Endeavour’s results in Q219 were materially ahead of not only the prior quarter, but also our expectations, which already anticipated a significant quarterly rise in production. In general, grades increased relative to Q1, owing to improved access to higher-grade material as a result of earlier pre-stripping, and a lower proportion of processed material being derived from low-grade stockpiles, partially offset by a higher proportion of transitional/fresh ore relative to oxide ore (NB this was particularly true of Houndé).
On an individual mine basis, all of Endeavour’s mines outperformed our production expectations during the quarter, with the exception of Karma, where a defective elution column allowed a build-up of gold in circuit. From a financial perspective, all of its mines outperformed our expectations, with the exception of Agbaou, which experienced a sharply higher depreciation charge. Of particular note was the performance of Ity in its first quarter of commercial production (which was declared on 8 April). Both mining activity and plant throughput ramped-up quickly, with the former achieving an annualised rate of 5.6Mtpa over the entire quarter and the latter achieving an annualised rate of nearly 5Mtpa (helped by the fact that the ore mined during the quarter was predominantly oxide in nature) in June, even before any debottlenecking initiatives have been put in place. Arguably more significantly, cash costs and all-in sustaining costs were within 1.4% of our expectations, at US$537/oz and US$585/oz, respectively. At US$13.72 per tonne milled, processing costs were approximately 10% higher than feasibility study estimates for the first five years of operation as higher reagent consumption was required to achieve higher recoveries on some ores containing high cyanide soluble copper. This is now reported to have decreased as the blend of ores fed to the mill has stabilised. In addition, mining efficiencies are expected to improve following the end of the rainy season in Q3/Q4, as more, harder ore is exposed, which will enable increased use of larger, rigid body trucks.
In summary, gold production was 41.8% higher than in the previous quarter and 19.4% (27.8koz) above our expectation. This resulted in a positive variance of US$42.4m in revenues relative to our expectations, only partially offset by operating expenses, depreciation and royalties, which were, collectively, US$16.0m higher. In addition, there was an US$11.8m loss on financial instruments, while taxes and the minority interest were US$6.4m and US$3.3m higher, respectively, to result in net earnings that were US$13.6m (or 12.4c per share) ahead of our forecasts. A detailed analysis of Endeavour’s financial and operational performance, relative to both the previous quarter and our prior expectations (as set out in our note, Endeavour Mining: Starting as it means to go on, published on 3 May 2019) is as follows:
Exhibit 1: Endeavour Mining earnings, by quarter, Q218–Q219
(US$000s unless otherwise indicated) |
Q218 |
Q318 |
Q418 |
Q119 |
Q219e |
Q219a |
Q2/Q1 |
Q2 vs Q2e |
Change (%) |
Variance (%) |
Variance (units) |
Houndé production (koz) |
66.9 |
60.7 |
75.8 |
55.4 |
46.6 |
58.2 |
5.1 |
24.9 |
11.6 |
Agbaou production (koz) |
33.7 |
31.2 |
44.4 |
31.8 |
29.4 |
34.6 |
8.8 |
17.7 |
5.2 |
Karma production (koz) |
21.0 |
26.1 |
33.5 |
22.1 |
23.0 |
21.0 |
-5.0 |
-8.7 |
-2.0 |
Ity production (koz) |
25.0 |
21.0 |
20.6 |
11.5 |
44.4 |
57.3 |
398.3 |
29.1 |
12.9 |
Tabakoto production (koz) |
26.8 |
26.5 |
29.6 |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
Total gold produced (koz) |
147 |
139 |
174.2 |
120.8 |
143.5 |
171.3 |
41.8 |
19.4 |
27.8 |
Total gold sold (koz) |
151 |
134 |
173.4 |
120.9 |
143.5 |
170.7 |
41.2 |
19.0 |
27.2 |
Gold price (US$/oz) |
1,306 |
1,161 |
1,198 |
1,304 |
1,283 |
1,285 |
-1.5 |
0.2 |
2 |
Mine level cash costs (US$/oz) |
608 |
643 |
555 |
659 |
657 |
632 |
-4.1 |
-3.8 |
-25 |
Group level AISC (US$/oz) |
768 |
820 |
707 |
877 |
874 |
790 |
-9.9 |
-9.6 |
-84 |
Revenue |
|
|
|
|
|
|
|
|
|
– Gold revenue |
189,515 |
155,764 |
207,784 |
151,310 |
176,993 |
219,371 |
45.0 |
23.9 |
42,378 |
Cost of sales |
|
|
|
|
|
|
|
|
|
– Operating expenses |
92,646 |
86,238 |
124,832 |
88,363 |
94,248 |
103,318 |
16.9 |
9.6 |
9,070 |
– Royalties |
10,254 |
8,293 |
10,338 |
8,989 |
8,366 |
11,032 |
22.7 |
31.9 |
2,666 |
Gross profit |
86,615 |
61,233 |
72,614 |
53,958 |
74,379 |
105,021 |
94.6 |
41.2 |
30,642 |
Depreciation |
(43,538) |
(35,911) |
(50,116) |
(36,132) |
(47,706) |
(51,970) |
43.8 |
8.9 |
-4,264 |
Expenses |
|
|
|
|
|
|
|
|
|
– Corporate costs |
(6,130) |
(5,888) |
(8,001) |
(6,061) |
(5,957) |
(5,143) |
-15.1 |
-13.7 |
814 |
– Impairments |
0 |
0 |
0 |
0 |
0 |
0 |
N/A |
N/A |
0 |
– Acquisition etc costs |
0 |
0 |
0 |
0 |
0 |
0 |
N/A |
N/A |
0 |
– Share based compensation |
(10,109) |
(4,007) |
(8,147) |
(2,600) |
(5,333) |
(4,385) |
68.7 |
-17.8 |
948 |
– Exploration costs |
(2,284) |
(2,583) |
0 |
(4,361) |
(821) |
(1,674) |
-61.6 |
103.9 |
-853 |
Total expenses |
(18,523) |
(12,478) |
(16,148) |
(13,022) |
(12,111) |
(11,202) |
-14.0 |
-7.5 |
909 |
Earnings from operations |
24,554 |
12,844 |
6,350 |
4,804 |
14,562 |
41,849 |
771.1 |
187.4 |
27,287 |
Interest income |
0 |
0 |
0 |
0 |
0 |
0 |
N/A |
N/A |
0 |
Interest expense |
(4,549) |
(6,679) |
(4,947) |
(4,919) |
(15,611) |
(12,386) |
151.8 |
-20.7 |
3,225 |
Net interest |
(4,549) |
(6,679) |
(4,947) |
(4,919) |
(15,611) |
(12,386) |
151.8 |
-20.7 |
3,225 |
Loss on financial instruments |
10,922 |
24,755 |
(16,239) |
1,123 |
- |
(11,757) |
-1,146.9 |
N/A |
-11,757 |
Other expenses |
(818) |
(173) |
(402) |
(197) |
0 |
4,574 |
-2,421.8 |
N/A |
4,574 |
Profit before tax |
30,109 |
30,747 |
(15,238) |
811 |
(1,050) |
22,280 |
2,647.2 |
-2,221.9 |
23,330 |
Current income tax |
17,095 |
17,443 |
21,212 |
13,478 |
8,980 |
13,845 |
2.7 |
54.2 |
4,865 |
Deferred income tax |
4,432 |
(2,007) |
(2,551) |
(1,224) |
0 |
1,531 |
-225.1 |
N/A |
1,531 |
Total tax |
21,527 |
15,436 |
18,661 |
12,254 |
8,980 |
15,376 |
25.5 |
71.2 |
6,396 |
Marginal tax rate |
71.5 |
50.2 |
(122.5) |
1,511.0 |
(855.5) |
69.0 |
N/M |
N/M |
N/M |
Profit after tax |
8,582 |
15,311 |
(33,899) |
(11,443) |
(10,030) |
6,904 |
-160.3 |
-168.8 |
16,934 |
Net profit from discontinued ops. |
(24,025) |
(35,705) |
(95,658) |
0 |
0 |
0 |
N/A |
N/A |
0 |
Total net and comprehensive loss |
(15,443) |
(20,394) |
(129,557) |
(11,443) |
(10,030) |
6,904 |
-160.3 |
-168.8 |
16,934 |
Minority interest |
(132) |
(3,619) |
(3,695) |
3,224 |
2,860 |
6,193 |
92.1 |
116.5 |
3,333 |
Minority interest (%) |
0.9 |
17.7 |
2.9 |
(28.2) |
(28.5) |
89.7 |
-418.1 |
-414.7 |
118 |
Profit attributable to shareholders |
(15,311) |
(16,775) |
(125,862) |
(14,667) |
(12,890) |
711 |
-104.8 |
-105.5 |
13,601 |
|
|
|
|
|
|
|
|
|
|
Basic EPS from continuing ops (US$) |
0.037 |
0.136 |
(0.292) |
(0.136) |
(0.118) |
0.006 |
-104.4 |
-105.1 |
0.124 |
Diluted EPS from continuing ops (US$) |
0.037 |
0.136 |
(0.292) |
(0.131) |
(0.114) |
0.006 |
-104.6 |
-105.3 |
0.120 |
Basic EPS (US$) |
(0.142) |
(0.156) |
(1.167) |
(0.136) |
(0.118) |
0.006 |
-104.4 |
-105.1 |
0.124 |
Diluted EPS (US$) |
(0.142) |
(0.155) |
(1.165) |
(0.131) |
(0.114) |
0.006 |
-104.6 |
-105.3 |
0.120 |
Norm. basic EPS from continuing ops (US$) |
(0.064) |
(0.094) |
(0.142) |
(0.146) |
(0.118) |
0.113 |
-177.4 |
-195.8 |
0.231 |
Norm. diluted EPS from continuing ops (US$) |
(0.064) |
(0.094) |
(0.141) |
(0.141) |
(0.114) |
0.113 |
-180.1 |
-199.1 |
0.227 |
Adj net earnings attributable (US$000s) |
9,189 |
(1,408) |
16,271 |
(4,910) |
(6,036) |
8,519 |
-273.5 |
-241.1 |
14,555 |
Adj net EPS from continuing ops (US$) |
0.085 |
(0.013) |
0.151 |
(0.045) |
(0.055) |
0.078 |
-273.3 |
-241.8 |
0.133 |
Source: Endeavour Mining, Edison Investment Research. Note: Company reported basis.
Once again, it is notable that both the tax charge and the minority interest charge during the quarter were anomalous and not reflective of the realities of Endeavour’s commercial circumstances.
FY19 cost and production guidance and Edison forecasts
Historically, Endeavour has a good record of meeting its production and cost guidance targets. For FY19, these remain unchanged, as follows (cf Edison’s updated forecasts):
Exhibit 2: Current Endeavour production and AISC cost guidance, by mine, FY19 vs FY18 and Edison forecast
|
Production |
All-in sustaining costs (AISC) |
Mine |
FY19e guidance (koz) |
Edison FY19e forecast (koz) |
Previous FY19 forecast (koz) |
FY19e guidance (US$/oz) |
Edison FY19e forecast (US$/oz) |
Previous FY19 forecast (US$/oz) |
Houndé |
230–250 |
244.0 |
239.1 |
720–790 |
790 |
739 |
Agbaou |
120–130 |
128.1 |
120.0 |
850–900 |
851 |
849 |
Karma |
105–115 |
105.0 |
108.4 |
860–910 |
872 |
872 |
Ity* |
160–200 |
185.1 |
166.5 |
525–590 |
590 |
566 |
Group total |
615–695 |
662.2 |
634.1 |
**760–810 |
**801 |
**788 |
Source: Endeavour Mining, Edison Investment Research. Note: *Ity production is Ity CIL and residual Ity heap leach operation combined; Ity AISC is CIL only; **Includes corporate general & administrative costs.
In the second half of the financial year, operations at Houndé are expected to benefit from access to high-grade ore from the Bouéré deposit, where pre-stripping was completed in Q219 and from which ore began to be processed early in Q319. While the proportion of fresh ore processed at Houndé is thus anticipated to rise to in excess of 30% (from c 20%) in the interim, it will reduce in Q4, before increasing once again in 2020 as mining at both Vindaloo and Bouéré transition to deeper levels. Given exploration success at Houndé and its increasing reserve and resource profile, management has confirmed that a review of the plant will be conducted during Q319 with a view to increasing capacity. Similarly, operations at Karma will benefit from the stacking of higher-grade oxide ore once again from the Kao North pit, which started in Q219 and is expected to be the main source of ore in H219.
Aside from the changes to production and cost estimates noted in Exhibit 2 above, Edison’s forecasts for FY19 continue to reflect Endeavour’s sustaining and non-sustaining capital cost guidance for each of its mines for the remainder of the year in addition to the assumption that operational performance will, in some cases, be adversely affected by the onset of the rainy season in Q3. Otherwise, compared with our previous forecasts, the most noteworthy change to our ongoing forecasts for Q3–Q419 relates to the assumed gold price in Q3 and Q4, which (in the light of recent moves and its current spot price) is now expected to be US$1,416/oz and US$1,418/oz, respectively (cf US$1,263/oz previously):
Exhibit 3: Endeavour Mining FY19 earnings forecasts, by quarter
(US$000s unless otherwise indicated)
|
FY18 |
Q119 |
Q219 |
Q319e (previous) |
Q419e (previous) |
Q319e (current) |
Q419e (current) |
FY19e (current) |
FY19e (previous) |
Houndé production (koz) |
277.2 |
55.4 |
58.2 |
68.6 |
68.6 |
61.8 |
68.6 |
244.0 |
239.1 |
Agbaou production (koz) |
141.3 |
31.8 |
34.6 |
29.4 |
29.4 |
32.2 |
29.5 |
128.1 |
120.0 |
Karma production (koz) |
108.7 |
22.1 |
21.0 |
28.3 |
35.0 |
25.9 |
35.9 |
105.0 |
108.4 |
Ity production (koz) |
84.8 |
11.5 |
57.3 |
55.3 |
55.3 |
60.8 |
55.3 |
185.1 |
166.5 |
Tabakoto production (koz) |
115.2 |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
Total gold produced (koz) |
612.1 |
120.8 |
171.3 |
181.5 |
188.3 |
180.8 |
189.3 |
662.2 |
634.1 |
Total gold sold (koz) |
612.1 |
120.9 |
170.7 |
181.5 |
188.3 |
180.8 |
189.3 |
661.7 |
634.1 |
Gold price (US$/oz) |
1,199 |
1,304 |
1,285 |
1,263 |
1,263 |
1,416 |
1,418 |
*1,335 |
*1,237 |
Mine level cash costs (US$/oz) |
579 |
659 |
632 |
540 |
521 |
590 |
497 |
587 |
584 |
Mine level AISC (US$/oz) |
744 |
827 |
790 |
689 |
667 |
804 |
685 |
763 |
740 |
Revenue |
|
|
|
|
|
|
|
|
|
– Gold revenue |
751,957 |
151,310 |
219,371 |
224,165 |
232,662 |
250,344 |
262,696 |
883,721 |
785,130 |
Cost of sales |
|
|
|
|
|
|
|
|
|
– Operating expenses |
386,926 |
88,363 |
103,318 |
98,110 |
98,110 |
106,651 |
94,134 |
392,465 |
378,831 |
– Royalties |
41,068 |
8,989 |
11,032 |
10,888 |
11,398 |
13,759 |
15,054 |
48,834 |
39,640 |
Gross profit |
323,963 |
53,958 |
105,021 |
115,167 |
123,155 |
129,934 |
153,508 |
442,422 |
366,659 |
Depreciation |
(169,069) |
(36,132) |
(51,970) |
(58,143) |
(62,137) |
(63,534) |
(66,760) |
(218,396) |
(204,118) |
Expenses |
|
|
|
|
|
|
|
|
|
– Corporate costs |
(26,573) |
(6,061) |
(5,143) |
(5,957) |
(5,957) |
(5,957) |
(7,943) |
(25,104) |
(23,932) |
– Impairments |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
– Acquisition etc costs |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
– Share based compensation |
(24,931) |
(2,600) |
(4,385) |
(5,333) |
(5,333) |
(5,333) |
(5,333) |
(17,651) |
(18,599) |
– Exploration costs |
(7,621) |
(4,361) |
(1,674) |
(821) |
(821) |
(1,271) |
(1,271) |
(8,577) |
(6,825) |
Total expenses |
(59,125) |
(13,022) |
(11,202) |
(12,111) |
(12,111) |
(12,561) |
(14,547) |
(51,332) |
(49,356) |
Earnings from operations |
95,769 |
4,804 |
41,849 |
44,913 |
48,907 |
53,839 |
72,202 |
172,694 |
113,185 |
Interest income |
0 |
|
0 |
|
|
|
|
0 |
0 |
Interest expense |
(23,671) |
(4,919) |
(12,386) |
(15,611) |
(15,611) |
(17,224) |
(17,224) |
(51,753) |
(51,753) |
Net interest |
(23,671) |
(4,919) |
(12,386) |
(15,611) |
(15,611) |
(17,224) |
(17,224) |
(51,753) |
(51,753) |
Loss on financial instruments |
8,035 |
1,123 |
(11,757) |
|
|
|
|
(10,634) |
1,123 |
Other expenses |
(1,558) |
(197) |
4,574 |
0 |
0 |
0 |
0 |
4,377 |
(197) |
Profit before tax |
78,575 |
811 |
22,280 |
29,301 |
33,295 |
36,615 |
54,978 |
114,684 |
62,358 |
Current income tax |
66,522 |
13,478 |
13,845 |
14,042 |
13,981 |
17,302 |
19,766 |
64,391 |
50,481 |
Deferred income tax |
(5,007) |
(1,224) |
1,531 |
0 |
0 |
0 |
0 |
307 |
(1,224) |
Total tax |
61,515 |
12,254 |
15,376 |
14,042 |
13,981 |
17,302 |
19,766 |
64,698 |
49,257 |
Marginal tax rate |
78.3 |
1,511.0 |
69.0 |
47.9 |
42.0 |
47.3 |
36.0 |
56.4 |
79.0 |
Profit after tax |
17,060 |
(11,443) |
6,904 |
15,259 |
19,315 |
19,313 |
35,212 |
49,986 |
13,101 |
Net profit from discontinued ops. |
(154,795) |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Total net and comprehensive loss |
(137,735) |
(11,443) |
6,904 |
15,259 |
19,315 |
19,313 |
35,212 |
49,986 |
13,101 |
Minority interest |
7,121 |
3,224 |
6,193 |
5,679 |
6,076 |
7,666 |
9,045 |
26,128 |
17,839 |
Minority interest (%) |
(5.2) |
(28.2) |
89.7 |
37.2 |
31.5 |
39.7 |
25.7 |
52.3 |
136.2 |
Profit attributable to shareholders |
(144,856) |
(14,667) |
711 |
9,580 |
13,239 |
11,648 |
26,167 |
23,858 |
(4,739) |
|
|
|
|
|
|
|
|
|
|
Basic EPS from continuing ops (US$) |
(0.001) |
(0.136) |
0.006 |
0.088 |
0.121 |
0.106 |
0.238 |
0.217 |
(0.043) |
Diluted EPS from continuing ops (US$) |
(0.001) |
(0.131) |
0.006 |
0.085 |
0.117 |
0.102 |
0.229 |
0.209 |
(0.042) |
Basic EPS (US$) |
(1.344) |
(0.136) |
0.006 |
0.088 |
0.121 |
0.106 |
0.238 |
0.217 |
(0.043) |
Diluted EPS (US$) |
(1.342) |
(0.131) |
0.006 |
0.085 |
0.117 |
0.102 |
0.229 |
0.209 |
(0.042) |
Norm. basic EPS from continuing ops (US$) |
(0.075) |
(0.146) |
0.113 |
0.088 |
0.121 |
0.106 |
0.238 |
0.314 |
(0.054) |
Norm. diluted EPS from continuing ops (US$) |
(0.075) |
(0.141) |
0.113 |
0.085 |
0.117 |
0.102 |
0.229 |
0.302 |
(0.052) |
Adj net earnings attributable (US$000s) |
53,132 |
(5,000) |
8,519 |
12,928 |
16,895 |
14,864 |
30,130 |
48,602 |
18,786 |
Adj net EPS from continuing ops (US$) |
0.493 |
(0.046) |
0.078 |
0.118 |
0.155 |
0.135 |
0.274 |
0.443 |
0.172 |
Source: Endeavour Mining, Edison Investment Research. Note: Company reported basis. *Includes adjustment for Karma stream.
We note that forecasting on a quarterly basis is prone to large variations between actual and forecast numbers (as demonstrated, not least, by the variances observed between Q219a and Q219e in Exhibit 1). To this end, it is worth noting that the top end of Endeavour’s production guidance is 32.8oz gold above our updated forecast for the year, which is worth a material US$47.3m in additional revenue to the company (at the current spot price of gold of US$1,441/oz) and therefore has the ability to increase Endeavour’s full year profit before tax by 41.2% relative to our forecasts above (assuming all other things are equal). As such, the exhibit above should be regarded as more indicative than prescriptive with respect to the individual quarters. Within this context, however, the table above nevertheless demonstrates the effects of a number of anticipated operating developments over the course of the year, including:
■
production from the higher-grade Bouéré pit at Houndé in H2;
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the start of commercial production from the Ity CIL project in Q2; and
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the processing of higher-grade ore (cf low-grade stockpiles) at Karma in H2.
By contrast, to date, we have given no credit to Endeavour’s plan to increase the Ity CIL plant nameplate capacity by 1Mtpa to 5Mtpa (which is expected to be completed in Q419). These plant upgrades are expected to be completed during scheduled maintenance shut-downs over the next four months. However, should the process be completed by the end of Q3, then we estimate that it would have the potential to increase quarterly Ity CIL production from 55.3koz to 69.1koz in Q4 and group adjusted net earnings attributable (see Exhibit 3, above) from 27.4c per share to 35.7c per share (all other things being equal) in Q419 and from 44.3c/share to 52.5c/share for FY19.