A Buy Rating for Shares of Endeavour Mining plc
This article suggests buying shares of Endeavour Mining plc (OTCQX:EDVMF) (TSX:EDV:CA), a London, UK-based gold explorer and producer with mines in Burkina Faso, Ivory Coast and Senegal, reflecting an increase in recommendation from the previous rating of Hold.
Endeavour Mining will continue to pay a semi-annual dividend of $0.41 per share on September 13, resulting in a forward yield of 4.02%, compared to the S&P 500’s dividend yield of 1.33% at the time of writing. Endeavour Mining plc is a generous dividend payer to its shareholders, achieving a dividend payout of over $700 million since the first quarter of 2021. This, plus $323 million in share buybacks, has seen Endeavour Mining return more than $1 billion to its shareholders for the past 3 years or so. The semi-annual dividend is part of the company’s new shareholder return program, which includes at least $435 million in dividends over the next two years. In addition, the company will also finance special dividends and share buybacks.
How the Stock Has Performed from The Previous Rating
Unless a large investor owns enough shares that the return the stock provides in the form of dividends makes perfect sense, most investors should probably invest in Endeavour Mining shares to benefit from the positive correlation with the cyclical nature of the gold price, rather than as part of a long-term investment strategy, it was said in the previous article. Thus, by taking advantage of the upward trend in gold prices, which would have added momentum to the above operational upside catalysts for Endeavour Mining shares, one could adjust the holdings near the peak of the share price increase by implementing strategies focused on profit-taking. A temporary return of doom and gloom in the gold price was predicted to be the main trigger for the significant downward momentum in Endeavour Mining’s share price, which would have provided opportunities to buy shares at a price level consistent with the strategy. From the previous analysis, this stock under the symbol EDVMF on the US Over-The-Counter market “OTCQX” fell by -8.56%, while the US stock market was slightly in the green, as indicated by the +1.74% change in the S&P 500. However, things look quite different if the investor had profited from the price cycles as suggested in the previous analysis. If so, his strategy was bound to be rewarded with a return on investment in the green, most likely even higher than the positive change of the S&P 500 index, and the possibility of a large margin of market outperformance could not be ruled out either.
Endeavour Mining plc’s share price had reached an interesting buying low around June 14 after the gold price experienced its “worst sell-off in 3 and 1/2 years”, or in the first week of August amid “massive sell-offs around the world”, or currently as the gold price weakens due to “continued uncertainty over the size of upcoming Fed rate cut”, according to Seeking Alpha.
Source: Seeking Alpha
While around the following dates, opportunities opened up for investors interested in profit-making initiatives or strategies: 1) Endeavour’s share price had reached an interesting peak around mid-July, when “gold prices settled at an all-time”, driven primarily by bets on the easing of US monetary policy in September, reported Carl Surran, Seeking Alpha News Editor on July 16, 2024. This led gold investors to take profits three days later in what some analysts called a “typical pullback following record high prices”, reported Carl Surran, Seeking Alpha News Editor on July 19, 2024. 2) Not as high as the mid-July peak but still high enough to encourage profit-taking, Endeavour’s stock price made an interesting spike around August 26-27, when “gold prices hit a new all-time high” in late August, spurred by dove-like signals from Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole Symposium on Friday, August 23, reported Carl Surran, SA News Editor. This sparkling gold bid trigger was strongly coupled with another price rally factor of “safe-haven interest stemming at least in part from geopolitical risks in the Middle East”, XS.com senior market analyst Samer Hasn told Dow Jones, reported Seeking Alpha News Editor Carl Surran on August 26. Two days later, investors resumed profit-taking as sentiment became more “cautious ahead of fresh data that should provide more hints of the size and scope of potential Federal Reserve interest rate cuts”, reported Seeking Alpha News Editor Carl Surran on August 28. The easing of expectations for a larger rate cut of 50 bps at the Fed’s September meeting caused the US dollar to strengthen and gold to become more expensive in the eyes of foreign investors. The stronger dollar, in turn, also prompted investors to take profits.
The Reason for a Buy Rating
These shares are sharpening their weapons to capture the benefits of a strengthening scenario for gold prices as a safe haven against a risky and uncertain landscape, and bolstered by rising hopes that the Federal Reserve will cut interest rates. Since gold does not provide income, the expectations of lower interest rates favour demand for the yellow metal at the expense of the US Treasuries, which pay interest income based on fixed rates. What will help this stock rebound quickly as gold resumes its bullish cycle are operational improvements represented by consistent gold ounces mined at an industry-low AISC, which driven by strong momentum in gold is poised to reflect in higher profitability serving as a share price efficient driving force. The company is also well positioned on the growth side, with exploration continuing to be successful at the Ity mine in Côte d’Ivoire and the Houndé mine in Burkina Faso, both of which are deserving of the market attention that is critical to helping share prices remain robust. The catalyst for upward share prices also comes from Sabodala-Massawa in Senegal ramping up to nameplate capacity in Q3 2024, and the benefits of the “first gold production from Lafigué in Côte d’Ivoire in the second quarter of 2024”. Once commercial production is achieved and plant capacity is increased to 4 million tonnes per year in the current quarter, CEO Ian Cockerill said Lafigué in Ivory Coast will be well positioned “to produce over 200,000 ounces per year for at least 13 years at industry-leading all-in costs of approximately $900 per ounce.” He further noted that this will prepare the company for “a new phase of free cash flow generation and deleveraging,” goals that shareholders can look forward too with optimism.
These growth projects are supported by a financial position strengthened by strong gold price momentum and intervention by the government of Burkina Faso to resolve a minor legal dispute with Lilium Mining. The government helped monetize the sale of two mines in Boungou and Wahgnion, which Endeavour is offloading as they are not considered core to the company’s corporate strategy.
Endeavour Mining will continue to pay a semi-annual dividend of $0.41 per share on September 13, resulting in a forward yield of 4.02%, compared to the S&P 500’s dividend yield of 1.33% at the time of writing. Endeavour Mining plc is a generous dividend payer to its shareholders, achieving a dividend payout of over $700 million since the first quarter of 2021. This, plus $323 million in share buybacks, has seen Endeavour Mining return more than $1 billion to its shareholders for the past 3 years or so. The semi-annual dividend is part of the company’s new shareholder return program, which includes at least $435 million in dividends over the next two years. In addition, the company will also finance special dividends and share buybacks.
The Risk Associated with an Investment in Endeavour Mining plc
Endeavour Mining plc shares carry some risk as it is a low liquidity stock on the OTCQX, as shown by an “Average Volume (3 months)” of just 14,655 shares at the time of writing. This can cause problems if a position is too large relative to the market’s absorption capacity. Operationally, West Africa poses somewhat risks to mining operations. According to the Sprott ESG Mining Risk Heat Map 2024, risks are moderate for Senegal and Côte d’Ivoire, but high for Burkina Faso and Mali. These risks are mitigated by West Africa’s mineral resources, which attract Endeavour Mining and many other mining companies with a robust Chinese interest. A big help in easing shareholders’ concerns about operational risks is the presence of available capital because Western investors will not let Endeavour’s new projects – Massawa BIOX and Lafigué – fall into Chinese hands now that Chinese President Xi Jinping has promised financial support for $50 billion throughout Africa.
How the Business Develops with Rising Gold Prices
Aided by strong bullish momentum for gold, with “realized gold prices” increasing 12% QoQ to $2,287/oz in Q2-2024, and robust operations (+15% QoQ to 251,000 ozs gold produced in Q2-2024) resulting in sales up 6% QoQ to 238,000 ozs gold, Endeavour Mining plc delivered the following improvement in profitability, contributing to upward momentum for the share price.
Increased ore grades processed at Houndé in Burkina Faso, Ity in Côte d’Ivoire and Sabodala-Massawa in Senegal benefited production more than offsetting headwinds from lower ounces mined at Mana in Burkina Faso as operations factored in development activities on underground deposits to improve ounces going forward.
With revenue up 6.3% year-over-year to $557 million for Q2-2024, beating expectations by $8.53 million, Endeavour generated Non-GAAP EPS of $0.01 missing expectations by $0.15 due to a higher AISC/oz at 1,287 (up 9% QoQ ) amid a temporary “increase in processing costs reflecting lower grid power availability.”, said the company. Setbacks in the electricity generator’s infrastructure were on the way to being rectified at the main supplier Ivory Coast, plus the season is approaching a more favourable season, and electricity utilization is continuously improving, which according to the company’s report for Q2 2024 on 31 July 2024 is not far from full speed again. Moreover, with energy setbacks in Q2-2024 causing an increase in operating costs, the AISC of Endeavour was still very competitive in the industry and should the company close the year 2024 with AISC towards the higher end of the guidance range of $955 – 1,035/oz its AISC promises good for share prices through positive fallout from improved profitability beating many other competitors. As a benchmark to assess the competitiveness of Endeavour Mining’s AISC/oz, the S&P Global Market Intelligence indicated in March 2024 that the weighted average of medium to large miners’ AISC was $1,345 per oz. of gold and the median AISC was $1,328/oz in Q4-2023.
Higher sales volumes, bullish gold prices and low industry operating costs drove Adjusted EBITDA up +17% QoQ to $249 million in Q2-2024, leading to a good profitability measure of Adjusted EBITDA margin of 44.7% of revenue in Q2-2024, almost in line with 45.1% in Q1-2024.
As a benchmark to assess whether Endeavour Mining plc is operating more or less profitably than most competitors in the gold mining and exploration sector, the sector has an EBITDA margin (TTM) of 16 to 17% calculated as the inverse of EV / EBITDA (TTM) of 10x multiplied by EV / Sales (TTM) of 1.66x.
Operating cash flow increased tremendously by +369% QoQ to $258 million in Q2 2024. This helped fund shareholder returns as previously mentioned and provided $93 million for growth capital, including expanding Sabodala-Massawa and Lafigué processing capacity to reach sometime in H2 2024. During the strong operations and supportive gold prices in Q2 2024, monetary resources were found internally to underpin $31 million of exploration activities at Houndé, Ity and Sabodala-Massawa, putting the company on track for share price upside potential later in the year from positive reserve and resource updates.
A labour claim at the Sabodala-Massawa mine in Senegal will not minimally affect ounces of gold, the company announced to the public at the beginning of last month, contrary to some “internal” rumors, and to hit full 2024 production targets through smooth operations and maintaining growth projects Endeavour Mining plc is making the following cash allocations in 2024:
For FY-2024 and planning for the whole group, Endeavour Mining plc is allocating a total of $125 million in sustaining capital expenditure, a total of $190 million in non-sustaining capital investment, a total of $245 million in growth capital expenditure, and a total of $77 million in exploration activities.
Endeavour Mining has already spent $56 million of $77 million available on exploration activities in 2024, from early 2024 to the second quarter of 2024.
The Group has already made sustaining investments of $51.3 million in the first half of 2024 for the development of gold deposits and the purchase and rebuild of heavy machinery across the entire portfolio and will spend $73.7 million in the second half of 2024.
The Group has already made non-sustaining investments of $93.1 million in the first half of 2024 for the construction of the Sabodala-Massawa solar power plant, underground development, the crusher technology optimization initiative, and the construction of a tailings’ storage facilities and will use $96.9 million in the second half of 2024.
As the funds are mainly absorbed by construction activities as part of the ongoing expansion project of the Sabodala-Massawa mine in Senegal and the Lafigué mine in Côte d’Ivoire, the group has already made growth investments of $192.1 million in the first half of 2024, with $52.9 million to be spent in the second half of 2024.
Therefore, in H2-2024, about $244.5 million has been set aside for sustaining and non-sustaining investments, for growth capital and exploration, and about $120 million will be used to fund the shareholder return program.
Endeavour Mining plc Margin per Ounce: Considerations amid Gold Price Forecasts
The Group stated that it expects to achieve its fiscal 2024 production guidance of 1,130,000 to 1,270,000 ounces of gold, with performance heavily tilted towards the second half of 2024 as previously forecast. The Group produced 470,000 ounces of gold in the first half of 2024, a decrease of 8% year-on-year, leading however to expected production of 660,000 to 800,000 ounces in the second part of 2024.
This means that the Endeavour Mining plc group will be required to incur various non-sustaining capital expenditures, growth capital and shareholder returns of approximately $363.50 to $440.61 per ounce of metal produced in H2-2024. The ongoing sustaining expenditures will continue to refer to waste removal or development of open pit waste or the purchase of new mining equipment, including a fleet without the purpose of expanding production capacity, as well as drilling and blasting activity. This is contained in AISC/oz, which the group says will approach the upper end of the $955 – 1,035/oz guided range, which in turn could be negatively impacted by the following headwinds: 1) lower volumes of gold sold and production at Sabodala-Massawa as it is expected to end 2024 below the lower end of the guidance range of 360,000 to 400,000 oz. 2) higher royalty costs as gold prices are on track in the market to trade significantly above Endeavour Mining’s “realized gold price” of $2,167/oz in H1-2024. Driven by the search for safe havens and rising hopes that the Fed will ease monetary policy on interest rates, spot gold prices averaged $2,441.36/oz, up 7.3% since the end of Q2-2024 at the time of writing. As Seeking Alpha News Editor Arundhati Sarkar reported on September 3, 2024, Goldman Sachs Group, Inc. (GS) analysts expect solid near-term upside potential for the gold price and a subsequent uptrend to a target price of $2,700/oz as early as 2025. This represents 8% growth from current levels, driven by, according to Goldman Sachs, hedging purposes against “geopolitical and financial risks” and a strong comeback of Western interest in gold in the wake of the Fed’s next monetary easing. Trading Economics analysts support views of a short-term rise in gold prices, forecasting a gold price of $2,532.66 per ounce by the end of this quarter and an even higher price of $2,623.27 per ounce in 12 months. Trading Economics is targeting a price of $2,563.9/ounce by the end of 2024 (see light green forecast line in the below chart), but gold is currently at $2,498.48 (as of September 9, 2024) and the gold price has averaged $2,441.36/ounce since the end of Q2 2024 to date.
Source: Trading Economics
Based on the above inputs we have that ($2,441.36/ounce x 10 weeks + avg $2,531.19/ounce x 16 weeks) / 26 weeks = approximately $2,496.64/oz is the estimate of the average gold price per ounce for the second half of 2024. If AISC is fixed at a gold price of $1,850/oz and a 19.5% increase in the “realized gold price” to $2,210/oz resulted in an additional royalty charge to AISC of approximately $34/oz, the company indicated, then this means that a 35% increase in the gold price to an estimate of $2,496.64/oz for H2 2024 could result in an additional royalty charge to AISC of about $61/oz in H2 2024. For example, if we add to the upper end of Endeavour Mining’s forecast AISC range of $1,035/oz non-sustaining expenses and capital growth and shareholder returns of $440.61/oz of metal produced for H2 2024, as well as forecast royalty cost impacts of $61/oz, the mining company will need to spend $1,537 to produce and sell one ounce of gold in H2 2024. Since analysts estimate that the gold price has a very bright future in the short term, Endeavour Mining can achieve a margin of around $960/ounce in the second half of 2024 if it sells an ounce of gold at the estimated price of $2,496.64/ounce. However, even if Endeavour continues to face the same headwinds as in H1 2024 and doesn’t reduce AISC/oz to levels below $1,264/oz (= $1,237/oz in H1 2024 plus additional royalty cost impact of $27/oz), the $440.61/oz increase in H2 2024 due to non-sustaining expenses, capital growth and shareholder returns will still leave Endeavour with a positive margin of $792.03/oz (= $2,496.64/oz – $1,704.61/oz). AISC/oz is also affected by processing costs, the impact of lower gold sales and production volumes, royalties, and the impact of greater reliance on self-generated electricity.
The Financial Condition of Endeavour Mining plc
This positive margin can help Endeavour Mining plc strengthen its balance sheet, and such an improvement is usually one of the most welcome improvements in the stock market at the corporate level. Perhaps the company could pursue this goal by reducing debt now, when the cost of money in the capital markets is very high, and then fall back on loan capital in the future after the Fed loosens monetary policy on interest rates, gradually leading to more affordable financing. On its own, Endeavour Mining plc’s balance sheet already appears sufficiently supported by solid fundamentals.
The balance sheet had $408 million in Total Cash & ST Investments as of June 30, 2024, down from $517.2 million at the end of 2023, but with a higher value of the inventory supported by strong momentum in gold prices; inventory was $280.5 million in Q2-2024 versus $224.9 million at the end of 2023. In addition to the growth potential that the inventory could unlock, current liquidity is supported by $70 million that could still be drawn from the $645 million revolving credit facility as of Q2-2024. On top of this, there is $80 million including royalties that Endeavour Mining will receive from the government of Burkina Faso from the nationalisation process of the Boungou and Wahgnion mines.
The balance sheet had a net debt of $890.1 million. Without taking into account Total Cash & ST Investments, the total debt amounted to $1,298.1 million, consisting of the $575 million drawn revolving credit facility and the drawn portion of the Lafigué Term Loan of 147 million dollars, and $500 million in Senior Notes.
Due to outstanding debt, Endeavour Mining paid $77.7 million in interest expenses for the last twelve months through the second quarter of 2024. An indicator to measure the company’s solvency is derived by dividing the last 12 months’ operating income of $340.9 million by the last 12 months’ interest expense of $77.7 million, and the result is 4.4 times.
An investor typically requires a minimum acceptable level of 1.5x to 2x to consider a company economically able to afford debt. Endeavour Mining is then in a strong position with a 12-month Interest Coverage Ratio of 4.4x.
Endeavour Mining also has a net debt to adjusted EBITDA (LTM) ratio of 0.81x. According to Investopedia, the ratio should not be higher than 4 or 5, otherwise the company may run into problems with its debt load and affect its credit rating, which is important for obtaining a capital loan when needed.
The Stock Price: A More Favourable Price Level Is Not Excluded
Endeavour Mining plc shares are trading at levels that, based on past trends, are not bad for trying to increase exposure to benefit from the subsequent rise in the price of gold. However, there is room for the shares to become even more attractive.
At the time of writing, Endeavour Mining plc shares under the symbol EDVMF were trading at $20.41 per share, giving it a market cap of $4.97 billion.
Source: Seeking Alpha
Shares of Endeavour Mining plc are in line with the lowest line of the MA ribbon and are beyond the midpoint of the 52-week range of $15.60 to $24.35/share but only a little bit.
The chart above includes a 14-day relative strength indicator of 44.63, which suggests that Endeavour Mining plc shares can reach even more attractive levels than the current ones. This analysis assumes that there will be no shortage of downward pressure in the coming weeks.
Based on the negative triggers that have pushed the share price of this gold stock to a significant low, earlier highlighted in this analysis, we believe that a possible market disappointment regarding the Fed’s interest rate decision scheduled for September 18 enables investors to reasonably expect a more attractive price level for Endeavour Mining shares.
Possibility of More Attractive Share Prices: The Markets May Get the Fed Wrong on the Labour Market
In line with the dovish stance signalled by Fed Chairman Jerome Powell in his speech at the Jackson Hole Symposium on August 23, 2024, the US Federal Reserve seems to be on track for a first-rate cut: Fed rate traders estimate the probability of a 25 basis point rate cut from the current target of 5.25-5.50% to 5.00-5.25% at 73%. After Job Openings and Labor Turnover Survey (“JOLTS”) data last Wednesday showed a much larger-than-expected decline in job openings to a 2021 low point, expectations of a labour market slowdown intensified, boosting speculation that the Fed will cut with a substantial 50 basis points this month.
These market participants could make a big mistake if they believe that a 50-bps rate cut is possible. According to this analysis, the labour market is arguably more relaxed than previously with the lowest level since January 2021 of job openings at 7.67 million in July, but the labour market remains in good shape. The latter will give consumers a solid footing to cope with the challenging environment of higher interest rates and inflation, which is still far from the target of 2 percent. Supporting the vision of a healthy labour market, on Wednesday, August 4, the JOLTS also showed month-over-month increases in hiring to 5.5 million in July and a 20 bps jump in the hiring rate to 3.5% in July, up from 3.3% in June. Also, as of Wednesday’s report, the quit rate, a sign of confidence among workers since you don’t quit your current job if you’re not convinced enough to find another soon, rose to 2.1%, up from 2% in June. The ratio of unemployed workers to job openings has improved, falling to 1.07 in July, putting it at about the same level as before the COVID-19 pandemic crisis disrupted the labour market.
“With so many unemployed workers per available job, it is no surprise that workers who have gotten laid off continue have a difficult time finding a new job and get stuck in unemployment for very long periods.”, suggested Heidi Shierholz on September 8, 2010, for the Economic Policy Institute.
“The number of long-term unemployed people seeking employment for over 27 weeks remained stable at 1.5 million,” Trading Economics reported, suggesting that conditions on that side are not deteriorating, helping to allay recent concerns.
A useful benchmark to get an idea of where we might stand now is that: during the early 2000s recession, the rate peaked in September 2003 at 2.8 unemployed per job opening.
“Renaissance Macro’s head of economic research Neil Dutta wrote on X that the decline in the ratio is “yet another sign that labor demand has cooled, going a bit beyond where we were just before the pandemic.”” Yahoo Finance reported.
However, since the pandemic was an extraordinary event that no one expected, in this analysis we believe that the assumption that the comparison with the pre-pandemic trend points to further signs of a cooling labour market is highly problematic. Perhaps things might have turned out differently if the subsequent disruption to the labour market in 2020 had been the result of an issue of the cycle, but that is not the case here.
Additionally, a more comprehensive look at the labour market was released on Friday alongside the August jobs report. Given that market chatter suggests that the July report may have exaggerated the weakness in the labour market, we, therefore, find it useful to compare the 142,000 jobs added to the U.S. economy in August 2024 with the uncensored figure of 114,000 jobs created in July. As the number of jobs created in August is still higher than in July, even without the downward revision of 25,000 jobs, we believe that suspicions of “overstated weakness in the labour market” are justified.
Trading Economics said, “employment growth in August was in line with average job growth in recent months but lower than the average monthly gain of 202,000 in the previous 12 months.”.
A very realistic indication comes from the real estate industry, as its dynamics are affected by changes in interest rates, which the Fed will consider implementing after receiving specific signals from the labour market as a preferred gauge along with a cooling core inflation rate. National Association of Realtors (“NAR”) chief economist Lawrence Yun said in a press release at the end of last month, reported by Yahoo Finance, that he saw a positive impact on the recovery of housing sales from “job growth.”
Plus, the US unemployment rate fell from its October 2021 peak of 4.3% in the previous month to 4.2% in August 2024. This was in line with market expectations, with the unemployed people and labour force participation rate largely unchanged from the previous month at 7.1 million and 62.7%, respectively, the US Bureau of Labor Statistics indicated, Trading Economics reported.
After Wednesday’s numbers, markets are more confident that the Federal Reserve will cut rates by 50 basis points by the end of its September 18 meeting, according to the CME FedWatch Tool. However, consistent with the analysis of the latest labour market developments presented here, we believe the Fed will cut rates by only 25 basis points, not 50 basis points. This vision is supported by the authoritative view of Raphael Bostic, president of the US Federal Reserve Bank of Atlanta, who also does not believe the labour market is “weak”.
This could disappoint market participants and damage the price of gold, leading to a decline in the share price of Endeavour Mining plc.
Conclusion
Endeavour Mining plc is a gold producer with mines in West Africa.
Driven by continued progress on two organic growth projects in Sabodala-Massawa in Senegal and Lafigué in Côte d’Ivoire, combined with robust yields from the rest of the portfolio, production is on track to end this year where the company had targeted. Perhaps the costs will be higher than expected by the company, but they are still very competitive in the industry and also in a conservative scenario with the same headwinds causing the increase in costs in Q2-2024, the company, helped by fantastic momentum in gold prices, is ready to provide margin abundantly in green territory.
In addition to the expected improvement in profitability metrics, the company has a chance to strengthen its financial position by reducing debt, which will also provide an upward catalyst for the share price.
The shares could be a Buy today as current prices are attractive given the strong upside potential and compared to recent trends. However, shares could become cheaper from current levels as a less dovish than expected Fed interest rate policy on September 18 would disappoint gold, and with its more subdued prices per ounce put pressure on Endeavour Mining’s share price as well.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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