Endeavour posts mixed Q1

Endeavour Mining (TSX: EDV) eked out a small profit in the first quarter as it increased gold production and lowered all-in sustaining costs, but missed analysts’ expectations.

Net earnings for the first quarter fell to US$1 million, or US2¢ per share, compared to last year’s US$9 million, or US22¢ per share. Endeavour attributes the drop to the acquisition cost for True Gold’s Karma gold mine in Burkina Faso, as well as higher operating and corporate costs associated with the first full quarter of operating the Ity mine in Côte d’Ivoire. Endeavour completed the True Gold takeover in late April.

“The first quarter of 2016 has been a pretty good start for us — a start to a busy and quite exciting year,” the company’s CEO Neil Woodyer said on a conference call.

Adjusted earnings, however, fell 81% from the year earlier to US5¢ per share, missing analysts’ average US21¢ estimate.

BMO analyst Andrew Breichmanas attributes the earnings miss to lower-than-expected production.

Endeavour’s five West African gold mines — Agbaou, Tabakoto, Nzema, Ity and Youga — churned out 131,567 oz., up 6% from the year earlier, but below Breichmanas’ 149,000 oz. estimate.

Despite the lower output, the analyst highlights the company’s “impressive cost reductions.”

Endeavour drove down all-in sustaining costs to US$900 per oz., compared to US$946 per oz. a year ago.

The decrease came from adding the low-cost Ity mine and cost reductions at the Agbaou and Tabakoto mines in Côte d’Ivoire and Mali. “Agbaou did achieve a record [US$525 per oz.] all-in sustaining cost low for the quarter, mainly due to the renegotiation of our mining contract rates and following the optimization of a mine plan,” Woodyer said.

All-in sustaining costs for its operations — which excludes the Youga mine — averaged US$889 per oz. gold. Earlier this year, Endeavour sold the non-core Youga mine in Burkina Faso for US$20 million.

Endeavour made US$28 million in free cash flow in the quarter (before working capital, tax and financing costs), which is up US$3 million from the same period last year. “Our guidance for the year is 90. So we are very much on track to achieve that,” Woodyer said.

“The second quarter is particularly important for us,” he added, explaining that the company is integrating the Karma mine and ramping it up to commercial production in June. Construction at its Houndé gold project in Burkina Faso also kicked off in the quarter.

First production at Houndé should start in late 2017. Once it does, Houndé will become the company’s flagship low-cost mine. Based on current reserves, it has a 10-year life, and during the first four years should produce 235,000 oz. a year at all-in sustaining costs of US$610 per oz. gold.

“With the addition of Houndé and Karma to our portfolio, we’re on a clear path to delivering our objectives as a group to improve the quality of our assets. We should increase the group’s production to 900,000 oz. a year, and at the same time lower our average all-in sustaining cost to below $800 by the end of 2018,” Woodyer said.

The company expects to update its 2016 guidance at the end of July to include the Karma mine. Its full-year forecast includes 535,000 to 560,000 oz. gold at all-in sustaining costs of US$870 to US$920 per oz. gold.

“With Karma now ramping up production and Endeavour moving forward with Houndé’s construction, we view the company as an aggressive growth story, with an improving cost profile and balance sheet, coupled with attractive valuation,” Raymond James analyst Chris Thompson writes. He has a “strong buy” and a $20 target on the stock.

BMO’s Breichmanas has a $17.50 target and “outperform” rating.

Endeavour ended the first quarter with a net debt of US$136 million, down from US$256 million a year ago. Its cash balance was US$182 million.