A profitable Endeavour in West Africa

A profitable Endeavour in West Africa
POSTED ON October 01, 2015 BY Riley Skinner
CATEGORY Endeavour Mining, Haywood Securities,

Endeavour Mining corporate presentation
Endeavour Mining (EDV-T)
Price: 0.55
MC: $227 million
During the bull market, large gold companies were pressured by shareholders to finance higher-cost mines by issuing debt. That increases production and cash flow when gold is rising, but when the price falls it burdens large producers with too much debt and renders their production unprofitable.
Four years into a bear market, gold majors are feeling the heat and it has reverberated all the way down the food chain. Who will acquire the juniors if the majors are saddled with debt and unwilling to issue shares at a dramatic discount? Even if a major did acquire a junior, they would be far too debt-laden to finance the asset’s production.
To remove themselves from this stagnant cycle, companies like Endeavour Mining have focused their efforts internally, as execution becomes the only true driver of profitability. Endeavour has effectively reduced costs while dramatically increasing their production. The results are significant: Endeavour has impressive cash flow, with US$54 million in EBITDA (earnings before interest, tax, depreciation and amortization) last quarter alone.
To find the next gold major, I am looking at companies that are well positioned for growth internally or through acquisitions. Endeavour is growing. In the past 5 years, Endeavour has transformed from a mining finance firm to a mine builder, consolidator and optimizer that executes quarter after quarter, routinely topping their own guidance on production while driving down costs.
Endeavour started this transition with a slew of acquisitions from 2010-2012, picking up 3 operational mines (Youga, Tabakoto and Nzema). Looking back, those acquisitions resulted in a pipeline of projects (Agbaou, Hounde and the Kofi pits) that represent the future of the company.
Endeavour Mining is once again the consolidator with the purchase – announced Sept. 21 – of La Mancha’s indirect 55% interest in Societe des Mines d’Ity SA (SMI), operator of the Ity gold mine in Ivory Coast. Endeavour has just added to their yearly gold production (+13%) and proven plus probable reserves (+22%). For their consideration, La Mancha will receive 177.1 million shares of Endeavour Mining representing 30% of the pro-forma company, worth (at the time of announcement) US$77.9 million.
It’s clear that La Mancha saw value in Endeavour’s shares, as the deal also includes a further cash investment by La Mancha of US$63 million payable to Endeavour Mining, as well as an in-principle commitment of up to US$75 million to support the company’s growth. The strategic partnership adds 80,000 ounces of yearly gold production, a carbon-in-leach development project to their pipeline and frees up some much-needed capital. Post-merger, Endeavour will have reduced their net debt to US$159M (0.7x Net Debt/EBITDA), giving them financial flexibility moving forward.
Endeavour’s six assets (four mines and two development projects) are located in Ghana, Ivory Coast (2), Burkina Faso (2) and Mali. While Burkina Faso has had its share of political turmoil as well as upcoming elections, the Ivory Coast has been noted by experienced West African mine operator Mark Bristow (Randgold CEO) for its “good infrastructure, low-cost power and an amenable political climate” (Financial Times). He should know: Randgold operates the Tongon mine, the Ivory Coast’s largest producer. Bristow has described the Ivory Coast’s new mining code – unveiled last year – as “the best in Africa.”
The mining code includes a sliding scale for royalties depending on prevailing metals prices, and a five-year tax holiday for new investments. With the addition of La Mancha’s assets, Endeavour will have two operating mines in the Ivory Coast (over 4 million ounces measured and indicated), with further exploration potential of 3,500 square kilometres.
Given the state of the junior markets, having deep-pocketed backers is a tremendous competitive advantage. The addition of Naguib Sawaris (the Sawaris family has an estimated net worth of over $36 billion) and La Mancha CEO Sebastian de Montessus, who will become Endeavour’s president, should help Endeavour increase its profile. Last May, Sawaris and de Montessus joined the board of Evolution Mining and their impact has been substantial. Evolution has been aggressive, snapping up the Cowal mine from Barrick for AUD$550 million dollars. Neil Woodyer, Endeavour Mining’s current CEO, has since stated that he sees similar opportunities in Africa.
If Endeavour is able to accomplish such growth in a down market, it would be interesting to see what the company could do with the tailwind of a rising gold price.
With a cash-infused balance sheet, low-cost mid-tier production and a couple of world-class billionaire financiers (Frank Giustra and Naguib Sawaris) on the board, Endeavour looks primed to take the next step. At a 55-cent valuation (C$542 million enterprise value pro-forma), Endeavour Mining is a mid-tier producer in a junior’s shoes.