Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
It is not too often that you come across a company with quarterly income that is just shy of their entire market cap. Endeavour Financial (TSE: EDV or EDVMF) is just such a company and boasts a P/E ratio of just 1.1 based on theirlatest quarterly earnings.
Not to be confused with Endeavour Silver, Endeavour Financial is a merchant bank focused on the natural resource sector. Somewhat similar to Silver Wheaton, Endeavour funds producing junior gold miners in exchange for ownership in the company. Since 2002, Endeavour has advised on M&A transactions valued at over US$28 billion, and has helped arrange US$3.5 billion of equity finance and US$2.2 billion of debt finance. It has worked with Wheaton River Minerals, Bema Gold and is currently working on funding for one of my favorite lithium plays – Canada Lithium.
The more interesting part of their business is the dedication of around US$150 million to a gold-focused investment strategy that seeks maximum returns by identifying, investing in, and consolidating junior gold mining companies. Endeavour carried out its first strategic investment in the gold space by buying 55 percent of the equity of Etruscan Resources for US$71.1 million. The second company to come into the Endeavour stable was Crew Gold, in which Endeavour acquired a 43 percent holding this year. Even with the recent correction in gold, Crew’s stock is still up over 100% year-to-date and the company recently turned a a quarterly profit of $10 million, after losing $12 million during the same quarter last year.
Now to the truly impressive part of the Endeavour Financial story. The company posted Q1 earnings of CAD$215 million, yet has a market cap of just CAD$240 million! Furthermore, their stake in Crew Gold alone is worth CAD$244 million, or about 102% of their entire market cap. Their 55% stake in Etruscan is valued at CAD$78 million and “other merchant banking clients” are valued at over $100 million. The bottom line is that Endeavour Financial is trading at a significant discount to its book value or the sum of its identifiable assets. These types of conditions don’t persist for too long and I believe the market will remedy this situation soon.
One factor that may be weighing down Endeavour’s share price is its ongoing dispute with Russian steelmaker Severstal, which is the second largest shareholder in Crew Gold. While the distraction certainly adds no value to the equation, I also don’t see how it justifies such a massive discount to Endeavour’s share price.
It should also be mentioned that Endeavour’s impressive earnings were a factor primarily of the appreciation in share price of the miners they own. Future earnings will be reliant on continued appreciation in the stock prices for both Crew and Etruscan. I essentially view Endeavour as a less expensive way to get exposure to these two miners, both of which are growing production, lowering costs and improving cash flow.
If you believe the gold price is heading higher and believe in the value Endeavour has gained with its low-cost stake in these West-African gold producers, picking up shares at current prices seems like a no brainer. I also have faith in the ability of CEO Woodyer and company to continue finding valuable partnership opportunities in the junior gold mining sector, which is often where the greatest gains are realized.
Disclosure: I own shares of Endeavour Financial and have recommended the company to premium members. If you have yet to sign up for a premium membership, click here to see what you are missing or go directly to the sign up page.
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