Transcript of
Endeavour Financial
Corporation (EDV)
Third Quarter Results Conference Call
May 13, 2010
Bill Koutsouras, EVP, Chief Financial
Officer, Endeavour Financial Corporation
Steven Roberts, Director Investor Relations,
Endeavour Financial Corporation
Dana Merber, Analyst, GMP Securities
Marcello Kim, Analyst, Paulson & Company
Patrick Chen, Analyst, TD Waterhouse
Operator
Greetings, and
welcome to the Endeavour Financial Corporation Third Quarter Results Conference
Call. At this time, all participants are in a listen-only mode. As a
reminder, this conference is being recorded. It is now my pleasure to
introduce your host, Bill Koutsouras, Executive Vice President and Chief
Financial Officer for Endeavour Financial Corporation. Thank you, you may now
begin.
Bill Koutsouras, EVP,
Chief Financial Officer, Endeavour Financial Corporation
Thank you, Operator.
I’m joined today on this call by Steven Roberts, our recently recruited director
of investor relations and business development; and Neil Woodyer, our chief
executive officer was scheduled to attend the call as well but unfortunately,
due to some travel disruptions, will not be able to attend today’s call.
For today’s call,
I’ll take you through the current focus of our business at Endeavour and a
summary of our financial results and our gold investments. Following that,
we’ll have a question-and-answer session. So if I can ask everybody to move to
slide 3 of the presentation.
Endeavour is a gold
investment company, so Endeavour’s primary business is making active strategic
investments in gold-producing companies. As of March 31, 88% of our capital is
strategically invested in Crew Gold and Etruscan Resources, the first of our
two strategic investments in gold producers. Endeavour also has a merchant
banking business that offers financial advice and small financings to natural
resource clients. This merchant banking business is what provides the
manpower, the skills and the market and industry intelligence to drive the
primary gold investment business of Endeavour.
Moving to slide 4,
Endeavour’s gold strategy: As part of our gold strategy we target listed
gold-producing companies with quality assets but with financial or strategic
issues. We deploy the specialized skills of our team and our financial
resources to resolve the financial issues and to create growth plans and
improved share values of the individual gold companies that we’re investing
in. The ultimate goal is to create an intermediate-sized producer which will
drive higher valuation multiples and standalone junior producers. Following
the creation of an intermediate-sized producer, further value may be realized
through sale to a major mining company, merger and acquisition activity, or
market activity.
Moving to slide 5,
Endeavour’s gold investments: To date, Endeavour has made two gold strategy
investments. We own 55% of Etruscan Resources which trades on the Toronto
Stock Exchange with symbols EET; and we own 43.2% of Crew Gold. Crew Gold
trades on the Toronto Stock Exchange and the Oslo Exchange, and the symbol is
CRU. Combined, Endeavour’s two gold strategy companies have annual production
of 330,000 ounces. That’s 80,000 ounces from Etruscan Resources and 250,000
from Crew Gold. Gold reserves of 4 million ounces and gold resources in the
measured and indicated category of 6.5 million ounces. Of course we feel there
is significant exploration upside on both Crew Gold and Etruscan, and we’re
exploring opportunities to increase the reserves and resources through
increased exploration activity. Endeavour continues to actively work with both
Crew and Etruscan to complement growth and value creation initiatives.
Moving to slide 6:
Slide 6 highlights some of our recent financial performance for the quarter and
nine-month period. For the nine months ended March 31, we’ve generated revenue
of $323.6 million. 79% of that revenue was generated by the gold strategy
investments. Net income for the nine-month period was $277.6 million or $2.88
per share.
In terms of our
financial position at March 31, our gold strategy investments were valued at
$454 million. Our general merchant banking investments, $59 million; and our
shareholders equity was $532 million, which is equated to $5.54 Canadian per
share. Our net tangible assets have grown from $165 million to $479 million
over the last 12 months, and that represents a 191% growth rate in our tangible
net asset value.
Moving to slide 7:
Slide 7 is a summary of our profit and loss statement for the three months
ended March 31st and the nine months ended March 31, 2010. I’ll
just focus on the nine-month numbers, and you’ll see that the total revenue for
the nine months was $323 million, of which $256.7 million was attributable to
the gold strategy investments; $55.7 million the general merchant banking
investments; and
$11.2 million in advisory fees.
Moving to the
expenses, there was approximately $8 million in operating overhead attributable
to employee salaries, general and administrative costs and consulting fees,
then a larger component of more direct or variable expenses related to
performance-related bonuses of $6.6 million, which relates to the general
merchant banking investment performance and the advisory fees and the profits
from those segments of the business; and then a performance-related bonus
accrued for the gold strategy of $21.6 million.
You can see that our expenses are quite highly variable and really a direct
function of profitability and an important thing to notice that the
performance-related bonuses accrued for the gold strategy of $21.6 million,
both amounts are being deferred and will be paid up on the realization of
investments in the gold strategy. So you will see that number fluctuate in
line with the returns and the income and profits from the actual gold strategy
investments. All in all, net income was $277.6 million for the nine-month
period after accounting for income taxes and some noncash items like
amortization and stock-based compensation, and the basic earnings per share
were $2.88 U.S.
Moving to slide 8:
Slide 8 is a summary of our balance sheet as at March 31, 2010, and as noted
earlier, our gold strategy investments were $454 million; our general merchant
banking investments $59 million; so our total investments are
$512.7 million. The gold strategy investments represent 88% of the total
investments and our general merchant banking investments represent 12% of the
total investments. Net shareholders equity of $532 million, and as noted
earlier, our shareholders equity per share at March 31, 2010, was $5.54
Canadian.
Moving to slide 9:
Slide 9 just highlights how the gold strategy is building share value within
Endeavour. What we have here is a table that shows from March 31, 2009, our
tangible net assets at that time were $165 million and our shareholders equity
per share at that time was $2.88. You may recall that at March 31, 2009, that
was the quarter that we initially raised money for the purposes of deploying
into our gold strategy, so we figure that’s a very good measurement period to
look at going forward, and as of today 12 months have passed by and we’ve had
the net tangible assets grow to $479 million or Canadian $5.54 per share, and
it’s really primarily due to the growth in our assets from the two gold
strategy investments we’ve made in Crew and Etruscan.
Moving to slide 10:
Recognizing that the market valuation of the gold strategy investments, in
particular, Crew has changed and has decreased somewhat in value since March 31st.
We thought it would be worthwhile to provide an update in net asset value as of
current market rates, so this is prepared as of May 11th. In this
table we have the values as of March 31, 2010, which we reviewed already of
$532 million or $5.54 per share; and you can see the updated values as of May
11th. The gold strategy investments of Crew and Etruscan are now
$329.2 million. That represents a share price of Crew of $0.27.5 and $0.41 for
Etruscan. The general merchant banking investments are $51.8 million and that
decrease primarily due to the liquidation of some of the investments
post-year-end; and you can see the deferred bonuses payable attributable to the
gold strategy has gone from $21.6 million to
$12.5 million due to the reduction in the investment income attributable to the
gold strategy. So as I noted earlier, that number will change based on the
marked-to-market valuations every quarter on the gold strategy.
Moving to slide 11:
This chart highlights how our share price is building momentum, and we’ve
charted it over the course of approximately one year. You can see that sort of
during the March period to the September period, our shares were consistently
trading between $1.50 and $1.80 per share. Around September/October, we made our
initial investment in Etruscan Resources, and we saw some share price momentum
then and we moved up to around the $2 mark. And following our investment into
Crew Gold in late January and our follow-on investments in February/March,
we’ve seen some positive momentum in our share price. We’re currently trading
around $2.60 a share, and we’ve seen some very good increases in the volumes
traded for the Endeavour stock since this time period, from March 2009 onwards.
Moving to slide 12:
Slide 12 is meant to highlight that Endeavour has a committed management team
which we think is crucial in order to continue to drive the primary gold
investment business forward. I’m pleased to note that Neil Woodyer, our chief
executive officer, has agreed to sign on for a minimum of an additional
three-year term. In addition, our exclusive advisor here with Fiore Financial
who’s lead by Frank Guistra has been extended for an additional three-year
term, and that term now expires in April 2013. In addition to that, our core
professional staff members also have long-term incentives due to the deferred
gold strategy bonuses attributable to the Crew and Etruscan investments and
follow-on investments, since they will only be paid on realization.
In addition, I
thought it was worth point out that in fact 11 of our core senior professionals
have quite a long tenure with Endeavour, and they have an average of eight and
a half years in terms of length of service, so we have a very core management
team that’s been with the company for quite a large number of years. And as
noted earlier, I’ve been joined on the call by Steven Roberts who we’ve
recently recruited to head our IR efforts, and we look forward to working with
Steven and Steven looks forward to going out on the road and meeting some of
our current investors and attracting new investors to Endeavour at the same
time.
Moving to slide 13:
Just a few concluding comments about Endeavour and our future plans. As noted
earlier, we’re a gold investment company. Our first two investments have been
successful and demonstrate that our strategy works. Our underlying assets have
a current market value of over $400 million, and that’s compared to our current
market cap of $230 million, but our share price is building momentum and Endeavour
does remain poised to capture additional gold investment opportunities similar
to Etruscan and Crew; and as we’ve noted in earlier calls, our approach in
terms of follow-on investments could include strategic alliances, co-investment
partners, and also potentially developing opportunities with our current
investments.
That concludes the
presentation, and now I’d like to hand the call back to the operator to
coordinate the question-and-answer session.
Operator
Thank you. We’ll now
be conducting a question-and-answer session. Our first question comes from Dana
Merber from GMP Securities.
<Q>: Just a question on the bonus
clause that you put in your financial statements regarding a change of control
and the fact that assets will be put in a trust. Can you just clarify that for
us?
Bill Koutsouras, EVP,
Chief Financial Officer, Endeavour Financial Corporation
Sure. Just simply given that we’ve taken the
approach that the gold strategy bonuses will be deferred. There’s obviously a
risk that there’s a potential that if someone were to acquire control of
Endeavour that they could potentially decide not to pay out the bonuses to the
professional staff members of Endeavour, so just in order to continue to
incentivize them and continue to attract and motivate staff, we thought it was
worthwhile for the company to make a commitment and just set aside those
assets, such that if there were a change of control, the assets are there and
available to be distributed to the staff members. It doesn’t change the fact
that we still have full beneficial ownership and voting control over those
investments. They’re just precautionary measures to ensure that people don’t
feel that there is a risk of them losing their entitlement to those bonuses if
there was some type of a change-of-control event.
<Q>: So this is not segmented on your
balance sheet or anything like that; that’s the listed liability?
Bill Koutsouras, EVP,
Chief Financial Officer, Endeavour Financial Corporation
That’s right. You have the listed liability,
which is the gold strategy bonuses, and it’s not segmented in any way other
than that.
<Q>: Okay, thank you.
Operator
Thank you. Our next question is from
Marcello Kim from Paulson & Company.
<Q>: I’m just wondering, as of the end
of March you have $19.2 million in unsettled trades. I’m wondering how that
number looks for the updated May 11th NAV that you are calculating.
Bill Koutsouras, EVP,
Chief Financial Officer, Endeavour Financial Corporation
There are no unsettled trades as of now, so
the cash balance you see as of May 11th is the cash balance that’s
in the company as of today, which remains at about
$10 million.
<Q>: Okay, and so the merchant banking
investments, we don’t have to net out basically anything anymore.
Bill Koutsouras, EVP,
Chief Financial Officer, Endeavour Financial Corporation
That’s correct.
<Q>: All right, thank you.
Operator
Thank you. Our next question comes from
Patrick Chen from TD Waterhouse.
<Q>: I have a question relating to the
outstanding lawsuit. Is there any update on that at all?
Bill Koutsouras, EVP,
Chief Financial Officer, Endeavour Financial Corporation
No, there’s no update
beyond what we’ve put in our public disclosure. Quite frankly there hasn’t
been very much activity on that over the past several months, and we haven’t
been devoting a lot of attention to it because things have gone quite quiet.
<Q>: Typically
how long does it take before it ever – if it were to go to court, how far away
would that be, based upon what you’ve heard from your sources?
Bill Koutsouras, EVP,
Chief Financial Officer, Endeavour Financial Corporation
It could take years,
from what we’ve heard from our sources.
<Q>: Okay.
What percentage of the common shares of your company are held institutionally?
Do you have any perspective on that at this point in time?
Bill Koutsouras, EVP,
Chief Financial Officer, Endeavour Financial Corporation
I don’t have numbers
as of today. I know there’s approximately 15% of the company that’s held by
sort of the core management team. Beyond that we have quite a good-sized
institutional shareholder base. When we did our financing back in March of
2009, that’s when we created about two-thirds of our shares and that was all
institutional buying that came in at that time. So assuming they still hold
the stock, we still have quite a large institutional shareholder base.
<Q>: Okay,
thank you.
Operator
We appear to have no
further questions. I’d like to turn the call back over to the speakers for any
closing comments.
Bill Koutsouras, EVP,
Chief Financial Officer, Endeavour Financial Corporation
Thank you, Operator.
Thank you to everybody for attending today’s Webcast call and for your continue
support as shareholders. If you do have any questions that were not addressed
on today’s call, please feel free to e-mail them to us or you can get in touch
with us directly, in particular Steven Roberts, our new director of investor
relations. His contact details are on our website and they’ve also been
included in the footer of our recent press release. Thank you again for
attending today’s call and thank you for listening. We look forward to
providing continue updates as we move forward with the strategy.
Operator
Thank you, this
concludes today’s teleconference. You may disconnect your lines at this time
and thank you for your participation.
