Endeavour Mining Corporation

Endeavour Mining Corporation (TSX: EDV) is a gold mining company that operates through four mines in West Africa, in addition to having project development and exploration assets.

Key Highlights:

• Impressive Production profile: Over the years, the company reported consistent growth in production and was able to meet its guidance, which is a key positive. In FY21, EDV expects its mine production in between 1,365 koz to 1,495 koz, higher than FY20 production of 1,066 koz.

Source: Company Presentation

• Improved prospects from recent acquisitions: The recent acquisition of SEMAFO has resulted in tremendous cash flow growth, which is a key positive. Operating cash flows before working capital grew to USD 311 million in Q4FY20, from USD 73 million in Q4FY19. Moreover, cash flow per share improved to USD 1.91 in Q4F20 v/s USD 1.10 per share in Q4FY19.

Source: Company Presentation

• Encouraging Exploration Programs: The company is progressing in line with the five-year exploration target and has reported 8.4 moz of discoveries from FY16 to FY20. Notably, the group achieved ~84% of its five-years exploration target within first four-years, which is a key positive.

Source: Company Presentation

• Issuance of Shares: On March 30, 2021, the company issued 8,910,592 ordinary shares to La Mancha for aggregate net proceeds of USD 200 million at a price of ~USD 22.45 per share. The above investment was made via La Mancha holding for the acquisition of Teranga Gold Corporation, announced on November 16, 2020. Following completion of the investment, the company holds an interest of ~19% in La Mancha holding.

FY20 Financial Highlights:

• EDV announced its full-year results, wherein the company posted revenue of USD 1,424.111 million, higher than USD 694.848 million in FY19.
• Earnings from mine operations stood at USD 490.036 million, significantly higher than USD 155.985 million in the previous year. The increase was driven by higher income, partially offset by higher operating expense (USD 574.791 million v/s USD 345.817 million in the previous year).
• The group reported earnings of USD 338.234 million, as compared to a loss of USD 27.502 million in FY19, supported by a lower impairment of mining interests (USD 64.506 million v/s USD 127.380 million in pcp).
• Net comprehensive earnings stood at USD 133.872 million, as compared to a net loss of USD 159.974 million in FY19.

FY20 Income Statement Highlights (Source: Company Report)

Risks: Volatility in the international Gold prices would affect the company’s income, cash flows and margins.

Valuation Methodology (Illustrative): Price to CF based

Note: All forecasted figures have been taken from Thomson Reuters

Stock Recommendation:

The group would continue its focus on organic growth with construction of the Sabodala-Massawa Phase 1 expansion, which is expected to be completed in FY21. Moreover, the company is conducting Definitive Feasibility Studies for Sabodala-Massawa Phase 2 expansion, Fetekro, and Kalana projects. Notably, the company has reported strong growth in its mineral reserves during FY20, supported by the recent acquisitions.

Source: Company Report

We have valued the stock using P/CF-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers B2Gold Corp, Yamana Gold Inc etc. Considering the aforesaid facts, we suggest a ‘Buy’ recommendation on the stock at the closing market price of CAD 27.99 on April 8, 2021.

One-year Price Chart (as on April 08, 2021). Source: Refinitiv (Thomson Reuters)

Osisko Gold Royalties Ltd

Osisko Gold Royalties Ltd (TSX: OR) is a Canada-based intermediate precious metal royalty company. The Company holds a North American focused portfolio of over 140 royalties, streams and precious metal offtakes.

Key highlights 

• Higher production guidance: The company’s asset base is performing well and is supported by several recent positive developments, including reaching a milestone on the underground Odyssey project that would increase production from its flagship asset Canadian Malartic for decades. The company raised the production guidance on the back of all these factors, which would be in the range of 78K-82K GEO with a 97% cash operating margin in 2021.

Source: Company 

• Earned record revenues and cash flows from operating activities: For FY 2020, the company reported sales of 66,113 ounces of gold equivalent and surpassed its revised outlook of 63,500 - 65,500 (GEO). Furthermore, this helped the company to achieve a record revenue from royalties and streams of CAD 156.6 million, against CAD140.1 million in FY2019. Additionally, cash flow from operating activities was up by 18% to CAD 108.0 million v/s CAD 91.6 million in FY2019.

Source: Company 

• Repaid convertible debentures: On February 12, 2021, the company repaid convertible debentures of CAD 50 million and drew the same amount from its revolving credit facility, lowering the amount of interest payable by approximately 1.5% per annum. Furthermore, the group holds CAD 105.1 million in cash and CAD 386.4 million in undrawn facilities. 

• Industry beating margin profile:The group reported strong operational efficiency during FY 2020, and the group’s margin profile stood higher than the industry median. The group reported EBITDA margin and operating margin of 51.3% and 25.7%, respectively, higher than the industry median of 40.2% and 24.5%. 

Financial overview of FY 2020

Source: Company 

• For FY 2020 the company posted revenues of CAD 213.63 million, as compared to CAD 392.60 million in the previous corresponding period (pcp). The lower gold production was partially offset by higher realized gold price of CAD 2,373/oz Vs CAD 1,821/oz in 2019.

• Gross profit stood at CAD 104.33 million in FY2020, as compared to CAD 82.79 million in pcp. The rise in gross profit was primarily due to lower cost of sales.

• The company reported operating income of CAD 41.7 million, as compared to a loss of CAD 183.23 million in pcp. The improvement was primarily due to lower impairment of assets, against FY2019. 

• Net earnings attributable to shareholders stood at CAD 16.88 million for FY2020, against a loss of CAD 234.20 million in 2019. 

Risks associated with investment

The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The Company witnessed an uptrend in GEOs and further look forward to growing it in 2021. The group reported an industry-beating EBITDA margin and operating margins, which indicates operational efficiency. Moreover, the group reported cash flow from operating activities of CAD 108.0 million, which increased by 18% compared to FY2019. The Company holds a diversified portfolio of 17 producing assets (majorly Gold) and is partnered with high-quality operators. Moreover, most partnered groups have reported the restart of operations and new mines' additions under their portfolio, which is likely to result in improved royalties in the coming quarters. Therefore, based on the above rationale and valuation, we suggest a "Buy" recommendation at the closing price of CAD 15.13 on April 8, 2021. We have considered Franco-Nevada Corp, Royal Gold Inc, Nomad Royalty Company Ltd, etc as the peer group for the comparison.

1-Year Price Chart (as on April 08, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.