Fitch Ratings has affirmed west-African gold mining company Endeavour Mining plc's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BB'.
The Outlook on the Long-Term IDR is Stable. The Recovery Rating is 'RR4'.
Endeavour's 'BB' Long-Term IDR balances strong financial and business profiles with a weaker operating environment, reflecting the group's focus on west African countries with diversification across Senegal, Burkina Faso and Cote d'Ivoire. The applicable Country Ceiling is Cote d'Ivoire's (BB).
Endeavour's business and financial profile otherwise compares favourably with higher rated peers', with meaningful scale of production (2022: estimated 1.3 million-1.4 million ounces), a favourable cost position, a reserve life of 12 years and a conservative financial policy of maintaining net debt/EBITDA below 0.5x through the cycle.
Key Rating Drivers
Conservative Financial Profile: Fitch forecasts almost USD1.2 billion EBITDA for 2022. Endeavour is now in a net cash position, which Fitch expects to reach more than USD200 million by end-2022. Even though the group is likely to incur negative free cash flow (FCF) in 2023 and 2024 due to expansion projects, our rating case sees funds from operations (FFO) net leverage and net debt/EBITDA remaining at or below 0.2x. Endeavour's financial policy aims for net debt/EBITDA below 0.5x (as per company's definition), even in a lower gold price environment and during construction of new assets.
Clear Capital Allocation Priorities: Endeavour aims to preserve a prudent balance sheet through the cycle before pursuing organic growth with capex based on a minimum of 20% after tax internal rate of return (at a gold price of USD1,300/oz) and discovery costs at or below USD25/oz for exploration activity. Shareholder returns are the next priority as long as leverage remains below target. As a result, distributions could be substantial at high gold prices, but decline materially when gold prices moderate.
Challenging Burkina Faso: In January 2022 a coup d'etat took place in Burkina Faso, with the military putting in place a temporary government with the intent to improve security and new elections are envisaged after a 24-month transition period. In August a convoy was attacked by militants along the access route to the Boungou mine in Eastern Burkina Faso. Endeavour management are engaging with the authorities and the military on a regular basis. The group has been able to operate its assets in the ordinary course of business and meet production guidance so far in 2022, while closely monitoring the security situation to adapt its security protocols over time.
Organic Growth on the Way: Construction of its Sabodala-Massawa extension commenced in April 2022, which will add 135,000 oz of production on average over 10 years (around 195,000 for the first five years of operations) per annum (capex of USD290 million), with first gold production in 1H24. The group is expected to conclude its definitive feasibility study of Lafigue in 3Q22, a greenfield project in Cote D'Ivoire, so that a final investment decision can be made before end-2022.
Diversification is Key: Endeavour operates four mines across Burkina Faso, which would limit the impact of disruptions at one mine on overall earnings. The group has adequate property and business interruption insurance to cover operations in case of an incident at one of the mines. Further, Senegal (Sabodala-Massawa extension) and Cote d'Ivoire (if Lafigue receives the green light) will increase the earnings contributions of those more benign west African countries to above two thirds over the medium term.
Strong Cost Position: Guidance for all-in-sustaining costs (AISC) of USD880-USD930/oz in 2022 firmly places Endeavour's portfolio in the second quartile of the global cost curve. This is confirmed by CRU data for 2022, with Sabodala-Massawa in the first quartile, Ity, Hounde and Mana in the second quartile, Boungou and Wahgnion in the third quartile. CRU expects Sabodala-Massawa to further improve cost performance in 2023 and beyond, as volumes increase once the capacity extension is complete. As this asset contributes almost one third of production it will support profitability for the long term.
Cote d'Ivoire Country Ceiling Applies: While a large proportion of earnings are generated in Senegal and Burkina Faso, we apply Cote d'Ivoire's Country Ceiling (BB) in our analysis as Endeavour's cash flow generated in Cote d'Ivoire covers at least 3x hard-currency gross interest expense (on a forward-looking basis). This is more than the required comfortable coverage at 1x or above under Fitch's Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria.
Derivation Summary
Endeavour has larger scale at 1.3 million-1.4 million oz production guidance for 2022 compared with Yamana Gold Inc. (BBB-/RWP) at 1 million gold-equivalent oz (combined gold and silver production), slightly better cost position (both on average in the second quartile based on AISC) and longer reserve life at 12 years compared with seven years for Yamana. Endeavour also has a more conservative capital structure, but higher country risk. The weak operating environment in west Africa constrains the rating.
Key Assumptions
Gold price in line with Fitch's price deck at USD1,800/oz in 2022, USD1,600/oz in 2023, USD1,400/oz in 2024 and USD1,300/oz in 2025
Gold production of 1.3 million-1.4 million oz in 2022, increasing to 1.6 million oz over the medium term, in line with management guidance
AISC for 2022 in line with management guidance of USD880-USD930/oz and at or below USD930/oz over the medium term
Capex of USD373 million for 2022, USD575 million for 2023, USD525 million for 2024 (2023 and 2024 higher capex linked to expected investment at Fetekro and capacity expansion at Sabodala-Massawa) and then moderating to below USD300 million
Dividends of USD200 million in 2022, with further absolute step-ups in the coming years subject to financial flexibility. Current dividend policy is based on gold prices at or above USD1,500/oz. Endeavour wants to maintain net debt/EBITDA as reported at or below 0.5x even during construction phase
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Additional diversification of geopolitical risks across countries in west Africa together with the majority of FCF from countries with a stronger operating environment
Ability to maintain reserve life above 10 years and AISC in the second quartile
FFO gross leverage below 1.5x on a sustained basis
FFO interest coverage above 9.0x on a sustained basis
EBITDA margin above 40% and positive FCF on a sustained basis
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on Cote d'Ivoire sovereign
EBITDA margin below 30% on a sustained basis
FFO gross leverage above 2.5x (or net leverage above 2.0x) on a sustained basis
FFO interest coverage below 6.5x on a sustained basis
Political risks, labour disputes or other operational disruptions negatively affecting cash flow generation for an extended period
Sustained negative FCF due to dividends or share buybacks
Failure to address major refinancing needs at least nine months in advance
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
As of end-June 2022 Endeavour held USD1.1 billion of cash and USD450 million of (undrawn) revolving credit facility commitments available until September 2025. Near-term maturities include a USD330 million convertible bond due in February 2023 and the deferred purchase consideration of USD50 million (assuming average gold price between March 2020 and March 2023 is above USD1,600 per oz) payable in March 2023 linked to the Massawa acquisition.
Even though Endeavour may incur negative FCF in 2023 and 2024 due to the Sabodala-Massawa extension and Lafigue development projects, it is funded beyond 2024 under Fitch's conservative gold price assumptions.
Summary of Financial Adjustments
For December 2021
Leases of USD51.2 million excluded from the debt amount. Right-of-use asset depreciation of USD13.1 million and interest for leasing contracts of USD1.2 million treated as operating expenditure, reducing EBITDA
Deferred financing fees of USD7.2 million not deducted from gross debt
The USD500 million senior unsecured bond reflected at face value, disregarding the issue premium. Under Fitch's criteria the debt should reflect the amount payable on maturity
The USD330 million convertible notes included within gross debt at a value of USD364.6 million, including the option value and disregarding the issue premium. The company will settle the USD300 million nominal amount in cash and any applicable option premium in equity.
The USD48.2 million contingent, deferred purchase consideration payable to Barrick Gold Corporation in March 2023 linked to the acquisition of Massawa (Jersey) Limited by Teranga added to the debt quantum
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
ENDEAVOUR MINING PLC 
