Date: Monday, 20 November 2023
In the wake of Endeavour’s Q323 results we have updated our FY23 estimates. Endeavour remains on track to achieve its production guidance of 1,060–1,135koz at an AISC of US$895–950/oz (792koz produced year-to-date at an AISC of US$974/oz). Endeavour has reaffirmed its performance is still set to be weighted towards H223 as previously guided, with Q323 recording the strongest performance this year (production of 280.8koz) and Q423 on track to beat this (estimated at 324.4koz). Q323 results were driven by impressive production at Houndé, reporting 109koz (cf estimates of 84koz). Following the overperformance at Houndé, Q423 is set to be driven by increasing production at its other assets, namely Sabodala-Massawa and Mana.
Endeavour has continued with its shareholder returns programme, confirming the payment of a US$100m (US$0.40/share) interim dividend for H123, which on an annualised basis represents US$25m, or 14%, more than the minimum dividend commitment for the year of US$175m. This dividend payment takes total shareholder returns to US$777m since Q121, representing roughly 15% of Endeavour’s current market capitalisation and US$354m more than its minimum commitment during this period.
Using an absolute valuation methodology, whereby we discount back four years of cash flows and then apply a perpetual ex-growth multiple to steady-state terminal cash flows in FY26, our valuation of Endeavour is US$34.90 (C$47.97 or £28.09) per share, using a 10% discount rate. Using a capital asset pricing model (CAPM) derived using a (real) discount rate of 6.34% (based on inflation expectations of 2.4499% derived from US 30-year break-even rates) Endeavour is valued at US$59.31 (C$81.51 or £47.74) per share (cf US$55.79, previously). To these valuations a further US$4.30–7.45/share may be added to reflect the value of Endeavour’s five-year exploration programme (see The second five-year plan, published on 20 October 2021). In the meantime, we note that Endeavour is trading at a discount to its peers on at least 84% of common valuation measures when consensus forecasts are used and 77% if Edison forecasts are used. The average valuation measures of its peers imply a share price for Endeavour of US$24.50 (C$33.83 or £20.04).
As stated throughout the year, Endeavour still expects production from its remaining assets to be weighted towards H223, which has been reaffirmed by Q323 results. It expects to achieve FY23 production of 1,060–1,135koz at an all-in sustaining cost (AISC) of US$895–950/oz. The strong Q323 production figure of 280.8koz was principally the result of better-than-expected output at Houndé, which reported 109koz (cf estimates of 84koz) as stripping activity came to a close at the Kari Pump pit, providing access to higher grades. The increased production at Houndé was somewhat offset by decreases at both Ity and Sabodala-Massawa (owing to lower throughputs and lower average grades). However, our forecasts for Q423 expect production to increase at both these assets, including Mana, which will ultimately drive production in Q423.
Following the divestment of Boungou and Wahgnion, discussed in our last note, Endeavour continues to support the growth of larger, low AISC and longer-life assets such as the Lafigué greenfield project and the Sabodala-Massawa BIOX expansion, which remain on budget and on schedule for start-up in Q224 and Q324 respectively. At the same time Endeavour continues with its exploration efforts, with US$78m of its intended US$80m FY23 budget now spent and it expects to come in slightly over its estimates for FY23.
As a result, we estimate Endeavour’s earnings from mining operations should continue to improve into Q423:
Note that Endeavour changed its definition of cash costs in Q420 to include royalties. The decision was made so that Endeavour could be more consistent in reporting in the context of its peer group. For reasons of comparability with past results, however, as well as ease of forecasting (given royalties are reported as a standalone item distinct from operating expenses), we are continuing to present total cash costs excluding royalties.
In the wake of the changes made to our forecasts, a comparison between our quarterly and full-year forecast and consensus forecasts for FY23 adjusted net EPS is as follows:
Readers should note the discrepancy between the ‘FY23e’ column and the ‘Sum Q1-Q423e’ column in the exhibit above, which strongly suggests that the analysts who are publishing quarterly forecasts are not the same as the ones who are publishing annual forecasts.
Endeavour is a multi-asset company that has shown a willingness and desire to trade assets to maintain production, reduce costs and maximise returns to shareholders (eg the sale of Youga in FY16, Nzema in FY17, Tabakoto in FY18, Agbaou in FY20, Karma in FY22 and Boungou and Wahgnion in FY23, and the acquisition of SEMAFO in FY20 and Teranga in FY21). Historically, rather than our customary method of discounting maximum potential dividends over the life of operations back to FY23, for Endeavour we have opted to discount four years of forecast cash flows in FY23–26 back to FY23, then apply an ex-growth terminal multiple of 10x (consistent with using a standardised discount rate of 10%) to forecast cash flows in that year (ie FY26). We would normally exclude exploration expenditure from such a calculation on the basis that it is an investment. In the case of Endeavour, however, we include it because it is a critical component of the company’s ability to continually expand and extend the lives of its mines.
We have updated our FY26 cash flow estimate to US$4.31/share (cf US$4.08/share previously), which implies a terminal valuation of Endeavour at end-FY26 of US$43.0/share, calculated using a discount rate of 10%. With forecast intervening cash flows, this terminal valuation then discounts back to a present valuation of US$34.90/share (cf US$33.52/share, previously) at the start of FY23, as shown in Exhibit 3.
Now that Endeavour is one of the world’s most important producers of gold, we believe it can increasingly attract lower-cost finance, which leads us to also consider a CAPM-derived valuation. Long-term nominal equity returns have been 9% and 30-year break-evens indicate an inflation rate of 2.4499% (source Bloomberg, 13 November 2023) versus 2.4197% previously. These two measures imply an expected real equity return of 6.34% (1.09/1.024499) and applying this to our forecast cash flows would imply a terminal valuation for Endeavour of US$67.97/share (US$63.46/share previously) and a current valuation of US$59.31/share (US$55.79/share previously).
Endeavour’s valuation on a series of commonly used measures relative to a selection of gold mining majors (the ranks of which it has joined since its takeover of SEMAFO and Teranga) is as follows:
Of note is that, without exception, Endeavour’s valuation is lower than the averages of all nine of the measures shown in Exhibit 4 when consensus forecasts are used and eight of the same nine measures when Edison’s forecasts are used. On an individual basis, it is lower than its senior gold mining peers on at least 38 out of 45 (84%) valuation measures if Edison forecasts are used and 35 out of 45 (77%) valuation measures if consensus forecasts are used. Reverse engineered, the average valuation measures of its peers suggest a share price for Endeavour of US$24.50 (C$33.83 or £20.04), implying the share price is at a 17.8% discount. The current London Stock Exchange share price is £16.48, equivalent to US$20.16 at an exchange rate of US$1.2230/£.
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