UPDATE
Endeavour
Mining Capital (EDV-TSX)
Weekly
chart, Semi-log Scale, High C$11.24, Low $2.93, Last Trade $6.85
We view Endeavour Mining Capital as a core asset for diversified exposure to
the ongoing secular bull market in commodities. Most retail investors don't
have the time, desire or expertise to select and follow a portfolio of
small-cap resource stocks. Endeavour finances many companies at their initial
formative and pre-growth stages, and has a compelling record of shepherding
them to ultimate success � often by way of takeover or merger.
Endeavour�s publicly traded shares offer investors de facto access to these
ground-floor junior mining companies without their need to be accredited
investors, or making the connections necessary to access such timely
opportunities. The corporation's board maintains a monthly dividend policy.
Last summer Endeavour Mining Corporation acquired 100% of sister company
Endeavour Financial Corporation, a privately-held investment banking firm. The
two businesses had already operated successfully in parallel for many years,
but this merger simplifies the Endeavour brand, and provides the resource
sector with one-stop integrated merchant banking services. It also ensures that
the entire Endeavour team is committed to maximizing value for shareholders
through their ownership of approximately 23% of the combined company (at least
31% and as high as 35% fully diluted).
Company Review
We have owned our share position in Endeavour Mining since May 2004, at an
average price of $2.40 per share. Our initial report on Endeavour was issued
May 8, 2004 just as the price of gold re-tested the US$378 technical support
area. Endeavour had suffered a dramatic sell-off as many junior-sector resource
stocks experienced lower liquidity, sporadic panic selling and apparent capitulation
of latecomer investors suffering rapid and severe losses � not dissimilar to
the current environment except that commodity prices are now significantly
higher.
Despite the volatile nature of the sector, Endeavour has generated a
58-per-cent annualized return since its inception in 2002 through to the merger
date. This largely reflects its early call on the resource secular bull market
and pinpoint accuracy in the timing of its exposure to multiple
specific-resource-focused vehicles.
The Endeavour team has been associated with some big success stories over the
years, including Bema Gold, Bolivar Gold, Northern Orion, Oriel Resources, Peak
Gold, Silver Wheaton, UrAsia Energy, Wheaton River Minerals, and of course
Endeavour Mining itself. Endeavour Mining's reliance on Endeavour Financial's
advisory services steadily increased as the resource market's growth
accelerated.
Stronger Together
Last summer�s acquisition of Endeavour Financial integrates the merchant
banking capital investment business with Endeavour Financial�s advisory
services business. By fully integrating their capabilities within one
publicly-listed entity, the new Endeavour has a strengthened operating platform
for continued growth with a talented management team focused on creating value
for shareholders, themselves included.
We originally invested in Endeavour Mining because it provides exposure to
participate alongside the industry�s most successful and well-connected
institutional investors. That advantage is now leveraged post-merger into an
integrated operation with excellent potential to generate long-term shareholder
value.
Endeavour Financial generates its revenue primarily from monthly retainers and
transaction-oriented success fees. The acquisition provides further lift and
greater predictability for Endeavour Mining�s revenues, which are largely
influenced by their mark-to-market portfolio revaluations and realized capital
gains. This new revenue also enjoys decent margins, since expenses are
primarily salaries and performance-related bonuses.
Endeavour has an aggressive business strategy which, combined with the nature
of the mining and energy equity market, does result in short-term earnings
volatility. Because of the diversified nature of its portfolio of merchant
banking investments, which includes a mix of resource commodities and a
combination of debt and equity instruments, it provides a useful proxy for the
junior resource market.
Proven leadership, market savvy
Endeavour benefits from having two Advisors � Frank Holmes� US Global Investors
and Frank Giustra�s Fiore Capital � to identify, develop and implement
investment opportunities. Endeavour�s Chairman, Frank Holmes, heads up the top
performing US Global Investors (GROW- Q), website: http://www.usfunds.com
Former Endeavour chairman Frank Giustra continues to apply his golden touch to
Endeavour�s deal-making through his Fiore Capital advisory services. Last June
Mr. Giustra announced he�s giving away $100 million and one-half of his future
mining earnings to the Clinton Giustra Sustainable Growth Initiative, earmarked
to fight third world poverty through sustainable development. This venture
bodes well for both the mining industry and the countries in which they�ll do
business, and it should also benefit Endeavour�s shareholders. While Frank
Giustra and his team have never needed any help putting together some of the
industry�s biggest and most successful deals, it doesn�t hurt that countries
targeted for resource acquisitions and concessions realize such deals come
complete with potentially millions of dollars in development aid.
Endeavour�s investment strategy is focused on high quality assets with strong
management teams, and with clear potential for high returns through their structured
investments. When Endeavour finances mining companies to fund their project
development, strategic initiatives and growth, we benefit from a management
team that has done their homework for us and structured its investment exposure
appropriately. This generally means a compelling and timely entry price
(downside protection), and better than average upside potential.
Endeavour offers us the built-in advantages of diversification,
cream-of-the-crop selection, sophisticated professional management, exceptional
deal-flow and access to global institutional and industry contacts. Given this
premise, we only need concern ourselves with the timeliness of such specific
exposure to the resource and precious metals sectors to determine the
appropriateness of owning Endeavour shares. It would be hard for investors to
consistently match Endeavour�s ability to select winners and realize on their
potential.
Latest Financial Results
Endeavour announced net income of $2.1 million for Q3 to March 31, and $3.4
million for the 9 months then ended, compared to $24.5 million and $41.0
million respectively in 2007. This performance requires some comment, as it was
apparently a tough three quarters. In our view the numbers are actually pretty
good considering the sub-debt freeze up and resulting crisis in confidence for
both the resource sector and the junior markets, so let�s drill down to what
the numbers say.
Endeavour�s quarterly results are largely influenced by the mark-to-market
change in the value of its investment portfolio, a virtual stroke of the
accounting pen. While Endeavour recorded $41.4 million investment value depreciation
for the last 9 months, they had booked a $41.2 million appreciation over
the same period in 2007.
When we look through such mark-to-market peaks and valleys what becomes clear
is that Endeavour�s financial performance has been stellar over the long term
but has high volatility, similar to the venture capital markets it has exposure
to. However, since the merger Endeavour�s business model has changed. It now
benefits from a steady stream of financial advisory fees, over $28 million in
the 9 months to March 31. With such relatively independent revenue (from the
inventory of its investments), these peaks and valleys in net earnings may be
somewhat tamed going forward. And with the monthly dividend payout to
shareholders, at least some of the share price volatility may also smooth out.
The bottom line is that Endeavour continues to offer significant leverage to
the resource sector�s bull market, now barely in year 8 of the historically 18
to 23 year cycle. Endeavour�s overhead is well-covered and relatively fixed,
and its investments have a record of significant appreciation over time,
notwithstanding that market sentiment can and will affect their day-to-day
market price until disposed of. Endeavour has only 32 million shares
outstanding and management has a large stake in the company, so everyone�s on
the same page with respect to their investment.
--------------------------------------------------------------
Current Price: C$6.85
52 Week Range: C$6.00 - C$10.60
Shares O/S: 30.95 million basic
Shares O/S: 37.55 million fully diluted (excluding out-of-the-money options
representing 2.76 million shares)
Market Cap: C$212 million
Cash on hand: C$49.1 million (Mar 31, 2008)
--------------------------------------------------------------
Conclusion
By integrating these two entities, Endeavour becomes better structured to
efficiently provide continuing and increasing investment opportunities, and is
better able to attract, retain and motivate key members of their team through
public-market equity ownership. The Endeavour team includes mining legends
Frank Giustra and Neil Woodyer. Combined with Frank Holmes as the visionary
front man of Endeavour Mining, the company will go forward as a powerhouse in
the mining finance sector � an excellent proxy for investment exposure to the
continuing secular bull market in commodities.
We believe that this merger will result in a gradual positive revaluation of
Endeavour�s share price. The Endeavour team owns a significant percentage of
the combined company and operations will be streamlined, with fees to Endeavour
Financial eliminated. Endeavour Mining has always traded at a significant
discount to its Net Asset Value (NAV) because it is viewed as a holding
company. With revenues and fees from all its different business activities
going to the one public entity, it should eventually command a higher multiple
from the market.
Comparable companies on the TSX like Quest Capital (QC-TSX) or Pinetree Capital
(PNP-TSX) trade at 1.5x book and 2x book respectively. If Endeavour trades like
its peers at 1.5 - 2 times book, the stock would be trading significantly
higher. In the U.S. merchant banking companies have recently traded up to 12
times book.
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Endeavour Mining Capital
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