Endomines |

Earnings clearly short of estimates
Endomines as expected did not report any significant revenue in Q4 (SEK 0.7m/0.5m act.*/Evli), as Friday has been under care and maintenance. EBIT fell clearly short of our estimates (SEK -99.0m/SEK -16.9m act.*/Evli) due to payments for claims of the US Grant project and write-downs of assets performed at the year-end. As expected, no dividend distribution was proposed. *Figures not reported, derived from Q1-Q3 and 2020 figures.

Production to ramp-up in H2
Endomines did not give a production guidance for 2021, aiming to give a guidance in connection with the Q1 release. Deepening of the Pampalo is expected to start mid-H1 while the goal is to have the first gold production by the end of the year. Production start at Friday will be somewhat dependent on how long the spring thaw will last but Endomines expects to be able to ramp-up production by early summer. Endomines completed its rights issue in January, raising approx. SEK 214m, which is a much-needed support to the previously very tight liquidity situation. Although the proceeds fell short of the target, the outcome is in our view still quite decent given the pressed financial situation the company has been facing. The Coronavirus pandemic is still causing some stir in supply chains but should not have any major short-term impact given the time the company has had to prepare for restarting production at Friday.

HOLD with a target price of SEK 2.7 (2.9)
We have made changes to our estimates, with the outcome of the rights issue vs. the assumed full subscription causing the largest changes to our SOTP model, along with the slight pressure to gold prices in Q1. We adjust our target price to SEK 2.7 (2.9) with our HOLD-rating intact.

• Revenue* in Q4 amounted to SEK 0.7m, with our estimates at SEK 0.5m. The Friday mine was put into care and maintenance during Q3 and as such no significant new gold concentrate production took place during Q4.
• EBITDA* in Q4 was at SEK -39.6m, below our estimate of SEK -14.0m. Adj. EBITDA* excl. payments for claims of the US Grant project amounted to SEK -9.7m, slightly better than expected.
• EBIT* amounted to SEK -99.0m (Evli SEK -16.9m). EBIT was affected by a clear increase in depreciations and write-downs due to write-downs performed at year-end.
  *Figures not reported, derived from Q1-Q3 and 2020 figures
• At Pampalo, deepening of the mine is expected to start in late March/early April after mining contractor has been selected and mobilized to the site and mining to start later in the year. At Friday the technical problems at the mill are being addressed and production is expected to start as soon as weather conditions permits in late spring.
• Liquid assets amounted to SEK 11.3m at the end of the quarter.
• During January 2021 Endomines carried out its rights issue, raising approximately SEK 214m.
• Endomines has not given a production guidance for 2021 but aims to specify its production guidance in connection with the Q1 release.

Previous years have not gone quite as planned
Endomines established operations in the United States in 2018, after having been active only in Finland throughout the majority of the 2010’s. The past years have seen focus being on bringing the first asset, Friday, to production. The company has been met with challenges along the way, relating both to technical and financial challenges, but production commenced at the site in 2020. Continued technical challenges and a tight liquidity situation, however, forced the company to put the site under care and maintenance towards during the latter half of 2020.

Seeking 40k oz p.a. production within four years
Endomines is seeking to bolster its financial position to be able to restart production. With the high gold prices, plans have also been made for restarting production at Pampalo in Finland, as production was halted due to the then unfavourable gold price levels. Financial challenges have unfortunately been an inherent feature in the past years, as the company has not been able to create reliable cash flows. Now with assets that can be rapidly brought to production due to existing infrastructure and the favourable gold price levels Endomines is looking to improve production figures, targeting a production of 40k oz p.a. within four years. With the recent year track-record, however, the company in our view still has quite a lot to prove.

HOLD with a target price of SEK 2.9 (3.5)
We lower our target price to SEK 2.9 (3.5) following adjustments to our assumptions with the information provided regarding the rights issue and production plans. We retain our HOLD-rating.

Friday operations put under care and maintenance
Endomines reported weaker than expected Q3 results, as the operations at Friday were put under care and maintenance due to a very tight financial situation. Ramp-up at Friday was previously delayed by problems with the tailings dewatering system and although solving the problems would not have been a large investment, the limited cash flows and very tight cash position (Q3/20: SEK 12.0m) forced the company to take more drastic measures. Q3 revenue and EBITDA of SEK 1.9m and SEK -23.1m were as such clearly below our estimates (Evli SEK 11.1m and -15.6m respectively).

Taking measures to improve financial position
Endomines announced intentions to initiate a SEK 281m rights issue, at a subscription price of SEK 2.5 per share, along with possible directed share issues of near SEK 75m to cover guarantee undertakings and bridge financing claim set-offs. With some 60 percent of the rights issue covered by subscription undertakings and guarantee commitments Endomines should in our view be able to secure enough funding to restart operations at Friday and potentially also Pampalo if the gold price remains at >1,800 USD/oz levels. We estimate a six to eight month delay in ramp-up of Friday due to the funding challenges.

HOLD (SELL) with a TP of EUR 3.5 (5.5)
With the estimated impact of the rights issue on share amounts and net debt we adjust our TP to SEK 3.5 (5.5), assuming that the rights issue is subscribed in full. The gold price remains at beneficial levels and is continuing to see upwards pressure despite minor short-term declines. We raise our rating to HOLD (SELL).

• Total revenue* in Q3 amounted to SEK 1.9m, with our estimates at SEK 11.1m. Gold production during 1-9/2020 amounted to 538.1.1oz (Evli 986oz), with a head grade of 3.52g/t (Evli 3.39g/t). Gold concentrate was produced from pre-production development material, thus resulting in low head grades.
• EBITDA* in Q3 was at SEK -23.1m, below our estimate of SEK -15.6m.
• *Figures not reported, derived from Q1-Q3 figures
• Due to challenges with the tailings dewatering system and as a result a faster than anticipated use-up of working capital, as production and revenues were delayed, the operations at Friday were put under care and maintenance in August. The start-up will be dependent on securing the required financing.
• Liquid assets amounted to SEK 12.0m at the end of the quarter.
• The BoD of Endomines has resolved on a rights issue of SEK 281m, at a subscription price of SEK 2.50. The rights issue is covered by subscription undertakings and guarantee commitments up to SEK 168m. Dilution for existing shareholders choosing not to participate in the rights issue will be approximately 46 percent assuming full subscription.
• Endomines has not given a production guidance for 2020.

Sales commenced but head grades still low
Endomines Q2 results were slightly below our estimates, with revenue of SEK 7.5m (Evli 9.0m), EBITDA of SEK -17.5m (Evli -20.6m) and EBIT of SEK -27.7m (Evli -24.5m). The first concentrate sales at the Friday mine were made, but with pre-production development material being milled head grades were low and with the still low capacity revenue was not yet significant. COVID-19 related challenges to supply chains and recruitment have further pushed back the ramp up timetable of the processing facility and design capacity will unlikely be reached in 2020.

Friday ramp-up delayed due to COVID-19
We have clearly lowered our 2020 estimates post-Q2 following the ramp-up delays and update on the stockpiled pre-production development material. We expect 80% of design capacity to have been reached in Q4 and atypical head grades throughout the year due to stockpiled development material. We now expect revenue of SEK 41.0m (prev. 77.1m) and EBITDA of SEK -68.9m (prev. -38.3m). Endomines reported that plans are being made for a possible re-opening of Pampalo given the current gold price, which in our view could provide a production boost somewhere towards H1/21 if initiated.

SELL with a target price of SEK 5.5
Despite production and sales having recommenced, the unfortunate side of the Q2 report was the cash burn rate, with liquid assets again largely depleted and some exploration activities having been put on hold. Gold price levels are clearly attractive but with the expected cash burn rate during H2/20 and so far lack of more permanent financing solutions risks are still substantial. We retain our TP of SEK 5.5 and SELL-rating.

• Endomines made its first shipments of gold concentrate from the Friday mine during Q2.
• Revenue* in Q2 amounted to SEK 7.5m, with our estimates at SEK 9.0m. Gold production amounted to 326.1oz, with a head grade of 2.9g/t. Gold concentrate was produced from pre-production development material, thus resulting in low head grades.
• EBITDA* in Q2 was at SEK -17.5m, slightly above our estimate of SEK -20.6m.
  *Figures not reported, derived from Q1-H1 figures
• At the processing facility at Friday Endomines was able to operate at an average rate of 41.1 tonnes per day. Ramp up to design capacity (3,445 tonnes per month) continued. The COVID-19 pandemic has continued to severely impact production ramp-up due to supply chain disruptions and slowdowns in hiring. Endomines now expects that near design capacity could be reached towards Q4 (previously expected in Q2).
• Endomines did not give any numeric production guidance for 2020.
• Endomines sees interest in investing in the decline at Pampalo at current all-time high gold prices.
• Liquid assets amounted to SEK 3.4m at the end of the quarter.

No gold concentrate sales in Q1
Endomines Q1 report contained limited new information of value. No gold concentrate sales from Friday occurred and revenue amounted to SEK 3.1m due to Pampalo clean up gold. Lesser cost activation saw costs higher than our estimates and as a result a weaker EBITDA, at SEK -27.8m (Evli -13.6m). 3,700 tonnes of lower grade (5.7 g/t) ore was mined during the first quarter. Design capacity (3,445 tonnes/month) at Friday is sought to be reached in Q2, however, COVID-19 impacts on staff and component availability may cause delays. The first gold concentrate shipment from Friday was made during Q2.

Financing arrangements to aid cash position
Post-Q1 financial transactions will bring much needed relief to Endomines’ strained cash position (Q1/20: SEK 1.3m), raising some SEK 81m through two loans and a rights issue. We expect further financing to be needed during 2020, as evident by the signing of an engagement letter with a financial advisor for long-term financing. Closing of the transaction with Transatlantic Mining provides additional production potential, although little is yet known of the assets. 2020 will in our view revolve around ramping-up production at Friday and planning for production at other assets from 2021 onwards.

SELL with a target price of SEK 5.5 (5.0)
Following adjustments to our valuation approach following the favourable gold price development and taking into account the transactions in Q2 we raise our target price to SEK 5.5 (5.0). Our SELL-rating remains intact.

• Endomines did not sell any gold concentrate from Friday in Q1. An agreement for the sale of gold concentrate was signed and the first shipment of gold concentrate from the Friday mine was done in May.
• Revenue in Q1 amounted to SEK 3.0m, with our estimates at SEK 3.1m.
• EBITDA in Q1 was at SEK -27.8m, below our estimate of SEK -13.6m following higher than expected costs.
• At the processing facility at Friday Endomines was able to operate at a rate of 36 tonnes per day. Ramp up to design capacity (3,445 tonnes per month) continued. The goal is to reach design capacity during Q2, however, the COVID-19 pandemic poses some challenges with staff and part availability and continued effects of the pandemic may postpone the reaching of design capacity. Endomines has mined approximately 3,700 tonnes of ore at a grade of 5.7 g/t at Friday in Q1.
• Endomines did not yet give any numeric production guidance for 2020.
• Liquid assets amounted to SEK 1.3m at the end of the quarter. After the quarter Endomines raised SEK 81m net proceedings through the issuance of two loans and a directed share issue.
• An agreement with Transatlantic Mining was signed after Q1 to buy US Grant Mine and mill and the Kearsarge Gold Project.

Nearing commercial production at Friday

Endomines continued to post meager figures in Q4, as gold concentrate sales from Friday have not yet commenced. Bottom-line figures were as a result clearly in the red, with EBITDA at SEK -15.1m. Endomines expects to ramp-up production at Friday to design capacity (3,445 tonnes/month) in March 2020. The concentrate sales agreement is yet to be confirmed but should in our view be signed during Q1. Built up ore stockpiles will speed up production ramp-up, but we expect head grades to be well below expected typical grades during the first half of 2020.

Financial position again at risk

Endomines financial situation has again become a reason for concern, as group cash fell to SEK 15.7m (Q3/19: SEK 61.9m) in Q4. The Friday production facility investments are largely behind and cash flows will improve once production at Friday picks up. Friday cash flows will however not suffice to develop new assets and Endomines will in our view seek additional financing in the near future. Previous debt-financing options have not been favourable and a rights issue could be on the table.

SELL (HOLD) with a target price of SEK 5.0 (4.7)

Endomines is finally nearing production start at Friday and has continued consolidating its land assets in Idaho and is seeking to expand further through the transaction with Transatlantic. The gold price development has further remained favourable. The positive drivers are in our view, however, overshadowed by the near-term financial risks. We adjust our target price to SEK 5.0 (4.7) and downgrade to SELL (HOLD).

• Endomines did not sell any gold concentrate from Friday in Q4 and had in early February announced the expected start-up of commercial production in March 2020, which was not included in our estimates.
• Revenue* amounted to SEK 0.7m, with our estimates at SEK 22.0m, as we had expected gold concentrate sales from Friday.
• EBITDA* in Q4 was at SEK -15.1m, below our estimate of SEK -0.8m given the lack of gold concentrate sales.
• (*Not reported, derived from H1 and Q1-Q3 figures)
• During December Endomines processed 420.5 ore tonnes with a head grade of 2.65g/t Au (low-grade pre-production development ore) resulting in 2.65 tonnes of concentrate grading 189.2g/t Au. In December Endomines took over all mining activities from the mining contractor at Friday. Endomines has mined approx. 5,000 tonnes of ore up to date, stockpiled at the mine and mill areas. Full mining production delayed to coincide with mill commissioning.
• Endomines did not give a numeric production guidance for 2020, expecting ramp-up to design capacity (3,445 tonnes per month) in March 2020.
• The BoD expectedly proposed that no dividend will be paid for 2019.

Estimates miss from mill commissioning delays

Endomines Q3 results fell clearly below our estimates, as no gold concentrate from the Friday-mine was yet sold, whereas we had expected minor sales. The gold concentrate production was affected by issues with commissioning the mill at Friday, which delayed previous plans of commencing production during Q3. Revenue amounted to SEK 1.6m (Evli 10.9m) and EBIT to SEK -16.4m (Evli -7.2m). Revenue was generated from gold recovered from the clean-up at Pampalo. Production at the Friday-mine has progressed well and a significant ore stockpile has been built up and Endomines expects to be reaching full forecasted production rates by the end of the year.

Bumps on the road in the near-term not unlikely

We have slightly revised our 2019 estimates downwards following the delay in concentrate production. The issues relating to the commissioning of the mill continue to pose risks for concentrate production in Q4. The impact of any further delays are however essentially not of any major importance and would only shift cashflows to a slightly later stage and the improved financial situation from the completed rights issue allows for some headwind.

HOLD (SELL) with a TP or SEK 4.7 (4.8)

Our view on Endomines post-Q3 in general remains intact. Our SOTP (Gold spot price) implies a value of SEK 5.4 per share but with the production uncertainty still present we continue to justify a discount and check our target price to SEK 4.7 (4.8) per share following SOTP adjustments. Due to a near 10% share price decline since our previous update we upgrade our rating to HOLD (SELL).

• Endomines did not sell any gold concentrate from Friday in Q3, while gold recovered from the clean-up at Pampalo generated some revenue. Mining has progressed well at Friday and a significant ore stockpile at the mine and the mill sites has been produced.
• Revenue* amounted to SEK 1.6m, with our estimates at SEK 10.9m. We had expected minor gold concentrate sales from Friday, while Q3 revenue consisted solely of sale of clean-up gold from the Pampalo mill.
• EBITDA* in Q3 was at SEK -13.2m, below our estimate of SEK -3.2m given the limited gold concentrate sales. (*Not reported, derived from H1 and Q1-Q3 figures)
• In the third quarter Endomines was able to commence the ramp-up of the Friday mining and milling operations and the work is now fully ongoing. Issues relating to the commissioning of the mill delayed the start of gold concentrate production. Successful commissioning of the mill is expected to take place during Q4.
• Endomines did not give an updated production guidance for 2019. The ramp-up of the Friday mine is on-going and an updated guidance will be given once completed the mill is successfully commissioned and ramp-up completed

No production in Q2, production guidance yet to be given

Endomines’ Q2 results were uneventful, as no gold concentrate production occurred during the quarter, as expected, and no new production guidance was given. Costs were limited compared to our expectations and EBITDA as such was SEK -9.3m compared to our estimate of SEK -15.0m. Ramp-up at Friday appears to be progressing rather well given the delays experienced so far. Based on the information given in Q2 we have, however, adjusted our Q3 production estimates further downwards, and now expect 2019 production of ~3,000oz.

Friday ramp-up key in the near-term

Endomines long-term plan is to produce over 40,000oz by the end of 2023, with near-term production relying on the Friday mine followed by the Rescue ore body (production in 2021). With essentially no production currently on-going the successful ramp-up of Friday remains vital to secure cash flows for on-going operations, although the recently completed rights issue substantially alleviated near-term financing concerns.

SELL with a TP of SEK 4.8 (4.4)

Our NPV values Endomines at SEK 4.8 per share, up from SEK 4.4 since our previous update following net debt adjustments based on the Q2 balance sheet and expected rights issue proceeds. We assume a 1,400USD/oz LT gold price, reflecting analyst estimates and the nature of the recent gold price increases. Drivers for long-term gold price through supply/demand remain in place but near-term gold price development remains uncertain following the more short-term macro event driven price increases.

• Endomines did not produce any gold concentrate in Q2.
• Revenue amounted to SEK 1.4m (42.1m in Q2/18), while we had not estimated any revenue for Q2. The Q2 revenue derived from clean-up gold from the Pampalo mill.
• EBITDA in Q2 was at SEK -9.3m, above our estimate or SEK -15.0m.
• Construction of the Mill was ongoing and developmental drifting at the Friday Mine was the focus for Q2.
• Endomines did not give an updated production guidance for 2019. A production plan is being worked on based on the results of the drilling campaign and test mining as well as the commissioning of the plant and an updated guidance will be given once completed.

Production to fall short of 2019 guidance

Endomines announced on August 9th that its production guidance for 2019 (5,000-8,000oz gold) will not be achieved due to reparations of damages to Friday’s tailings pond causing longer than expected delays to production. Ramp-up of the processing plant is expected to take a couple of weeks before being fully commissioned. No new guidance was given. We now estimate a gold production in 2019 of 4,340oz. Although the added delay to production timewise is relatively short, this will cause additional strain on the already limited near-term cash flows.

Sounder financial situation following the rights issue

With the completion of Endomines’ rights issue, having raised gross proceeds of SEK 156m, the company’s financial situation is now at a much sounder level. The raised funds should as such cover the by the company earlier estimated next twelve-month capital need of SEK 100m. Proceeds will mainly be used to short-term debt repayment and ramp-up of Friday as well as start-up of other assets.

SELL (N/A) with a target price of SEK 4.4 (N/A)

Endomines’ share price has seen recent rapid increases, as the gold price has climbed to levels last seen in 2019, driven by macroeconomic uncertainties. Although the rise in gold prices certainly is a welcome development, the current valuation in our view does not reflect the high uncertainty relating to Endomines’ gold production, with Friday having seen several delays and additional costs, and production has not yet commenced. We re-establish our rating with SELL (N/A) and a target price of SEK 4.4 (N/A), in line with our SOTP.

Seeking to raise SEK 165m

Endomines is through a rights issue seeking to raise gross proceeds of around SEK 165m, with expenses related to the rights issue estimated at SEK 10m. Endomines has estimated that its current financial position does not cover the capital needs for the following twelve months. Trading in subscription rights will take place during the 14-25 June 2019 while subscription using the subscription rights will take place from the 14th of June to the 1st of July, 2019.

Proceeds mainly to cover debt and project development

Of the proceeds some SEK 36m would be used to repay debts and interest relating to the TVL Gold acquisition. The larger share of the proceeds from the rights issue are intended to be used for development of its projects in Idaho. To our understanding some of the proceeds would be used for further development of the Friday mine while the bulk would be allocated to development of the Rescue, Kimberly, and Unity projects. Furthermore, part of the proceeds would be used to continue exploration along the Karelian Goldline as well as to cover general corporate costs. The cost allocation and project timelines are described in further detail in figures 1 and 2.

Rating withdrawn during rights issue

Evli Bank is the financial advisor of the rights issue, and although a segregation of duties is followed, we refrain from expressing our views on the rights issue. Our estimates have not been revised to include any new information given in the prospectus and we withdraw our rating and target price (prev. HOLD, TP SEK 6.0). We will publish an updated view after the rights issue.

Friday production expected in Q2

Endomines’ Q1 revenue and EBIT amounted to SEK 2.1m and -13.0m respectively. Ore production at the Friday mine is on-going but due to damage to the processing facility no new gold concentrate was produced and revenue was only generated from sales of remaining concentrate from Pampalo. Ramp-up of gold concentrate production at the Friday site is expected to start in Q2. Although the concentrate production was delayed Endomines has remained on schedule with the mining of ore and retained its 2019 guidance production for Friday of 5,000-8,000 oz gold concentrate.

Financial situation concerning

Endomines’ financial situation has increased causes for concern. The liquid funds at the end of the period amounted to SEK 7.8m, despite issuance of the EUR 3.7m bond, as Q1 cash flow after investments amounted to SEK -46.7m. The situation should be alleviated with the ramp-up of production at Friday, with the larger investments also having been done. With the additional costs of the processing plant at Friday the financial situation is in our view now even more fragile and Endomines can’t really afford more setbacks in production start-up without additional financing.

HOLD (BUY) with a target price of SEK 6.0 (8.0)

Endomines is in our view in a delicate situation financially and the need for additional financing, at least to finance any new projects, seems inevitable. Endomines already issued a rather expensive bond and further financing will likely not come easily or cheap. We downgrade to HOLD (BUY) with a target price of SEK 6.0 (8.0).

• Endomines did not produce any gold concentrate in Q1. The revenue was generated by sales of remaining Pampalo gold concentrate. Gold concentrate production at Friday has been delayed due to damage to the tailings area of the processing plant. Concentrate production is expected to commence in Q2.
• Revenue amounted to SEK 2.1m (29.4m in Q4/18), below our estimates of SEK 8.0m due to our estimates not having accounted for the processing plant damage.
• EBITDA in Q1 was at SEK -11.5m, below our estimates of SEK -3.9m, mainly due to the lower revenue.
• Friday’s processing plant repairs expected to amount to USD 400,000 and to take four to six weeks to complete.
• Guidance reiterated: Annual gold production at the Friday mine in Idaho, USA, is expected to be approximately 9,000oz at a cash cost of 650-900 USD/oz, depending on the area of production, over the life time of the mine. Endomines anticipates production of 5,000 – 8,000oz gold (~156-249kg) in concentrate during the year.

Friday gold production 5,000-8,000oz in 2019

Endomines’ gold production in Q4 amounted to 27.9kg (98.7kg), impacted by the suspension of mining operations at Pampalo. Revenue and EBITDA in Q4 amounted to SEK 7.9m (Evli 5.4m) and SEK -6.1m (Evli -6.4m) respectively. Mining operations at the Friday-mine have commenced but production has seen slightly behind schedule due to delays in equipment deliveries at the processing plant. The project’s capex estimate was revised to USD 9.5-10m (prev. 7.7m) due to cost overruns. Production of gold concentrate in 2019 is estimated at 5,000-8,000oz.

Acquired additional assets, seeking to secure financing

Endomines acquired leasing rights to the Unity mine adjacent to its Rescue property. We expect the company’s development operations during 2019 to focus on Unity/Rescue along with Friday. We have shifted our production estimates as we view any significant production figures (apart from Friday) to be achieved during 2020 unlikely. Endomines commenced the sale of an up to EUR 5m bond with associated warrants (strike price EUR 0.90). Although the financing covers at least the near-term investment needs we expect Endomines to need additional financing to develop additional assets.

BUY with a target price of SEK 8.0 (7.2)

The gold price saw favourable development during H2/2018, returning to above 1,300USD/oz levels, driven by the increased market uncertainty. Our revised estimates put our NAVPS at SEK 8.5. We retain our BUY-rating with a target price or SEK 8.0 (7.2).

• Endomines gold production in Q4 amounted to 27.9kg (98.7kg), affected by the suspension of the Pampalo mine in October. Milled ore amounted to 7,559 tonnes (39,692), at head grades of 2.6g/t (3.0g/t). Cash cost was 948 USD/oz (1,264).
• Revenue amounted to SEK 7.9m (28.5m in Q4/17), above our estimates of SEK 5.4m.
• EBITDA in Q4 was at SEK -6.1m (Evli -6.4m) and EBIT at SEK -14.2m (Evli -11.7m).
• Total cash flow was SEK -43.5m (1.8m).
• Guidance: Annual gold production at the Friday mine in Idaho, USA, is expected to be approximately 9,000oz at a cash cost of 650-900 USD/oz, depending on the area of production, over the life time of the mine. In the first quarter of 2019, Endomines has commenced ramp-up of the mine and anticipates producing 5,000 – 8,000oz gold (~156-249kg) in concentrate during the year.
• Endomines has commenced the sale of a up to EUR 5 million senior secured bonds and warrants. The bond carries a coupon of 12.0 per cent and has 3-year maturity. The number of the associated warrants is 5,555,555 and their exercise price is EUR 0.90 per warrant.

EBITDA positive despite mining operation suspension

Endomines gold production amounted to 81.6kg in Q3. Production figures were aided by the high head grades of 3.9g/tonne. Revenue and EBITDA in Q3 were SEK 25.9m and 0.6m respectively. Mining operations at the Pampalo mine were suspended in mid-September, which along with the higher head grades contributed to a positive EBITDA, despite lower volumes. Gold production during 1-9/2018 was 303.5kg, with another 15kg produced in October and the total 2018 output expected to exceed 320kg.

Limited new information in the earnings release

Endomines’ third quarter earnings release contained limited new information regarding the Idaho projects. The start-up timetable of the Friday mine was updated, with production anticipated to start in December. Details on the progress of the exploration activities in the vicinity of Pampalo were given, noting some samples with anomalies warranting further evaluation. Endomines had earlier specified the expected cash costs of the Friday mine, estimated to be around USD 650-900 per oz following ramp-up. We have updated our estimates for the cash costs for Friday and expect levels of around 900 USD/oz during 2019 and a decrease to 700-800 USD/Oz levels towards later production phases.

BUY with a target price of SEK 7.2 (7.8)

Following our revised estimates, we lower our target price to SEK 7.2 (7.8) but retain our BUY rating. The gold price has hovered at around 1,200 USD/oz following declines in Q3 but has seen slight upward pressure following recent stock market uncertainty.

• Endomines had pre-announced Q3 production figures, with gold production of 81.6kg (94.1kg). Milled ore amounted to 26,876 tonnes (37,422), at head grades of 3.9g/t (3.0g/t). Cash cost was 768 USD/oz (1,081).
• Revenue amounted to SEK 25.9m (26.7m in Q3/17), above our estimates of SEK 21.1m, driven by the higher head grades.
• EBITDA in Q3 was at SEK 0.6m (Evli -11.4m) and EBIT at SEK -11.2m (Evli -21.7m), with depreciations and write-downs of assets of SEK -11.8m. The suspension of mining activities in mid-September and higher revenue contributed to the higher than anticipated EBITDA. Adjusted EBITDA, excluding costs associated with the TVL acquisition and co-operation negotiations amounted to SEK 4.3m.
• Total cash flow was SEK -27.7m (1.6m).
• Guidance: Gold production in January-October amounted to 318.5kg. Total output from Pampalo, including additional gold recovery in connection with maintenance of the processing facility, is expected to exceed 320kg.
• Initial production at Friday is anticipated to commence in December 2018. No substantial production volumes are expected before the year-end.

Acquisition and strengthening of balance sheet

Endomines recently acquired TVL Gold and its five gold projects in the Orogrande mining district in Idaho, USA. In conjunction with the acquisition and completed rights issue, with net proceeds of some SEK 180m, Endomines completed a series of financial transactions after which the company has no remaining bank debt.

Production focus to shift to the acquired assets

With the current reserves Endomines targets production of 250-300kg gold at the Pampalo mine after which investments into an extension would need to be made. Production at the first of the acquired assets is expected within a year of the acquisition and within 2-5 years at the other assets.

Potential coupled with uncertainty

The acquisition and a planned expansion of the exploration program offer increased potential but we note a high uncertainty relating to the TVL Gold assets as resource estimates are limited and no production is currently on-going at the assets and resources at Pampalo are nearing depletion.

Initiate coverage with BUY and target price of SEK 9.3

We initiate coverage of Endomines with a BUY rating and a target price of SEK 9.3. Our target price is based on a 0.95x multiple to our NAVPS estimate, taking into consideration the stability of the operating jurisdictions and the early stages of the assets.