Endeavour Mining PLC (TSX: EDV) is a gold mining company. The company engages in gold mining operating four mines in West Africa in addition to having project development and exploration assets. It focuses on effectively managing its existing assets to maximize cash flows as well as pursuing organic and strategic growth opportunities that benefit from its management and operational expertise. Its operations are held in Burkina Faso (Karma, Hounde, Mana and Boungou mines), Cote d'Ivoire (Ity mines), and Mali (Kalana Project). The company generates maximum revenue from Burkina Faso.

Investment Rationale

• Flow in Gold ETF Continued in July 2021: Global flow in the Gold ETFs continued to increase in July 2021, with inflows of 11.1 tonnes (USD 669 million, +0.3% AUM). The positive flows came alongside a recovery in gold prices, particularly in the latter half of the month amid concerns of uncertain global growth outlook and a reaffirmed commitment by central banks to continue with easy money policies despite elevated inflation. Also, the resurgence of the Delta variant further fanning demand for safe-haven asset classes over speculative assets.

• Gold Prices to Remain Firm in Mid-term: The opportunity cost of investing in gold continues to improve as the real earnings yield plus the dividend yield are trending lower. Further, recent commentary out of the Fed and ECB suggests the US and possibly other countries may place less emphasis on inflation and more on employment which could prolong tapering activity. A Lower rate and the US Federal Reserve comments helped propel gold 4% higher on the month and back to nearly flat on the year.

• Cross Border Listing would Benefit Investors: Endeavour’s premium listing on the London Stock Exchange (“LSE”) was successfully completed on 14 June 2021, positioning Endeavour as the largest pure-play gold producer listed on the premium segment of the LSE.  Cross-listings often require companies to establish a clear and well-defined set of rules that govern their corporate structure. This means that it must be open regarding its operations. Many cross-listed companies improve their governing structure that guides the company’s directions and goals. Also, opting for a cross border listing on major exchanges enhances a company’s public profile. It can be used as an advertising strategy for cross-border listed companies to attract foreign investors. Further, Endeavour expects to be eligible for inclusion in the MSCI Europe index, with index rebalancing occurring on 30 November 2021 following the semi-annual review, which is expected to be completed by mid-November.

• Record Q2FY21 result: The group’s second-quarter production was up 18% over the previous corresponding period to 409koz, while AISC decreased by USD 15/oz to USD 853/oz. Adjusted Net Earnings (from cont. operations) came in at USD 183 million or USD 0.73/share in Q2FY21 compared to USD 49 million in the previous corresponding period. Net debt decreased by USD 85 million during the quarter to USD 77 million, and gross debt decreased by USD 120 million.

• Shareholder Returns Programme: The company declared H1-2021 interim dividend of USD 70 million, with a record date set at 10 September 2021. The group is well-positioned to deliver more than the minimum committed dividend of USD 125 million for the full year. Share buybacks continue to supplement shareholder returns, with a total of USD 70 million of shares repurchased since April 2021.

• Focusing on Organic Growth: The company mentioned that construction of Sabodala-Massawa Phase 1 expansion is on schedule for completion by the year-end; DFS is underway for Sabodala-Massawa Phase 2 expansion, Fetekro, and Kalana projects. The group is on track to discover over 2.5Moz of Indicated resources in 2021. It has made significant discoveries recently at Ity, Houndé, Sabodala-Massawa and Fetekro.

• Strong Balance Sheet: The company has a strong balance sheet, with total assets of USD 3,881.7 million and total liabilities of USD 1,824.7 million at the end of the last fiscal year, which implies Total Assets/Total Liabilities ratio of 2.13x. Moreover, the company’s cash and marketable securities have grown with a CAGR of 43% over the past 5-years. Also, the company has a strong liquidity position to cover its short-term obligation with a current ratio of above 2x. Further, the group’s netblock has also expanded significantly from USD 740.8 million at the end of fiscal 2015 to USD 2,566.1 million at the end of fiscal 2020, increased with a CAGR of 28% at the same time.

• Technical Strength: Despite recent correction on the back of weakness in the underlying commodity prices, EDV shares have not charted into a bearish zone, with the leading momentum indicator 14-day RSI hovering above 40. Also, EDV shares are still hovering above their crucial short-term as well as long-term support levels of 50-day and 200-day SMAs, which implies the long-term bullish trend is still intact and RSI support near 40, indicating that stock is getting prepared for an upside move.

Technical Chart (as on August 11, 2021). Source: Refinitiv, Analysis by Kalkine Group

• Risk Associated to Investment: The company's business is significantly exposed to the volatility in gold prices. Further inherent risks associated with mining and mineral processing such as the company's mines may not perform as planned; uncertainty with the company's ability to secure additional capital to execute its business plans; the speculative nature of mineral exploration and development, including the risks of obtaining and maintaining necessary licenses and permits, including the necessary licenses, permits, authorizations and/or approvals from the appropriate regulatory authorities.

 Financial Highlights: Q2FY21

Source: Company Filing

• Revenue for Q2-2021 was USD 753.4 million compared to USD 635.8 million for Q1-2021. The increase in revenue in Q2-2021 was mainly due to higher gold sales in Q2-2021 due to the benefit of a full quarter of production from the newly acquired Sabodala-Massawa and Wahgnion mines, together with strong performances at Houndé and Ity and a higher realised gold price for Q2-2021 of USD 1,791/oz compared to USD 1,749/oz for Q1-2021.
• Operating expenses and depreciation, and depletion increased for Q2-2021 compared to Q1-2021 due to the addition of the Wahgnion and Sabodala-Massawa mines, which were acquired on 10 February 2021, for the full quarter.
• Royalties were USD 43.9 million for Q2-2021, compared to USD 44.4 million in Q1-2021. Royalty expenses remained stable as the decrease in the realised gold price was offset by increased production from the Wahgnion and Sabodala-Massawa mines acquired on 10 February 2021.
• Corporate costs were USD 15.9 million for Q2-2021 compared to USD 11.4 million for Q1-2021. The increase in corporate costs is primarily due to costs associated with listing on the LSE as well as additional corporate costs following the integration of Teranga.
• Net comprehensive earnings were USD 148.9 million for Q2-2021 compared to USD 110.9 million in Q1-2021. The increase in earnings was related to higher earnings from mine operations due to the addition of Wahgnion and Sabodola-Massawa, as well as a lower income tax expense, which contained one-off expenses related to the divestment of Agbaou in Q1-2021.
• Adjusted Net Earnings attributable to shareholders for continuing operations were USD 183.1 (or USD 0.73 per share) in Q2-2021 compared to USD 93.2 million (or USD 0.45 per share) in Q1-2021.
• Operating cash flows increased by USD 102.5 million from USD 197.9 million (or USD 0.99 per share) in Q1-2021 to USD 300.5 million (or USD 1.19 per share) in Q2-2021, mainly due to higher gold sales at a higher realised price as well as lower operating costs and a working capital inflow, which more than offset the higher income taxes paid and the foreign exchange losses incurred.
• Net Debt amounted to USD 77.1 million at quarter-end, a decrease of USD 84.9 million during the quarter despite dividend payments of USD 60.0 million and USD 59.5 million of shares repurchased.

Top-10 Shareholders

Top-10 shareholders together holds approximately 55.29% stake in the company, with Loza-Sawiris (Yousriya) and BlackRock Investment Management (UK) Ltd. are the major shareholders with an outstanding position of 19.25% and 11.46%, respectively.

Valuation Methodology (illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: The strong free cash flow generation ability of the company has significantly improved Endeavour’s balance sheet strength and bolstered the company’s ability to reward shareholders. The group paid its first dividend of USD 60 million in Q1 for the 2020 fiscal year and declared an interim dividend of USD 70 million for H1-2021, placing them on track to deliver more than the guided minimum dividend of USD 125 million for the full year. Moreover, their near-zero Net Debt to adjusted EBITDA leverage ratio is supplementing their shareholder return programme with share buybacks, having repurchased USD 70 million of shares since April.

At quarter-end, Endeavour’s liquidity remained strong with USD 832.9 million of cash on hand and USD 220.0 million undrawn of the RCF. The company would seek to reduce its cash balance in the upcoming quarters by continuing to pay down its debt.

Further, the Net Debt / Adjusted EBITDA (TTM) leverage ratio ended the quarter at a healthy 0.07x, down from 0.16x in Q1-2021, and well below the company’s long-term target of less than 0.50x, which provides flexibility to continue to supplement its shareholder return programme while maintaining headroom to fund its organic growth. The ratio had improved by 93% from the corresponding period last year when the ratio stood at 1.00x.

Also, gold prices are likely to stand firm as the opportunity cost of investing in gold continues to improve on the back of lower real earnings yield plus a lower dividend yield.

Hence, based on the rationale discussed above and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 28.88 on August 11, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

1-Year Price Chart (as on August 11, 2021). Source: Refinitiv, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on August 12, 2021 price as well.

Disclaimer

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