Wednesday, January 12, 2011

Investors Guru Small Cap Stock Observer

(TSX: EDV) Endeavour Mining - How To Buy Gold For $50 An Ounce

As Endeavour Mining Corp (TSX: EDV) transitions from merchant bank to gold miner, there is an opportunity to buy gold in the ground for $50 an ounce compared with a junior gold explorer average of $138 an ounce.

Why is a cash flowing, gold-producer with $165 million in petty cash trading at a discount to companies still fumbling around for permits?

The answer is clear: the market is struggling to absorb EDV’s business model transition – despite the improved balance sheet from the Youga gold mine in Burkina Faso.

No one can argue with Endeavour’s track record as a deal maker. It has brokered billions of dollars worth of deals in Canada, United States, Brazil, Colombia, Chile, Mexico, Angola, Burkina Faso, Côte d'Ivoire, China, Kazakhstan, Mongolia, Russia etc.

In Q4, 2010 EDV closed an $858 million deal for Baja Mining (TSX: BAJ) to develop a Copper/Cobalt deposit in Mexico. The negotiations displayed Endeavour’s trademark geological and financial sophistication involving off-take agreements and a consortium of Korean corporations. The same quarter EDV flipped its 43% stake in Crew Gold (TSX: CRU) for an $80 million profit.

But the market wants to know: what’s next?

Endeavour has been clear and vocal about its intention to become a mid-tier gold producer.

With $180 million in cash and access to a US$100 million Acquisition Debt Facility EDV has the ability to close deals. Their stated M&A acquisition strategy is focused on a relative P/NAV valuation metric. They are looking for projects that are undervalued due to financial or operational inefficiencies.

That’s a bit like saying a cat is looking for a comfortable place to sleep.

But what makes Endeavour’s ambitions worth noting is the intellectual capital it brings to its acquisition program. Operatives from EDV are currently inspecting gold production opportunities in South America and West Africa.

Will they succeed in finding a good deal and unlocking value for EDV shareholders? I don’t have a crystal ball. But I wouldn’t bet against them.

To put it bluntly, EDV’s financial and geological team are the Miami Heat of resource acquisition. With a $280 million war chest, they are driving hard to the net. I don’t know who or what is going to stop them.

The momentum around EDV is starting to build.

A November 18, 2010 research report from Canaccord Genuity raised the target price from $4.65 to $5.00 – almost a double from its current stock price of $2.85.

“EDV is one of the cheapest gold producers in our coverage universe,” states the report, authored by Nicholas Campbell, “Some investors have been hesitant in taking a position in EDV as the company transitioned into a gold producer”.

The report claims that “EDV is one of the cheapest gold producers in our coverage universe - trading at an EV (Enterprise Value) of only US$50/oz compared with the junior gold average of US$138/oz.

For resource investors looking for unlocked value, that’s worth noting: a gold producer trading at a 64% discount to the non-producer average. More at .

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