Endeavour’s organic-growth model off to strong start

Endeavour Mining (EDV-T) has ambitions of being a mid-tier gold outfit. With two West African mines already in  production, a third moving towards feasibility and a US$30-million exploration program scheduled for 2012, it appears the company is well on its way. 

Endeavour started as an investment firm with stakes in a variety of junior mining outfits, but the company saw potential in the equity multiples that are afforded multi-mine gold operators. 

Endeavour has since acquired two financially struggling junior mining firms with advanced-stage gold assets in West Africa, and saw the assets through to commercial production. 

The Youga gold mine, 180 km southeast of Ouagadougou in Burkina Faso, was acquired when Endeavour took over cash-strapped Etruscan Resources in 2009. Youga exceeded its 2011 guidance by 3,000 oz. gold, with annual production totalling 87,265 oz. at average cash costs of US$644 per oz. The mine produced operating cash flows of US$53.9 million and has a projected seven-year life.

Endeavour’s second producing gold mine is Nzema, located 280 km west of Accra, Ghana’s capital city. Nzema was acquired when Endeavour merged with Adamus Resources late last year, and the mine began full-scale production in April 2011. The open-pit operation has a 10-year mine life and produced 90,026 oz. gold last year at cash costs of US$585 per oz., resulting in cash flows totalling US$36.9 million. 

The two mines are expected to cost Endeavour just US$23 million in capital expenditures (capex) this year, leaving a significant amount of cash flow available for the development of a third mine — the Agbaou gold project 200 km northwest of the port city of Abidjan in Côte d’Ivoire, as well as the completion of an US$30-million West African exploration program.

Endeavour projects 170,000 oz. gold production in 2012 at average cash costs between US$650 and US$680 per oz., which would generate US$150 million in free cash flows at a US$1,600-per-oz. gold price.

 “That’s very strong for us, because it means we can pay the capex we discussed at Youga and Nzema,” CEO Neil Woodyer says during a phone interview. “We can pay for the exploration plan we spoke of, we can pay corporate overheads and taxes, and we’ll have enough left over after this year and next year to build our third mine in Agbaou. And that’s a great organic growth model.”

Woodyer formerly ran Lloyds Banking Group’s (LYG-N) gold operations, and his investment and commodities background gives him a solid grasp of multi-mine gold production and valuation.

“We need to achieve that credibility in the market place. We met our guidance last year from Endeavour, Nzema was built on schedule and we produced what we said we would produce in the end,” Woodyer explains. “We need to build up that confidence in the market that we can actually perform — meet our guidances, and run them as stable operating units.”

Endeavour has divested itself from previous roles as a capital markets advisor and financier, with company operations focused on streamlining and expanding its West African gold operations. 

“One of the important things is that in this short period of time, we put the new management structure into place,” Woodyer says. “It combines the operational-construction strength of Adamus with the financial strength of Endeavour.  We’ve set up a West African operations team based in Accra, and we now have a mine-building team based in Abidjan.”

The 2012 exploration program earmarks US$19 million towards expanding the reserves at Youga and Nzema, with US$8 million to be spent at Nzema, and US$11 million at Youga. Endeavour extended Youga’s mine life by two years in 2011 when it expanded reserves by 49%, or 180,000 oz. gold. 

Endeavour has 19 targets lined up at Youga.

“They are all within around 3.5 km of the mine, so we’re looking to see an improvement in grade and extension of mine life there over the remainder of the year,”  Woodyer explains.

At Nzema, Endeavour is looking at sulphide mineralization below the oxides. It carried out some drilling and cement work on the sulphides last year, which led to a program of about US$5 million this year. 

“We’re just putting that together to see how we can get to a preliminary economic assessment on the sulphides by the end of the year,” Woodyer says.

Nzema’s reserves total 14 million tonnes grading 2 grams per tonne gold for 964,000 contained oz. gold, while Youga holds 4.6 million tonnes carrying 2.1 grams gold for 317,000 contained oz. gold. 

At Agbaou in Côte d’Ivoire, Endeavour is tendering an engineering, procurement and construction management contract.  Agbaou has reserves of 10.9 million tonnes grading 2.1 grams gold for 732,000 contained oz. gold, and a projected seven-year mine life.

The company is hoping to keep capex costs around US$130 million, and initial projections have annual production at 100,000 oz. gold at cash costs of US$650 per oz. Endeavour’s mining plan includes a carbon-in-leach plant scaled to throughput levels of 1.6 million tonnes per annum, with test-work recovery rates at 92%. 

 “When we took over the project around eighteen months ago, we had to redo the feasibility study. We wanted to make sure we had the right project, and the right costs, and everything else,” Woodyer explains. “We also wanted to make sure some of the infill drilling — which our predecessors did not have the cash to do — was finished off. So we did that program, and we’ve pretty much completed it. The infill drilling has come out quite well in terms of grade, and even some of the condemnation drilling came up with results that forced us to relocate the plant.”

Endeavour is initiating permit and environmental reviews with the Côte d’Ivoire government. The company’s experience as a West African operator should help, and the country’s current president, Alassane Ouattara, is a former executive at the International Monetary Fund who is reportedly committed to attracting international investment to promote the nation’s development. 

Agbaou is expected to be in production by early 2014. Endeavour will spend US$6 million on drilling aimed at expanding the mine’s reserves during 2012, with an updated resource estimate scheduled for June. 

“We do think there are more reserves we should be able to add well before the mine is complete,” Woodyer says. “The mine plan we end up starting with most likely won’t be the mine plan we’re looking at today.”

Endeavour is aiming to produce 250,000 oz. gold per year by the end of 2013, and with West Africa’s third largest land package — totalling 10,000 sq. km — the company has room for growth on the exploration side as well. 

Endeavour has a resource-stage asset at its Ouare property 40 km northeast of Youga, which holds inferred resources of 4.7 million tonnes grading 2.1 grams gold for 323,000 contained oz. gold. Work will continue at Ouare during 2012 with the goal of turning the project into a stand-alone asset by year-end. 

Endeavour is also completing early surface work and US$1 million worth of scout drilling at its 3,000-sq.-km land package in Liberia. The focus is on tenements located near Aureus Mining’s (AUE-T) resource-delineation stage New Liberty gold project.

Endeavour’s US$2.5-million exploration program in Mali was interrupted by a coup d’état, but with hostilities seemingly decreasing, the company’s 10-person exploration team is back to work. 

Despite meeting production expectations, an expansive West African exploration profile and a deep cash pool, Endeavour has been hit by a drop in gold equities. Share prices have fallen 16% since mid-March, from a $2.64 high to a presstime close of $2.17.

“We’re trading at about a 40% give-or-take discount to net asset value,” Woodyer explains. “It’s a bigger discount than we should be trading at, and others are trading at. I think that’s because we’re a relatively new story, recently having two mines up and running and a third on the way.”

Endeavour remains  well-funded, with US$130 million in cash and marketable securities to start the year. The company has US$100 million in credit available, and projected 2012 cash margins of US$150 million.  

“Our priority right now is to get Agbaou into the production line,” Woodyer says. “The other thing is to assure we have the right cost-control mechanisms in place so that we can cover the movement of costs going forward and maintain a good cash flow. After we’ve built up shareholder confidence by doing these things, we should talk about how to look at other assets.”