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Endomines - Uncertainties remain high

Endomines' H1 2023 revenue aligned with our estimates, yet profitability fell short of expectations. Due to estimate changes, continued uncertainty regarding the US asset portfolio and stretched balance sheet, we downgrade our rating to HOLD (BUY) and adjust TP to EUR 4.7 (5.6).

Production developed as estimated

Revenue in H1 2023 amounted to EUR 10.7m, up by 91.1% y/y. The reason for strong growth was previously announced increase in gold production. The production increased from 3,478 oz in H1 2022 to 6,753 oz, up by 94.1% y/y. The company’s EBITDA reached positive territory at EUR 0.4m, (-3.5m H1 2022) yet was lower than we anticipated (Evli est. EUR 1.6m). The reason for lower-than-expected profitability was higher overhead costs and lower than anticipated profitability for Pampalo mine. With the modest profitability, the company’s cash flow from operating activities was EUR -2.3m and cash in hand stood at EUR 1.2m. Despite the convertible loan financing that was agreed upon in June, the current cash position is arguably low.

 

H2 volume estimates stable, profitability lowered

Endomines updated its FY 2023 outlook, anticipating Pampalo production to hit the higher end of the growth range (+35-55% y/y). We maintain our production estimates for H2, already projecting a 54% growth in produced ounces for FY 2023. Profitability wise, the main changes relate to Pampalo as the cash cost for H1 2023 was at a higher level than we had anticipated. With the revised estimates, we expect EBITDA of EUR 5.0m for Pampalo for FY 2023 (prev. EUR 7.2m). In aggregate, we now expect group EBITDA of EUR 0.9m (prev. EUR 3.5m). Alongside the updated production guidance, the company reaffirmed its goal to finalize partnership discussions concerning its US assets by the end of 2023. Endomines conducted preliminary negotiations with potential partners during H1 2023 yet there was no concrete evidence yet regarding potential deals.

 

Current valuation appears fair considering the risks

Given the uncertainties, we maintain our valuation on the lower end of our SOTP-based valuation range. Driven by the beforementioned estimate revisions, continued uncertainty regarding the US asset portfolio and stretched balance sheet, we lower our rating to HOLD (BUY) and adjust TP to EUR 4.7 (5.6).

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