Endeavour Mining: A Solid African Gold Player About To Enter A New Phase

 

Investment thesis

Endeavour Mining plc (TSX: EDV, LSE: EDV, OTCQX: OTCQX:EDVMF) is the largest gold producer in West Africa, with seven operating assets across Senegal, Cote d’Ivoire, and Burkina Faso, and a strong portfolio of advanced development projects and exploration assets in the highly prospective Birimian Greenstone Belt across West Africa.

Source: Presentation

The company released its first quarter 2021 results on May 13, 2021. It was a good quarter that beat analysts’ expectations. It was due to increased output and reduced costs.

The investment thesis is quite simple when we look at the balance sheet. I believe EDVMF is an excellent long-term investment. However, the caveat emptor here is that West Africa is not a totally safe jurisdiction for gold mining, and we should factor in an extra risk due to the location.

Thus, I recommend trading short-term about 40% of your long-term position.

EDVMF performed reasonably well on a one-year basis compared to a few of its peers and is down only 7%.

 

 

CEO Sébastien de Montessus said in the conference call:

We are well-positioned to deliver strong cash flow and organic growth while at the same time, rewarding shareholders through our dividend and buyback programs.

Endeavour Mining – 1Q’21 Balance Sheet and Trend – The Raw Numbers

Endeavour Mining	1Q’20	2Q’20	3Q’20	4Q’20	1Q’21
Total Revenues in $ Million	226.32	253.08	481.56	419.56	635.79
Net Income in $ Million	26.00	-37.23	59.13	24.33	89.57
EBITDA $ Million	100.56	42.75	233.02	124.18	332.41
EPS diluted in $/share	0.24	-0.34	0.36	0.16	0.43
Operating Cash flow in $ Million	125.96	57.42	201.88	363.67	197.94
Capital Expenditure in $ Million	53.81	58.33	53.57	70.01	113.70
Free Cash Flow in $ Million	72.14	-0.91	148.32	293.66	84.24
Total Cash $ Million	357.3	351.8	523.3	645.0	868.2
Total Long term Debt in $ Million	757	826	720	688	1,045
Shares outstanding (diluted) in Million	110.59	110.99	162.99	163.23	209.21
Production Au Oz	1Q’20	2Q’20	3Q’20	4Q’20	1Q’21
Total Production Gold produced	172	149	244	343	347
AISC (co-product) from continuing operations	647	750	935	779	858
Gold Price realized	1,546	1,689	1,841	1,841	1,749

Source: Company release. Fun Trading files.

Note: On June 14, 2021, Endeavor Mining Plc started listing on the premium segment of the London Stock Exchange under the ticker EDV.LSE, targeting inclusion in the FTSE indices.

Analysis: Revenues, Free Cash Flow, Debt, and Gold Production

1 – Quarterly revenues were $635.79 million in 1Q’21

Revenues for the first quarter of 2021 were $635.79 million, up from $226.32 million in 1Q’20 and up 51.5% sequentially. The increase is due to the divestitures of Mana, Boungou, Wahgnion, and Sabodala-Massawa mines after 1Q’20.

The adjusted net earnings were $104.7 million or $0.50 per share for the quarter ended March 31, 2021, compared to adjusted net earnings of $26.3 million or $0.24 per share in 1Q’20

2 – Free cash flow was $84.24 million in 1Q’21

Note: Generic free cash flow is the cash generated from operating activities minus CapEx. The company uses a slightly different way of calculating FCF.

Free cash flow from the first quarter of 2021 was $84.24 million, and trailing yearly free cash flow was $525.3 million.

Note: Endeavour expects to declare dividends on a semi-annual basis, to maintain a consistent dividend yield until the company reaches a targeted net cash position of $250 million.

Once that target is reached, the company would be well-positioned to re-assess its capital allocation priorities, including augmenting its shareholder return program.

Endeavour announced its first dividend of $60 million for the 2020 fiscal year. This first dividend equates to $0.37 per ordinary share and represents a 1.6% yield based on Endeavour’s closing price on November 11, 2020.

Also, the company has a share buyback program.

Between March 22, 2021, to March 21, 2022, Endeavour Mining will buy up to 12.2 million ordinary shares, or approximately 5% of its total issued and outstanding ordinary shares at the time.

CEO Sebastien de Montessus said in the conference call:

our operating cash flow per share is up nearly 50% while the adjusted EPS is up 111%, consistent with our expectations that the transactions would be accretive to our shareholders, while also benefiting from the continued strong gold price environment. Strategically, we are focused on ensuring our shareholders’ realized strong returns. As such, we have laid out our first $60 million dividend in January and started during Q2 our buyback program which will run over the year.

3 – Debt situation. Excellent profile.

Note: Endeavour Mining completed the acquisition of Teranga Gold on February 11, 2021.

Given the significant potential within our portfolio, our sole priority in 2021 is to unlock value organically through mine life extensions, asset optimization initiatives, and by advancing our brownfield and greenfield projects through studies and further exploration.

The company reduced its debt significantly during 2020 and closed an $800 million debt financing package to retire $359 million higher-cost debt facilities.

Endeavour had net debt of $220.2 million post-acquisition of Teranga and the injection of $200 million by La Mancha (including lease liabilities of $43.6 million).

Source: Presentation

The debt situation is excellent with a net debt/Adjusted EBITDA (“LTM”) of 0.16x.

4 – Quarterly gold production analysis

1Q’21 consolidated production from all operations amounted to 346,837 Au ounces, increasing by 3,283 ounces or 1.0% compared to 4Q’20.

Below are the details that explained the large increase year-over-year.

Source: Presentation

Note: Karma is an asset held for sale.

On January 22, 2021, Endeavour announced it had agreed to sell its 85% interest in its non-core Agbaou mine in Côte d’Ivoire to Allied Gold Corp. for consideration of up to $80.0 million with further upside through its equity exposure and a Net Smelter Return (“NSR”) royalty. The disposition was finalized on March 1, 2021 (from the press release).

Also, lower production at Houndé mine this quarter was offset by adding the Wahgnion and Sabodala-Massawa mines acquired on February 10, 2021. In the conference call:

On production, we are solidly on track relative to our full year guidance and we will see a full quarter of production at Sabodala Massawa and Wahgnion included in our results in Q2

AISC for all operations increased by 8% or $65 per ounce due primarily to the higher sustaining capital and cash costs. AISC for all operations decreased by $31 per ounce or 3% to $868 per ounce as higher total cash cost, and higher sustaining capital were offset by the higher ounces sold. AISC from continuing operation was $858 per ounce.

4 – 1Q’21 compared to full-year 2021 guidance

Source: Presentation

Commentary and Technical Analysis

Endeavour Mining has accomplished some impressive milestones in the last six months. The sale of its interest in Agbaou mine and the completion of its acquisition of Teranga Gold were great news.

The company also announced positive pre-feasibility study results for both Fetekro and Kalana projects.

Endeavour Mining is entering a “new phase” in which it intends to fund its large CapEx program internally.

CEO Sébastien de Montessus said in the conference call:

Having this strong balance sheet position with a net debt-to-EBITDA leverage ratio currently sitting below 2.2x gives us the flexibility to focus on both shareholder returns and on investing to unlock our organic growth potential. One of the best features of our new portfolio is the ability to generate sufficient cash to pay dividends and do buybacks, while also being able to reinvest in the business to support organic growth projects and exploration.

Technical analysis

EDVMF forms a descending channel pattern with resistance at $24.25 and support at $20.50. The trading strategy starts selling between $23 and $24.5, about 30% of your position, assuming a profit. I suggest buying between $21 and $20.5.

EDVMF is highly correlated to the price of gold, and if the gold price continues to drop, EDVMF could cross the support (breakdown) and retest $19. Conversely, if the gold price turns bullish, we could go as high as $26.

Watch gold like a hawk.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker.

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