Description

Endeavour Standalone

Endeavour Mining is a West African gold miner headquartered in London and listed in Canada and the US with a great track record of purchasing, developing, and operating gold mining properties in West Africa’s Birimian Greenstone Belt. The company has a strong balance sheet, carrying Net Debt of $472.7 million at the end of Q1 2020 (which equates to 1.06x LTM Adjusted EBITDA). Endeavour’s standalone FY 2020 guidance is for 680-740koz of gold production at a Corporate Level All-In Sustaining Cost (Including both Corporate G&A and Sustaining Exploration costs) of $845-895/oz. At today’s gold prices of $1,770/oz, meeting 2020 guidance will produce between $595.0 million and $684.5 million in All-In-Sustaining-Margin (AISM) or between a 22.2% and 25.5% AISM yield on Endeavour’s $2.68B market cap. 

At the end of 2019, Endeavour had Proven and Probable Reserves of 7,885koz at assumed gold prices of $1,350 and below. Current reserves will provide over 10 years of production at the current rate of production, and at current gold prices, much of the company’s 14Moz of Measured & Indicated Resources can and will be converted into reserves. Over the last three years, the company has discovered 5.3Moz at an average discovery cost of $12/oz, compared to a $76/oz average West African Discovery Cost and a $149/oz average Global Discovery Cost according to SNL Metals & Mining.

West Africa Strategy

Endeavour operates in the highly economical Birimian Greenstone Belt of West Africa, a region that ranks 1st in the world for gold discovery and 4th for gold production over the last decade. Burkina Faso and Cote D’Ivoire, where all four of Endeavour’s operating mines are located, represent 60% of the Birimian Greenstone geological formation but currently only 25% of overall production. These two nations have been historically underdeveloped compared to nearby Ghana and Mali due in part to political instability and lack of infrastructure, but their lack of exploration creates a long term opportunity for Endeavour. The company’s numerous exploration opportunities include high grade deposits nearby its flagship mines.

Over the years, Endeavour has done very well at increasing production and lowering costs. Total production has risen from 466koz in 2014 to 651koz in 2019. Meanwhile All-In Sustaining Costs have dropped from $1,010/oz in 2014 to $818/oz in 2019. They’ve managed to continually improve their mines profile by selling higher cost and non-core operations like Youga(Burkina Faso), Nzema (Ghana), and Tabakoto (Mali) and investing in high return, long-lived mines like Hounde (Burkina Faso) and Ity CIL (Cote D’Ivoire). Endeavour's strategy of high-grading the mines portfolio has been underpinned by the investment in these two flagship mines with extraordinary project economics and very large exploration potential.

Flagship Mine #1

In April 2016, Endeavour Mining began construction of the flagship Hounde mine, with 90% ownership by Endeavour and 10% by the Burkina Faso government. For an estimated capital cost of $328 million, the mine provided expected average gold production of 190koz per year over a 10-year mine life at an AISC of $709/oz. The Project Economics at $1,250 gold (the prevailing price at the time) provided $342million in After-tax NPV(r=5%), an After-tax Project IRR of 32%, and a 2.2 year payback from the start of production. 

Less than 18 months later in October 2017, construction of the Hounde mine was completed ahead of schedule and below budget. In 2019, Hounde produced 223koz at an all-in sustaining cost (AISC) of $862/oz and is on track to produce similar performance in 2020. At flat current gold prices of $1,770, the mine is will produce between $201.25 million and $226.25 million of mine level all-in sustaining margin (AISM) in the year 2020.

From inception, Hounde reported 2.164Moz reserves at an average grade of 2.06g/t (grams per ton of milled ore). Since then, 710koz of high grade (3.01g/t average) reserves have been added through exploration of the Kari area where further reserve additions are expected to be announced in Q2 and mining activities are expected to begin in late 2020. These new high grade reserves will extend the life of the mine and also lower the overall cost per ounce.

Flagship Mine #2

Before the first gold pour at Hounde was completed, the Endeavour construction team was already transitioning to work on another long-lived investment project with highly attractive economics. In September 2017, Endeavour began the 20 month, $412 million upgrade of the Ity Mine processing plant from a Heap Leach to Carbon-In-Leach (CIL) process. At an assumed gold price of $1,250/oz, the project had an after-tax NPV(r=5%) of $710 million, an after-tax IRR of 40.3%, and a project payback of 1.8 years from commencement of production. 

Ity CIL was completed on budget and ahead of schedule in March 2019, taking Ity from a 85koz production, $719/oz AISC mine in 2018 to an estimated 230-250koz of production and $630-675/oz in 2020. 

At the current gold price of $1,770, Ity will produce between $251.85 million and $285.0 million of mine-level AISM in 2020. Ity has a 14+ year remaining mine life and reserves of 3.144Moz and growing. In Q1 2020, Endeavour also announced the discovery of 415koz higher-grade Probable Reserves at the Ity area La Plaque discovery with average grades of 2.34g/t. An updated Le Plaque resource is expected to be announced mid-year to be included in an updated Ity mine plan. Endeavour holds an 85% ownership interest in the mine with the Cote D’Ivoire government holding 10% and the remaining 5% owned by the Society For Mining Development in Ivory Coast. 

SEMAFO Combination

On March 23, 2020, Endeavour announced the acquisition of fellow West African gold producer SEMAFO. The exchange rate was set at 0.1422 Endeavour shares for every one SEMAFO share and gives existing Endeavour shareholders approximately 70% of the combined business and existing SEMAFO shareholders approximately 30%. On May 28, Endeavour announced shareholders’ overwhelming approval of the transaction with 99.98% of votes cast for the Issuance of Endeavour Shares for SEMAFO shares. All required regulatory approvals for the transaction have been recieved and it is expected to close on or around July 1st.

SEMAFO entered this year with $9.98 million in Net Cash, two high-grade mines in Burkina Faso that produced a total of 341koz in 2019 at an AISC of $735.5/oz, a nice package of exploration projects, and $262.75 million in 2019 Adjusted EBITDA. SEMAFO’s 2020E AISM of $272.9 million is to be acquired with just $1.074B worth of Endeavour stock (prices as of June 19th) for a slightly higher than 25% AISM yield. The combined entity is expected to produce 12% FCF Yield in 2020 which is twice the median gold miner’s 6% yield. 

Not only is this transaction financially accretive to Endeavour shareholders, but it will give the added benefit of management synergies and mine level synergies at the nearby Hounde (Endeavour) and Mana (SEMAFO) mines. The transaction will make Endeavour the largest gold producer in West Africa with over 1.0Moz production in 2020, and provide a position of greater strength when partnering with West African governments and localities. Post-transaction Endeavour will be the 12th largest gold producer in the world, and this larger market profile will give the company the ability to meet the investment hurdles of larger funds.

Valuation

Simply coming in line with the cash flow multiples of its gold mining peers would imply a doubling of Endeavour's stock price. Endeavour also deserves a premium for its great track record of acquiring and developing mining assets as well as its plentiful near and long-term exploration and development opportunities in West Africa. The potential for future political instability and security concerns in parts of Burkina Faso are probably still providing a discount on the stock, but Endeavour's French-speaking management team are well-positioned to tackle these issues in partnership with local operations teams and governments. When the SEMAFO merger is concluded with its synergies realized, a closing of the valuation gap with gold mining peers should reasonably leave Endeavour's stock trading for $50/share.

Case For Gold

Endeavour is in the bottom third of the gold mining industry’s cost curve and is therefore well-positioned for various gold price environments. However, the price of gold is of course important to the success of any gold mining investment. With the Fed projecting no rate increases through 2022, the US national debt now over $26 trillion, and more fiscal and monetary stimulus from governments and central banks around the world, the case for gold prices to continue rising is strong. As an inflation hedge and alternative to dollar fiat, gold will see increasing demand from large institutional investors as will shares of Endeavour Mining.

Catalyst

• Announcing new discoveries at Ity and Hounde (end of June and July)

• Completion of merger with SEMAFO, expected July 1st

• Re-rating as top 15 global gold producer

• Operating synergies leading to lower AISC’s

• Close to zero Net Debt by YE2020

• Announcing new dividend policy in second half of year