Investors Guru Small Cap Stock Observer - Thu, Aug 25, 2011
(TSX: EDV) Endeavour Mining - Two West African Gold Producers Merge
Synergy: "Two or more things functioning together to produce a result not independently obtainable".
On August 22, 2011 Endeavour Mining (TSX: EDV) and Adamus Resources (ASX: ADU)(TSXV: ADU) announced their intention to merge into a growth-focused West African gold producer with combined 2011 production of 172,000 ounces.
Within hours, Endeavour stock price had risen 5% and Adamus was up 8%.
Over the last 12 months both companies have been trading at significant P/NAV discounts to their peers. A balance sheet analysis reveals the perfect synergy of this deal.
Amidst skyrocketing gold prices, Endeavour - who owns the Youga gold mine in Burkina Faso and a number of advanced exploration projects in West Africa - appeared to be an all-good news story.
Q2, 2011 gold production increased to 21,575 ounces from 20,292 ounces in the same quarter of 2010. Gold revenues increased to $36.0 million from $20.8 million in the same quarter of 2010.
Operating cash flow from mine operations was $13.3 million compared to $6.7 million in the same quarter of 2010. Earnings from mine operations were $14.9 million compared to $7.2 million in the same quarter of 2010.
Based on actual production results of 41,631 ounces at a cash cost of $608 per ounce produced for the first half of 2011, EDV anticipates achieving full year guidance of 84,000 ounces.
And yet, according to a Canaccord Genuity report, EDV is trading at "62% discount to the junior producer average."
Endeavour has $175 million cash on its balance sheet!
As one financial observer commented, "A $250 million market cap producer with $175 million cash is a bank - not a gold company."
So Endeavour needed to find a gold producer - preferably in West Africa - with a stressed balance sheet.
Enter Adamus, which began commercial production in April at the Nzema gold project in Ghana. Projected 2011 production at Nzema is 88,000 ounces, at a cash cost of $550 - $600.
But Adamus is also trading at a discount to its peers because of a $60 million project debt and a significant gold hedgebook (275,887 ozs at US$1,075).
So Endeavour and Adamus fit together like the last two pieces of a jigsaw puzzle.
Adamus has a strong technical team which just completed construction of the Nzema mine in Ghana on time and on budget. This technical experience will be used to begin construction at Agbaou in 2012.
The new entity will have about 250,000 oz. gold production a year by the end of 2013 (including Agbaou). Cash costs from the Youga and Nzema gold mines in 2011 are estimated at $575 - $625.
- Strong cash generation from two operating mines
- Immediate ability to eliminate Nzema project debt and reduce gold hedge
- Enhanced development team for Agbaou
- Financial strength and significant "free-cash" balances for future growth and acquisitions
- Significant near-term market re-rating potential
- Enhanced liquidity from blending active TSX and ASX listings
- Enhanced capital markets profile with potential for increased analyst coverage and institutional ownership
- Increased leverage to gold price through de-hedging
- Combined Company is a solid platform for future growth with substantial financial strength
- Ability to continue funding Endeavour exploration and ramp-up Adamus' exploration
- Increased scale will broaden acquisition universe
- Gold production expected to be approx. 250,000 ounces/year by end of 2013
- Strategic goal to double this gold production rate by end of 2013 from acquisitions
In October 2009, as Endeavour (TSX: EDV) transitioned from a merchant bank into a gold miner, CEO Neil Woodyer stated: "We believe in long-term rising gold prices".
With the spot price of gold surging from $780 to $1,750 since then, Mr. Woodyer's assessment has been affirmed.
Endeavour Mining's deal-making DNA morphed to meet the new challenges of increasing production and reducing costs at West African gold mines.
But with too much cash on the balance sheet, the market has been waiting for Endeavour to acquire a new producing asset.
Patience has been rewarded.
The merger of Endeavour Mining and Adamus creates an emerging mid-tier gold producer with the combined technical and financial teams to grow organically and through acquisition.
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