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Africa's new gold titan lands in London

West Africa-focused Endeavour Mining will become the largest pure play gold company quoted on the London Stock Exchange when it lists on June 14. Mining Journal caught up with CEO Sébastien de Montessus to discuss the rationale for the listing, comparisons with Randgold Resources and what investors can expect to see from the miner over the coming months after an M&A heavy 2020.
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Endeavour Mining's CEO Sébastien de Montessus

Mining Journal: Why London?

Sébastien de Montessus: I think we've been pretty happy with our Toronto listing, but by adding a new listing like London we believe we will gain access to a new base of globally-minded investors and also a different pool of capital as we continue to grow. Clearly, all the generalist funds are in London; the management team [of Endeavour] is based in London; and we believe also that there is a pretty strong understanding on the London market about mining and in particular mining in Africa, probably more than in North America. For us the options, given where our peers are listed, was either New York or London, and obviously it felt pretty natural for us to land in London, given where our asset base is, and given fund management is based in London. And the other thing I guess is we felt like there was a bit of a gap in the market after Randgold was merged into Barrick and left the London stock exchange. Randgold had a similar portfolio in the same region and I guess that being able to be the largest pure gold producer on the premium segment is probably attractive for shareholders.

MJ: To what extent did you use Randgold as a template and how much have you leant on Mark Bristow for advice along the way?

SdM: We never intended to duplicate or replicate Randgold. I think it's more the philosophy behind probably the personalities, which are quite similar, with the same passion for Africa. I learned how to walk in West Africa, and then grew up in Cape Town, so I've always been pretty attached to Africa. And given how blessed we are in the Western world, I always had a desire to support the growth of West Africa and give opportunities for a lot of youngsters there to be successful. And I think that we probably share with Mark this passion of having impactful investment; so being able to do something beyond our business, which is giving opportunities for our host countries and people in Africa to develop and access their full potential. Then I think obviously there are some comparisons because we've been operating in the same region, and I think it's not by chance that today West Africa is the second largest gold producing region in the world. So bigger than the US, bigger than Canada, bigger than Australia, and it's also been for the last 10 years the largest region for discovery. There has been more than 80 million ounces discovered over the last 10 years, far beyond all the big countries that I mentioned before, so it's a very attractive area for gold discoveries, and it's Africa. I think Randgold was about about 1.2-1.3 Moz in terms of production; We're going to be about 1.5Moz - so we were a similar size, and operating in the same region with the same passion about developing Africa, so that's probably the relationship.

In terms of Mark himself I've always respected Mark for what he's done; not just for Randgold but I think also for the gold industry. We've been speaking to each other on a very frequent basis, in particularly when he was at Randgold because we were operating in the same region. Lately we spoke also a lot because he was instrumental in helping us with David Mimran, the main shareholder of Teranga, to acquire Teranga for Endeavour. And as you know Barrick is also today a 3% shareholder in Endeavour as part of this transaction with Teranga. So we keep having a good dialogue.

MJ: You mentioned at the company's recent results that M&A was off the table for now. But given the acquisitions you've made have been very value accretive to shareholders to this point, why rule that out?

SdM: When we came into Endeavour back in 2016, we basically felt that the first step was to build a proper portfolio of assets. And when I say proper portfolio of assets I mean basically assets with a long mine life at low cost in order to give visibility and to be able to generate enough cash flow, whatever the gold price environment. Unfortunately, we don't control the gold price; the only thing we can control is trying to control our operating costs and ensure in particular for investors that whatever the gold price environment and the cycle, we're still able to generate good cash flow. Some companies are blessed - they're ones with tier one assets - which was not the case of Endeavour when we took it over in 2016, and therefore the last four years have been really about doing explorations and discovering new ounces and new assets, and in parallel being able to build our own mines, like we did with Houndé and Ity, and when we felt it was the right thing [to do], to acquire some assets to strengthen the portfolio. And I think today, after the construction of Houndé and Ity and after the acquisitions of Semafo and Teranga, I just feel that we have an amazing portfolio. We're able to produce over the next few years between 1.4 to 1.6-1.7Moz; We have growth with a lot of organic growth thanks to the project pipeline that we have; We have an amazing exploration portfolio, and therefore this is where you can create even more value than by doing external growth. And that's why I don't feel that M&A is on the agenda for the time being. Plus I would add on top of that: we've always wanted to focus on this West African region, and clearly there is no particular assets that would be attractive enough to tick all the boxes in terms of returns and expectations in the region.

MJ: Given that you are trading at a significant discount to a lot of peers on most metrics, do you think Endeavour itself is an M&A target?

SdM: Given the shareholder base that we have, we're not necessarily an M&A target in a hostile way, and we haven't seen over the last 5-10 years a hostile takeover in this industry. Whether we would be attractive for some of our peers? Maybe. Clearly we have a very strong geographical focus and a very nice platform in West Africa, so someone that would be interested in growing in that region, could be interested. Obviously that's not today on the agenda for us but at the end of the day I'm making sure that we do all the right decisions for our shareholders. As we say, even my chair is for sale, at the right price. As long as it's the right thing for my shareholders.

MJ: What's the ideal size of your business? Do you have a limit as to the number of mines that you would be able to operate?

SdM: I've always said the right portfolio is probably around six to eight mines; you don't want to be operating 20 mines. The right size is probably around 1.5 million ounces [of production] per year. And the reason for that is simply because for 1.5Moz annual production - if you want to be a sustainable business - it means you need to replace depletion. So that's 1.5Moz of reserves you need to add every year; that's probably about 2.5Moz of indicated resources or 3Moz of inferred resources that we need to find on a yearly basis. That's a pretty damn strong discovery pipeline you need to have, and we feel that, beyond that, it starts to become difficult. I think that 2-2.5Moz of indicated resources is about the track record that we have for the last few years, thanks to the amazing exploration team that we have. We said that from now, we're going to invest probably around $80 million a year for the next five years in exploration in order to maintain this profile, and any time we feel that an asset is not delivering the right returns to us that we are expecting, we should simply divest the asset and focus on the right ones. So I have no issue at all in managing the portfolio to a point where we're able to divest shorter mine lives, higher cost assets and focus on the new ones or the ones which are delivering the right returns.

MJ: Are you considering moving into new countries in West Africa?

SdM: Sure - we'd like to continue to expand in West Africa. The other big country where we started exploration about 18 months ago is Guinea. I believe that Guinea will be a big gold mining region in the next in the next few years. It's significantly under-explored, and I think there is a lot of potential there. So the objective for us is to continue to grow in this country. I wouldn't be surprised if at some point we look also at Mauritania, which is an attractive jurisdiction too. So yeah, I think there's a lot to be done in this region.

MJ: The company generates a lot of free cash at current gold prices and you recently started a share buyback as well as a dividend. What's your cash returns policy, and would you consider hedging to protect distributions?

SdM: It's a very good question, because obviously we are monitoring the gold price and market expectations around futures for gold. It's not easy; I'm personally extremely bullish on gold but it's a very unpredictable market from time to time. So I think it's normal for any companies to think about hedging. For the time being, our policy around hedging has been to hedge during construction phase, when we felt that the balance sheet, which was heavily geared because of construction, would need to be protected. Now that we've been able to significantly deleverage the balance sheet, it's not something that we're contemplating going forward, simply because we believe that our business - with low production costs - can be fully exposed to gold price. In terms of dividend policy, you probably saw we came out with our first dividend back in January, and we said that the objective from now on is to increase progressively our dividends. with the cash flow of the company that is growing. So we will be announcing as part of our investor day which is on the 7th June, a range of capital allocation strategy and policies. It still hasn't been finalised with the board but we should be in a strong position by the seventh of June. But I think the key thing behind it is growing dividend, supplemented by buybacks, whenever we feel that our share price is attractive in terms of valuation and particularly in terms of returns, which is currently the case. And that's why we initiated that program back in March and I think so far we probably completed a big chunk.

MJ: Miners in North America and Australia are talking a lot about cost inflation. What are you seeing on the ground - is it an issue for Endeavour and are you concerned?

SdM: It's a question we've been frequently asked over the last few months; people are a bit afraid around inflation on costs. I must say that for the time being we're not seeing that trend, but it's probably a bit biased in our case because with the two acquisitions that we made last year, we've been able to renegotiate and consolidate all our procurement supply chain logistics, and by renegotiating based on volume and size of the contract, we've been able to either maintain current costs or reduce costs, and therefore we haven't seen this inflation.

MJ: I just want to move on to COVID now. How have you managed the business and relationships in West Africa over the past year?

SdM: We were fortunate compared to other regions of the world because COVID-19 hasn't been too complicated in West Africa. When I say too complicated, I mean there was a lot of cases, but most of them were asymptomatic, so there was no panic I would say in those countries. We had to obviously navigate a lot in terms of logistics for people but also for goods and selling gold, like to refineries in Europe, because obviously with commercial flights down we had to improvise a bit, but overall I think we were pretty happy meant to be impacted at all on the operational side; we had an amazing team and some of the some of the management team that agreed to change their rosters in order to stay much longer on site. We had some people staying up to three months in a row on site, just to be able to continue to operate properly during that period. So, I'm extremely thankful to all the team for their hard work during that complicated period. Where I think we have probably a big strength compared to a lot of our peers operating in Africa, is the fact that we've been able with the executive team and myself, to continue to go to West Africa during all that period. So I was able to go there nearly every every four to six weeks, even during lockdown, simply to be able to continue to support, visit the teams and also continue to manage our relationship with all our stakeholders in country. And I know that, for example, some of our peers in West Africa that are based in Toronto or in Vancouver or in Australia haven't been to their operations for 12 or 16 months. And it must be tough not to be able to go on the ground, and spend time with your team, but being based in London and having strong operations in the region has helped through that period.

MJ: Can you talk about your recent ESG initiatives; do they provide you with a competitive advantage?

SdM: ESG for us has been part of our business for many years. People are just rebranding the subject a bit differently. But this has formed all parts of our licence to operate. If you don't operate properly with strong environmental studies and stewardship; if you don't do that also on the social side or on the governance side, you just can't operate in those countries, simply because the host countries and the communities won't let you grow. That's why there's been so much done at mine site and in country in the past few years.

I think it's really the size of the business now which is now taking us to the next level in terms of initiatives. So we have a full range of initiatives going on and we'll be announcing some strong initiatives around CO2 emissions reduction. But one thing which is interesting with us is, given the nature of our mines which are pretty new and a higher grade compared to our peers, and given the energy mix in the countries where we operate, we have one of the lowest CO2 emissions intensity in the top 10 gold players - probably the second lowest in terms of CO2 emissions intensity. And that's something which is helpful but we believe we can do even more.

Solar has been a strong subject for us on the agenda because we believe solar can help us both in terms of production costs, but also in terms of reducing CO2 emissions. The third point - also very important - is it helps us play a role in the local government agenda in order to help people to access electricity. So that's a strong initiative we're going to launch. There are others are around biodiversity, and there are a lot of initiatives that we'll be presenting on 7th June.