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Research: Metals & Mining
For the second time in less than a month, Endeavour has announced the delineation of a c 1Moz maiden resource – in this case, at Kari Pump, 7km west of the Houndé processing plant in Burkina Faso. As at Fetekro, the majority (98.0%) of the resource has been classified into the indicated category of resources. More significantly, the average grade of the maiden Kari Pump resource is at a 31.8% premium to the average of the pre-existing Houndé resource and a 44.3% premium to the average of the pre-existing Endeavour resource, with further potential upside in the region.
Endeavour Mining |
Pumping it |
Kari Pump maiden resource |
Metals & mining |
19 December 2018 |
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Business description
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For the second time in less than a month, Endeavour has announced the delineation of a c 1Moz maiden resource – in this case, at Kari Pump, 7km west of the Houndé processing plant in Burkina Faso. As at Fetekro, the majority (98.0%) of the resource has been classified into the indicated category of resources. More significantly, the average grade of the maiden Kari Pump resource is at a 31.8% premium to the average of the pre-existing Houndé resource and a 44.3% premium to the average of the pre-existing Endeavour resource, with further potential upside in the region.
Year |
Revenue (US$m) |
EBITDA (US$m) |
PBT* |
Operating cash flow per share (US$) |
Capex (US$m) |
Net debt** (US$m) |
12/16 |
566.5 |
213.9 |
103.4 |
1.91 |
212.3 |
21.4 |
12/17 |
652.1 |
201.2 |
51.6 |
2.25 |
441.4 |
216.8 |
12/18e |
720.5 |
261.0 |
74.8 |
1.53 |
456.5 |
475.4 |
12/19e |
762.1 |
372.1 |
153.3 |
2.77 |
81.4 |
305.9 |
Note: *PBT is normalised, excluding amortisation of acquired intangibles, discontinued operations and exceptional items; **includes restricted cash.
On track for achieving five-year exploration target
Kari Pump’s 1,007koz maiden resource equates to 5.4% of Endeavour’s prior, global resource (on a 100% basis), or 5.7% on an attributable basis. However, it equates to 6.7-10.1% of Endeavour’s five-year exploration target of 10-15Moz and was achieved at a discovery cost of US$9/oz (cf US$15/oz budgeted). Taken together with Fetekro, Endeavour can thus be seen to have achieved 11.5-17.3% of its five-year target in under a year.
Kari Pump valuation range US$1.09-2.16/share
At Endeavour’s (pre-Kari Pump) resource multiple of US$129.09 per attributable resource oz, Kari Pump’s resource would have a value of US$130.0m or US$117.0m (or US$1.09/share) attributable to Endeavour. On the basis of it being processed through the Houndé mill however, at costs comparable to the existing operation (see pages 3-4 for detailed assumptions), we estimate that it has a fundamental value somewhere between US$232.6m, or US$2.16/share, based on mining the total resource from FY21, and US$125.7m, or US$1.17/share, based on mining our estimate of its potential reserve from FY26.
Valuation: US$30.74/sh plus Kari Pump and Fetekro
In valuing Endeavour, we have opted to discount potential cash flows back over four years from end-FY18 and then to apply an ex-growth, terminal multiple of 10x (consistent with a discount rate of 10%) to forecast cash flows in FY22. In the case of Endeavour, our estimate of cash flow in FY22 is US$3.36 per share (including exploration expenditure), in which case our terminal value for the company at end-FY22 is US$33.63/share, which (in conjunction with forecast intervening cash flows) discounts back to a value of US$30.74/share at the start of FY19. This valuation remains unchanged since our last note, although to it may now be added our estimate of the potential value of Kari Pump, in the range US$1.09-2.16/share, as well as that for Fetekro, in the range US$0.06-0.44/share.
Kari Pump maiden resource
For the second time in less than a month, Endeavour has announced the delineation of a c 1Moz maiden resource – in this case, at Kari Pump, 7km west of the Houndé processing plant in Burkina Faso. Owing to the intensive in-fill nature of the exploration programme to define the resource, which was based on a 40m x 40m drilling grid, even more so than at Fetekro, the majority (98.0%) of the resource has been classified into the indicated resource category (see Exhibit 1).
Generally, the mineralisation at Kari Pump is reported to exhibit excellent continuity over 1.3km and to display its typical pinch and swell characteristics with, very often, high grade quartz veining systems over significant thickness alternating with thinner intercepts associated with more moderate grades. The average drill hole intercept was 6.54m at 3.01g/t Au (uncapped) and over 84% of the diamond and reverse circulation (RC) holes drilled into the deposit were reported to have encountered at least one interval of mineralisation of 0.5g/t Au with a minimum width of more than two metres. Overall, the average grade of the maiden Kari Pump resource is at a 31.8% premium to the average of the pre-existing Houndé resource and a 44.3% premium to the most recently published global average Endeavour resource (dating from 31 December 2017) plus Fetekro. What is more, the mineralisation starts at surface and is amenable to open pit mining and approximately 45% of the Indicated resource is located within the oxide and transition zones (and is therefore typically less costly to process than the equivalent sulphide resource). A summary of the Kari Pump maiden resource, including an estimate of its potential reserve (assuming the same resource:reserve conversion ratio as at the main Houndé operation is as follows):
Exhibit 1: Kari Pump maiden resource and Edison estimate of pro-rata reserve
Category |
Resource |
Category |
Reserve |
Reserve:Resource (%) |
Attributable |
|||||||||||
Mt |
Grade (g/t) |
koz |
Mt |
Grade (g/t) |
koz |
Tonnes |
Grade |
Contained gold |
EDV interest (%) |
Resource (koz) |
Reserves (koz) |
|||||
Measured |
0.0 |
0.00 |
0 |
Proven |
0.0 |
0.00 |
0 |
100.0 |
0.0 |
93.8 |
90 |
0.0 |
0.0 |
|||
Indicated |
11.3 |
2.71 |
987 |
Probable |
8.9 |
2.68 |
767 |
78.6 |
99.1 |
77.7 |
90 |
887.9 |
690.2 |
|||
Inferred |
0.3 |
2.21 |
20 |
Possible |
0.0 |
0.00 |
0 |
0.0 |
0.0 |
0.0 |
90 |
18.3 |
0.0 |
|||
Total |
11.6 |
2.70 |
1,007 |
Total |
8.9 |
2.68 |
767 |
76.6 |
99.4 |
76.2 |
90 |
906.2 |
690.2 |
|||
Source: Endeavour Mining, Edison Investment Research
Kari Pump’s 1,007koz maiden resource equates to 5.4% of Endeavour’s prior, global resource (on a 100% basis), or 5.7% on an attributable basis. However, it equates to a rather more significant 6.7-10.1% of Endeavour’s 10-15.0Moz exploration target over the course of the next five years and was achieved at a below average discovery cost of US$9/oz (implying an aggregate exploration cost of US$9.1m in total). Taken together with Fetekro, Endeavour can thus be seen to have achieved 11.5-17.3% of its five-year target in under a year.
Within the context of Houndé, the Kari Pump resource represents 28.6-40.0% of Endeavour’s five-year exploration target of 2.5-3.5Moz for 20.2% of its total budget (see our initiation report, From the ground upwards, published on 16 October 2018). The discovery cost of US$9/oz compares with a budgeted cost of US$15/oz. It increases resources in the measured and indicated categories at Houndé by 40.1% and, at its current milling rate of c 3.6Mtpa, could support operations there for 2.5 years based on Edison’s estimate of potential reserves (see Exhibit 1, above), 3.1 years based on indicated resources only and 3.2 years based on total resources including those in the inferred category.
Regional context
The Kari Pump resource covers an area of 1.3km x 0.8km. To define it, a total of 2,237 holes (majority air core) have been drilled over the course of the past 18 months covering 203,900m (average 91m per hole), of which over 71,000m has been drilled to extend and in-fill the mineralisation within the past six months. Nevertheless, the deposit remains open to the east, north, northwest and southwest. Moreover, it represents only 35% of the wider Kari gold-in-soil anomaly, which covers an area of 6.0km x 2.5km and includes the two other high grade discoveries of Kari Center (1.2km x 0.2km) and Kari West (1.0km x 0.5km), at which resources are expected to be delineated in 2019. Note that the Kari area is located only 7km west of the processing plant and in proximity to an existing haul road that will be used to transport ore from Bouéré.
Potential Kari Pump valuation
At Endeavour’s existing resource multiple of US$129.09 per attributable resource oz, Kari Pump’s resource would have a value of US$130.0m or US$117.0m (or US$1.09/share) attributable to Endeavour. Given that Kari Pump is within 7km, and is thus within easy ore trucking distance, of the Houndé processing plant (in contrast to Fetekro), this valuation approach is appropriate given that the profile of Kari Pump’s resource ounces is similar to that of the majority of those within the group.
Alternatively, looked at from the perspective of a potential mining operation, at a milling rate of 3.6Mtpa (drawn from the existing Houndé operation), an assumed stripping ratio of 13:1, an economic interest of 90%, assumed capex of US$5m, mining losses of 5%, mining dilution of 15%, metallurgical recoveries of 94%, a royalty rate of 6%, transport and refining costs of US$3.35/oz and a mining cost of US$3.50/t ore and US$2.15/t waste, Edison offers the following mine schedule – and, thus, potential fundamental valuation – of the delineated Kari Pump resource at the current time (NB see pages 5-6 for valuation based on reserves):
Exhibit 2: Kari Pump resource potential valuation
2019e |
2020e |
2021e |
2022e |
2023e |
2024e |
|
Tonnes milled (kt) |
3,600 |
3,600 |
3,600 |
1,906 |
||
Diluted grade (g/t) |
2.29 |
2.29 |
2.29 |
2.29 |
||
Contained gold (oz) |
265,607 |
265,607 |
265,607 |
140,615 |
||
Metallurgical recovery (%) |
94.0 |
94.0 |
94.0 |
94.0 |
||
Recovered gold (oz) |
249,671 |
249,671 |
249,671 |
132,179 |
||
Gold price (US$/oz) |
1,437 |
1,304 |
1,303 |
1,264 |
||
Revenue (US$m) |
358,803 |
325,471 |
325,225 |
167,074 |
||
Royalty rate (%) |
6.0 |
6.0 |
6.0 |
6.0 |
||
Royalty (US$000s) |
21,528 |
19,528 |
19,514 |
10,024 |
||
Transport and refining costs (US$/oz) |
3.35 |
3.35 |
3.35 |
3.35 |
||
Transport and refining costs (US$000s) |
12,020 |
10,903 |
10,895 |
5,597 |
||
Net revenue (US$000s) |
325,255 |
295,040 |
294,817 |
151,453 |
||
Ore mining cost (US$/t) |
3.50 |
3.50 |
3.50 |
3.50 |
||
Waste mining cost (US$/t) |
1.85 |
2.08 |
2.53 |
1.92 |
||
Processing costs (US$/t) |
14.49 |
14.21 |
14.49 |
13.22 |
||
G&A cost (US$/t) |
3.28 |
3.28 |
3.28 |
3.28 |
||
Total (US$/t) |
46.90 |
50.14 |
57.30 |
17.08 |
||
Mining cost (US$000s) |
116,682 |
129,346 |
154,122 |
7,366 |
||
Processing and G&A costs (US$000s) |
52,164 |
51,164 |
52,164 |
25,189 |
||
Total (US$000s) |
168,846 |
180,509 |
206,286 |
32,555 |
||
Total cash costs (US$/oz) |
676 |
723 |
826 |
246 |
||
AISC (US$/oz) |
811 |
845 |
948 |
364 |
||
Gross profit (US$000s) |
156,408 |
114,530 |
88,530 |
118,898 |
||
Depreciation (US$000s) |
1,417 |
1,417 |
1,417 |
750 |
||
EBIT (US$000s) |
154,992 |
113,114 |
87,114 |
118,148 |
||
Net interest (US$000s) |
||||||
Pre-tax profit (US$000s) |
154,992 |
113,114 |
87,114 |
118,148 |
||
Tax (US$000s) |
27,124 |
19,795 |
15,245 |
20,676 |
||
Marginal tax rate (%) |
17.5 |
17.5 |
17.5 |
17.5 |
||
PAT (US$000s) |
127,868 |
93,319 |
71,869 |
97,472 |
||
Minority interest (US$000s) |
12,787 |
9,332 |
7,187 |
9,747 |
||
Minority interest (%) |
10.0 |
10.0 |
10.0 |
10.0 |
||
Attributable profit (US$000s) |
115,081 |
83,987 |
64,682 |
87,725 |
||
Capex (US$000s) |
1,667 |
2,500 |
833 |
|||
Attributable cash-flow (US$000s) |
-1,667 |
-2,500 |
115,665 |
85,404 |
66,099 |
88,475 |
NPV10 (US$000's) |
232,635 |
|||||
Do. per oz (US$/oz) |
231.05 |
|||||
Do. per share (US$/sh) |
2.16 |
Source: Edison Investment Research
Note that the above analysis values the Kari Pump resource as though it is brought into production at the earliest possible moment in FY21 which, in Edison’s opinion, is relatively unlikely. At the other extreme, bringing it into production at the latest possible moment (which we estimate to be FY26), our valuation falls to US$144.4m (cf US$232.6m in Exhibit 2, above), or US$143.46 per resource ounce (cf US$231.05/oz, above), or US$1.34/share (cf US$2.16/share).
Performing exactly the same analysis as the above, but on the basis of Edison’s reserve estimate as per Exhibit 1, our valuation is US$202.4m, or US$263.89 per reserve ounce, or US$1.88/share, if Kari Pump is brought into production at the earliest possible opportunity, in FY21, or US$125.7m, or US$163.86 per reserve ounce, or US$1.17/share, if it is brought into production at the latest opportunity, in FY26.
Endeavour valuation (plus Kari Pump plus Fetekro)
In common with past practice, in valuing Endeavour, Edison has opted to discount potential cash flows back over four years from end-FY18 and then to apply an ex-growth terminal multiple of 10x (consistent with using a standardised discount rate of 10% ad infinitum) 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 in order to maintain production, reduce costs and to maximise returns to shareholders (eg the sale of Youga and Nzema in FY16 and FY17, respectively). In recognition of the fact that exploration investment will be required to maintain cash flows at their FY22 level however, we have 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).
At the time of our last note, (Materially ahead of expectations, published on 3 December 2018), our estimate of Endeavour’s cash flow was US$3.36 per share in FY22, on which basis our terminal valuation of the company at end-FY22 was US$33.63/share, which (in conjunction with forecast intervening cash flows) discounted back to a value of US$30.74/share at the start of FY19:
Exhibit 3: Endeavour forecast valuation and cash flow per share, FY18–FY22
|
|
Source: Edison Investment Research |
This valuation remains unchanged, although to it may now be added our estimate of the potential range of values of US$1.09-2.16 /share for the Kari Pump maiden resource (see above) and US$0.06-0.44/share for our estimate of the potential range of values for the Fetekro maiden resource (see our note, Maiden resource paves way for potential project, published on 9 November 2018).
Exhibit 4: Financial summary
US$'000s |
2016 |
2017 |
2018e |
2019e |
2020e |
|||
December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||
PROFIT & LOSS |
||||||||
Revenue |
|
|
566,486 |
652,079 |
720,514 |
762,133 |
1,002,952 |
|
Cost of Sales |
(376,794) |
(597,528) |
(458,343) |
(390,076) |
(441,940) |
|||
Gross Profit |
189,692 |
54,551 |
262,171 |
372,057 |
561,012 |
|||
EBITDA |
|
|
213,916 |
201,166 |
261,042 |
372,057 |
561,012 |
|
Operating Profit (before amort. and except.) |
127,981 |
70,379 |
101,302 |
200,811 |
377,829 |
|||
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
|||
Exceptionals |
(36,272) |
(149,942) |
25,403 |
0 |
0 |
|||
Other |
(1,989) |
(2,242) |
(1,156) |
0 |
0 |
|||
Operating Profit |
89,720 |
(81,805) |
125,549 |
200,811 |
377,829 |
|||
Net Interest |
(24,593) |
(18,789) |
(26,467) |
(47,540) |
(30,592) |
|||
Profit Before Tax (norm) |
|
|
103,388 |
51,590 |
74,835 |
153,271 |
347,237 |
|
Profit Before Tax (FRS 3) |
|
|
65,127 |
(100,594) |
99,082 |
153,271 |
347,237 |
|
Tax |
(27,643) |
(32,945) |
(48,394) |
(55,962) |
(95,285) |
|||
Profit After Tax (norm) |
73,756 |
16,403 |
25,285 |
97,309 |
251,952 |
|||
Profit After Tax (FRS 3) |
37,484 |
(133,539) |
50,688 |
97,309 |
251,952 |
|||
Average Number of Shares Outstanding (m) |
80.6 |
98.5 |
107.7 |
107.8 |
107.8 |
|||
EPS - normalised (c) |
|
|
(37.8) |
(6.5) |
(43.9) |
63.5 |
185.9 |
|
EPS - normalised and fully diluted (c) |
|
(37.5) |
(6.5) |
(42.9) |
62.2 |
181.8 |
||
EPS - (IFRS) (c) |
|
|
28.8 |
(114.5) |
34.7 |
63.5 |
185.9 |
|
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|||
Gross Margin (%) |
33.5 |
8.4 |
36.4 |
48.8 |
55.9 |
|||
EBITDA Margin (%) |
37.8 |
30.8 |
36.2 |
48.8 |
55.9 |
|||
Operating Margin (before GW and except.) (%) |
22.6 |
10.8 |
14.1 |
26.3 |
37.7 |
|||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
1,073,562 |
1,331,745 |
1,477,848 |
1,387,960 |
1,390,711 |
|
Intangible Assets |
29,978 |
6,267 |
6,267 |
6,267 |
6,267 |
|||
Tangible Assets |
1,039,529 |
1,317,952 |
1,464,055 |
1,374,167 |
1,376,918 |
|||
Investments |
4,055 |
7,526 |
7,526 |
7,526 |
7,526 |
|||
Current Assets |
|
|
283,536 |
361,766 |
279,462 |
324,970 |
614,291 |
|
Stocks |
110,404 |
141,898 |
147,044 |
155,537 |
204,684 |
|||
Debtors |
36,572 |
95,212 |
103,734 |
107,155 |
126,948 |
|||
Cash |
124,294 |
122,702 |
0 |
33,594 |
253,974 |
|||
Other |
12,266 |
1,954 |
28,684 |
28,684 |
28,684 |
|||
Current Liabilities |
|
|
(149,626) |
(241,185) |
(213,632) |
(186,496) |
(205,283) |
|
Creditors |
(145,311) |
(223,527) |
(195,974) |
(168,838) |
(187,625) |
|||
Short term borrowings |
(4,315) |
(17,658) |
(17,658) |
(17,658) |
(17,658) |
|||
Long Term Liabilities |
|
|
(246,811) |
(451,705) |
(527,778) |
(391,894) |
(391,894) |
|
Long term borrowings |
(146,651) |
(323,184) |
(459,068) |
(323,184) |
(323,184) |
|||
Other long term liabilities |
(100,160) |
(128,521) |
(68,710) |
(68,710) |
(68,710) |
|||
Net Assets |
|
|
960,661 |
1,000,621 |
1,015,900 |
1,134,540 |
1,407,824 |
|
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
164,522 |
244,092 |
185,719 |
354,338 |
532,191 |
|
Net Interest |
(19,626) |
(15,212) |
(26,467) |
(47,540) |
(30,592) |
|||
Tax |
(10,625) |
(22,301) |
(21,357) |
(55,962) |
(95,285) |
|||
Capex |
(212,275) |
(441,396) |
(456,481) |
(81,358) |
(185,934) |
|||
Acquisitions/disposals |
32,098 |
(37,332) |
60,000 |
0 |
0 |
|||
Financing |
174,702 |
116,536 |
0 |
0 |
0 |
|||
Dividends |
(2,612) |
(5,177) |
0 |
0 |
0 |
|||
Net Cash Flow |
126,184 |
(160,790) |
(258,586) |
169,478 |
220,380 |
|||
Opening net debt/(cash) |
|
|
152,856 |
26,672 |
218,140 |
476,726 |
307,248 |
|
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
|||
Other |
0 |
(30,678) |
0 |
0 |
0 |
|||
Closing net debt/(cash) |
|
|
26,672 |
218,140 |
476,726 |
307,248 |
86,868 |
|
Source: Company sources, Edison Investment Research
|
|
MOD Resources (MOD) is a copper-silver exploration and development company with a substantial ground holding in the Kalahari Copper Belt, Botswana. The company has been very successful with its regional exploration concept, which has led to the discovery and drill-out of the significant T3 copper-silver deposit and the delineation of a preliminary resource at the T1 copper-silver deposit. Regional drilling in the T3 Expansion Project has led to two additional discoveries, A1 and A4, while regional drilling at the T20 Exploration Project has also returned interesting results at T4 and T23. MOD is completing a feasibility study at T3, which will benefit from a coarser grind size and an increased base case plant size, and a scoping study at T3 underground, both due for completion in Q119, while continuing its regional exploration programme.