Endeavour Mining Corp (TSX: EDV) is a gold mining company. The company engages in gold mining operating four mines in West Africa in addition to having project development and exploration assets. It focuses on effectively managing its existing assets to maximize cash flows as well as pursuing organic and strategic growth opportunities that benefit from its management and operational expertise. Its operations are held in Burkina Faso (Karma, Hounde, Mana and Boungou mines), Cote d'Ivoire (Ity mines), and Mali (Kalana Project). The company generates maximum revenue from Burkina Faso. Recently, Endeavour completed the acquisition of Teranga Gold Corporation (“Teranga”), a TSX-listed gold company that owned the Sabodala-Massawa and Wahgnion mines, as well as certain development and exploration assets.

Investment Rationale

• Industry Leading Margin Profile Recorded in Q1FY21: The company reported industry leading margin profile in Q1FY21, which exhibits the competitive advantage of the company within the industry. Also, the margin profile was significantly bolstered by higher realization prices the group had in the first quarter of 2021. Further, a significantly higher EBITDA margin profile shows the company’s prudent financial management.

• Higher Gold Price would Benefit the Group’s Performance in Q2FY21: The recent rally in the gold prices is moving well for the gold miner, and we can see a significant impact of this movement in the gold mining company’s balance sheet. As gold prices go up, it increases averages realization prices for yellow metal miners, which lead to a higher margin profile, higher free cash flow generation and deleveraging of the balance sheet. We believe that Endeavour is well placed to capitalize on the increasing prices of the underlying commodity and would exit the second quarter of fiscal 2021 on strong financial health.

• Strong Financial Risk Profile: The company has maintained a robust financial profile with strong debt protection metrics. Its Net/Debt to EBITDA ratio of 0.16x implies negligible balance sheet risks. Also, the company has consistently deleveraged its balance sheet since June 2020. At the end of June 2020, the group’s Debt/Equity ratio stood at 1.27x, which has significantly come down to 0.27x at the end of Q1FY21.  Therefore, the company’s balance sheet is quite stronger compared to a year over period, and debt protection metrics have also improved significantly at the same time. Net Debt/EBITDA came down to 0.16x at the end of March 2021 from 4.15x at the end of June 2020.

• Gold Hovering in a Bullish Territory: After months of side-ways movement, gold has now entered a strong bullish trend and trading above the upward sloping trend line. Moreover, the Gold spot traded above the crucial support levels of 10-day, 20-day, 30-day, 50-day and 200-day SMAs, which implies a strong bullish trend. Further, the leading momentum indicator, the MACD, is soaring up with the difference between 12-day EMA and 26-day EMA is positive, and the MACD oscillator is hovering above the 9-day SMA signal line. This is another bullish indicator. Also, given the free fall in the crypto markets, a lot of fund flow would take place in the gold assets as a hunt for safe-haven.

Technical Chart, Analysis by Kalkine Group

• Ample Liquidity: At the end of Q1FY21, the group’s Cash and cash equivalents stood at USD 868.2 million, providing significant headroom to finance the Company’s ongoing operation.

• Stable Outlook: EDV is expected to achieve healthy revenue growth over the medium term on the back of higher commodity prices, improving business risk profile, higher gold production, and higher gold realization prices. Also, the financial risk profile is likely to remain robust in the near term.

• Stock Hovering in a Bullish Price Territory: Given the solid run-up in the gold prices, gold mining stocks are doing quite well, as the increase in underlying commodity prices could bolster their financial health. EDV shares are hovering in bullish territory, with stock traded well above the crucial near-term and short-term support levels of 21-day SMA and 50-day SMA, and stock is moving towards its 200-day SMA of CAD 30.03. A breakout above the 200-day SMA could take its shares in the long-term bullish cycle. Further, the leading momentum indicators Moving Average Convergence Divergence (MACD) is also rising, with the difference between 12-day EMA and 26-day EMA is positive a bullish indicator. Further, the MACD oscillator is hovering above the 9-day SMA signal line. Also, 14-day RSI is hovering in the neutral zone with a bullish bias at 62.2. This implies that there is ample room left for further upside movement in the stock from the current trading levels.

Technical Price chart (as on May 26, 2021). Analysis by Kalkine Group

• Risk Associated to Investment: The company's business is significantly exposed to the volatility in gold prices. Further inherent risks associated with mining and mineral processing such as the company's mines may not perform as planned; uncertainty with the company's ability to secure additional capital to execute its business plans; the speculative nature of mineral exploration and development, including the risks of obtaining and maintaining necessary licenses and permits, including the necessary licenses, permits, authorizations and/or approvals from the appropriate regulatory authorities.

Financial Highlights: Q1FY21    

 Source: Company Filing

• Gold production for the first quarter was a record 334,262 ounces and is on track to meet the full-year guidance from continuing operations of 1,350,000 - 1,475,000 ounces.
• Revenues for the quarter ended March 31, 2021, were USD 635.8 million, an increase of USD 409.5 million compared to the previous corresponding period. Earnings from mine operations stood at SD 217.7 million, which was an increase of USD 145.5 million over Q1 2020. The increase was due to the acquisition of the Mana, Boungou, Wahgnion and Sabodala-Massawa mines subsequent to Q1 2020.
• EBITDA for the quarter ended March 31, 2021, was USD 334.8 million compared to EBITDA of USD 101.8 million in Q1 2020, which represents an increase of USD 232.9 million.
• Operating cash flows before changes in working capital for the quarter ended Q1 2021 amounted to USD 265.3 million, or USD 1.28 per share, an increase of USD 169.9 million and USD 0.411 per share compared to Q1-2020. Operating cash flows after changes in working capital from all operations were USD 206.7 million, or USD 0.99 per share, an increase of USD 106.8 million and USD 0.09 per share compared to Q1 2020.
• Net comprehensive earnings attributable to shareholders stood at USD 94.7 million for the quarter ended March 31, 2021, compared to net comprehensive income of USD 19.4 million in Q1 2020.
• Net Debt / adjusted EBITDA (LTM) ratio stood at 0.16x at quarter-end, an increase over Q4-2020 due to acquired debt in the newly combined Teranga assets.
• Cash and cash equivalents came in at USD 868.2 million on March 31, 2021, providing significant headroom to finance the Company’s ongoing operations.

Top-10 Shareholders

Top-10 shareholders in the Company held around 58% stake. Loza-Sawiris (Yousriya) and BlackRock Investment Management (UK) Ltd. are among the largest shareholder in the Company and carrying an outstanding position of 19.15% and 12.55%, respectively. The institutional ownership in “EDV stood at 55.48%, and ownership of the strategic entities stood at 26.28%.

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: The company reported decent quarterly numbers in the Q1FY21, with production surged 102% on a YoY basis, All-in Sustaining Margin per share jumped by 30%, operating cash flow before change in WC nudged by 115%, and Net Debt/Adjusted EBITDA came down to 0.16x. The decent performance was largely driven by a USD 211/oz surge in the gold prices on a YoY basis. We expect that the higher average realization prices to continue in the mid-term, which would continue to bolster the group's performance.

The company reported an industry-leading margin profile in Q1FY21, which reflects the strong competitive moat the company is having within the industry. Moreover, EDV shares are hovering in bullish territory, with stock traded well above the crucial near-term and short-term support levels of 21-day SMA and 50-day SMA, and stock is moving towards its 200-day SMA of CAD 30.03. A breakout above the 200-day SMA could take its shares in the long-term bullish cycle.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 28.90 on May 26, 2021.

1-Year Technical Price Chart (as on May 26, 2021). Analysis by Kalkine Group

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

*Recommendation is valid on May 27, 2021 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.