Endeavour Mining — Maiden resource paves way for potential project

Consistent with its strategic objective of identifying a new project as part of its five-year exploration strategy, set out in late 2016, Endeavour began exploration at Fetekro (located in north central Côte d’Ivoire at the northern end of the Oumé-Fetekro greenstone belt) in March 2017, following a strategic assessment of its exploration tenements (which ranked the property as a top priority target) and a full reinterpretation of the available historical data. Since then, nearly 32,000m have been drilled, mainly focused on the ‘highly prospective’ Lafigué target, where a large, mineralised vein system encompassing three main mineralised zones (denoted Lafigué South, Center [sic] and North) was defined over an area of 2.5km x 0.6km (being two-thirds of the total mineralised area defined to date). As a result, on 29 October, Endeavour declared a maiden resource at the property, as follows:

The gold assays from the drill holes were composited to 1.0m intervals within the mineralised wireframes and capped at 30g/t gold.

To date therefore, the resource equates to 22.5oz of gold per metre drilled or 479,333oz per square kilometre of mineralisation. In the meantime, drill results suggest that the Lafigué target remains open at depth and to the south-east, while ground geophysics and geochemical data suggest that its mineralisation also extends towards the east and north-east. Based on initial analysis of the ore characteristics and orebody shape, Endeavour believes that these resources could be amenable to open pit mining as mineralisation starts at surface, while preliminary metallurgical test work suggests the potential for high rates of gold recovery.

In addition to those resources defined above, a preliminary assessment of a recent gold-in-soil campaign at Fetekro, coupled with versatile time-domain electromagnetics (VTEM), ground geophysics and geological mapping, suggests the occurrence of additional mineralised systems – and up to 14 targets – located within a 14km radius of the Lafigué target. A number of these targets have already been drill tested on a number of reverse circulation (RC) drilling fences. Of these, Target 4, which is located 4km south-west of Lafigué, is reported to have already returned ‘encouraging results’ and is currently being followed up with additional drilling. At the same time, three further, large gold-in-soil anomalies (which may be related to the shear zones hosting the regional mineralised quartz system veins) have also been identified in the western section of the property, covering an aggregate total area of 11.2km2 (note: 11.2km2 x 479.3koz/km2 = 5.4Moz). As a result, a second, 45,000m exploration (note: 45km x 22.5oz/m = 1.0Moz) campaign has now been launched at the Lafigué target by Endeavour, with the dual goal of:

The campaign will continue into 2019 in conjunction with a regional exploration programme to test nearby targets and is expected to result in an updated mineral resource estimate being published in late 2019.

Fetekro’s 719koz maiden resource equates to 4.0% of Endeavour’s prior, global resource (on a 100% basis), or 4.8% on an attributable basis. However, it equates to a rather more significant 4.5-7.6% of Endeavour’s 9.5-16.0Moz exploration target over the course of the next five years. Moreover, at 2.25g/t, its average grade is 21.0% above the average of Endeavour’s other resources.

Endeavour’s current enterprise value (EV) equates to a resource multiple of US$139.55 per attributable resource oz. On this basis, Fetekro’s resource would/should be valued at US$100.3m (or US$0.93/share). Given that almost all of Endeavour’s other resources relate to assets in which development (as well as exploration) capital has already been sunk, however, such an estimate is likely to be an over-estimation, except in the event that ore derived from the resource could easily be transported to other, nearby processing facilities. Within this context, investors should note that Endeavour’s balance sheet value of its ‘Mining interests’ as at 31 December 2017 (a measure of Endeavour’s investment into its resources in order to achieve their US$139.55/oz valuation) equated to US$73.55 per resource ounce on a 100% basis, which suggests a pre-development valuation of Endeavour’s resources of US$66.00/oz (being 139.55 - 73.55 = 66.00), on which basis Fetekro would be worth US$47.5m (or US$0.44/share).

Adopting a similar methodology, this valuation of US$66.00/oz may be compared with Endeavour’s peers as follows:

Investors should note the wide range of values. In addition, a crude interpretation of a negative result for a company is that it is quite likely to be trading below net book value. Nevertheless, the (simple) average of pre-development resource values of those companies with a positive number is US$51.01/oz, which is acceptably close to the same multiple for Endeavour of US$66.00/oz to provide confidence in both this valuation and this methodology.

In our report, Mining overview: Unlocking the price to NPV discount, published in November 2017, we calculated average values for pure in situ resources, differentiated both by the markets in which they were listed and also by category of resources (as well as on a blended average basis). The results of this process for London- and Canada-listed companies (as well as the global average) plus their implications for the valuation of Fetekro are provided in Exhibit 3, below.

On the basis of this analysis, a minimum value for the Fetekro maiden resource is US$6.0m (second last column, 3.4 + 2.6 = 6.0), or US$8.40/oz, or US$0.06/share, derived from applying Canadian resource multiples differentiated by category (including the apparent anomaly that Canadian investors seemingly apply a counterintuitive discount to indicated resources relative to inferred ones). A maximum value for the Fetekro maiden resource (valued purely as an in situ resource) may otherwise be seen to be US$12.6m (or US$0.12/share), derived by applying a geometric, global mean rating of US$17.54/oz to the resource in its entirety. Note that these valuations (particularly at the lower end) accord closely with the reported investment in the drilling programme to define the resource of US$6.0m.

In valuing Endeavour in our initiation note (see From the ground upwards, published on 16 October) we opted to discount potential cash flows back over four years from end-FY18 and 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 FY22) to reflect the fact that Endeavour is a multi-asset company that has shown a willingness and desire to trade assets, maintain production, reduce costs and maximise returns to shareholders (eg the sale of Youga in FY16 and Nzema in FY17). In recognition of the fact that exploration investment would be required to maintain cash flows at its FY22 level, however, we also opted to include it in our cash flow analysis on the grounds that it may be a critical component of ongoing business performance in its ability to continually extend the lives of the company’s assets, instead of excluding it (as would be our normal practice).

Our estimate of Endeavour’s cash flow remains US$3.38 per share in FY22, on which basis our terminal valuation of the company at end-FY22 is US$33.76/share, which (in conjunction with forecast intervening cash flows) discounts back to a value of US$26.32/share at the start of FY18 and US$29.76/share at the start of FY19 (as per our initiation note published on 16 October).

This underlying valuation remains unchanged, although to be added to it now is our estimate of the potential range of values of US$0.06-0.44/share for the Fetekro maiden resource.