Endeavour to grow in West Africa with True Gold offer

VANCOUVER — Endeavour Mining (TSX: EDV; US-OTC: EDVMF) CEO Neil Woodyer describes his growth strategy as “buy and build,” and his company is doing a bit of both this year.

On March 4 Endeavour tabled a friendly $226-million offer for True Gold Mining (TSXV: TGM), which is approaching a first gold pour at its Karma heap-leach gold operation, 185 km northwest of Burkina Faso’s capital of Ouagadougou. Meanwhile, Endeavour is looking to start construction at its fully permitted Houndé mine in Burkina later this year.

Under the deal, True Gold investors will receive 0.044 of an Endeavour share, which values the target company at 57¢ per share. The offer represents a 32.7% premium based on True Gold’s 20-day, volume-weighted average trading price.

Endeavour will also provide a US$15-million convertible bridge loan to cover any financing gaps as Karma moves toward production. True Gold has drawn US$105 million of a US$120-million streaming facility with Franco-Nevada (TSX: FNV; NYSE: FNV) and Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND). The bridge allows the companies to avoid further gold streaming.

Karma hosts probable reserves of 33.2 million tonnes grading 0.89 gram gold per tonne for 949,000 contained oz. Indicated resources at the project total 75.2 million tonnes of 1.08 grams gold for 2.6 million oz. The acquisition would increase Endeavour’s forecast gold production by between 110,000 and 120,000 oz. annually at all-in sustaining costs of US$700 per oz. over the first five years. Current mine life at Karma is pegged at 8.5 years, based on reserves.

“This deal creates a much stronger company all around,” True Gold chairman Mark O’Dea said during a conference call. “It offers an attractive premium, and what’s most exciting is that our shareholders become a meaningful part of a leading, intermediate gold producer. We maintain exposure to Karma, and gain exposure to Endeavour’s diverse and growing portfolio. The upside here is tremendous, and I’d point out that together we’ll hold one of the largest exploration portfolios in West Africa.”

Karma consists of six contiguous exploration permits (Goulagou, Rambo, Kao, Rounga, Youba and Tougou) totalling over 856 sq. km, and includes more than 45 “high-priority targets,” with high-grade rock values associated with untested gold-in-soil anomalies and historical workings.

Endeavour owns five mines in Côte d’Ivoire, Ghana, Mali and Burkina Faso, and could  produce between 575,000 and 600,000 oz. this year at all-in sustaining costs ranging from US$870 to US$920 per oz. The company could add 190,000 oz. per year by developing the fully funded Houndé project.

Endeavour produced 517,000 oz. in 2015 at all-in sustaining costs of US$922 per oz. The company generated after-tax free cash flows of US$34 million and finished the year with a US$110-million cash balance after lowering its debt 43%, or US$60 million. Adjusted net earnings jumped 191% year-on-year to US$42 million, or 99¢ per share.

The company may make a production decision at Houndé next quarter.

The mine would cost US$325 million to build, and exploit proven and probable reserves of 30.6 million tonnes of 2.1 grams gold for 2.1 million contained oz.

The processing plant would consist of a 3-million-tonne-per-year primary crushing and milling circuit to feed a gravity and carbon-in-leach plant.

“This deal continues our successful ‘buy and build’ strategy focused on acquiring low-cost production,” Woodyer said. “It will extend our mine life and increase our production, while lowering our all-in sustaining cash costs and boosting our cash flows. It also, very significantly, enhances our financing plans to accelerate the construction of Houndé. As a result of the transaction we’ll have a strong liquidity position and improved net debt position. In addition, this will help us focus on our promising exploration packages and unlock some of the potential we have there.”

Endeavour shares have traded in a 52-week range of $4.35 and $13.02, and closed at $11.32 per share at press time. The company has 59 million shares outstanding for a $669-million market capitalization.

On a pro-forma basis, True Gold shareholders would hold a 20.9% stake in the combined company, which would have 84 million shares outstanding and a market capitalization of just over $1 billion.

“With the proposed transaction value generally in line with our modelled value for Karma, we are moving our rating to ‘tender,’” Scotibank analyst Ovais Habib said. “The combined company is expected to have greater liquidity, greater access to capital and a stronger balance sheet, and attract a wider investor audience.”