Endeavour Mining's Stable Q3 Underscores Resilient Cash Flows And Growth Potential For Long-Term Investors

About Endeavour Mining

Endeavour Mining operates as one of the world’s senior gold producers, holding the largest gold mining presence in West Africa. With operating assets across Senegal, Côte d’Ivoire and Burkina Faso, the company has established a leading position in the region’s mining industry. As a member of the World Gold Council, Endeavour Mining has pledged its commitment to responsible mining practices and delivering sustainable value. The company’s operations and growth projects target the highly prospective Birimian Greenstone Belt across West Africa.

Endeavour Mining recently announced its third quarter 2023 earnings results, underscoring the company’s stable operating performance, good progress on growth projects, and commitment to shareholder returns despite inflationary pressures. With its strong production base, attractive growth pipeline, and solid balance sheet, Endeavour appears well-positioned to continue generating robust cash flows and creating value for shareholders.

Financial and Operating Performance

In the third quarter, gold production from continuing operations increased 5% sequentially to 281,000 ounces, driven by higher grades from the Kari Pump pit at Endeavour’s Houndé mine in Burkina Faso. This marked the strongest quarterly performance this year for the company. For the nine months year-to-date, production declined 9% to 792,000 ounces compared to the same period last year, primarily impacted by lower grades at the Sabodala-Massawa mine in Senegal and slower than expected ramp-up at the Mana mine in Burkina Faso. However, Endeavour remains on track to meet its full-year guidance of 1.06-1.13 million ounces of gold production.

The company reported net earnings of $60 million or $0.24 per share in the third quarter, and $137 million or $0.55 per share for the nine months ended September. Adjusted net earnings amounted to $69 million ($0.28 per share) in the latest quarter. The year-on-year decline in bottom-line earnings reflects the impact of lower production volumes and increased operating expenses, partially mitigated by a 5% increase in Endeavour’s average realized gold price to $1910 per ounce.

All-in sustaining costs (AISC) rose 16% year-to-date to $974 per ounce compared to the same period last year. The increase was attributed to lower production, cost inflation, and higher spending on sustaining capital. However, AISC declined 3% sequentially to $967 per ounce in the third quarter, aided by increased production. Endeavour maintains one of the lowest cost profiles in the sector, underscoring its operating efficiency.

Operating cash flow for the first nine months decreased 27% year-on-year to $453 million, pressured by increased operating costs, higher income tax payments, and changes in working capital. The company ended the third quarter in a healthy financial position, with a net debt to adjusted EBITDA leverage ratio of 0.40x, providing balance sheet flexibility to fund growth.

Advancing Attractive Growth Projects

Endeavour is advancing construction on two key organic growth projects that are expected to boost its production profile once commissioned.

The $290 million expansion project at the Sabodala-Massawa mine remains on budget and on schedule for completion in the second quarter of 2024. The project will expand the processing plant capacity and install a BIOX facility to improve gold recoveries from the refractory ore at the mine. This is expected to increase annual production at Sabodala-Massawa while reducing operating costs.

The $448 million Lafigué project in Côte d’Ivoire also continues tracking on timelines and within budget for the first gold production in the third quarter of 2024. Once ramped up, Lafigué is anticipated to produce over 200,000 ounces of gold per year at low all-in sustaining costs of $871 per ounce over an initial 12.8-year mine life, providing a cornerstone asset with robust margins.

The significant investment by Endeavour in advancing these two high-return growth projects on schedule reaffirms the company’s strategy of allocating capital towards long-term value creation while maintaining its dividend commitments.

Sustained Focus on Shareholder Returns

In the third quarter, Endeavour paid out its half-year dividend of $100 million to shareholders, consistent with its minimum dividend commitment. The company also allocated a further $20 million to repurchase its shares.

The share buyback programme continued with $20m worth of shares repurchased in Q3 of 2023. Since it commenced this program in early 2021, Endeavour has returned over $770 million to shareholders, exceeding its minimum dividend commitment for this period by $354 million. This highlights the company’s focus on maximizing long-term shareholder value.

The strong shareholder returns are underpinned by Endeavour’s robust operating cash flows, which provide the capacity to fund growth spending without compromising dividend commitments. The company operates a portfolio of low-cost, long-life mines benefiting from the current elevated gold price environment. Once the Sabodala-Massawa and Lafigué expansion projects get commissioned over the next year, Endeavour expects to further supplement shareholder distributions given the additional free cash flow generation.

Quarterly Performance Review

Delving deeper into the third quarter results, Endeavour’s gold production from continuing operations totaled 281,000 ounces, up 13,000 ounces or 5% compared to the previous quarter. This marked the strongest quarterly operational performance in 2022 driven by the following factors:

• Production at the Houndé mine increased significantly by 37,000 ounces quarter-on-quarter to 109,000 ounces, due to higher-grade ore sourced from the Kari Pump pit.
• The Ity, Mana, and Sabodala-Massawa mines saw lower production mainly attributable to lower processed grades.
• On a year-to-date basis, production was pressured by lower grades at Sabodala-Massawa and issues with contractor ramp-up at the Mana underground mine.

The realized gold price for the third quarter was $1,903 per ounce including the impact of Endeavour’s revenue protection program consisting of gold collars and forward sales. This compared to $1,947 per ounce in the preceding quarter.

Endeavour’s AISC of $967 per ounce in the third quarter marked a 3% sequential decline, attributed to higher production partly offset by inflationary pressures on mining and processing costs. AISC for the nine months year-to-date was $974 per ounce, 16% higher than the prior year period, reflecting lower production volumes and cost increases. Operating cash flow amounted to $115 million in the third quarter, lower than the previous quarter, mainly impacted by lower realized gold prices and the timing of income tax payments. Year-to-date operating cash flow was $453 million, 27% below last year, pressured by lower earnings and working capital changes.

Endeavour maintained a healthy financial position during the quarter despite its continued investment in growth initiatives. The company ended the third quarter with a net debt position of $445 million and a low net debt to adjusted EBITDA leverage ratio of 0.40x. This provides adequate liquidity and balance sheet flexibility.

Financial Position Remains Strong

Notwithstanding its capital investments and shareholder returns this year, Endeavour maintains a solid financial position. The company ended the third quarter with a cash balance of $625 million and debt of $1.07 billion, giving a net debt position of $445 million. With a trailing 12-month adjusted EBITDA of $1.11 billion, this translates into a conservative net debt to EBITDA ratio of just 0.40x. Endeavour also has access to around $110 million in undrawn debt facilities. This healthy leverage profile provides the capacity to continue funding its growth initiatives.

Moreover, Endeavour’s net debt position is expected to decline once the Lafigué and Sabodala-Massawa projects get commissioned. The strong cash flows from both growth assets will improve the company’s credit profile and support further shareholder returns.

Endeavour also continues to benefit from its revenue protection program covering a portion of 2022-2025 production. This provides cash flow visibility during the construction phase and limits exposure to gold price fluctuations. Around 105,000 ounces are still hedge-protected for the fourth quarter of 2022 at an average floor price above $1,800 per ounce. The revenue protection strategy, combined with Endeavour’s low AISC and leveraged gold exposure, underpins the resiliency of its margins and cash flows even in a lower gold price environment.

Growth Capital Projects Update

Endeavour is currently advancing two key growth projects, the Lafigué development in Côte d’Ivoire and the Sabodala-Massawa expansion in Senegal.

The $290 million Sabodala-Massawa expansion project remains on schedule and within budget. Key infrastructure is nearing completion, including the processing plant, additional power capacity, and tailings dam construction. Commissioning of the new BIOX circuit is slated for Q2 2024 which will boost recoveries and production. Around $166 million has already been invested in the project, with $114 million incurred so far in 2022. The expenditure is tracking in line with the capital outlay of $170 million planned for this year.

Meanwhile, the $448 million Lafigué project also continues to progress on timelines and within budget. The project is expected to add annual production of over 200,000 ounces from Q3 2024 onwards at low projected AISC of $871 per ounce.

Approximately $194 million has been spent so far on Lafigué, with $161 million incurred this year, primarily relating to detailed engineering and site construction work. The growth capital outlay for 2023 is estimated at $230 million. Detailed engineering is nearing completion, while key infrastructure like the process plant, tailings dam, and power plant are advancing as per plan. The significant capital investment in these attractive, high-return projects demonstrates Endeavour’s focus on allocating capital in a disciplined manner to reinforce its long-term growth pipeline. Once completed, both projects will boost the company’s production profile and enhance its cost position.

Exploration Upside

Drilling activities continue to progress well, generating positive results during the quarter. Expenditure on exploration is likely to moderately exceed the initial 2023 budget of $80 million, given the promising drill results. Particularly encouraging results were achieved at the Tanda-Iguela greenfield discovery in Côte d’Ivoire during the quarter and year-to-date. Additional drilling has delineated a much larger mineralized system at Tanda-Iguela than initially anticipated.

The indicated resource published at the Assafou deposit covers 1.1 million ounces of gold. Moreover, the overall mineralized trend has expanded significantly from the initial 2 kilometers to over 3.3 kilometers currently. Several other deposits have been identified adjacent to Assafou, highlighting the district-scale potential of the project. An updated resource estimate incorporating approximately 160,000 meters of new drill data is slated for release by end-2023. The eventual development of Tanda-Iguela has the potential to provide Endeavour with another core asset that can generate robust returns over a long mine life.

Encouraging exploration results were also obtained near the existing Sabodala-Massawa, Ity, and Mana mine sites during the quarter. For instance, at Sabodala-Massawa, drilling extended mineralization at the Niakafiri East and Kerekounda deposits. At Ity, high-grade mineralized extensions were intersected at the West Flotouo and Gbampleu deposits. At Mana, drilling showed positive results at the Maoula and Nyafé targets.

Such near-mine exploration success indicates the potential to organically grow resources and extend mine lives across Endeavour’s production assets. The ongoing drill program supports the achievement of Endeavour’s 5-year target of discovering 12-17 million ounces of indicated resource at a modest discovery cost of $25 per ounce.

Key Risks and Challenges

While Endeavour exhibits an attractive investment profile, the company faces several risks and challenges:

Operational risks: Endeavour’s mining operations are subject to various risks like geotechnical issues, adverse weather events, higher input costs, and contractor performance that could impact production and costs. The slower than planned ramp-up at the Mana underground mine highlights such execution risks.

Project development risks: Large growth projects like Lafigué and Sabodala-Massawa carry inherent risks around schedule delays, cost overruns, and performance shortfalls post-commissioning. Any challenges in project delivery could defer production and cash flow timelines.

Exploration risks: Endeavour’s exploration activities may fail to sustainably replace depleted reserves or sufficiently expand resources. New discoveries like Tanda-Iguela require further confirmatory drilling and may face development hurdles.

Gold price volatility: While the revenue protection program provides some safeguard, Endeavour’s profitability remains exposed to gold price fluctuations driven by economic and geopolitical factors. A sustained decline in gold prices could pressure earnings and cash flows.

Shareholder returns: The significant capital allocation towards growth projects limits Endeavour’s capacity to substantially increase shareholder returns in the near-term. Investors might have an expectation for higher dividends that may not materialize.

Financial risks: Endeavour faces financial risks related to currency fluctuations, refinancing existing debt, and servicing upcoming debt maturities, given its leveraged balance sheet. The company is also exposed to counterparty risks.

Geopolitical risks: Endeavour’s West African operations expose it to risks around political instability, taxation, nationalization, community relations issues, security threats, and supply chain disruptions that could cause business interruptions.

To mitigate these risks, Endeavour requires robust risk management practices across operations, projects, exploration, financial management, and external engagement. The company needs to demonstrate operating discipline, judicious capital deployment, and resilience to dynamic market conditions.

Positive Catalysts for Endeavour

Looking ahead, some of the key catalysts that could drive Endeavour’s share price higher:

• Continued positive drill results from the ongoing exploration program, highlighting resource growth potential. Further discoveries like Tanda-Iguela could be game-changing.
• Successful on-time and on-budget delivery of the Sabodala-Massawa and Lafigué expansion projects, leading to lower costs and higher production.
• Strong operating performance and financial results underpinned by high gold prices and cost control measures. Margin expansion would accelerate cash flow generation.
• Increased dividends or special payouts on the back of stronger free cash flows once growth projects get commissioned. Higher yield would augment investor appeal.
• Accretive acquisitions or value-enhancing consolidation opportunities within West Africa that augment Endeavour’s portfolio. Additional scale would drive efficiencies.
• Active portfolio optimization through divestments of non-core assets like the Boungou mine. Simplifying the asset base sharpens the investment case.
• Continued share buybacks highlighting management’s conviction around Endeavour’s value proposition and intent on enhancing shareholder returns.

Investment Thesis

Underpinned by a strong existing production base, attractive growth pipeline, disciplined capital allocation, and exploration upside, Endeavour offers a compelling investment proposition in the gold mining sector:

• Diversified operating portfolio generating robust cash flows even at lower gold prices. With four cornerstone mines in West Africa and AISC in the lowest quartile, the company is resilient to inflationary pressures.
• Organic growth prospects progressing well, extending current mine lives. The Sabodala-Massawa and Lafigué projects once online will provide incremental production at low costs.
• Ongoing exploration success creating opportunities to expand resources. Exploration continues yielding promising results, highlighting potential to organically develop the next core asset.
• Sustained focus on significant shareholder returns despite investing in growth. Commitment to minimum dividend policy and supplemental buybacks underscore shareholder focus.
• Strong balance sheet with low leverage. Manageable debt levels and operating cash flows provide financial flexibility.

As Endeavour’s Sabodala-Massawa and Lafigué expansion projects get commissioned over the next 12-18 months, the company appears strategically well positioned to boost production, lower costs, extend mine lives, and enhance shareholder value. Inflationary pressures pose some risk on costs, but Endeavour’s leverage to gold prices as a low-cost producer allows it to maintain healthy operating margins. Moreover, the company has demonstrated prudent capital management and an ability to advance long-term growth without compromising on shareholder distributions. With its robust operating performance, growth initiatives tracking on schedule, pipeline of development assets, and continued focus on attractive returns, Endeavour offers investors exposure to a quality gold producer positioned for sustainable success.