Endeavour Mining Corporation (TSX: EDV) is a gold mining company and operates through mines which are located in West Africa, in addition to having project development and exploration assets. The company’s assets include four mines in Burkina Faso, the Ity mine in Côte d’Ivoire, the Sabodala-Massawa mine in Senegal, two development projects and has a portfolio of exploration assets across the Birimian Greenstone Belt across Burkina Faso.

Key Investment Rationale:

• Positive Macros: International Gold price has remained elevated since September 2021 due to rising inflation and weak macros outlook. Moreover, being a defensive asset class, gold is gaining traction due to the overvalued equity market coupled with persisting tensions between Ukraine and Russia. Considering the current inflation growth scenario and phenomenal returns generated by the yellow metal till date, the outlook for the Gold looks promising.
  

• Encouraging Q1FY22 production: The company reported its Q1FY22 production of 357,089 oz from all operations, surged from 312,689 oz, reflecting a surge of 14% on y-o-y basis. The increase was due to higher production from the Sabodala-Massawa which stood at 96,326 oz v/s 38,948 oz in pcp. Notably, the company expects the Sabola-Massawa to produce 360 to 375 koz of gold in FY22.
• Expansion program from Sabodala-Massawa mine: Currently, the company is conducting Phase 2 expansion across Lafigué and Kalana projects in Sabodala-Massawa mine. This is expected to uplift the Sabodala-Massawa complex to top tier status and is expected to deliver an incremental annual production of 194 koz over next five years at a low AISC of USD 531/oz, which is encouraging. Construction to commence in Q2FY22, while the production from the plant is expected in early 2024.
• Surge in cash from operations: The company reported a strong cash flow generation in Q1FY22 at USD 304.3 million, as compared to USD 197.9 million in pcp. This is a key positive and is expected to support the company’s overall liquidity. Notably, operating cash flow before changes in working capital stood at ~USD 370 million, which is the highest in the last five quarters.

Source: Company Presentation

• Well-balanced Risk Profile: The company operates through six mines located across three countries in West Africa. In Q1FY22, the group derived 32% and 22% of its operating cash flows from Sabodala-Massawa mine and Ity mine, respectively, located in Senegal and Côte d’Ivoire. The company generated the rest ~48% operating cash flow from four mines located in Burkina Faso region. Hence, the operation is not highly dependent on a particular mine. Thus, we believe, the company’s operating performance would be less impacted due to any major shutdown, or any other restrictions imposed on a particular mine. This is a key positive for the group as it ensures cash flow stability.
  

Source: Company Presentation

• Impressive Exploration Program: During the first quarter of FY22, the company conducted exploration activities, which includes more than 9,000 meters across 102 drill holes in Mana Gold Mine, located in Burkina Faso. At the Nyafe area, the group reported the extension of mineralization for over 2 kilometres in the northeast direction, where early-stage drilling was focused on delineating the under explored refractory ore potential. The report confirmed that mineralization remains open along strike towards the southwest and downdip. Also, in the Maoula area, the company reported the discovered of several high-grade intercepts, which is encouraging. Hence, an expected mineral discovery is likely to support the company’s reserve base.

Risk Associated with the investment:

The company’s operations might be impacted due to substantially declining commodity prices, currency volatility, high input costs, etc.

Financial Overview of Q1 2022

Q1FY22 Income Statement Highlights (Source: Company Reports)

• Higher Income: EDV announced its Q1FY22 result, wherein the company posted its revenue of USD 686.2 million, which is higher than USD 601 million in pcp. The growth was primarily driven by higher gold sales of 359,094 oz in Q1FY22, as compared to 341,122 oz in pcp. Moreover, a higher realized gold price of USD 1,911/oz v/s USD 1,762/oz in pcp also supported the Company’s topline.

• Increase in earnings from mine operations: Earnings from mine operations stood at USD 275.7 million, surged from USD 190.9 million in pcp, supported by higher income, partially offset by an increased Depreciation and depletion expense.

• Earnings from operations: Corporate costs, and exploration costs stood lower than the previous corresponding period. Hence, the company reported higher earnings from operations of USD 246.7 million from USD 146.6 million in pcp.

• Reported Net Loss: The company reported a loss on financial instruments amounting USD 178.8 million v/s a gain on financial instruments of USD 42.2 million in pcp. Current income tax expense also stood higher at USD 74.7 million v/s USD 71.9 million in pcp. Thus, the company’s reported a net loss of USD 20.4 million v/s a net profit of USD 98 million in pcp

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 56.16% stake, La Mancha Global Holdings, Ltd., and BlackRock Investment Management (UK) Ltd., Inc. emerged as the major shareholders in the company with an outstanding position of 19.48% and 11.85%, respectively.

Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales based methodology.

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation:

For FY22, the company expects its gold production in between 1,315 to 1,400koz, while its AISC is expected in between USD 880 to 930/oz. Moreover, the group is on track to discover 15 to 20 Moz of Indicated resources during 2021-2025 period. This is expected to support the company’s upcoming operations.  We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like K92 Mining Inc, Equinox Gold Corp etc.  Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of EDV at the last closing price of CAD 29.95 on June 08, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on June 08, 2022). Analysis by Kalkine Group

*Recommendation is valid on June 09, 2022, price as well.

Technical Analysis Summary

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