Endeavour Mining — Leaner and ready to grow

At the time of the sale of its 90% interests in the Boungou and Wahgnion mines, Endeavour revised its FY23 production guidance and now expects to achieve production of 1,060–1,135koz (cf 1,325–1,425koz) at an all-in sustaining cost (AISC) of US$895–950/oz (previously US$940–995/oz). As discussed in our last quarterly results update note and reaffirmed by its Q223 results, Endeavour still expects production from its remaining assets to be weighted towards H223 after the company focused on development over production in H123. This is owing to lower grades processed at Sabodala in preparation for in-pit tailings deposition and development of the new Massawa North Zone satellite pit, while Houndé focused on higher stripping activity in Q123, allowing access to higher-grade mining areas in H223. As a consequence, our forecasts for FY23 are for gold production of 1,098koz at an AISC of US$890/oz, with notably improved production from Sabodala-Massawa, Mana and Houndé in Q424. In the longer term, in line with Endeavour’s company strategy, the divestment of Boungou and Wahgnion actively supports the growth of larger, low AISC and longer-life assets such as the Lafigué greenfield project and the Sabodala-Massawa BIOX expansion. At the same time Endeavour continues to expand its exploration budget from US$65m in FY23 previously to US$80m (of which c 60–70% will be expensed). From this, the Tanda-Iguela asset is their primary exploration focus, which to date, has completed 123,514m if the planned 180,000m drilling program (cf 70,000m originally planned). The Company remains on track to publish an updated resource in Q423, which expects to convert inferred resources to indicated while substantially increasing the overall resource base. The drill results released on 11 October 2023 highlight the mineralisation zone increase, where the original Assafou deposit’s 2022 maiden Indicated resource now only covers approximately 18% of the extended 3.3km long mineralised envelope, which remains open along strike and at depth.

In the light of events over recent months, we have:

Edison has updated its gold price forecasts, derived with respect to the gold price’s historical correlation with the total US monetary base, inflation and currency in circulation. In our latest gold report (Shades of the 1970s), we have added two further analyses compared with previous reports: one that looks at gold in the context of the absolute level of the US Consumer Price Index (CPI) and one that looks at the gold price in the context of real US interest rates (for these purposes, defined as the Fed funds rate minus the rate of US CPI inflation). Finally, we have brought the process all together with a series of multiple regression analyses that look at the price of gold in the context of these variables simultaneously.

We recognise that there is significant scope for upside in the price of gold relative to our scenarios listed above. However, in deference to the principle of conservatism, for the purposes of our gold equity valuations, we have decided to make our formal gold price forecasts the lowest number from each of our multiple regression analyses. Nevertheless, this remains a considerable increase relative to our prior forecasts (see A Golden Future published in June 2020) as shown below:

As a result, we estimate that Endeavour’s earnings from mining operations should improve throughout H223 in real terms accounting for the sale of non-core assets:

Note that Endeavour changed its definition of cash costs in Q420 to include royalties. The decision was made so that Endeavour could be more consistent in reporting in the context of its peer group. For reasons of comparability with past results, however, as well as ease of forecasting (given royalties are reported as a standalone item distinct from operating expenses), we are continuing to present total cash costs in exhibits excluding royalties.

In the wake of the changes made to our forecasts, a comparison between our quarterly and full-year forecast and consensus forecasts for FY23 adjusted net EPS 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, Tabakoto in FY18, Agbaou in FY20, Karma in FY22 and Boungou and Wahgnion in FY23, 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 FY23, for Endeavour we have opted to discount four years of forecast cash flows in FY23–26 back to FY23, then 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). We would normally exclude exploration expenditure from such a calculation on the basis that it is an investment. In the case of Endeavour, however, we include it because it is a critical component of the company’s ability to continually expand and extend the lives of its mines.

Endeavour continues to enjoy organic growth, with management aiming to expand current projects and delineate further resources. This is shown across three key ventures. First, the BIOX expansion at Sabodala-Massawa, which remains on budget and is set for completion in Q224 with US$217.1m (or 75%) of the total growth capital committed to date. Second, the Lafigué greenfield project construction, with US$264.9m or 59% of the total budget committed following the results of a robust definitive feasibility study on schedule for Q324. Third, Endeavour will continue its company-wide exploration programme with an US$80m budget for FY23 (US$51m spent in H123), with a key focus on the new Tanda-Iguela discovery, of which 60–70% will be expensed. The company has recently committed to a 157% increase in its drilling programme at Tanda-Iguela to 180,000m where an updated resource estimate is expected in H223.

In the longer term, Endeavour’s ongoing development activities are poised to more than offset the reduction of sales from Boungou and Wahgnion. Significant improvements to both production and AISC are expected as the BIOX expansion comes online next year (Q224), with further increases expected in the near future as the Lafigué greenfield project progresses.

We have updated our FY26 cash flow estimate to US$4.08/share (cf US$4.25/share previously, prior to the sales of Boungou and Wahgnion), which implies a terminal valuation of Endeavour at end-FY26 of US$40.77/share, calculated using a discount rate of 10%. With forecast intervening cash flows, this terminal valuation then discounts back to a present valuation of US$33.52/share (cf US$36.73/share, previously) at the start of FY23, as shown in Exhibit 4. On a headline basis, it compares with the valuation of US$36.73 prior to the sales of Boungou and Wahgnion – a decline of only 8.7%.

Now that Endeavour is one of the world’s most important producers of gold, we believe it can increasingly attract lower-cost finance, which leads us to also consider a CAPM-derived valuation. Long-term nominal equity returns have been 9% and 30-year break-evens indicate an inflation rate of 2.4197 % (source Bloomberg, 9 October 2023) versus 2.2345% previously. These two measures imply an expected real equity return of 6.42% (1.09/1.024197) and applying this to our forecast cash flows would imply a terminal valuation for Endeavour of US$63.46/share (US$64.20/share previously) and a current valuation of US$55.79/share (US$58.15/share previously).

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

Of note is that, without exception, Endeavour’s valuation is lower than the averages of all nine of the measures shown in Exhibit 5, regardless of whether Edison or consensus forecasts are used. On an individual basis, it is lower than its senior gold mining peers on at least 48 out of 54 (89%) valuation measures if Edison forecasts are used and 43 out of 54 (80%) 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$25.50 (C$34.79 or £21.33). The current London Stock Exchange share price is £15.53, equivalent to US$18.56 at an exchange rate of US$1.1954/£.