November 18, 2020
Endeavour Mining Corp
The Next Endeavour: A new leader in West Africa
Our view: In our view, the acquisition of Teranga Gold will put Endeavour firmly in a leadership position within West Africa and amongst the top 10 producers globally. Endeavour remains one of our Mining Best Ideas given its strong production profile, robust FCF generation, and attractive valuation. Maintain Outperform, price target to C$51.
Key points:
The go-to name in West Africa: The acquisition of Teranga will establish EDV as the leader within West Africa and in our view will combine two companies positioned right at an inflection point on FCF, creating the go- to name in the space. We estimate pro-forma production of 1.55 Moz at low AISC of $830/oz through 2024 and in our view, the ability to acquire a Tier I asset at a low premium, particularly given the scarcity of these types of assets (Ex 2), positions Endeavour favourably for years to come.
Modest dilution on near-term metrics; neutral on NAV and accretive on 2023+: Based on our pro-forma analysis, we estimate modest dilution on near-term metrics with accretion in 2023+ as the BIOX plant at Sabodala-Massawa is completed, bolstering production as reserves are depleted at the non-core Agbaou and Karma (Ex 13-18). Additionally, we estimate a relatively neutral impact on long-term NAV (Ex 19). While the acquisition comes with incremental near-term synergies associated with lower financing costs and corporate G&A, we believe longer-term synergies will come via capital savings at Golden Hill, located ~30 km from the Hounde mill, relative to our prior capex estimate of $225M.
London listing to be key: In our view, the planned premium listing in London could be the key to unlocking trading liquidity in EDV shares, which have been less liquid when compared to peers and in relation to the size of the company. Targeted for mid-2021 and in conjunction with Endeavour’s increased scale, we believe EDV could fill the gap left by Randgold within the London market, and potential inclusion into the FTSE100, if achieved, could force greater generalist ownership (page 5). Additionally, the larger notional float will help to improve liquidity and smooth out quarterly earnings volatility previously inherent with EDV’s lower share count.
Current valuation does not reflect quality and scale; one of the highest FCF yields in the space: We estimate EDV trades at a 20% discount to Senior/Intermediate peers on long-term NAV with one of the highest FCF yields in the space at 21%, double the peer average of 9.8% (Ex 11). Given Endeavour’s increased scale, FCF outlook, deep portfolio pipeline, and recent initiation of a dividend, we do not believe this is justified and anticipate potential for a significant re-rating ahead.