina Faso grew to in excess of 4,500km2, representing one of the most extensive land positions in the country.

A brief summary of SEMAFO’s two operating mines plus its main exploration assets is provided below.

The Boungou permit, which contains the Boungou deposit, lies within the Diapaga greenstone belt, a north-east to south-west orientated belt that extends over 250km in length and over 50km in width in the Est region of south-eastern Burkina Faso. SEMAFO holds four contiguous permits, collectively known as the Tapoa Permit Group, covering approximately 70km in strike length along the Diapaga Belt. Laterite and alluvium cover extensive (lateral) portions of the permit; however, both are generally less than 10m in thickness

Commercial production at Boungou, which comprises an open-pit mine and 4,000tpd carbon-in-pulp processing plant, began on 1 September 2018. In 2019 (the first full year of operations), the mine delivered a total of 205,000oz gold at an AISC of US$497/oz over a 10-month period. However, operations were suspended in November, after an attack by unidentified insurgents on a convoy of five buses carrying 241 contractors and employees on the road between Fada and the mine site escorted by military personnel resulted in at least 99 casualties (killed and wounded). Prior to the attack, the mine had been forecast to produce 220,000–240,000oz gold.

While not detracting from the tragedy of the attack at both a personal and a corporate level, Endeavour has an enviable and long-standing track record in providing security for its sites and also a very good relationship with the government. One aspect of this that differentiates Endeavour, in particular, from its peers is that security at Endeavour is run as a business unit and not as a function of a mine’s general manager’s responsibilities. Among other things, this will mean the combined group of Endeavour and SEMAFO will be better positioned to manage its security in the region than previously, with Endeavour’s specialist security unit seeking to implement many of its security procedures and protocols at the earliest practicable moment. To that end, Boungou has been visited by both Endeavour’s head of security and also its president and CEO, Sébastien de Montessus and both are reported to be ‘very confident’ they can run the site securely. In the meantime, in February, SEMAFO announced a phased re-opening plan, whereby it will process stockpiled material during an initial three-month phase, during which it will use on-site supplies with limited deliveries of new supplies. All other things being equal, the plans anticipate a restart of mining activities in Q420, while continuing to process the current stockpile of 1.1Mt at an average grade of 3.4 g/t Au. However, to increase the frequency of deliveries required to operate after the initial three months, SEMAFO has stated that it will ‘need the government to improve security on the public road and in the surrounding region’, to which end it is in discussion with the authorities regarding the necessary security plan.

Capital costs relating to the re-start of the mine in Q4 are expected to amount to no more than US$10m, of which US$7m is represented by stripping costs and US$2m by sustaining capital. In the medium to longer term, Boungou’s target AISC is c US$500/oz.

The Mana mine is located 260km south-west of Burkina Faso’s capital Ouagadougou. Originally a grassroots discovery, the processing plant has been expanded four times since its first gold pour in 2008 and it has now evolved into the third largest mine in the country with milling capacity in excess of 7,200tpd (2.6Mtpa) and having produced c 2.0Moz gold over the course of its life to date. In 2014, SEMAFO developed the high-grade Siou deposit from a blind discovery to production in a mere 18 months, thereby boosting both the mine’s production and reserve grade. As a result, production at Mana is now derived from both the Siou underground and open pits as well as the Wona open pit.

Siou is a high-grade gold deposit located some 20km from Mana. Conversion of Siou from an open pit into an underground mining operation began in Q318 with full underground production expected in Q120. A pre-feasibility study investigated the potential for extracting the deeper zone of the Siou deposit using underground mining operations (mainly long-hole stoping). Access to the operations is through a single portal and a 5.5m x 5.5m ramp at a 14° gradient. The location of the portal will allow mining in the northern part of the Siou pit to continue uninterrupted. The ultimate size of the underground mining operation will be more than 600m along strike by 200m deep. With the development of the underground project, a summary of the Siou operation in its entirety is as follows:

In early August 2019, SEMAFO reported a pit wall failure at Mana in the Wona pit. Since SEMAFO was then engaged in mining the southern part of the Wona pit, no mining was underway in the affected area at the time, no one was injured and no equipment was damaged, although, under the 2019 mine plan, some 45,000oz had been expected to be produced from the northern portion of the pit between late August and December. To regain access to ore in Wona North and to operate safely, SEMAFO made the decision to defer mining there until Q120 and, in the meantime, to bring forward the mining of 6Mt of waste material that was otherwise scheduled for FY21 and to push back the pit wall. As a result, production guidance for Mana in FY19 was reduced from 170–190koz to 130–140koz, although guidance for all-in sustaining costs remained ostensibly unchanged as the majority of the costs relating to the wall failure were capitalised. The mining plan for the Siou pit was not affected, however, and guidance for Boungou (at the time) was left unchanged at 220–240koz at an AISC of US$470–510/oz.

A summary of SEMAFO’s production guidance for FY20 is as follows:

From FY21 onwards, Mana’s AISC is targeted at less than US$850/oz for the remaining four to five years of its formal life. Note that the figures in Exhibit 1 may be compared with Endeavour’s cost and production guidance for its assets in FY20 in Exhibit 12, below.

While Mana has only four to five years of formal life remaining, based on its reserves of 15.0Mt of ore, its additional 52.6Mt of resources have the potential to more than quadruple this. With a land position over 2,035km2 on the highly prospective Houndé gold belt, since November 1999 SEMAFO has completed more than 1,700,000m of drilling at Mana. In 2020, a US$2m budget has been established to follow up on targets identified by a geological review conducted by an external consultant in 2019. The majority of the 3,800m reverse circulation (RC) drill campaign will be carried out on three different areas around Siou. SEMAFO will also conduct an underground drill programme to test if mineralisation extends at depth below the existing underground mining plan.

The Bantou project includes Bantou Nord, Bantou and the Karankasso Zones (20% owned by Sarama), located some 170km south of Mana, also along the Houndé greenstone belt in Burkina Faso. A total of 1.2Moz gold were delineated by SEMAFO at Bantou in 2019 to add to the 0.7Moz added via the acquisition of Savary Gold's Karankasso properties. As of 31 December 2019, inferred mineral resources at Bantou amounted to 2.2Moz of gold and its initial 2020 exploration budget of US$4m is likely to increase as the exploration programme moves outside the existing zones and follows up promising intersections such as 14.6 g/t recorded over 21m at Tiébi.

Located 250km south-east of Ouagadougou, the Nabanga project lies within the Nabanga exploration permit, comprising a resource of almost 1.0Moz:

On 30 September, SEMAFO announced the results of a preliminary economic assessment (PEA) at Nabanga. Highlights of the study were as follows:

In addition, opportunities exist to improve returns through an increase in resources and/or additional cost saving measures during and after mine development.

The Korhogo project comprises a 380km2 exploration permit in the northern region of Côte d’Ivoire on the Banfora greenstone belt, which also hosts the multi-million ounce Tongon and Banfora gold deposits.

A provision of US$1m was allocated to exploration on Korhogo in 2019 in order to conduct auger and trenching programs in the southern part of the permit.

A summary of SEMAFO’s geological assets compared with those of Endeavour is as follows:

Aside from Endeavour’s higher resource and reserve numbers in absolute terms, also notable within the context of the above summary is Endeavour’s higher average conversion of resources into reserves (to date).

In general, the combination of Endeavour and SEMAFO is also a combination of two successful and accomplished management groups with, in a number of ways, complementary management experience. From an operational and strategic perspective, the three main objectives achieved by the acquisition of SEMAFO by Endeavour are as follows:

From a financial perspective, the combination will allow for the usual cost savings in general and administrative costs. On average, the two groups, combined, recorded a return on capital employed of 11% in FY19 (management calculation). This they expect to increase to in excess of 20% in the near future, as the combined entity transitions from ‘investment’ mode (as represented by Endeavour’s recent investment into the Ity CIL project and SEMAFO’s investment in the Boungou project) to ‘harvest’ mode.

The combination of Endeavour and SEMAFO, two companies that specialise in gold mining in West Africa, will create the largest, single producer of gold in a region that (by Endeavour’s estimation) ranks number one in the world in terms of exploration success and number four in the world in terms of production over the course of the past 10 years:

In terms of price, Endeavour’s acquisition of SEMAFO is accretive to shareholders on a number of important measures of profitability and cash flow (see ‘Price of the acquisition’, below). In turn, the combination will allow it certain opportunities, such as:

In the near term, Endeavour’s focus is on cash flow generation. The acquisition of SEMAFO will immediately add Mana and Boungou to the combined company’s portfolio of producing mines and Bantou and Nabanga to its portfolio of near-term developments. As such, it will have four mines (Houndé, Ity, Mana and Boungou) with the ability to produce in the order of 200koz annually (see Exhibits 1 and 11), underpinning group production in excess of 1Moz per annum from six mines (including Karma and Agbaou) at an immediate AISC below US$900/oz and a targeted AISC of US$800/oz and certainly within the bottom third of the global cost curve.

In addition to being the largest single gold producer in West Africa, the combined entity will also be the largest producer in either Burkina Faso or Ivory Coast, individually, with a special focus on both the highly productive Houndé belt in the former and the Ity belt in the latter.

At present, management estimates the combined group has a pro-forma US$500m in liquidity immediately available to it via its various banking arrangements.

At the same time as becoming the largest regional producer of gold in West Africa, the combined Endeavour-SEMAFO entity will also be among the top 15 gold producers globally, as measured by both gold output and market capitalisation:

In relative terms, the acquisition will project the combined entity to the bottom of the group of super-major gold mining companies, globally (see Exhibit 16). From a practical perspective, the new company’s scale could make it a natural partner of choice for governments looking to develop their gold mining industries in the region.

On the Thursday immediately prior to the announcement of the acquisition, the relative valuations of Endeavour and of SEMAFO were as follows:

Readers should note the discount of the SEMAFO multiples relative to the Endeavour multiples indicating that, at the time, the transaction would have been accretive to Endeavour shareholders on a relative valuation basis.

As at the time of writing, the same valuation measures are as shown in Exhibit 8, indicating that the transaction remains accretive to Endeavour shareholders notwithstanding the disproportionate intervening increases in SEMAFO’s multiples as a result of its re-rating since the transaction was announced (note that SEMAFO is currently trading at, to all intents and purposes, exactly the price that would be expected from Endeavour’s share price and the acquisition terms):

As noted previously, while Edison has analysed Endeavour since October 2018, it has never followed SEMAFO. As a result, we are not able to represent the price being offered by Endeavour for SEMAFO in terms of a detailed discounted cash (or dividend) flow valuation. Nor, at this stage, are we able to provide a detailed cash (or dividend) flow valuation for the combined entity.

Nevertheless, a summary of the valuations of the geological assets of both companies plus Edison’s estimate of the valuation of the consolidated group based on the companies’ respective reserves and resources (assuming imminent closure of the transaction), both at the current time and when the deal was announced, is as follows:

Of note, within the context of the analysis in Exhibit 9, is the similarity between the current reserve valuations of the two companies (as evidenced in the column entitled ‘EV per reserve oz’). Differences in the valuation of resource ounces between the two companies may then be explained in terms of Endeavour’s historically higher rate of conversion of resources into reserves.

In the aftermath of the acquisition, the combined entity’s immediate strategic imperatives will be the continuation of exploration at Ity and Houndé plus investigating the potential to extend the mine lives at Mana and Boungou.

While Edison has provided research and analysis on Endeavour since at least October 2018 (see our initiation note From the ground upwards, published on 16 October 2018), we have never formally followed SEMAFO. As a result, we have not yet undertaken any forward-looking analysis or forecasts of the combined group. Nevertheless, with that proviso, on the basis of SEMAFO’s historical financial results for 2018 and 2019, Edison has constructed the following pro-forma income and cash flow statements for the combined group plus its pro-forma end-FY19 balance sheet (note that the year-end for each company prior to the merger was 31 December):

Self-evidently, since they are historical in nature, these numbers do not capture any transaction related impact on the financials, which will instead be recognised in FY20’s results. On the closure of the transaction, at current prices, Edison estimates that approximately US$51.2m in ‘goodwill’ will be written off by Endeavour against reserves, which compares with SEMAFO’s year-end 2019 net asset (book) value attributable to shareholders of US$798.1m. Readers should note that, for ease of presentation:

Edison’s estimates of the contributions of each to the pro-forma income and cash-flow statements, above, to be as follows:

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

Production and cost guidance for FY20, compared with Edison’s forecasts, is as follows:

Readers should note that changes in our cost forecasts relative to those set out in our last note (see Q419 and FY19 results ahead of expectations, published on 20 March 2020) have arisen solely as a consequence of our increased gold price expectations for the year (see ‘FY20 financial forecasts by quarter’, below), which affect royalties payable by Endeavour’s mines that, in their turn, contribute to AISC estimates. All other forecasts remain unchanged.

In general, the first half of FY20 in particular is expected to be an extension of circumstances in Q419. Ity will continue to mine into harder fresh ore at Daapleu, which will restrain recoveries before a degree of improvement in H220. However, its CIL plant should naturally be less affected by the uncertainties of the Q3 rainy season than its historical heap leach operation. In addition, the second lift of its tailings storage facility is reported to be progressing well and management believes that the mine, which is located in an area of acknowledged high rainfall, is now better prepared for the FY20 wet season than in previous years. Performance at Houndé will depend largely on its ability to mine Kari Pump in H220, for which a permit is expected to be received in Q2/Q3. In the meantime, it will continue to mine predominantly hard ore at a relatively high stripping ratio in H120, although this will be somewhat mitigated by its plant continuing to operate at or above nameplate capacity throughout the year. Readers should note that the difference between Edison’s cost and production forecasts for FY20 and company guidance may be explained by the timing of operations at Kari Pump. Whereas management expects a contribution from Kari Pump’s materially higher grade ore in H220, Edison’s forecasts assume that there is no such contribution until FY21, with the result that our cost forecasts in particular are slightly above the top of the guidance range for FY20 (and are therefore inherently conservative). At Agbaou, harder ore is expected to be mined, while the overall stripping ratio is anticipated to decrease slightly and throughput and recovery rates to decrease marginally owing to the harder ore blend. In the meantime, tonnes stacked at Karma are projected to increase as a result of the installation of the new stacker system and grades and recoveries to remain consistent with Q419 (albeit to improve upon FY19 generally, which was adversely affected by maintenance downtime related to the installation and commissioning of the tripper conveyor in addition to the heavy rains, which resulted in an increase in unit mining costs, among other things).

Whereas, in our last report (see Q419 and FY19 results ahead of expectations, published on 20 March 2020), we were forecasting quarterly gold prices of US$1,566/oz in Q120 followed by US$1,479/oz for the remainder of the year, we have now increased these to US$1,581/oz for Q120, US$1,686/oz for Q220 and US$1,670/oz for the remainder of the year. On this basis, Edison’s financial forecasts for Endeavour for FY20, by quarter, are now as follows (note that there has been no material effect of the coronavirus, to date, on Endeavour’s operations – see below):

Relative to our last note, all other forecasts except the gold price for FY20 remain unchanged. Nevertheless, readers are cautioned that forecasting on a quarterly basis is prone to large variations between actual and forecast numbers. To this end, it is worth noting that the top end of Endeavour’s production guidance is 37.4koz gold (5.3%) above our forecast for the year, which is worth a material US$59.0m in additional revenue to the company (net of royalties) and therefore has the ability to increase our estimate of Endeavour’s FY20 profit before tax by 20.6% (all other things being equal). As such, the exhibit above should be regarded as indicative, rather than prescriptive, particularly with respect to individual quarters. Within that context a comparison between Edison’s FY20 adjusted net EPS from continuing operations estimates and consensus estimates, by quarter, is as follows:

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 FY20, therefore, we have opted to discount potential cash flows back over three years from FY20 and then to apply an ex-growth terminal multiple of 10x (consistent with using a standardised discount rate of 10%) to forecast cash flows in that year (ie FY22). In the normal course of events, exploration expenditure would be excluded from such a calculation on the basis that it is an investment. In the case of Endeavour, however, we have included it in our estimate of FY22 cash flows on the grounds that it may be a critical component of ongoing business performance in its ability to continually expand and extend the lives of the company’s assets. Note that, in the aftermath of the acquisition, the combined entity’s immediate strategic imperatives will be the continuation of exploration at Ity and Houndé plus investigating the potential to extend the mine lives of Mana and Boungou.

Compared with our last note, our estimate of Endeavour’s cash flow in FY22 on the above basis has increased by 2.0% to US$4.04 per share (cf US$3.96/share previously – the change being largely a consequence of the effect of lower levels of net debt on the interest charge in FY22), which should be credible within the context of its having generated US$1.10/share in cash flow from operations in Q419 alone. On this basis, our terminal valuation of the company at end-FY22 is US$40.38/share (cf US$39.62/share previously), which (in conjunction with forecast intervening cash flows) discounts back to a value of US$33.38/share at the start of FY20 (cf US$32.74/share previously).

Endeavour’s valuation on a series of commonly used measures, relative to a selection of gold mining majors, is as follows:

Of note is the fact that Endeavour’s valuation is materially cheaper than the averages of the majors on 100% of measures, regardless of whether Edison or consensus forecasts are used. On an individual basis, it is cheaper than the majors on at least 94% (34 out of 36) of valuation measures.

Endeavour had US$535.9m in net debt on its balance sheet at end-Q419, after US$40.2m in net capex during the quarter (vs US$110.8m in Q318). This level of net debt equates to a gearing (net debt/equity) ratio of 74.7% and leverage (net debt/[net debt + equity]) ratio of 42.7%. Note that US$535.9m reconciles with Endeavour’s Q419 balance sheet; it differs from the figure of US$528.2m quoted in some of the company’s other materials on account of the fact that the latter is calculated on the basis of the value of the minimum equipment finance obligations discounted back to present value rather than being presented 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 either Kalana and/or Fetekro. In the new gold price environment, cash flows were strongly positive in Q419 and we expect them to remain strongly positive into the foreseeable future, such that (excluding the merger with SEMAFO) we are forecasting that the company would have net debt of c US$394.1m as at end-FY20, which would equate to a gearing ratio of 43.8% and a leverage ratio of 30.5%. Thereafter, net debt would decline rapidly such that, all other things being equal, we estimate that the company would be net debt-free early in FY22 notwithstanding any capex related to the Kalana project, at which point it would have potentially been able to make dividend distributions to shareholders.

In contrast to Endeavour, as at end-December 2019, SEMAFO had US$10.7m in net cash on its balance sheet (excluding a further US$10.0m in ‘restricted cash’). When consolidated with Endeavour’s accounts, SEMAFO’s net cash position results in a group consolidated net debt position of US$515.2m (including ‘restricted cash’) as at end-December FY19 (see Exhibit 10). On the group’s expanded equity base, this results in a gearing (net debt/equity) ratio of 34.0% and a leverage (net debt/[net debt + equity]) ratio of 25.4%. Even under the influence of Endeavour’s assets’ cash flows alone, we would still expect the combined company to be net debt free in late FY21 based on our current gold price forecasts and assuming that the companies’ operations are not unduly affected by the coronavirus. Within this context, readers should note that SEMAFO recorded US$71.2m in positive pre-financing cash flows in FY19.

During the year ended 31 December 2019, Endeavour put in place a gold revenue protection programme in order to maximise cash flow certainty during its debt reimbursement phase. Similar to the strategy it put in place during its recent construction phases, this comprises a deferred premium collar strategy using written (sold) call options and bought put options to (effectively) create a synthetic short position. The programme began on 1 July 2019 and will end on 30 June 2020 and covers a total of 360,000oz (approximately 50% of Endeavour’s total estimated production over the period), with a floor price of US$1,358/oz and a ceiling price of US$1,500/oz. As at end-Q419, 210,000oz remain outstanding under the collar derivative liability, implying that call options over 150,000oz of gold were exercised by counterparties in Q3 and Q419.

Edison’s short- to medium-term gold price forecasts are those set out in our recent report, Portents of economic weakness: Gold – doves in the ascendant, published on 14 August 2019, expressed in both nominal and real terms, below:

At US$1,670/oz at the time of writing, the gold price is currently 2.1% above Edison’s price forecast for CY20. In common with Edison’s stated practice, however, we use prevailing prices to generate our forecasts for the remainder of the current year (see Exhibit 13), followed by long-term forecasts thereafter (Exhibit 20).

While it is tempting to assume that a gold price above US$1,500/oz will automatically result in losses on Endeavour’s gold revenue protection programme, recent history would suggest that this is not a foregone conclusion. Exhibit 18, in particular, details Edison’s estimates of the losses and gains incurred by the programme during the past two quarters within the context of the gold price movement during the quarters and the extent of potential losses in Q120 and Q220, assuming that all remaining ounces covered by the revenue protection programme are exercised during those periods:

Self-evidently, the extent of actual losses realised depends on, among other things, the timing and the exact price of gold when the contracts are exercised. Nevertheless, while the extent of the potential realised losses on the gold revenue protection programme in Q120 could not be considered trivial, it is worth noting that, historically, gains (or losses) on the gold revenue protection programme have not always been the largest constituent part of total gains (or losses) on financial instruments, as in Q319, as a case in point, below:

As a result of the inherent uncertainties surrounding gains (or losses) from financial instruments, they have been excluded from our forecasts in Exhibits 13 and 20. While the gold price protection strategy programme is a limited one therefore, investors should nevertheless be aware that the remaining contracts outstanding potentially represent an up to US$44.520m (US$0.405 per share gross of tax) risk to our FY20 earnings forecasts (albeit not our normalised or adjusted earnings forecasts).

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

Whether as a direct result of these measures or not, of all of the (populated) continents in the world, Africa to date has been the least affected by COVID-19. Endeavour has been supporting the national response in close collaboration with the health authorities in its host countries. In addition, it has mobilised and dispatched an expert medical response team to the region to provide it with an on-hand unit to respond rapidly to any infections that might arise at its mines.

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

On 14 March 2020, Endeavour was informed that an employee at the Houndé mine in Burkina Faso tested positive for COVID-19. The employee experienced mild symptoms hours after arriving at site, following his return from the UK. In line with the company’s COVID-19 protocol and procedures, the Burkinabe health authorities were immediately notified and the employee was placed in quarantine. The small number of people who had come into contact with the employee were all identified and also placed in quarantine as a preventative measure. As the employee did not show symptoms upon arrival and passed the mandatory health screening, the company further increased its preventive measures by introducing a mandatory 14-day quarantine period for any employees or contractors arriving in West Africa. As a result, of the few employees who had previously tested positive for COVID-19, all have now recovered and there have been no new reported cases since.

Consequently, Endeavour states that it has not witnessed any impact to production or operations at any of its mines or exploration activities as a result of COVID-19. It also states that it has sufficient inventory of supplies and equipment until at least the end of July 2020, while suppliers have confirmed that placed and forecast orders are intact. In the meantime, Endeavour has stated a readiness, if necessary, to charter its own planes to keep its operations supplied with necessary supplies and equipment.

From a financial perspective, Endeavour calculates its current cash-burn rate to be of the order of c US$70m per month, with the potential to reduce to US$25–30m per month (including paying all salaries) in the event that all mines are put on care and maintenance. As such, its current access to c US$300m of liquidity equates to approximately four months’ worth of costs at current rates of operation or 10 months at reduced rates.

To date, Endeavour’s efforts to combat the disease have concentrated on its global supply chain, health and safety systems, community relations and communication teams and, notably, includes the provision of medical equipment and supplies to local communities, such as masks, gloves and cleaning equipment, training dozens of local health workers and running COVID-19 awareness campaigns. It has undertaken to continue to provide these essential supplies and services for the duration of the pandemic in support of the healthcare centres in its local communities.

Simultaneously, Endeavour’s president and CEO Sébastien de Montessus has said that he will donate 30% of his base salary, and members of the leadership team and the board of directors have also volunteered to donate a portion of their salaries or fees for the next three months to combating the outbreak. As a company, Endeavour has said that it will match these funds to result in a total donation of approximately US$1m. The funds will be deployed by Endeavour’s community relations and medical teams to source much needed medical equipment for local community health centres and also to provide financial support to families and schools that have been affected by a loss of income as a result of the disease. These donations, combined with the amount already spent at the mines and supporting national and local efforts in Cote d’Ivoire, Burkina Faso, and Mali, will bring Endeavour’s total contribution to c US$6m.