With the departure of several big gold miners from the UK market over the past decade, Endeavour Mining (EDV) saw an opportunity when it was looking to add a stock listing to its existing one in Toronto.

Endeavour shares began trading in London in June 2021 and it joined the FTSE 100 in 2022. With the subsequent delisting of the Russian gold miner Petropavlovsk and likely departure of Polymetal (POLY) from the London Stock Exchange, Endeavour is left as the UK market’s largest pure gold miner.

Having flirted with a record level earlier this year, gold prices have lost some shine and Endeavour is not the cheapest gold miner on the market. However, in Shares’ view, Endeavour is the logical choice for investors who want to include a gold miner in their portfolio.

At £18.78, the shares trades on a price to earnings ratio of 15.1, a price to net asset value ratio of 1.7 and a 3.6% prospective yield based on consensus forecasts. However, for those prepared to take a long-term view we believe an investment in Endeavour is likely to pay off.

HOW DOES ENDEAVOUR MAKE MONEY?

Endeavour produces gold from four mines in Francophone West Africa. In 2022 it generated $504 million worth of free cash flow from these operations as it delivered a tenth consecutive year of production and costs at least in line with guidance.

The company also has several exploration and development opportunities in its portfolio. It operates in an attractive postcode; after 80% production growth in the last 10 years, West Africa combined now represents the world’s leading gold mining province.

The development of the West African gold industry means the region’s fiscal terms are now in line with more mature developed jurisdictions. Endeavour’s deputy chief financial officer Martino De Ciccio says: ‘There have been big incentives in the past for these countries to attract foreign investment. Now the region is a top gold producer and aligning itself to the rest of the world progressively. The main reason to go to this region now is the geology and that’s more important than having a favourable tax regime.’

The government’s take in Endeavour’s countries of operation is around 40% to 45%. Endeavour has a progressive dividend policy and has also returned capital to shareholders through share buybacks. According to SharePad the company generated a 16% total return in its two-and-a-bit years as a UK-listed entity.

WHAT IS THE COMPANY’S STRATEGY?

A key part of Endeavour’s approach is that assets have a high bar to clear if they are going to be part of its portfolio.

The criteria include low costs, a long life (at least a decade) and production of more than 250,000 ounces per year. This informed the recent decision to sell the non-core, higher cost Boungou and Wahgnion mines – which contributed around 17% of total production.

As Liberum analyst Yuen Low observes, this strategy ‘improves country risk (via reduced Burkina Faso exposure), operating expenditure and margin profiles, while increasing the materiality of potential catalysts [from exploration and development assets]’.

In global terms the company’s all-in sustaining cost or AISC is very low, guided to be $895 to $950 per ounce in 2023.

AISC is a key metric which shows the direct and recurring costs to mine a unit of ore or, in plain English, the total costs of sustaining operations. It is expressed in terms of dollars per ounce of gold sold. According to data from the World Gold Council the average AISC for the industry reached a record high of $1,276 per ounce in 2022.

Endeavour’s ability to keep a tight rein on costs reflects several factors, including the company’s strategy, its scale and more predictable energy costs due the regulation of prices in the countries in which it operates. Lower labour costs are also part of the equation.

De Ciccio says: ‘In Canada, the US and Australia there was a big increase on salaries, there is a scarcity of people in these markets. In the areas we operate over 95% of our workforce is local and we’ve had no shortage of skilled labour and unskilled labour which we’re able to train.’

WHAT WILL ENDEAVOUR DO WITH ITS CASH?

According to forecasts from investment bank Berenberg, Endeavour will be sitting on net cash of $780 million by the end of 2025. This strong balance sheet will provide it with considerable room for manoeuvre but, while the business has been built through M&A, De Ciccio says finding new deals will not be easy given Endeavour’s strict criteria.

‘The immediate opportunities we see is through our own development pipeline. It’s very difficult to compete with this type of organic pipeline specifically on returns.’

Most mines of scale in the region are already owned by major mining companies and at the current gold price they have limited incentive to sell. Though that may change in the future.

This means Endeavour is focused on organic growth through a planned extension of Sabodala-Massawa and the greenfield project Lafigué in Cote D’Ivoire, due to start production in 2024. The company is also making timely progress with its Tanda Iguela discovery, also in Cote D’Ivoire. Encouragingly, the group has a record of constructing new mines on time and on budget.

The balance sheet strength should also mean the company has the potential to pursue supplemental dividends – something it has pledged to do if its net debt to earnings ratio is below 0.5 times.

COULD ENDEAVOUR BECOME A TAKEOVER TARGET?

If acquisitions are off the table for Endeavour, could it become a target in an industry where there has been recent consolidation and where big discoveries are hard to come by?

With the sale of the non-core assets, the company could be more attractive to prospective bidders, though much may depend on mining investment firm La Mancha which has a 19% stake in the business.

‹ Previous2023-07-20Next ›