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Endeavour’s Q222 results were better than our expectations. Production for the quarter was 345koz (cf our expectation of 322koz) at an all-in sustaining cost (AISC) of US$954/oz (cf US$995/oz) to result in revenue of US$629.6m (cf US$600.8m), adjusted EBITDA of US$329m (cf US$305m) and adjusted EPS of 45c/share (cf 38c/share). Given that Edison’s expectations were close to consensus, it similarly outperformed the consensus. As a result of its strong H122 performance (702koz produced from continuing operations at an AISC of US$900/oz), the company increased its interim dividend by 43% to US$100m (or US$0.40/share) and increased its minimum FY22 committed dividend by US$50m (or 33%), from US$150m to US$200m (or US$0.80/share) to put the company on a prospective dividend yield of 4.0% with additional shareholder gains available in the form of its share buyback programme.
Endeavour Mining |
Yield hits 4% |
Q222 results analysis |
Metals and mining |
8 August 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 Q222 results were better than our expectations. Production for the quarter was 345koz (cf our expectation of 322koz) at an all-in sustaining cost (AISC) of US$954/oz (cf US$995/oz) to result in revenue of US$629.6m (cf US$600.8m), adjusted EBITDA of US$329m (cf US$305m) and adjusted EPS of 45c/share (cf 38c/share). Given that Edison’s expectations were close to consensus, it similarly outperformed the consensus. As a result of its strong H122 performance (702koz produced from continuing operations at an AISC of US$900/oz), the company increased its interim dividend by 43% to US$100m (or US$0.40/share) and increased its minimum FY22 committed dividend by US$50m (or 33%), from US$150m to US$200m (or US$0.80/share) to put the company on a prospective dividend yield of 4.0% with additional shareholder gains available in the form of its share buyback programme.
Year end |
Revenue (US$m) |
EBITDA (US$m) |
PBT* |
Operating cash flow per share (US$) |
DPS |
Yield |
12/20 |
1,847.9 |
910.3 |
501.2 |
5.35 |
37 |
1.8 |
12/21 |
2,903.8 |
1,517.3 |
756.5 |
4.83 |
56 |
2.8 |
12/22e |
2,492.8 |
1,326.6 |
644.1 |
4.86 |
80 |
4.0 |
12/23e |
2,219.0 |
1,223.2 |
764.4 |
3.86 |
82 |
4.1 |
Note: *PBT is normalised, excluding amortisation of acquired intangibles and exceptional items.
On track to hit guidance
Most of Endeavour’s outperformance could be attributed to higher production at Ity, Hounde and Mana and lower corporate costs. After producing, 702koz at an AISC of US$900/oz in H122, Endeavour reiterated its guidance for FY22 of production of 1,315–1,400koz at an AISC of US$890–930/oz. Higher quarterly costs could generally be attributed to increased proportions of fresh rock mining at deeper horizons at Boungou, Sabodala-Massawa and Wahgnion and stripping and scheduling ahead of West Africa’s rainy season in Q3. Countering this, Endeavour benefited from in-country fuel pricing mechanisms, long-term supply contracts and local currency weakness versus the US dollar.
Valuation: Holding steady at US$35.54/share
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, implies a present valuation for the company of US$35.54 (C$45.70 or £29.46) per share if performed using a 10% discount rate (cf US$35.88 previously) or US$57.15 (C$73.48 or £47.37) per share if performed using a CAPM-derived (real) discount rate of 6.59% (based on inflation expectations of 2.26% derived from US 30-year break-evens). To these valuations a further US$4.30–7.45/share may be added to reflect the value of Endeavour’s five-year exploration programme (see The second five-year plan, published on 20 October 2021). Otherwise, Endeavour is trading at a discount to the average multiples of its peers on at least 57% of common valuation measures, regardless of whether Edison or consensus forecasts are used, despite being the largest premium LSE-listed pure gold producer in the FTSE 100 Index.
Q222 results and analysis
A summary of Endeavour’s Q222 results is provided in the table below, showing both its headline results and its underlying results, excluding most of the major adjusting items:
Exhibit 1: Endeavour Mining Q222 results cf prior expectations and Q122
US$000s (unless otherwise indicated) |
Q421a |
Q122a |
Q122a |
Q222e |
Q222 |
Q222a (underlying) |
Change |
Variance |
Variance |
Houndé production (koz) |
77.3 |
73.1 |
73.1 |
76.4 |
87.0 |
87 |
19.0 |
13.9 |
10.6 |
Karma production (koz) |
20.5 |
0.0 |
10.2 |
0.0 |
0.0 |
0 |
-100.0 |
0.0 |
0.0 |
Ity production (koz) |
60.0 |
72.4 |
72.4 |
67.8 |
76.9 |
76.9 |
6.2 |
13.4 |
9.1 |
Boungou production (koz) |
34.9 |
33.8 |
33.8 |
26.0 |
27.0 |
27 |
-20.1 |
3.8 |
1.0 |
Mana production (koz) |
53.8 |
52.6 |
52.6 |
49.3 |
54.8 |
54.8 |
4.2 |
11.2 |
5.5 |
Sabodala-Massawa |
104.6 |
96.3 |
96.3 |
75.4 |
72.9 |
72.9 |
-24.3 |
-3.3 |
-2.5 |
Wahgnion |
47.2 |
28.9 |
28.9 |
27.5 |
26.5 |
26.5 |
-8.3 |
-3.6 |
-1.0 |
Total gold produced (koz) |
398.3 |
357.1 |
367.3 |
322.3 |
345.1 |
345.1 |
-6.0 |
7.1 |
22.8 |
Total gold sold (koz) |
391.0 |
359.1 |
369.2 |
322.3 |
343.7 |
343.7 |
-6.9 |
6.6 |
21.4 |
Gold price (US$/oz) |
1,783* |
1,911 |
1,904* |
1,873 |
*1,832 |
*1,832 |
-3.8 |
-2.2 |
-41 |
Mine level cash costs (US$/oz)** |
639 |
609 |
629 |
722 |
713 |
713 |
13.4 |
-1.2 |
-9 |
Mine level AISC (US$/oz) |
865 |
809 |
828 |
995 |
934 |
934 |
12.8 |
-6.1 |
-61 |
Revenue |
|||||||||
– Gold revenue |
697,174 |
686,200 |
703,400 |
600,831 |
629,600 |
629,600 |
-10.5 |
4.8 |
28,769 |
Cost of sales |
|||||||||
– Operating expenses |
249,921 |
217,500 |
232,200 |
232,879 |
251,200 |
251,200 |
8.2 |
7.9 |
18,321 |
– Royalties |
44,917 |
41,000 |
42,700 |
36,657 |
38,100 |
38,100 |
-10.8 |
3.9 |
1,443 |
Gross profit |
402,336 |
427,700 |
428,500 |
331,295 |
340,300 |
340,300 |
-20.6 |
2.7 |
9,005 |
Depreciation |
(201,668) |
(152,000) |
(153,900) |
(136,452) |
(139,800) |
(139,800) |
-9.2 |
2.5 |
-3,348 |
Expenses |
|||||||||
– Corporate costs |
(20,000) |
(14,000) |
(14,000) |
(15,000) |
(6,800) |
(6,800) |
-51.4 |
-54.7 |
8,200 |
– Impairments |
0 |
0 |
0 |
N/A |
0.0 |
0 |
|||
– Acquisition etc costs |
(992) |
(200) |
(1,300) |
N/A |
0.0 |
0 |
|||
– Share based compensation |
(7,425) |
(7,700) |
(7,700) |
(6,607) |
(3,100) |
(3,100) |
-59.7 |
-53.1 |
3,507 |
– Exploration costs |
(5,061) |
(7,100) |
(7,100) |
(5,000) |
(8,000) |
(8,000) |
12.7 |
60.0 |
-3,000 |
Total expenses |
(33,478) |
(29,000) |
(28,800) |
(26,607) |
(19,200) |
(17,900) |
-37.8 |
-32.7 |
8,707 |
Earnings from operations |
167,190 |
246,700 |
245,800 |
168,237 |
181,300 |
182,600 |
-25.7 |
8.5 |
14,363 |
Interest income |
N/A |
N/A |
0 |
||||||
Interest expense |
(25,392) |
(15,200) |
(15,200) |
(14,373) |
(16,500) |
(16,500) |
8.6 |
14.8 |
-2,127 |
Net interest |
(25,392) |
(15,200) |
(15,200) |
(14,373) |
(16,500) |
(16,500) |
8.6 |
14.8 |
-2,127 |
Loss on financial instruments |
15,642 |
(178,800) |
106,800 |
N/A |
N/A |
0 |
|||
Other expenses |
(2,051) |
(2,000) |
(10,600) |
N/A |
N/A |
0 |
|||
Profit before tax |
155,389 |
50,700 |
230,600 |
153,864 |
261,000 |
166,100 |
-28.0 |
8.0 |
12,236 |
Current income tax |
39,394 |
74,700 |
77,800 |
42,260 |
64,700 |
64,700 |
-16.8 |
53.1 |
22,440 |
Deferred income tax |
(34,000) |
11,200 |
11,200 |
0 |
(8,200) |
(8,200) |
-173.2 |
N/A |
-8,200 |
Total tax |
5,394 |
85,900 |
89,000 |
42,260 |
56,500 |
56,500 |
-36.5 |
33.7 |
14,240 |
Effective tax rate (%) |
3.5 |
(169.4) |
38.6 |
27.5 |
21.6 |
34.0 |
-11.9 |
23.7 |
6.5 |
Profit after tax |
149,995 |
(35,200) |
141,600 |
111,604 |
204,500 |
109,600 |
-22.6 |
-1.8 |
-2,004 |
Net profit from discontinued ops. |
0 |
14,800 |
0 |
0 |
0 |
N/A |
N/A |
0 |
|
Total net and comprehensive income |
149,995 |
(20,400) |
141,600 |
111,604 |
204,500 |
109,600 |
-22.6 |
-1.8 |
-2,004 |
Minority interest |
(6,559) |
21,800 |
22,600 |
17,580 |
15,100 |
15,100 |
-33.2 |
-14.1 |
-2,480 |
Minority interest (%) |
(4.4) |
(106.9) |
16.0 |
15.8 |
7.4 |
13.8 |
-13.9 |
-12.8 |
-2.0 |
Profit attributable to shareholders |
156,554 |
(42,200) |
119,000 |
94,023 |
189,400 |
94,500 |
-20.6 |
0.5 |
477 |
Basic EPS from continuing ops (US$) |
0.628 |
(0.23) |
0.48 |
0.378 |
0.76 |
0.38 |
-20.8 |
0.6 |
0.002 |
Diluted EPS from continuing ops (US$) |
0.623 |
(0.23) |
0.48 |
0.376 |
0.76 |
0.38 |
-21.0 |
0.9 |
0.003 |
Basic EPS (US$) |
0.628 |
(0.17) |
0.48 |
0.378 |
0.76 |
0.38 |
-20.8 |
0.6 |
0.002 |
Diluted EPS (US$) |
0.623 |
(0.17) |
0.48 |
0.376 |
0.76 |
0.38 |
-21.0 |
0.9 |
0.003 |
Norm. basic EPS from cont. ops (US$) |
0.569 |
0.49 |
0.48 |
0.378 |
0.34 |
0.38 |
-20.8 |
0.6 |
0.002 |
Norm. diluted EPS from cont. ops (US$) |
0.565 |
0.49 |
0.48 |
0.376 |
0.34 |
0.38 |
-21.0 |
0.9 |
0.003 |
Adj net earnings attributable (US$000s) |
118,770 |
122,300 |
122,300 |
94,023 |
111,300 |
111,300 |
-9.0 |
18.4 |
17,277 |
Adj net EPS from continuing ops (US$) |
0.477 |
0.49 |
0.49 |
0.378 |
0.45 |
0.45 |
-8.2 |
19.0 |
0.072 |
Source: Endeavour Mining, Edison Investment Research. Note: *Includes Karma and Sabodala-Massawa streams. **Excludes royalty costs. ***Q222 (underlying) cf Q122 (underlying). ****Q222 (underlying) cf Q222e.
Items included in the reconciliation between adjusted net earnings attributable and total net and comprehensive earnings are losses from discontinued operations, gains/losses on financial instruments, other expenses and acquisition costs (all shown independently in the table above), plus the tax impact of adjusting items, non-cash and other adjustments and the minority interest attributable to the adjusting items (not shown independently). In the case of Q222, Endeavour’s results were distorted by an exceptional gain on financial instruments of US$106.8m (largely unrealised gains on forward contracts) and an increase in ‘other’ expenses to US$10.6m. For the purposes of like-for-like comparison, therefore, these two items have been excluded from the column entitled ‘Q222 (underlying)’ in Exhibit 1, above.
Within this context, gold produced and sold was 7% ahead of our forecasts (as in Q122), with the outperformance accounted for by Hounde, Ity and Mana. This outperformance in production led to a positive variance of US$28.8m (or 4.8%) in revenue, relative to our prior expectations, that was partially offset by a US$19.7m (or 7.3%) negative variation in costs and royalties to result in a gross profit that was US$9.0m (or 2.7%) ahead of our prior forecast. This was augmented by lower corporate costs, such that the variance had become US$12.2m (positive) at the pre-tax level, but was then largely negated by a US$14.2m negative variation in the tax charge to result in post-tax profits that were within US$2m of our forecasts and (after a lower minority interest) earnings that were within US$0.5m (or 0.5%) of them. The 19.0% outperformance of adjusted net earnings was then attributable to ‘non-cash, tax and other adjustments’ and the minority interest therein.
A comparison between Endeavour’s actual results and both our and the market’s prior forecasts for the quarter is as follows:
Exhibit 2: Edison adjusted net EPS from continuing operations estimates cf consensus FY22 by quarter
(US$/share) |
Q122 |
Q222e |
Q222 |
Variance |
Edison |
0.49 |
0.378 |
0.45 |
+19.0 |
Mean consensus forecast |
0.49 |
0.39 |
0.45 |
+15.4 |
High consensus forecast |
0.49 |
0.44 |
0.45 |
+2.3 |
Low consensus forecast |
0.49 |
0.33 |
0.45 |
+36.4 |
Source: Refinitiv, Edison Investment Research. Note: Consensus as at 2 August 2022.
Readers are reminded that Endeavour changed its definition of cash costs in Q420 to include royalties. The decision was made so that Endeavour may be more consistent in reporting within the context of its peer group. For reasons of comparability with past results, however, as well as ease of forecasting (given that royalties are reported as a discrete item distinct from operating expenses), we are continuing to calculate total cash costs in Exhibits 1 and 3 excluding royalties.
FY22 forecasts
Endeavour maintained its production and cost guidance for FY22 (made in the aftermath of its sale of the Karma mine in February) of 1,315–1,400koz at an AISC of US$890–930/oz. In addition to incorporating its Q222 actual results into our full-year forecasts, in recognition of recent metals price moves, we have also reduced our gold price forecast for the remainder of the year, from US$1,812/oz previously to US$1,776/oz currently (the prevailing price at the time of writing). As a result (and with the usual caveat around quarterly estimates), our updated forecast for adjusted net earnings attributable to shareholders for FY22 for Endeavour in the wake of its Q222 results is now as follows:
Exhibit 3: Endeavour Mining FY22 forecasts, by quarter
US$000s (unless otherwise indicated) |
Q122 |
Q222 |
Q322e |
Q322e |
Q422e |
Q422 |
FY22e |
FY22e |
Houndé production (koz) |
73.1 |
87.0 |
68.8 |
68.8 |
57.3 |
57.3 |
286.1 |
275.5 |
Karma production (koz) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Ity production (koz) |
72.4 |
76.9 |
63.2 |
63.2 |
63.2 |
63.2 |
275.6 |
266.5 |
Boungou production (koz) |
33.8 |
27.0 |
29.9 |
29.9 |
30.4 |
30.4 |
121.1 |
120.1 |
Mana production (koz) |
52.6 |
54.8 |
40.6 |
40.6 |
43.1 |
43.1 |
191.0 |
185.6 |
Sabodala-Massawa |
96.3 |
72.9 |
98.2 |
98.2 |
98.2 |
98.2 |
365.5 |
368.0 |
Wahgnion |
28.9 |
26.5 |
33.4 |
33.4 |
43.1 |
43.1 |
131.9 |
132.9 |
Total gold produced (koz) |
357.1 |
345.1 |
334.0 |
334.0 |
335.1 |
335.1 |
***1,381.6 |
***1,358.8 |
Total gold sold (koz) |
359.1 |
343.7 |
334.0 |
334.0 |
335.1 |
335.1 |
***1,382.0 |
***1,360.6 |
Gold price (US$/oz) |
1,911 |
*1,832 |
1,812 |
1,763 |
1,812 |
1,776 |
*1,816 |
*1,844 |
Mine level cash costs (US$/oz)** |
609 |
713 |
643 |
661 |
655 |
672 |
668 |
661 |
Mine level AISC (US$/oz) |
809 |
934 |
888 |
925 |
855 |
893 |
893 |
889 |
Revenue |
||||||||
– Gold revenue |
686,200 |
629,600 |
601,626 |
585,515 |
603,488 |
591,498 |
2,492,813 |
2,492,144 |
Cost of sales |
||||||||
– Operating expenses |
217,500 |
251,200 |
214,932 |
220,798 |
219,448 |
225,314 |
914,812 |
884,759 |
– Royalties |
41,000 |
38,100 |
36,420 |
36,082 |
36,434 |
36,362 |
151,544 |
150,511 |
Gross profit |
427,700 |
340,300 |
350,273 |
328,635 |
347,605 |
329,822 |
1,426,457 |
1,456,874 |
Depreciation |
(152,000) |
(139,800) |
(152,725) |
(155,267) |
(160,934) |
(164,341) |
(611,408) |
(602,111) |
Expenses |
||||||||
– Corporate costs |
(14,000) |
(6,800) |
(15,000) |
(15,000) |
(15,000) |
(15,000) |
(50,800) |
(59,000) |
– Impairments |
0 |
0 |
0 |
|||||
– Acquisition etc costs |
(200) |
(1,300) |
(1,500) |
(200) |
||||
– Share based compensation |
(7,700) |
(3,100) |
(6,999) |
(6,507) |
(6,999) |
(6,635) |
(23,941) |
(28,304) |
– Exploration costs |
(7,100) |
(8,000) |
(5,000) |
(5,000) |
(5,000) |
(5,000) |
(25,100) |
(22,100) |
Total expenses |
(29,000) |
(19,200) |
(26,999) |
(26,507) |
(26,999) |
(26,635) |
(101,341) |
(109,604) |
Earnings from operations |
246,700 |
181,300 |
170,550 |
146,861 |
159,673 |
138,847 |
713,708 |
745,159 |
Interest income |
0 |
0 |
||||||
Interest expense |
(15,200) |
(16,500) |
(13,036) |
(13,579) |
(11,411) |
(13,253) |
(58,532) |
(54,019) |
Net interest |
(15,200) |
(16,500) |
(13,036) |
(13,579) |
(11,411) |
(13,253) |
(58,532) |
(54,019) |
Loss on financial instruments |
(178,800) |
106,800 |
(72,000) |
(178,800) |
||||
Other expenses |
(2,000) |
(10,600) |
(12,600) |
(2,000) |
||||
Profit before tax |
50,700 |
261,000 |
157,514 |
133,282 |
148,262 |
125,593 |
570,575 |
510,340 |
Current income tax |
74,700 |
64,700 |
43,296 |
38,004 |
41,079 |
36,452 |
213,855 |
201,335 |
Deferred income tax |
11,200 |
(8,200) |
0 |
0 |
0 |
0 |
3,000 |
11,200 |
Total tax |
85,900 |
56,500 |
43,296 |
38,004 |
41,079 |
36,452 |
216,855 |
212,535 |
Effective tax rate (%) |
(169.4) |
21.6 |
27.5 |
28.5 |
27.7 |
29.0 |
38.0 |
41.6 |
Profit after tax |
(35,200) |
204,500 |
114,218 |
95,278 |
107,183 |
89,142 |
353,720 |
297,805 |
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 |
114,218 |
95,278 |
107,183 |
89,142 |
368,520 |
312,605 |
Minority interest |
21,800 |
15,100 |
17,347 |
15,437 |
16,435 |
14,786 |
67,124 |
73,162 |
Minority interest (%) |
(106.9) |
7.4 |
15.2 |
16.2 |
15.3 |
16.6 |
18.2 |
23.4 |
Profit attributable to shareholders |
(42,200) |
189,400 |
96,872 |
79,841 |
90,748 |
74,356 |
301,397 |
239,443 |
Basic EPS from continuing ops (US$) |
(0.23) |
0.76 |
0.390 |
0.321 |
0.365 |
0.299 |
1.154 |
0.904 |
Diluted EPS from continuing ops (US$) |
(0.23) |
0.76 |
0.388 |
0.321 |
0.363 |
0.299 |
1.151 |
0.899 |
Basic EPS (US$) |
(0.17) |
0.76 |
0.390 |
0.321 |
0.365 |
0.299 |
1.213 |
0.964 |
Diluted EPS (US$) |
(0.17) |
0.76 |
0.388 |
0.321 |
0.363 |
0.299 |
1.210 |
0.959 |
Norm. basic EPS from cont. ops (US$) |
0.49 |
0.34 |
0.390 |
0.321 |
0.365 |
0.299 |
1.450 |
1.625 |
Norm. diluted EPS from cont. ops (US$) |
0.49 |
0.34 |
0.388 |
0.321 |
0.363 |
0.299 |
1.446 |
1.616 |
Adj net earnings attributable (US$000s) |
122,300 |
111,300 |
96,872 |
79,841 |
90,748 |
74,356 |
387,797 |
403,943 |
Adj net EPS from continuing ops (US$) |
0.49 |
0.45 |
0.390 |
0.321 |
0.365 |
0.299 |
1.561 |
1.626 |
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.
As before, items included in the reconciliation between adjusted net earnings attributable and total net and comprehensive earnings are losses from discontinued operations, gains/losses on financial instruments, other expenses and acquisition costs (all shown independently in the table above), plus the tax impact of adjusting items, non-cash and other adjustments and the minority interest attributable to the adjusting items (not shown independently). As noted previously, Endeavour has now changed its definition of adjusted net earnings attributable, such that deferred tax effects and share-based payments are no longer included in the adjustments to total net and comprehensive earnings, and this is now the manner in which our FY22 forecasts are presented.
Within this context, a comparison between our quarterly and full-year forecast and consensus forecasts for FY22 net adjusted EPS is as follows:
Exhibit 4: 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 |
0.321 |
0.299 |
1.561 |
1.561 |
Mean consensus forecast |
0.49 |
0.45 |
0.41 |
0.46 |
1.81 |
1.71 |
High consensus forecast |
0.49 |
0.45 |
0.54 |
0.69 |
2.17 |
2.05 |
Low consensus forecast |
0.49 |
0.45 |
0.24 |
0.36 |
1.54 |
1.03 |
Source: Refinitiv, Edison Investment Research. Note: Consensus at 8 August 2022.
Although we are forecasting a decline in profitability in Q3 (being the quarter historically most susceptible to disruption from the seasonal rains in West Africa), in this case, the decline may be attributed to recent moves in the gold price, rather than production, as we are expecting a material increase in production at Sabodala-Massawa in Q322 and H222. Mining activities commenced at both the Massawa Central Zone and Massawa North Zone pits in H122 and are expected to continue for the remainder of the year, with supplemental mining from the Sofia North and Sabodala pits. At the same time, the Bambaraya satellite pit is being accelerated to provide an additional ore source in the latter part of H222, while there is a greater focus on waste extraction at the Massawa Central and North Zones pits. As a result, mined and processed grades are therefore expected to increase in the second half of the year, while mill throughput and recovery rates are expected to remain fairly constant.
Self-evidently, one of the main assumptions behind our forecasts is that there are no major deleterious effects to ongoing operations as a result of the COVID-19 pandemic. We also assume no collateral escalation of war between Russia and Ukraine into West Africa. To date, the effect of COVID-19 on Endeavour’s operations in West Africa has been negligible and is expected to remain so, as the company has now been able to vaccinate more than 50% of its workforce in an ongoing programme of pandemic mitigation. In addition, Endeavour has further mitigated future risks as far as possible by setting itself up to operate under level 2 COVID-19 restrictions (see our note New senior gold major looking to join FTSE 100, published on 17 December 2020) and by preparing multiple different levels in its pits from which to produce, thereby affording it maximum operational flexibility in the future.
Valuation
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 and Karma in FY22, 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 FY22, in the case of Endeavour, we have instead opted to discount five years of forecast cash flows in FY22–26 back to the start of FY22 and then to 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). In the normal course of events, exploration expenditure would have been excluded from such a calculation on the basis that it is an investment. In the case of Endeavour, however, it was included on the grounds that it was a critical component of ongoing business performance in its ability to continually expand and extend the lives of its mines.
In the wake of Q222 results, our estimate of cash flows in FY26 has remained almost unchanged at US$4.27/share (cf US$4.28/share previously), which implies a terminal valuation of the company at end-FY26 of US$42.75/share (cf US$42.78/share previously) if calculated using a discount rate of 10%. In conjunction with forecast intervening cash flows, this terminal valuation then discounts back to a present valuation of US$35.54/share (cf US$35.96/share previously) at the start of FY22, as follows:
|
Exhibit 5: Endeavour forecast valuation and cash flow per share, FY22–26e (US$/share) |
|
|
Source: Edison Investment Research |
Given its elevation into the ranks of the world’s foremost producers of gold, however, we believe Endeavour can increasingly attract lower-cost finance and, as such, a CAPM-derived WACC can also be considered. In this case, long-term nominal equity returns have been 9% and 30-year break-evens are expecting an inflation rate of 2.2625% (source: Bloomberg, 5 August) cf 2.2757% previously. These two measures imply an expected real equity return of 6.59% (1.09/1.022757) and applying this to our forecast cash flows would imply a terminal valuation for Endeavour of US$64.88/share (cf US$65.06/share previously) and a current valuation of US$57.15/share (cf US$57.64/share previously).
In the meantime, Endeavour’s valuation remains at a material discount to those of its peer group, as shown in Exhibit 6, below.
Relative Endeavour valuation
Endeavour’s valuation on a series of commonly used measures, relative to a selection of gold mining majors (the ranks of which it has now joined since its takeovers of SEMAFO and Teranga have been completed), is as follows:
Exhibit 6: Endeavour valuation relative to peers
Company |
Ticker |
Price/cash flow (x) |
EV/EBITDA (x) |
Yield (%) |
||||||
Year 1 |
Year 2 |
Year 3 |
Year 1 |
Year 2 |
Year 3 |
Year 1 |
Year 2 |
Year 3 |
||
Endeavour (Edison) |
EDV |
4.3 |
6.0 |
4.6 |
3.7 |
4.1 |
4.0 |
4.0 |
4.1 |
4.7 |
Endeavour (consensus) |
EDV |
4.4 |
4.8 |
4.5 |
4.1 |
4.4 |
4.2 |
3.1 |
3.4 |
3.5 |
Majors |
||||||||||
Barrick |
ABX |
6.6 |
6.0 |
5.9 |
6.0 |
5.6 |
5.4 |
4.5 |
5.7 |
5.6 |
Newmont |
NEM |
8.1 |
8.1 |
8.2 |
6.8 |
6.6 |
6.6 |
5.0 |
4.9 |
4.5 |
Newcrest |
NCM AU |
9.4 |
6.7 |
7.2 |
6.2 |
5.3 |
5.9 |
1.8 |
1.7 |
1.9 |
Kinross |
K |
3.4 |
3.1 |
3.4 |
4.2 |
3.6 |
4.0 |
3.6 |
3.5 |
3.6 |
Agnico-Eagle |
AEM |
7.8 |
7.6 |
7.9 |
7.1 |
6.8 |
6.9 |
3.7 |
3.7 |
3.7 |
Eldorado |
ELD |
3.8 |
2.8 |
2.6 |
3.2 |
2.8 |
2.5 |
0.0 |
0.0 |
0.0 |
Average |
|
6.5 |
5.7 |
5.8 |
5.6 |
5.1 |
5.2 |
3.1 |
3.2 |
3.2 |
Implied EDV share price (US$) |
30.72 |
21.63 |
25.45 |
30.79 |
26.65 |
28.19 |
25.99 |
25.23 |
29.48 |
|
Implied EDV share price (C$) |
39.50 |
27.82 |
32.73 |
39.59 |
34.26 |
36.24 |
33.42 |
32.45 |
37.91 |
|
Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 8 August 2022.
Of note is the fact that, almost without exception, Endeavour’s valuation is materially cheaper than the averages of the majors on all of the measures shown in Exhibit 6 regardless of whether Edison or consensus forecasts are used. On an individual basis, it is cheaper than its senior gold mining peers on at least 37 out of 54 (68%) valuation measures if Edison forecasts are used and 31 out of 54 (57%) 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$27.13, or C$34.88 (or £22.49), per share.
Research: TMT
YouGov’s year-end trading update (to end-July) indicates results in line with management expectations, with underlying growth across all segments and a ‘modest’ step up in operating margin. Our FY22 forecasts are therefore unchanged, as are those for FY23. We now also publish our first thoughts on FY24, showing continuing progress on revenue and margin as the increased productisation drives efficiencies. YouGov’s share price performance year-to-date has been affected by the rotation away from and derating of higher-growth and tech stocks. Its valuation remains at the higher end of peers, reflecting its continued positive prospects.
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