ENDEAVOUR Mining opened the door to more portfolio restructuring today, saying its 100,000 ounce per year Karma mine in Burkina Faso would not remain long in the group if it failed to improve its shareholder return.
Asked during the firm’s fourth quarter and full-year results presentation how long underperforming mines would be allowed to stay in the group, Sébastien de Montessus, the CEO of Endeavour Mining said: “The answer is: not long.
“We want to be focusing on assets that bring the return we are expecting. If they don’t perform, they don’t fit in our portfolio. Karma is on the spot unfortunately, and unless the gold price, improves Karma will become non-core”. Endeavour has sold two mines in the past two years: Tabakoto in Mali and its Ghana mine, Nzema.
Endeavour for the first time published mine-by-mine details of return on capital employed (ROCE) which compares capital invested in the business against pre-tax earnings level. The company has a target of +20% ROCE against which Karma produced negative ROCE of 10% last year. Other mines in the portfolio: Agbaou, Ity CIL and Houndé reported +32%, +27% and +14% ROCE respectively. Group ROCE for the 2019 was about 10%.
Endeavour posted adjusted full year share earnings of 0.67 US cents for the 2019 financial year representing a one-third increase year-on-year. This was on the back of slightly higher production – of some 651,000 ounces (2018: 612,000 oz) – and a $140/oz year-on-year increase in the realised gold price to $1,366/oz, offset by a 10% increase in all sustaining costs (AISC) which came in at $818/oz.
Perhaps most importantly for Endeavour, however, was that the firm turned cash flow positive in the third quarter to the tune of $52m which it then extended another $80m in the fourth quarter. It consequently cut debt from $660m at the close of the second quarter to $528/oz as of December 31 – equal to a net debt:EBITDA of 1.48x. De Montessus said the aim was to get the ratio down to 1x by the close of 2020.
The company has guided to production of between 680,000 and 740,000 oz in 2020 at an AISC of $845-895/oz. De Montessus said investors could expect the firm to register gold production at the higher end of guidance provided the Burkina Faso government authorised its Kari Pump extension at Houndé as it expected in the second quarter.
The advent of positive cash flow, and consequent net debt reduction, would remove at least one share overhang which had for several years seen Endeavour’s stock trade in line with the index, said De Montessus. “Today we believe that risk is largely eliminated.
“Mine life has been another risk but we will deal with that as we get mine lives to 10 years whilst merger and acquisition (M&A) risk is another (share overhang) although we have shown discipline with Centamin,” he said.
Endeavour said in December it had twice suggested an all-share merger with Centamin, which mines in Egypt – only for the invitations to be rebuffed by the UK-headquartered company. Endeavour decided it would not pursue a hostile takeover which De Montessus said was indicative of its restraint. Similarly, the firm called off a merger with Acacia Resources, taken over by Barrick Gold last year, in 2017 – perhaps the wisest piece of gold industry corporate back-tracking of the last decade.
“Given the portfolio and options in our cash flow from 2020, mergers and acquisitions are not a priority; we are rather than opportunistic,” he said. “When we look at M&A, we try not to do crazy things … A lot is happening in the market.”
One potential re-rating catalyst will be the declaration of a dividend policy. Endeavour has long stated payouts as an aspiration, but De Montessus has been more evasive lately, especially on its timing as the reality of it happening drew closer.
He stated today: “We have been saying over the last few months that the key challenge was to demonstrate cash flow generation.
“We need to do that in Q1 and Q2, and that would show 12-months rolling (positive cash flow) which would put in place a dividend declaration and so we are on course for a July board meeting. That is on our minds.”
Shares in the company was down 5.5% on the Toronto Stock Exchange where it is principally listed. On a 12- month basis, the share is 5.9% higher and is currently capitalised at C$2.46bn (US$1.82bn).
