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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.
Endeavour Mining |
Quarter end refinements and Lafigué go-ahead |
Q322 results preview and Lafigué go-ahead |
Metals and mining |
18 October 2022 |
Share price performance
Business description
Next events
Analyst
Endeavour Mining is a research client of Edison Investment Research Limited |
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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$1,776/oz previously – down 6.0%) as well as some of the habitual disruption to operations that typically occur in Q3 on account of the seasonal rains in West Africa. In the meantime, Endeavour has announced the go-ahead of its Lafigué project and we understand the company remains essentially unaffected by recent political developments in Burkina Faso.
Year end |
Revenue |
EBITDA (US$m) |
PBT* |
Operating cash flow per share (US$) |
DPS |
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$000s (unless otherwise indicated) |
Q122 |
Q222 |
Q322e |
Q322e |
Q422e |
Q422 |
FY22e |
FY22e |
Houndé production (koz) |
73.1 |
87.0 |
68.8 |
68.8 |
57.3 |
57.3 |
286.1 |
286.1 |
Karma production (koz) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Ity production (koz) |
72.4 |
76.9 |
63.2 |
63.2 |
63.2 |
63.2 |
275.6 |
275.6 |
Boungou production (koz) |
33.8 |
27.0 |
29.9 |
29.9 |
30.4 |
30.4 |
121.1 |
121.1 |
Mana production (koz) |
52.6 |
54.8 |
40.6 |
40.6 |
43.1 |
43.1 |
191.0 |
191.0 |
Sabodala-Massawa |
96.3 |
72.9 |
98.2 |
85.0 |
98.2 |
98.2 |
352.4 |
365.5 |
Wahgnion |
28.9 |
26.5 |
33.4 |
26.5 |
43.1 |
43.1 |
125.0 |
131.9 |
Total gold produced (koz) |
357.1 |
345.1 |
334.0 |
313.9 |
335.1 |
335.1 |
***1,361.5 |
***1,381.6 |
Total gold sold (koz) |
359.1 |
343.7 |
334.0 |
313.9 |
335.1 |
335.1 |
***1,361.9 |
***1,382.0 |
Gold price (US$/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
|
|
Atlantis Japan Growth Fund (AJG) invests in a diversified portfolio of Japanese equities. Its bias towards high-quality, innovative growth and small-cap stocks has put performance under pressure this year. However, the fund has achieved its long-term capital growth objective, delivering an average annual NAV return of 9.7% over the past 10 years and outperforming its benchmark, the TOPIX, on this basis, over this period. This long-term track record attests to the stock selection skills of AJG’s lead adviser, Taeko Setaishi. She believes that while further patience may be required, an eventual recovery in Japanese corporate earnings will be the catalyst for renewed interest in growth stocks and an associated improvement in AJG’s performance.
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