Rising West African Royalties And Assafou Execution Risks Will Pressure Long Term Prospects

Catalysts

About Endeavour Mining

Endeavour Mining is a West Africa focused gold producer developing and operating open pit and underground mines alongside a growing project and exploration pipeline.

What are the underlying business or industry changes driving this perspective?

• The multiyear build of the Assafou project in Côte d’Ivoire exposes Endeavour to execution slippage, permitting delays on the exploitation permit and potential cost escalation in a tight construction and contractor market. These factors could compress future returns on invested capital and delay earnings growth.
• Governments across West Africa, including Côte d’Ivoire and Senegal, are openly pursuing higher mining royalties and tax takes. This raises the risk of structurally higher government charges that could erode the company’s first quartile cost position and reduce net margins over the long term.
• Rising reliance on high grade stockpiles and brownfield discoveries to sustain output at Sabodala-Massawa, Houndé and Ity increases operational and geological risk. Any disappointment in resource conversion or underground potential could cap production and pressure revenue beyond 2026.
• Persistently elevated VAT receivables in Burkina Faso and administrative delays in Côte d’Ivoire point to ongoing working capital friction. This may continue to tie up cash, limit the flexibility to fund growth internally and constrain free cash flow available for dividends and buybacks.
• Expanding into new jurisdictions such as Kazakhstan via joint ventures introduces geopolitical, regulatory and technical complexity in unfamiliar operating environments. Exploration failure or slower than expected progress could dilute returns and weigh on earnings growth relative to current expectations.

Assumptions

This narrative explores a more pessimistic perspective on Endeavour Mining compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Endeavour Mining's revenue will decrease by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.6% today to 18.1% in 3 years time.
• The bearish analysts expect earnings to reach $603.0 million (and earnings per share of $7.08) by about December 2028, up from $492.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $3.0 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, down from 23.5x today. This future PE is lower than the current PE for the CA Metals and Mining industry at 21.5x.
• The bearish analysts expect the number of shares outstanding to decline by 1.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.27%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is delivering sector leading organic growth from existing assets, with year to date production up 23% to 911,000 ounces and a strong Q4 outlook, which, if sustained, could support higher long term revenue and earnings than implied by a declining share price view.
• All in sustaining costs remain firmly in the first cost quartile despite royalty inflation from higher gold prices, and initiatives like solar power at Sabodala-Massawa and grid power optimization at Mana may structurally protect or expand margins over time, underpinning resilient net margins.
• A deep and growing organic growth pipeline led by the Tier 1 Assafou project, plus multiple brownfield and greenfield programs in highly prospective gold provinces, creates potential for extended mine lives and new projects that could lift long run production, revenue and free cash flow.
• Strong free cash flow generation, equivalent to a 19% free cash flow yield over the last 12 months and record adjusted EBITDA with a 55% margin, combined with low leverage and reduced gross debt, provides balance sheet strength that can support continued shareholder returns and reinvestment, limiting downside risk to earnings and cash returns.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Endeavour Mining is CA$50.76, which represents up to two standard deviations below the consensus price target of CA$75.69. This valuation is based on what can be assumed as the expectations of Endeavour Mining's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$88.0, and the most bearish reporting a price target of just CA$37.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $3.3 billion, earnings will come to $603.0 million, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of CA$65.97, the analyst price target of CA$50.76 is 30.0% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.