Endeavour Mining: Robust Results From Updated Fetekro Study

Summary

• Endeavour Mining recently released a positive Pre-Feasibility Study for its Fetekro Project in Cote d'Ivoire.
• The study has shown significant improvements from the previous Preliminary Economic Assessment, with the projected production profile boosted to 209,000 ounces per annum.
• Endeavour Mining already had an enviable organic growth pipeline ahead of the recent Fetekro Pre-Feasibility Study, and this project could push Endeavour closer to the 1.8-million ounce mark.
• Given Endeavour's solid organic growth pipeline and transition into a lower-cost producer, thanks to Sabodala-Massawa and Boungou, I see this violent correction as a buying opportunity.

It's been a rough 15 months for Endeavour Mining (OTCQX:EDVMF), given that the stock has continued to lag its peers following its failed bid to acquire Centamin Egypt (OTCPK:CELTF). However, this failed bid ended up being a blessing in disguise for the company because it was able to scoop up Semafo at the COVID-19 Crash lows and recently completed a merger with Teranga Gold (OTCQX:TGCDF). This has transformed the company from an intermediate producer to a senior gold producer in less than a year, and its recent Pre-Feasibility Study results out of Fetekro suggest that further growth to 1.75~ million ounces could be attainable by FY2024. Given the continued robust results out of Endeavour's project pipeline, I see this violent correction as a buying opportunity. All figures are in US Dollars unless otherwise noted.

(Source: Company Presentation)

Endeavour Mining released its FY2021 guidance last week, with its outlook set at 1.45~ million ounces at all-in sustaining costs of $865/oz. This is a massive boost from its FY2019 results of 651,000 ounces at $818/oz, given that the company is on track to more than double production while maintaining a similar cost profile. As we've seen elsewhere in the sector, growing production while keeping costs low is not easy, with Northern Star's (OTCPK:NESRF) acquisition of Pogo and Evolution's (OTCPK:CAHPF) acquisition of Red Lake being a recent example of this. Fortunately, Endeavour has accomplished its growth through shrewd acquisitions with favorable timing, with its Kalana, True Gold, Semafo, and Teranga acquisitions all being recent examples. However, one of its best investments could end up being its decision to focus its exploration efforts towards Fetekro in 2017, and increasing its stake from 65% to 80% recently on the project.

(Source: Company Presentation)

As noted earlier, Endeavour Mining released an updated study for its Fetekro Projet, and the project has gone from David to Goliath in size despite only a modest increase in the upfront capital. Previously, Endeavour had considered a 1.5 million tonne-per annum plant at Fetekro. This translated to average gold production of just 119,000 ounces per year and life of mine production of 1.0 million ounces. However, the updated PFS envisions a 3.0 million-tonne per annum throughput rate and a slightly higher strip ratio, with the goal of recovering 2.1 million ounces over a similar mine life. This higher throughput rate translates to 209,000 ounces of gold production per annum after offsetting for slightly lower grades (2.05 grams per tonne gold vs. 2.38 grams per tonne gold), and 220,000~ ounces of gold production over the first 5 years of the Fetekro mine life.

(Source: Company News Release)

The upgrade from 119,000 ounces to 209,000 ounces per annum has come with only a 26% increase in upfront capex, with initial capital costs projected at $338 million. Meanwhile, the After-Tax NPV (5%) on the project has increased by nearly 80% to $479~ million, with a payback period of 2.7 years at a gold (GLD) price of $1,500/oz. This is a major deal for Endeavour because following its growth from 650,000-ounce producer to 1.45~ million-ounce producer, the smaller-scale Feketro Project would barely move the needle. So, while Endeavour will be mining lower grades through the mine life at a higher strip ratio which will push costs from $697/oz to $838/oz, it's more than worth it for the added boost to its production profile.

(Source: Company Presentation)

Assuming, Endeavour decides to go ahead with the project; this could push production from 1.45~ million ounces in FY2021 to closer to 1.75~ million ounces in FY2024 when factoring in the Sabodala-Massawa Phase 2 Expansion as well. This is because Sabodala-Massawa is expected to ramp up to just shy of 400,000~ ounces per annum at lower costs, making it one of the largest and lowest-cost mines in Africa. As the chart above shows, Sabodala-Massawa will be only slightly behind Fekola and Tasiast for gold production and all-in sustaining costs, and this transition to Phase 2 will tack on an additional 55,000~ ounces to Endeavour's production profile vs. the guidance of 330,000 ounces in FY2021.

So, when will we know if Endeavour has decided to go ahead with the project?

Currently, Endeavour is working on an updated Definitive Feasibility Study due before year-end, and assuming similar economics, we could see a construction decision by as early as next year. Based on the estimated 22-month construction schedule, this means that Fetekro could potentially pour its first gold by Q1 2024. If we assume 90,000 ounces of attributable production from Fetekro in FY2024 and 200,000 ounces in 2025, this would give Endeavour a 4.3~% compound annual production growth rate (1.45~ million ounces to 1.70~ million ounces), or one of the best growth rates among the million-ounce producers currently. It's worth noting that Fetekro's projected costs will allow Endeavour to maintain its industry-leading cost profile among its peers, with most million-ounce producers pulling gold out of the ground for closer to $975/oz.

(Source: Company Presentation)

If we look at the chart above, we can see that this transformation for Endeavour over the past 15 months is significant, with the company moving from a ranking of 13th out of 15 senior gold producers to 9th. Meanwhile, the company has maintained its industry-leading ranking in terms of costs, with costs expected to remain at or below $875/oz, which compares very favorably to similar-sized producers like Agnico Eagle (AEM) at above $950/oz, Yamana Gold (AUY) at above $1,000/oz. One worry among investors might be that this aggressive M&A spree could continue, but I don't see any reason that it would, given that Endeavour picked up additional organic growth potential with its most two recent acquisitions. As shown below, Endeavour has two projects in the Pre-Feasibility Stage now (Kalana & Fetekro) and Nabanga in the PEA stage.

(Source: Company Presentation)

The other good news to report about this growing organic growth pipeline is that it affords Endeavour the ability to monetize its non-core assets, as shown by its recent divestment of its high-cost Agbaou Mine. The other potential asset that the company could look at divesting is Karma, which is projected to do 90,000~ ounces at $1,300/oz on FY2021. If the company did choose to divest the project following a positive construction decision on Fetekro, it would bring its cost profile down even further to below $850/oz while still maintaining a 1.6~ million-ounce production profile with Fetekro picking up the slack. Let's take a look at Endeavour's valuation:

(Source: Company Presentation)

Following the addition of new reserves at Fetekro, Endeavour is sitting on roughly 18 million ounces of reserves, which gives the company a reserve value per ounce on a market cap basis of $260.00. This is a dirt-cheap valuation, regardless of Endeavour's Tier-3 jurisdiction, given that the company is pulling its gold out of the ground for all-in sustaining costs that are 15% below the industry average of $1,010~/oz. One reason for the discount might be that Endeavour has a sub-10-year mine life across its assets based on its upgraded production profile. Still, with its much beefier production profile, we should see ample room to increase the exploration budget and build out this reserve base to well over 20 million ounces.

(Source: Company Presentation)

From a financial standpoint, we can see that Endeavour Mining's valuation metrics are at the lowest among its peers, with a free cash flow yield of 19% for FY2021 and the stock trading at just 3.3x enterprise value to EBITDA. The only company cheaper than Endeavour is Harmony Gold (HMY), but Harmony is an ultra-high cost producer, with costs consistently coming in above $1,200/oz. Therefore, it makes little sense that Endeavour would be valued near Harmony, given that Harmony is not a defensive play at all relative to the gold price, with very slim all-in sustaining cost margins of barely $500/oz at current spot prices. Conversely, Endeavour Mining has projected all-in sustaining cost margins of $850/oz at the same gold price of $1,700/oz. This suggests that Endeavour is a steal at current levels.

(Source: Company Presentation)

Buying on valuation alone can lead to sharp draw-downs, and we still don't have any clear signs of a bottom in Endeavour Mining with the stock below its key moving averages. However, given the compelling valuation, I have started a small position in the stock at C$24.75. I have purposely sized my position conservatively to account for volatility. Obviously, there's no reason that the market has to wake up to the exceptional reward to risk proposition here immediately. Still, with Endeavour trading at a sub $4.7~ billion valuation, with the potential to generate over $2.20~ billion in attributable revenue this year, it's hard to find many better value propositions out there in the market currently. The bonus here is the organic growth pipeline with a path to 1.75~ million ounces in three years, making this correction look like a low-risk buying opportunity.

Analyst’s Disclosure: I am/we are long GLD, EDVMF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.