Endeavour’s Q3 results were considerably ahead of our forecasts, despite a challenging rainy season in which more than four times as much precipitation fell than in the equivalent period in Q316. The effects of the weather were notable particularly in individual mines’ unit mining costs (as opposed to processing or G&A costs), which were flat or increased in every instance, not least as a result of additional water pumping costs being incurred. In addition, inventory adjustments added to the cost of sales at Houndé, Agbaou and Karma. However, production also rose at three of Endeavour’s four mines – the exception being Houndé, where output dropped by 6.1% quarter-on-quarter. Note that this performance followed a Q2 in which all of Endeavour’s mines also outperformed our production expectations, with the exception of Karma. Overall, group production increased by 5.5% relative to the prior quarter (NB historically, production has tended to fall in Q3 relative to Q2) and was 3.5% above our forecasts, driven by increases in both tonnes milled/processed (+3.3% q-o-q) and head grades (+6.3%), despite the selective utilisation of low-grade stockpiles, partially offset by a decline in recovery rates at all of the mines with the exception of Agbaou.
Financial results included a US$49.5m loss on financial instruments (see dedicated section on page 4) and a US$10.6m charge for deferred tax. Even so, stripping these out, earnings were US$28.0m compared with Edison’s forecast of US$10.4m – albeit almost all of the difference could be accounted for by the additional US$15.7m in revenues that were generated by Endeavour’s 6.1koz increase in production relative to our forecasts plus a further 4.5koz of sales over and above production. Net adjusted EPS of 30.2c was more than twice our forecast of 12.9c. Otherwise, operating cash flow (before working capital items) more than doubled to US$1.05/share, return on capital employed increased to 15% (on an annualised basis) and net debt (excluding IFRS 16 leases – see Financials, below) reduced by US$52m. Capex continued to fall with sustaining plus non-sustaining capex amounting to no more than US$24.3m across the company’s four mines.
From an operational perspective, the best performance during the quarter was recorded by Ity, where an increase in production of 10.9% on an ostensibly flat cost base resulted in an increase in the mine’s earnings of 85.5%, or US$15.8m, relative to the prior quarter, albeit aided by a relatively low marginal tax rate and a lower than ambient minority charge. Of note was a moderation in reagent consumption, which had previously been required to achieve higher recoveries on some ores containing high cyanide soluble copper as the blend of ores fed to the mill stabilised. By contrast, rain slowed the development of the high-grade Bouéré deposit at Houndé, which was mined at a slower rate than planned and necessitated the augmentation of the mill feed with low-grade stockpiles, which also reduced metallurgical recoveries on account of the ore blend. In addition, Houndé attracted a deferred tax charge, which resulted in an increased marginal tax rate, as well as a higher than ambient minority charge. Agbaou similarly attracted a deferred tax charge as well as a higher than ambient minority charge. Operationally however, it benefited from higher throughput and recovery (as a result of increased capacity utilisation and, consequently, lower unit processing and G&A charges) and a lower stripping ratio as mining focused on the deeper elevations of the North Pit and as it commenced in the South Pit extension, which resulted in an increase in capitalised waste, albeit less than anticipated owing to better than expected unit mining costs. Finally, at Karma, mining transitioned from the Kao Main pit to the Kao North pit early in the quarter, with the result that the stacked grade increased owing to the oxide nature of the new ore, while metallurgical recovery rates declined at the same time as tonnes stacked declined, owing to maintenance downtime related to the installation and commissioning of the tripper conveyor in addition to the heavy rains, which resulted in an increase in unit mining costs. As at Houndé and Agbaou, Karma experienced a deferred tax charge, which increased its marginal tax rate. It also recorded a sharply higher depreciation and depletion charge (although no more than in line with the increase in production). However, there was no charge for minority interests.
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: Valuation US$27.58; potential 32% upside, published on 3 October 2019) is as follows:
Exhibit 1: Endeavour Mining earnings, by quarter, Q218–Q319
(US$000s unless otherwise indicated) |
Q218 |
Q318 |
Q418 |
Q119 |
Q219 |
Q319e |
Q319a |
Q3/Q2 |
Q3a vs Q3e |
Change (%) |
Variance (%) |
Variance (units) |
Houndé production (koz) |
66.9 |
60.7 |
75.8 |
55.4 |
58.2 |
58.2 |
54.7 |
-6.0 |
-6.0 |
-3.5 |
Agbaou production (koz) |
33.7 |
31.2 |
44.4 |
31.8 |
34.6 |
32.2 |
36.1 |
4.3 |
12.1 |
3.9 |
Karma production (koz) |
21.0 |
26.1 |
33.5 |
22.1 |
21.0 |
23.5 |
26.2 |
24.8 |
11.5 |
2.7 |
Ity production (koz) |
25.0 |
21.0 |
20.6 |
11.5 |
57.3 |
60.8 |
63.8 |
11.3 |
4.9 |
3.0 |
Tabakoto production (koz) |
26.8 |
26.5 |
29.6 |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
Total gold produced (koz) |
147 |
139 |
174.2 |
120.8 |
171.3 |
174.7 |
180.8 |
5.5 |
3.5 |
6.1 |
Total gold sold (koz) |
151 |
134 |
173.4 |
120.9 |
170.7 |
174.7 |
185.3 |
8.6 |
6.1 |
10.6 |
Gold price (US$/oz) |
1,306 |
1,161 |
1,198 |
1,304 |
1,285 |
1,474 |
1,443 |
12.3 |
-2.1 |
-31 |
Mine level cash costs (US$/oz) |
608 |
643 |
555 |
659 |
632 |
605 |
613 |
-3.0 |
1.3 |
8 |
Group level AISC (US$/oz) |
768 |
820 |
707 |
877 |
790 |
856 |
803 |
1.6 |
-6.2 |
-53 |
Revenue |
|
|
|
|
|
|
|
|
|
|
– Gold revenue |
189,515 |
155,764 |
207,784 |
151,310 |
219,371 |
251,582 |
267,292 |
21.8 |
6.2 |
15,710 |
Cost of sales |
|
|
|
|
|
|
|
|
|
|
– Operating expenses |
92,646 |
86,238 |
124,832 |
88,363 |
103,318 |
105,631 |
114,599 |
10.9 |
8.5 |
8,968 |
– Royalties |
10,254 |
8,293 |
10,338 |
8,989 |
11,032 |
13,669 |
14,480 |
31.3 |
5.9 |
811 |
Gross profit |
86,615 |
61,233 |
72,614 |
53,958 |
105,021 |
132,282 |
138,213 |
31.6 |
4.5 |
5,931 |
Depreciation |
(43,538) |
(35,911) |
(50,116) |
(36,132) |
(51,970) |
(60,757) |
(54,509) |
4.9 |
-10.3 |
6,248 |
Expenses |
|
|
|
|
|
|
|
|
|
|
– Corporate costs |
(6,130) |
(5,888) |
(8,001) |
(6,061) |
(5,143) |
(5,957) |
(6,166) |
19.9 |
3.5 |
-209 |
– Impairments |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
N/A |
N/A |
0 |
– Acquisition etc costs |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
N/A |
N/A |
0 |
– Share based compensation |
(10,109) |
(4,007) |
(8,147) |
(2,600) |
(4,385) |
(5,333) |
(5,238) |
19.5 |
-1.8 |
95 |
– Exploration costs |
(2,284) |
(2,583) |
0 |
(4,361) |
(1,674) |
(1,271) |
(3,858) |
130.5 |
203.5 |
-2,587 |
Total expenses |
(18,523) |
(12,478) |
(16,148) |
(13,022) |
(11,202) |
(12,561) |
(15,262) |
36.2 |
21.5 |
-2,701 |
Earnings from operations |
24,554 |
12,844 |
6,350 |
4,804 |
41,849 |
58,964 |
68,442 |
63.5 |
16.1 |
9,478 |
Interest income |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
N/A |
N/A |
0 |
Interest expense |
(4,549) |
(6,679) |
(4,947) |
(4,919) |
(12,386) |
(20,224) |
(14,170) |
14.4 |
-29.9 |
6,054 |
Net interest |
(4,549) |
(6,679) |
(4,947) |
(4,919) |
(12,386) |
(20,224) |
(14,170) |
14.4 |
-29.9 |
6,054 |
Loss on financial instruments |
10,922 |
24,755 |
(16,239) |
1,123 |
(11,757) |
(1,445) |
(49,528) |
321.3 |
3,327.5 |
-48,083 |
Other expenses |
(818) |
(173) |
(402) |
(197) |
4,574 |
0 |
(673) |
N/A |
N/A |
-673 |
Profit before tax |
30,109 |
30,747 |
(15,238) |
811 |
22,280 |
37,295 |
4,071 |
-81.7 |
-89.1 |
-33,224 |
Current income tax |
17,095 |
17,443 |
21,212 |
13,478 |
13,845 |
18,667 |
16,917 |
22.2 |
-9.4 |
-1,750 |
Deferred income tax |
4,432 |
(2,007) |
(2,551) |
(1,224) |
1,531 |
0 |
10,699 |
598.8 |
N/A |
10,699 |
Total tax |
21,527 |
15,436 |
18,661 |
12,254 |
15,376 |
18,667 |
27,616 |
79.6 |
47.9 |
8,949 |
Marginal tax rate (%) |
71.5 |
50.2 |
(122.5) |
1,511.0 |
69.0 |
50.1 |
678.4 |
883.2 |
1,254.1 |
628 |
Profit after tax |
8,582 |
15,311 |
(33,899) |
(11,443) |
6,904 |
18,629 |
(23,545) |
N/A |
N/A |
-42,174 |
Net profit from discontinued ops. |
(24,025) |
(35,705) |
(95,658) |
0 |
0 |
0 |
0 |
N/A |
N/A |
0 |
Total net and comprehensive loss |
(15,443) |
(20,394) |
(129,557) |
(11,443) |
6,904 |
18,629 |
(23,545) |
N/A |
N/A |
-42,174 |
Minority interest |
(132) |
(3,619) |
(3,695) |
3,224 |
6,193 |
8,197 |
8,654 |
39.7 |
5.6 |
457 |
Minority interest (%) |
0.9 |
17.7 |
2.9 |
(28.2) |
89.7 |
44.0 |
(36.8) |
N/A |
N/A |
-81 |
Profit attributable to shareholders |
(15,311) |
(16,775) |
(125,862) |
(14,667) |
711 |
10,432 |
(32,199) |
N/A |
N/A |
-42,631 |
|
|
|
|
|
|
|
|
|
|
|
Basic EPS from continuing ops (US$) |
0.037 |
0.136 |
(0.292) |
(0.136) |
0.006 |
0.095 |
(0.293) |
N/A |
N/A |
-0.388 |
Diluted EPS from continuing ops (US$) |
0.037 |
0.136 |
(0.292) |
(0.131) |
0.006 |
0.091 |
(0.293) |
N/A |
N/A |
-0.384 |
Basic EPS (US$) |
(0.142) |
(0.156) |
(1.167) |
(0.136) |
0.006 |
0.095 |
(0.293) |
N/A |
N/A |
-0.388 |
Diluted EPS (US$) |
(0.142) |
(0.155) |
(1.165) |
(0.131) |
0.006 |
0.091 |
(0.293) |
N/A |
N/A |
-0.384 |
Norm. basic EPS from continuing ops (US$) |
(0.064) |
(0.094) |
(0.142) |
(0.146) |
0.113 |
0.108 |
0.158 |
39.8 |
46.3 |
0.05 |
Norm. diluted EPS from continuing ops (US$) |
(0.064) |
(0.094) |
(0.141) |
(0.141) |
0.113 |
0.104 |
0.158 |
39.8 |
51.9 |
0.054 |
Adj net earnings attributable (US$000s) |
9,189 |
(1,408) |
16,271 |
(4,910) |
8,519 |
14,227 |
33,155 |
289.2 |
133.0 |
18,928 |
Adj net EPS from continuing ops (US$) |
0.085 |
(0.013) |
0.151 |
(0.045) |
0.078 |
0.129 |
0.302 |
287.2 |
134.1 |
0.173 |
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 above those that would naturally be expected, given the realities of Endeavour’s commercial circumstances. On an underlying basis however, the marginal current income tax rate was more in line, equating to 33.8% of underlying pre-tax profits (compared to 17.5–25.0% for those of Endeavour’s individual operations), while the underlying minority charge equated to 24.1% of underlying profits after tax (compared to 10–15% for those of Endeavour’s individual operations) – albeit it is noticeable that both of these numbers have always exhibited considerable volatility, historically, on a quarterly basis.
Gains/(losses) on financial instruments
The largest single variance between Edison’s Q319 forecasts and actual results related to losses on financial instruments. Edison had forecast a loss of US$1,445k compared to an actual figure of US$49,528k. However, whereas Edison’s forecast was based on the anticipated loss on the realisation of contracts relating to its gold revenue protection strategy during the quarter, the actual loss reflected a number of other items, which are summarised below:
Exhibit 2: Endeavour Q3 gain/(loss) on financial instruments
Item |
Amount (US$000s) |
Percent of total (%) |
Gain/(loss) on other financial instruments |
(1,307) |
2.6 |
Change in value of receivable relating to sales of Tabakoto and Nzema to reflect increasing uncertainty |
(22,389) |
45.2 |
Gain/(loss) on gold revenue protection programme |
(8,138) |
16.4 |
Unrealised gain/(loss) on convertible senior bond derivative |
(14,168) |
28.6 |
Gain/(loss) on foreign exchange |
(3,526) |
7.1 |
Total gain/(loss) on financial instruments |
(49,528) |
100.0 |
Source: Endeavour Mining. Note: Totals may not add up owing to rounding.
In addition to the additional four items, in the third quarter, of the US$8,138k charge relating to the gold revenue protection programme, only US$1,633k related to realised losses (ie tolerably close to Edison’s forecast of US$1,445k) with the balance relating to unrealised losses for the balance of the programme:
Exhibit 3: Gain/loss on gold revenue protection programme
|
Amount (US$000s) |
Percent of total (%) |
Realised gain/(loss) on gold revenue protection strategy programme |
(1,633) |
20.1 |
Unrealised gain/(loss) on gold price protection strategy |
(6,505) |
79.9 |
Gain/(loss) on gold revenue protection programme |
(8,138) |
100.0 |
Source: Endeavour Mining.
Note that the charges relating to realised and unrealised gains/(losses) on the gold revenue protection programme relate to the short-term strategy put in place by Endeavour in order to maximise cash-flow certainty during its debt reimbursement phase. Similar to the strategy it put in place during its recent construction phases, this comprises a deferred premium collar strategy using written (sold) call options and bought put options to (effectively) create a synthetic short position. The programme began on 1 July 2019 and will end on 30 June 2020 and covers a total of 360,000oz (approximately 50% of Endeavour’s total estimated production over the period), with a floor price of US$1,358/oz and a ceiling price of US$1,500/oz. Now that the gold price has reverted below US$1,500/oz however (and is close to our forecast of US$1,474/oz for the quarter) the bought put option contracts will be ‘out of the money’ and therefore has the potential to result in reversals of these losses in future quarters (all other things being equal).
Note also that, in recognition of the change in value of the Tabakoto and Nzema receivables (Exhibit 2), we have removed an assumed cash inflow of US$10m from our cash-flow forecasts for FY19 in Exhibit 9.