Endeavour Mining — Quarter end refinements and Lafigué go-ahead

Endeavour Mining (LSE: EDV)

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Endeavour Mining — Quarter end refinements and Lafigué go-ahead

Endeavour’s Q322 results are scheduled for release on 10 November. In the wake of the quarter’s end, we have refined our earnings forecasts to reflect a lower gold price in both Q3 (US$1,727/oz cf US$1,763/oz previously – down 2.0%) and Q4 (US$1,669/oz cf US$1,776/oz previously – down 6.0%) as well as some of the habitual disruption to operations that typically occur in Q3 on account of the seasonal rains in West Africa. In the meantime, Endeavour has announced the go-ahead of its Lafigué project and we understand the company remains essentially unaffected by recent political developments in Burkina Faso.

Lord Ashbourne

Written by

Lord Ashbourne

Director, Energy & Resources

Endeavour Mining

Quarter end refinements and Lafigué go-ahead

Q322 results preview and Lafigué go-ahead

Metals and mining

18 October 2022

Price

1,497p

Market cap

£3,693m

C$1.3715/US$, US$1.1344/£

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

232.6

Shares in issue

246.7m

Free float

75.2%

Code

EDV

Primary exchange

LSE

Secondary exchange

TSX, USOTC

Share price performance

%

1m

3m

12m

Abs

(9.9)

(8.2)

(20.0)

Rel (local)

(5.3)

(4.4)

(12.8)

52-week high/low

2,100p

1,465

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

Q322 results

10 November 2022

Exploration update

November 2022

Q422/FY22 results

March 2023

Analyst

Lord Ashbourne

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

Endeavour’s Q322 results are scheduled for release on 10 November. In the wake of the quarter’s end, we have refined our earnings forecasts to reflect a lower gold price in both Q3 (US$1,727/oz cf US$1,763/oz previously – down 2.0%) and Q4 (US$1,669/oz cf US$1,776/oz previously – down 6.0%) as well as some of the habitual disruption to operations that typically occur in Q3 on account of the seasonal rains in West Africa. In the meantime, Endeavour has announced the go-ahead of its Lafigué project and we understand the company remains essentially unaffected by recent political developments in Burkina Faso.

Year

end

Revenue
(US$m)

EBITDA (US$m)

PBT*
(US$m)

Operating cash flow per share (US$)

DPS
(c)

Yield
(%)

12/20

1,847.9

910.3

501.2

5.35

37

2.2

12/21

2,903.8

1,517.3

756.5

4.83

56

3.3

12/22e

2,410.9

1,241.7

572.7

4.51

81

4.8

12/23e

2,219.0

1,223.2

763.8

3.76

84

4.9

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

A few traditional and non-traditional disruptions

In the case of Q322 we believe that the main effect of an uncharacteristically high level of rainfall in Senegal will have been to reduce production at Sabodala-Massawa to c 85,000oz. In addition, we suspect that mine sequencing will also have been instrumental in keeping mining costs, in particular at Boungou, at around Q2 levels (although we do still expect them to reduce in Q4, which is traditionally Endeavour’s strongest quarter), while also temporarily delaying access to high grade ore at Wahgnion’s Nogbele and Fourkoura pits ahead of the commissioning of the high grade Samavogo pit relatively late in the quarter, in September.

Lafigué adds c US$1.93/share in NPV5

In the meantime, on Monday, Endeavour Mining announced the start of construction at its cornerstone 203koz pa Lafigué project in the Cote d’Ivoire in parallel with the results of a definitive feasibility study (DFS) showing a post-tax NPV5 for the project of US$477m (US$1.93/share) at a gold price of US$1,500/oz.

Valuation: Fundamental value unchanged

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, we calculate a present valuation for the company of US$35.46/share (cf US$35.54 previously) if performed using a 10% discount rate or US$55.63/share if performed using a CAPM-derived (real) discount rate of 6.75% (calculated from expected long-term equity returns of 9% and inflation expectations of 2.11%, as measured by US 30-year break-evens). Both are subject to revisions relating to Endeavour’s development of the Lafigué project (which will be included in our next note). In the meantime, Endeavour remains the largest premium LSE-listed pure gold producer in the UK 100 index and at a discount to the average multiples of its peers on at least 79% of common valuation measures.

Updated Q3, Q4 and FY22 forecasts

As a result of these changes, our updated forecast for adjusted net earnings attributable to shareholders for Endeavour for Q3, Q4 and FY22 are now as follows:

Exhibit 1: 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

286.1

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

275.6

Boungou production (koz)

33.8

27.0

29.9

29.9

30.4

30.4

121.1

121.1

Mana production (koz)

52.6

54.8

40.6

40.6

43.1

43.1

191.0

191.0

Sabodala-Massawa

96.3

72.9

98.2

85.0

98.2

98.2

352.4

365.5

Wahgnion

28.9

26.5

33.4

26.5

43.1

43.1

125.0

131.9

Total gold produced (koz)

357.1

345.1

334.0

313.9

335.1

335.1

***1,361.5

***1,381.6

Total gold sold (koz)

359.1

343.7

334.0

313.9

335.1

335.1

***1,361.9

***1,382.0

Gold price (US$/oz)

1,911

*1,832

1,763

1,727

1,776

1,713

*1,783

*1,816

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

609

713

661

730

672

672

684

668

Mine level AISC (US$/oz)

809

934

925

1,002

893

887

909

893

Revenue

– Gold revenue

686,200

629,600

585,515

539,170

591,498

555,908

2,410,878

2,492,813

Cost of sales

– Operating expenses

217,500

251,200

220,798

229,046

225,314

225,314

923,059

914,812

– Royalties

41,000

38,100

36,082

33,272

36,362

34,174

146,546

151,544

Gross profit

427,700

340,300

328,635

276,852

329,822

296,421

1,341,273

1,426,457

Depreciation

(152,000)

(139,800)

(155,267)

(141,665)

(164,341)

(163,701)

(597,166)

(611,408)

Expenses

– Corporate costs

(14,000)

(6,800)

(15,000)

(15,000)

(15,000)

(15,000)

(50,800)

(50,800)

– Impairments

0

0

0

– Acquisition etc costs

(200)

(1,300)

(1,500)

(1,500)

– Share based compensation

(7,700)

(3,100)

(6,507)

(6,20)7

(6,635)

(6,635)

(23,643)

(23,941)

– Exploration costs

(7,100)

(8,000)

(5,000)

(5,000)

(5,000)

(5,000)

(25,100)

(25,100)

Total expenses

(29,000)

(19,200)

(26,507)

(26,207)

(26,635)

(26,635)

(101,043)

(101,341)

Earnings from operations

246,700

181,300

146,861

108,980

138,847

106,084

643,064

713,708

Interest income

0

Interest expense

(15,200)

(16,500)

(13,579)

(13,579)

(13,253)

(13,974)

(58,532)

Net interest

(15,200)

(16,500)

(13,579)

(13,579)

(13,253)

(13,974)

(59,253)

(58,532)

Loss on financial instruments

(178,800)

106,800

(72,000)

(72,000)

Other expenses

(2,000)

(10,600)

(12,600)

(12,600)

Profit before tax

50,700

261,000

133,282

95,401

125,593

92,110

499,212

570,575

Current income tax

74,700

64,700

38,004

31,872

36,452

29,476

200,748

213,855

Deferred income tax

11,200

(8,200)

0

0

0

0

3,000

3,000

Total tax

85,900

56,500

38,004

31,872

36,452

29,476

203,748

216,855

Effective tax rate (%)

(169.4)

21.6

28.5

33.4

29.0

32.0

40.8

38.0

Profit after tax

(35,200)

204,500

95,278

63,529

89,142

62,634

295,463

353,720

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

95,278

63,529

89,142

62,634

310,263

368,520

Minority interest

21,800

15,100

15,437

12,124

14,786

11,968

60,991

67,124

Minority interest (%)

(106.9)

7.4

16.2

19.1

16.6

19.1

19.7

18.2

Profit attributable to shareholders

(42,200)

189,400

79,841

51,405

74,356

50,667

249,272

301,397

Basic EPS from continuing ops (US$)

(0.23)

0.76

0.321

0.208

0.299

0.205

0.946

1.154

Diluted EPS from continuing ops (US$)

(0.23)

0.76

0.321

0.207

0.299

0.205

0.942

1.151

Basic EPS (US$)

(0.17)

0.76

0.321

0.208

0.299

0.205

1.006

1.213

Diluted EPS (US$)

(0.17)

0.76

0.321

0.207

0.299

0.205

1.001

1.210

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

0.49

0.34

0.321

0.208

0.299

0.205

1.243

1.450

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

0.49

0.34

0.321

0.207

0.299

0.205

1.237

1.446

Adj net earnings attributable (US$000s)

122,300

111,300

79,841

51,405

74,356

50,667

335,672

387,797

Adj net EPS from continuing ops (US$)

0.49

0.45

0.321

0.208

0.299

0.205

1.355

1.561

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.

Endeavour’s guidance for FY22 is for 1,315–1,400koz of production at an AISC of US$890–930/oz. Within this context, a comparison between our quarterly and full-year forecast and consensus forecasts for FY22 net adjusted EPS is as follows:

Exhibit 2: 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

0.208

0.205

1.354

1.355

Mean consensus forecast

0.49

0.45

0.33

0.40

1.67

1.56

High consensus forecast

0.49

0.45

0.43

0.54

1.91

1.78

Low consensus forecast

0.49

0.45

0.24

0.30

1.48

1.03

Source: Refinitiv, Edison Investment Research. Note: Consensus at 17 October 2022.

While it is not Edison’s practice to forecast detailed cash flows on a quarterly basis, we note that there are a number of items in Q3 that will have affected overall cash flows relative to the ambient, including:

A US$100m interim dividend paid in Q322.

An estimated US$36.7m in share buybacks.

Approximately US$50m of drawn revolving credit facility repaid in Q322.

Approximately US$400m in cash up-streamed from site to corporate level in Q322 in anticipation of retiring Endeavour’s convertible bond in FY23 giving rise to a minority dividend payment (estimated at US$65m) and associated withholding tax (estimated at US$48m) in addition to ordinary cash taxes.

Lafigué

On Monday, Endeavour Mining announced the start of construction of its 80% owned Lafigué project in the Cote d’Ivoire in conjunction with the results of a robust definitive feasibility study (DFS). The salient features of the DFS were:

An average of 203koz pa of production from the processing of c 4Mtpa of ore at an average grade of 1.69g/t over 13 years at an average cash cost of US$721/oz, an average US$871/oz all-in sustaining cost and an upfront capital cost of US$448m.

A pre-tax internal rate of return of 25% and a post-tax NPV5 of US$477m (US$1.93/share) at a gold price of US$1,500/oz.

The project will be funded from internal cash flow at Endeavour as well as its net cash position of c US$217m as at end-H122. First gold from the project is expected to be poured in Q324.

Lafigué was discovered in 2017 and expanded as a result of c US$30m of exploration expenditure, equating to an industry-leading discovery cost of $12/oz of ‘indicated’ resources. Moreover, since the deposit remains open and Endeavour has confirmed mineralisation at several targets in close proximity, there remains strong potential to extend its mine life and further increase annual production.

In terms of its initial production profile, Lafigué already exceeds those of both Ity and Houndé at the equivalent point in their development (eg Ity c 173kozpa over 13 years and Houndé c 190koz over 10 years cf both now in excess of c 250koz pa after subsequent exploration success and plant optimisations). As such, Lafigué represents a fourth cornerstone asset for Endeavour.

Exhibit 3: Financial summary

US$'000s

2019

2020

2021

2022e

2023e

2024e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,362,121

1,847,894

2,903,756

2,410,878

2,218,986

2,235,703

Cost of Sales

(884,869)

(1,061,891)

(1,675,393)

(1,170,648)

(995,810)

(1,007,684)

Gross Profit

477,252

786,003

1,228,363

1,240,231

1,223,175

1,228,019

EBITDA

 

 

618,443

910,295

1,517,263

1,241,731

1,223,175

1,228,019

Operating Profit (before amort. and except.)

 

 

281,400

546,072

859,409

644,564

761,714

707,316

Intangible Amortisation

0

0

0

0

0

0

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

558,464

761,714

707,316

Net Interest

(51,607)

(53,774)

(70,623)

(59,253)

2,071

2,985

Profit Before Tax (norm)

 

 

220,401

501,184

756,523

572,712

763,785

710,301

Profit Before Tax (FRS 3)

 

 

21,242

299,652

490,523

499,212

763,785

710,301

Tax

(97,253)

(158,466)

(178,253)

(203,748)

(216,607)

(149,734)

Profit After Tax (norm)

123,148

342,718

578,270

368,963

547,179

560,567

Profit After Tax (FRS 3)

(76,011)

141,186

312,270

295,463

547,179

560,567

Net loss from discontinued operations

(4,394)

0

0

14,800

0

0

Minority interests

33,126

44,719

64,486

60,991

89,696

88,338

Net profit

(80,405)

141,186

312,270

310,263

547,179

560,567

Net attrib. to shareholders contg. businesses (norm)

90,022

297,998

513,784

307,972

457,483

472,229

Net attrib.to shareholders contg. businesses

(109,137)

96,466

247,784

234,472

457,483

472,229

Average Number of Shares Outstanding (m)

157.4

160.8

250.7

247.8

246.9

246.9

EPS - normalised (c)

 

 

57.20

185.34

204.95

124.28

185.30

191.27

EPS - normalised fully diluted (c)

 

 

56.95

181.51

203.21

123.71

184.44

190.39

EPS - (IFRS) ($)

 

 

(0.72)

0.60

0.99

1.01

1.85

1.91

Dividend per share (c)

0

37

56

81

84

98

Gross Margin (%)

35.0

42.5

42.3

51.4

55.1

54.9

EBITDA Margin (%)

45.4

49.3

52.3

51.5

55.1

54.9

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

20.7

29.6

29.6

26.7

34.3

31.6

BALANCE SHEET

Fixed Assets

 

 

2,330,033

5,093,409

5,404,900

5,338,823

5,469,206

5,567,180

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

4,914,123

5,044,506

5,142,480

Investments

70,059

1,099,812

414,700

414,700

414,700

414,700

Current Assets

 

 

652,871

1,168,382

1,366,000

1,505,261

1,622,949

1,805,435

Stocks

266,451

305,075

311,300

301,360

277,373

279,463

Debtors

83,836

104,545

139,900

167,203

217,482

218,856

Cash

288,186

751,563

906,200

1,100,098

1,191,494

1,370,516

Other

14,398

7,199

8,600

(63,400)

(63,400)

(63,400)

Current Liabilities

 

 

(354,931)

(661,171)

(567,100)

(638,902)

(583,731)

(589,961)

Creditors

(312,427)

(612,862)

(552,700)

(624,502)

(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

4,387,081

4,690,325

4,964,554

CASH FLOW

Operating Cash Flow

 

 

628,617

1,046,370

1,415,306

1,317,513

1,141,711

1,230,786

Net Interest

(35,413)

(53,774)

(26,900)

(59,253)

2,071

2,985

Tax

(109,494)

(186,332)

(205,573)

(200,748)

(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)

(98,589)

(0)

0

Dividends

(6,154)

(88,288)

(159,800)

(248,935)

(248,935)

(286,338)

Net Cash Flow

82,385

463,377

341,437

193,898

91,396

179,022

Opening net debt/(cash)

 

 

518,607

525,220

323,083

(13,200)

(207,098)

(298,494)

Other

(88,998)

(261,240)

(5,154)

0

0

0

Closing net debt/(cash)

 

 

525,220

323,083

(13,200)

(207,098)

(298,494)

(477,516)

Source: Company sources, Edison Investment Research


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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

1,185 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

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

1,185 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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Copyright: Copyright 2022 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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.

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

1,185 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

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

1,185 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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