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Endeavour Mining: A gold business built for the long-haul

A recent acquisition and a home-grown opportunity mean costs are only going one way - down.

Gold pour: Endeavour is producing around 580,000 ounces of the precious metal a year.

What do the Chelsea legend Didier Drogba and Naguib Sawiris, Egypt’s richest man, have in common?

Give up? Okay, it’s the Ity gold mine in the Ivory Coast.

Drogba bought a 5% stake back in 2013, while Sawiris, the founder of Orascom Telecom, became Ity’s main investor when he bought La Mancha Resources in 2012.

Endeavour Mining (TSE:EDV) completed the acquisition of a La Mancha, which has 55% of Ity, in a deal tied up late last month.

The TSX-listed gold digger issued 17.7mln shares to Sawaris, receiving the stake in Ity, cash held by La Mancha worth US$63mln, and a commitment for a further $75mln for future growth. 

It has also brought on board Sawiris as a supportive cornerstone investor with 30% of the firm.

The deal will see La Mancha’s CEO Sebastien de Montessus joining the top team at Endeavour, which operates five mines in four countries in West Africa.

Ity will be one of the main planks of the future development of a mining company that packs a big punch for a mid-cap.

Following the transaction, annual production rate will grow to about 580,000 ounces a year, while Endeavour’s proven and probable reserves sit at 4.8mln ounces, with measured and indicated resources of 8.5mln ounces.

Away from Ity, the other major opportunity to expand organically is offered by the fully permitted Houndé Project in Burkina Faso.

It is scheduled to come into production 18 months after the board pulls the trigger on an estimated US$325mln of capital expenditure, expected in early 2016.

With proven and probable reserves of around 2.1mln ounces of gold, its output is slated to be 190,000 ounces a year over the 10-year life of the operation at an all-in sustaining cost of US$717 an ounce.

That latter figure really does represent the low end of the international cost curve.

Bringing it on-stream would undoubtedly lower yet further the firm’s production cost base, which currently stands at around US$900 an ounce all in – having come down from somewhere closer to US$1,200 in 2012.

It means Endeavour, by burnishing the quality of its assets and cutting costs, is sensibly positioned going forward.

Houndé and its 55% share in Ity will ensure costs will nudge even lower over the next two to three years.

Chief executive Neil Woodyer reckons the business has enough funds internally from its cash flows and US$350mln revolving debt facility to develop Houndé internally.

As for Ity, the asset was mined for the easiest and cheapest-to-extract oxide ore, a step that has been taken to ensure it is supremely economical in this period of subdued gold prices.

There is scope, however, for a much larger operation, which would require the addition of a carbon-in-leach facility.

The team has yet to formally decide how the asset might be developed. In fact, said Woodyer, further exploration may be required to optimise the full potential of Ity.

While Endeavour’s share price has fared quite well given the rather opaque outlook for the gold price, it is fair to say its current valuation really fails to reflect the transformation it has undergone.

It actually still penalises the company for being over-leveraged but it is worth pointing out its debt levels look more conservative since the cash infusion from the La Mancha deal.

Even in today’s pricing environment and during a phase of heavy capital investment, analysts expect the firm to generate around US$100mln of free cash flow.

With capex taps on a low setting next year, Endeavour should be in an even sounder position financially.

Add a supportive cornerstone investor in Sawiris who understands the business and the opportunity shouldn’t be under-estimated.

Remember the billionaire has committed to providing US$75mln of funding if the right opportunity comes along.

“He has done similar things with other investments and is committed to growing the business” said Woodyer.

As the Endeavour boss points out, mines in West Africa, are both cheaper to build and acquire than they might be anywhere else in the world.

And with some operators struggling in the region, there may be opportunities to pick up production, or near production assets.

The biggest boost to the value of the shares would be a sudden, and positive turn in the gold price.

It may be a while before this happens. In the meantime, Woodyer and his team have created a resilient business that can operate comfortably, and generate cash flow with a strong balance sheet, in the current conditions.

“I think the big point about Endeavour is we have done what we said we would do.

“Now we have teamed up with a long-term financial investor who believes in the industry and has a lot of confidence in us to deliver value.”

Quick facts: Endeavour Mining Corp

Price: 33.45 CAD

Market: TSX
Market Cap: $3.71 billion

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