Endeavour Mining Corporation

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

Key Highlights:

• Solid Production profile: Over the years, the company reported consistent growth in production and was able to meet its guidance, which is a key positive. Gold production during the first quarter of FY21 stood at 334,262 ounces, which is in line with the full-year guidance of 1,350,000 - 1,475,000 ounces. Moreover, gold production per share increased by 23% on y-o-y basis.             

• Industry Beating Margin profile: The company commands a higher margin than its peers, which is an indication of an improved cost structure. EBITDA margin and operating margin stood at 48.9% and 27.7%, respectively, in Q1FY21, higher than the industry median of 39.4% and 25%, respectively. Moreover, the net margin stood at 18.7% in the quarter, higher than the industry median of 14.6%
  

• Listing on London Stock Exchange: On June 14, the company announces the listing of its ordinary shares on the London Stock Exchange’s main market (LSE) under the ticker name ‘EDV’. Apart from LSE, the stock would continue to trade in the Toronto Stock Exchange (TSX) with its total share capital comprising of 250,491,755 shares. Notably, LSE is regarded as one of the most diverse capital markets across the globe and is accessed by a higher number of investors groups, starting from high-net-worth private individuals to premier financial institutions.

• Rise in Cash flows: The company’s robust operational excellence has reflected in the cash flows. The company reported its operating cash flows before changes in working capital at USD 265.254 million, up from USD 95.331 million in Q1FY20, supported by higher net profit. Moreover, free cash flow stood at USD 86.857 million, higher than USD 65.687 million in the previous corresponding period (pcp).

Q1FY21 Financial Highlights:

• EDV impresses with its quarterly results, wherein the group reported its revenue of USD 635.792 million, jumped from USD 226.321 million in the previous corresponding period (pcp). The surge was driven by higher gold sales (364 koz v/s 147 koz in pcp) coupled with a surge in realization price (USD 1,749/oz v/s USD 1,538/oz in pcp).
• Earnings from mine operations stood at USD 217.703 million, significantly higher than USD 72.182 million in the previous corresponding period (pcp). The increase was driven by elevated topline, partially offset by higher operating expenses due to comparatively higher production.
• The group reported earnings from operations at USD 176.369 million, higher than USD 59.665 million in pcp. The group reported a surge in corporate costs, acquisition and restructuring costs and exploration costs during the quarter. Notably, All-in Sustaining Cost (AISC) stood 3% y-o-y lower to USD 868/oz.
• Net comprehensive earnings stood at USD 119.002 million, soared from USD 27.485 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in the international gold prices are likely to affect the company’s income, cash flows and margins. Additionally, the group reported a surge in All-in Sustaining Cost to 868/oz in Q1FY21, from 803/oz in Q4FY20. The above trend is alarming and might ruin the company’s margins.

Valuation Methodology (Illustrative): Price to Cash flow  

Stock Recommendation:

The company has high-quality, diversified asset base and a strong pipeline of near-term organic development projects, which are likely to support the company’s upcoming operations. Notably, the company expects its Sabodala-Massawa Phase 1 expansion to be completed by FY21, which provides ample exploration opportunities for the company. Moreover, the group has a strong margin profile and has a healthy balance sheet with a low Net Debt / adjusted EBITDA leverage ratio of 0.2x, which indicates strong financial flexibility. Based on technical analysis, the stock has support at CAD 23.12 level. We have valued the stock using the P/CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered the industry (Metal & Mining) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 27.55 on July 08, 2021.

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

One-Year Technical Price Chart (as on July 08, 2021). Source: REFINITIV, Analysis by Kalkine Group

Sandstorm Gold Ltd.

Sandstorm Gold Ltd. (TSX: SSL) provides financing to companies engaged in gold mining through gold stream and royalty. Geographically, the company has operational footprints in North America, South & Central America, Africa, and Asia & Australia.

Key Highlights:

• Record quarterly sales: The group released preliminary numbers for Q2 FY21, wherein, it sold 18,000 attributable gold equivalent ounces and realized preliminary revenue of USD 32.4 million. The company also reported that the preliminary cost of sales, excluding depletion, stood at USD 4.1 million, resulting in cash operating margins of ~USD 1,570 per attributable gold equivalent ounce.

• New Strategic Acquisition to support upcoming operations: Recently, the company announced the increase of its portfolio of mining assets and immediate cash flow through a gold stream and royalty agreement with Vatukoula Gold Mines PTE Limited (VGML) with a price consideration of USD 30 million.  The company would receive 25,920 ounces of gold for the next six years, followed by 2.55%–2.9% of the gold production from the Vatukoula Mine mining licenses. Additionally, the group also purchased 9.3 million units of royalty package portion of Vale S.A.'s (Vale) at USD 108 million. The company is expected to earn an additional revenue of USD 12 million to USD 15 million from the above royalty for the next five years.
  

• Industry beating margins: The company commands a higher margin than its peers, which indicates operational efficiency. The group reported an EBITDA margin and operating margin of 71% and 29.3%, respectively, higher than the industry median of 39.8% and 25.4%, respectively. The company’s net margin stood at 16% in Q1FY21, as compared the industry median of 14.6%.

Q1FY21 Financial Highlight:

• SSL announced quarterly result, wherein the company reported revenue of USD 30.997 million, climbed from USD 21.332 million in the previous corresponding period (pcp). The increase was driven by higher Attributable Gold Equivalent ounces sold (17,444 ounces v/s 13,393 ounces in pcp), coupled with an increase in average realized gold price (1,777/ounce v/s 1,593/ounce).
• Gross profit stood at USD 15.725 million, jumped from USD 8.559 million in pcp. The growth was driven by elevated sales, partially offset by a higher cost of sales (USD 5.350 million v/s USD 4.209 million in pcp).
• The company turned profitable and reported net income of USD 969 million, versus a net loss of USD 10.342 million in pcp. The growth was supported by lower Stream, royalty and other interests impairments expense (USD 0. 408 million v/s USD 8.877 million in pcp), decline in Loss on revaluation of investments (USD 1.794 million v/s USD 5.852 million in pcp), partially offset by higher administration expenses (USD 2.381 million v/s USD 2.062 million in pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s operations are correlated with the international gold prices, and price volatility would impact the group’s margins and cash flows.

Valuation Methodology (Illustrative): Price to Cash Flow 

Stock Recommendation:

With the new acquisition, the company’s performance is expected to spur in the coming days, while the Management expects its FY21 gold equivalent production in between 62,000–69,000 ounces in 2021. The company expects ~80% of the revenue to come from gold and silver while it expects iron ore revenue to contribute ~10% of the overall income. Moreover, the group has lowered its total debt to USD 2.8 million in Q1FY21, from USD 53.2 million in Q1FY21, which is encouraging. Based on technical analysis, the stock has support at CAD 8.25 level. We have valued the stock using the Price to Cash Flow based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Maverix Metals Inc, Franco-Nevada Corp and Kirkland Lake Gold Ltd. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 9.58 on July 08, 2021.

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

One-Year Technical Price Chart (as on July 08, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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