Scandal left this stock looking cheap – now it's ready to recover

Endeavour says Sébastien de Montessus redirected almost $21mn meant for the company to outside bank accounts. The money allegedly ended up at a United Arab Emirates company that has since been dissolved. De Montessus, adamant that he did not benefit personally, said he used the funds to pay invoices. 

The former boss was stripped of his $10mn bonus from 2021 (which made him the best-paid FTSE 100 executive) and another $1.5mn payout from 2022. However, this was offset against previously vested share awards, so the ‘clawback’ was $2.7mn. It looks like Endeavour has decided to park the matter without attempting to recover more of the money. 

This is no bad thing from an investor perspective, as it means the company can finally turn its back on an embarrassing scandal. The situation is far more stable now. Industry veteran Ian Cockerill is in place as chief executive and the shares have largely been climbing alongside the gold price since, meaning Endeavour re-entered the FTSE 100 last week. A new mine and $290mn processing plant have also opened in the past three months. 

There could be further hiccups as these facilities are ramped up, but they are not the only gold mines Endeavour has, limiting the risks to 2024 guidance. This is currently set at production of 1.1mn oz of gold at an all-in sustaining cost of around $1,000 an oz. 

All-in sustaining costs reflect how much miners must spend in total to dig up one ounce of gold. Endeavour’s cost base is very low compared with those of its peers, especially those of a similar scale. Barrick Gold (CA:ABX) sits at around $1,400 an oz, Centamin is $1,200-$1,350 an oz and fellow West Africa-focused miner AngloGold Ashanti (US:AU) has guided for over $1,500 an oz this year. 

Its relatively lean model means Endeavour will generate plenty of cash, especially given the current price of bullion. In the words of Cockerill, the miner will now “begin a new phase of increased free cash flow generation, de-levering and enhanced shareholder returns”.

The valuation does not reflect this higher production and payout outlook, with Endeavour and Centamin trading on forward price/earnings multiples of under 10 times compared with Barrick at 13 times and industry favourite Agnico Eagle (CA:AEM) at over 20 times. The average for the sector outside the majors is around 15 times, judging by the VanEck Junior Gold Miners ETF (GDXJ), which also holds Endeavour. 

New blood

Endeavour is at the back-end of an acquisition cycle, having expanded its portfolio massively during the pandemic through the buyouts of Semafo and Teranga Gold. The company’s debt load was very high for a moment after these deals but cash flow quickly reversed this. 

Borrowings are climbing again, with Endeavour moving from net cash of $121mn in December 2022 to net debt of $555mn in December 2023. This is a result of the two new mine builds: Lafigué in Côte d’Ivoire and the expansion of Sabodala-Massawa in Senegal. Debt should come down swiftly thanks to the elevated gold price, though. Analysts expect net debt to peak at $635mn at the end of 2024, before flipping to net cash of $108mn by the end of 2025. 

It's important to remember that building a gold mine is a different proposition to building an industrial mine. Exported bricks of gold, as opposed to copper or iron ore, are measured in kilograms rather than in thousands or millions of tonnes. Access to roads and power is important for the mine to keep running, clearly, but operators do not need to plough billions into railway lines or port infrastructure. 

Endeavour, therefore, with its West Africa focus, can explore cheaply and then get a mine into production quickly. Lafigué went from discovery to first gold in eight years.

In West Africa, it also matters where mines are based. Côte d’Ivoire is an easier place to operate in than neighbours Mali and Burkina Faso, for example. Endeavour’s recent expansion has been in Côte d’Ivoire and Senegal, and it sold two of its Burkina Faso operations last year. A strong gold price should support further exploration spending and development. 

Indeed, Stifel analyst Andrew Breichmanas said the success of Lafigué "appears to be repeatable" with another deposit in Côte d’Ivoire identified as a source of organic growth. 

Given the asset sales in Burkina Faso, production will not shoot up with the new operations. Stifel forecasts output of 1.4mn oz in 2025, an increase of 30 per cent on 2023, but below the company’s peak of 1.5mn oz in 2021 after the pandemic dealmaking. 

The mines should be more profitable, however. There was a $233mn free cash outflow last year, but this is expected to flip to $1bn in free cash flow next year, as per Stifel’s forecasts. This is double the figure achieved in 2021 when the company was producing more gold, thanks to the cheaper operations and higher prices. Higher shareholder returns could well be on the way. 

Looking ahead

The portfolio has a healthy outlook, with multiple mines that have over 10 years of gold reserves. This includes older mines such as Ity in Côte d'Ivoire, first in production in 1991, and Houndé in Burkina Faso, which Endeavour built and brought to production in 2017 and has a mine life of 12 years. Often open-pit mines like these can stay productive through a shift underground, which Endeavour is doing with the Mana operation in Burkina Faso.

But miners have to look well into the future, especially with an M&A market that has made new assets extremely expensive. 

The next major operation will be Assafou in Côte d’Ivoire. A preliminary feasibility study will be done at the end of the year, but the resource (a less certain estimate of gold ores underground than reserves) is already bigger than Lafigué, at over 4mn oz versus 3mn oz. This could point to a more sizeable bill than the $450mn spent on Lafigué. 

But another big mine in the country will further lower Endeavour’s risk profile. Burkina Faso is governed by a military junta which has allied itself with Russia, and mining workers have previously been targeted by terrorists – in 2019, 39 workers were murdered on their way to the Boungou mine then owned by Semafo, and in 2022 six people travelling to Boungou were killed. 

Endeavour has now sold that operation to a local company. The new owner has not been able to keep Boungou running, however, so it is unlikely Endeavour will receive much more than the $34mn already handed over, even with arbitration now taking place. In any case, the shift to easier jurisdictions is part of a virtuous circle. 

The best bet would be to buy now before the payout goes up and more of the market cottons on to where this company is going.