Interview: Endeavour's CEO Sebastien de Montessus on M&A, the "magic box" and creating a Top Ten gold miner

Endeavour Mining (TSX: EDV; US-OTC: EDVMF) has become a Top Ten global gold producer since announcing two major acquisitions last year - Semafo and Teranga Gold. It is now the largest gold producer in West Africa with a production base across six mines in three countries, and has the largest exploration portfolio in the region, with a development pipeline of six greenfield projects. Last year Endeavour produced 908,000 oz. gold, up 39% year-on-year, at all-in sustaining costs of US$860 per ounce, and announced its first-ever dividend. In less than 18 months it also reduced its net debt position by over US$660 million, ending 2020 with a cash position of US$70 million. This year the company's priority is to unlock value organically through mine life extensions, asset optimization initiatives and by advancing its brownfield and greenfield projects through studies and exploration. It is also planning to list on the London Stock Exchange in the second quarter of the year. The Northern Miner named Sebastien de Montessus its Mining Person of the Year for 2020 and recently caught up with the CEO at his vacation home in France. He lives and works in London, where the mining company has its headquarters. This is an edited version of our conversation on February 5.

The Northern Miner: You executed two large acquisitions last year. That's phenomenal.

Sebastien de Montessus: First of all it's not M&A just for the sake of M&A. And in order to seize opportunities you have to be extremely agile and you've got to have the right team with you to be able to move forward quickly. If you take the case of Semafo, a year before, that was 2019, we had done comprehensive due diligence and negotiations between Semafo and Endeavour, if you recall it was probably six months after they commissioned Boungou, and therefore they had a very strong rally in their share price. We were just finishing the construction of our major Ity mine and therefore, we were not yet benefiting from a re-rating after commissioning and therefore when we did the due diligence we basically concluded that we were unable to find grounds in terms of valuation, from both sides to make a deal happen, so we just left the Semafo subject there, and we said, 'Look, maybe another time.' And as you know in M&A, it's about windows and conditions to make things happen between valuation, between the teams, the management, the board, the shareholders. There are a number of factors that need to be aligned to make a deal happen. And unfortunately, after the Bougou attack on the Semafo asset, I think that the management of Semafo was a bit shocked by the violence of the attack, and I think that they realized at that time, in January 2020, that they were extremely fragile with two assets in the same country, it was a challenging country, it was probably better for them to agree on a combination with Endeavour - to be part of a larger group with more assets and more diversified geographically. And obviously after the Boungou attack their share price had been significantly underperforming, and therefore the conversation was much easier than a year before, and given that at that time we had done all the due diligence it was a very, I would say, easy and quick conversation because we had already done all the due diligence. And I think we were lucky enough to strike a deal in the beginning of March-March 20-just three weeks ahead of the epidemic and the major first lockdown.

If we look at the Teranga transaction and the history behind the transaction, we had done in the past, a few years ago, some due diligence on Massawa when Mark Bristow at Randgold wanted to sell this project. When we looked at it we concluded that the most obvious owner of this asset was Teranga because of the proximity of the Sabodala plant and therefore at the time I said to Mark, 'Mark, you should sell this asset to Teranga.' But there was at the time a bit of tension I would say between Teranga and Mark, and what I told him was, 'Look, I'm going to introduce you to David Mimran, the major shareholder of Teranga. He's an African and I'm sure you'll get along very well,' and the introduction I would say eased the conversation between the two companies and they were then able to strike this transaction between the two companies and shortly after they announced the transaction, David called me and said: 'Now that we have Massawa as part of our Sabodala complex, why don't do we do a merger between Teranga and Endeavour?'

I told him 'Look, we'd just announced the Semafo transaction so it might take a bit of time before we are ready,' and shortly after that, Bristow called me and said: 'This is a one-time opportunity because you've got the two biggest shareholders that are supportive of this transaction. We believe that Endeavour is rightly placed first of all, to develop the Sabodala-Massawa complex, and secondly to take this new Randgold position in West Africa, so let's do it,' and I think I was helped with a great team that wasn't shy in efforts in completing one transaction and then moving to the second one, with all the complexity as you can imagine of doing those things through different lockdowns and within this Covid-19 crisis, including integrating Semafo on one side while doing the acquisition of the second one, and now we're working on the integration of the second one. So it's been a pretty busy year but this Teranga acquisition was I would a logical add-on to our portfolio one day or another, simply because it was providing us with a potential Tier One asset with Sabodala-Massawa, but more importantly was giving us this diversification across three major countries in West Africa rather than being too focused on Burkina after the Semafo acquisition. I must say I'm glad and extremely happy with those two acquisitons because this allows us to complete the five-year strategic plan that I had built when I joined Endeavour back in 2016. We now have an amazing portfolio. We have a very strong position in West Africa and we see a lot of potential going forward with our organic growth and our portfolio, so I'm extremely happy with this 2020 challenging year.

TNM: Do you think the gold industry needs more consolidation?

SdM: Well I do think that the consolidation in the sector needs to continue, simply because if this industry, which is extremely small within the natural resources sector, wants to attract generalist funds, we need to have bigger names that are more relevant for generalist funds. So I do believe like others, and with Mark Bristow in particular, that this industry needs to continue to consolidate.

TNM: Is more M&A in Endeavour's future?

SdM: I think we've done our share and we've now completed two major acquisitions. We are extremely happy with the portfolio that we have. What's very important for us is that we want to remain focused in West Africa because we do see a lot of opportunity in this region and being focused in one specific region from an operational standpoint is a big plus. It's much easier. Much more synergies. And much easier for me from a management perspective, to have to stay in one time zone. When I'm travelling to West Africa I've got all my different sites, which are I would say, a two-hour flight from each other. So for example, last week, I spent ten days in West Africa and I was able to go to the three countries and to five out of the seven assets that we currently have. So it's extremely efficient. The current portfolio we have now has major organic growth, with two projects that will go into construction in 2022, a big budget for exploration, and hopefully with new greenfield discoveries to come, and therefore we don't see any more the necessity for external growth or M&A.

The mill at Teranga Gold's Sabodala gold mine in Senegal. Credit: Teranga Gold.

TNM: You spend one to two weeks a month on the ground in West Africa.

SdM: It varies between one to two weeks a month. We tend to quantify ourselves as hands-on management, spending a lot of time on the ground for two reasons. One is that things are happening on the ground, and not in London, and I tend to keep a very lean structure centrally at the headquarter level. So as part of our organization, the general manager of the mine site is really at the heart of our organization. He has all the levers to deliver his budget, which is production, cost, and cash flow, and we are there to support him. And to understand all the issues they are facing - all our GMs -obviously you need to spend a lot of time on the ground to understand them. The second thing is I'm spending a lot of time with our communities and our host governments in trying to understand what can we do to be their preferred partner when we speak about gold mining. We are currently the largest gold producer in West Africa. If you take Senegal, we are the largest gold producer; Burkina Faso we are the largest gold producer; C??te d'Ivoire we are the largest gold producer. In Burkina Faso, for example, about 60% of the gold production in the country comes from Endeavour and we are the largest private company in terms of employment. So this gives us a lot of responsibility. The governments in each of the countries where we operate see us as a potential role model for the other mining companies and for this you need to spend time there to understand what they are looking for and what we can do better to improve those relationships and make sure that all stakeholders are benefiting from those operations.

TNM: One of the things that seems to differentiate Endeavour from most of its peers is your "magic box" criteria: Development projects and mines need to have all-in sustaining costs below US$850 per oz. and have a ten-year mine life. And you've always said that you're not about production, you're about controlling cash flow and capex - the things that are in your control - unlike the gold price. While you've been at Endeavour you have also announced the sale of four mines that haven't met that criteria and you've often said you can't be emotional about your mines, you have to get rid of them if they don't fit into that "magic box."

SdM: The main reason why we call this the 'magic box' and I'm really focused on this magic box is, at the end of the day, mine life gives you visibility, and if you are able to have at least a ten-year mine life ahead of you, it means that you have time for exploration to either extend this mine life or to be able to prepare the next projects that will give you the answers to replace the end of one mine. The difficulty when you have a short mine life like three years or five years, is that, as a CEO, you already know that you need to prepare your next move, and if you don't have that move internally, it means that you're going to have to do some M&A and you're going to be forced into M&A and this leads usually to crazy decisions where you prepare to pay whatever value to get your next mine simply because you are running out of production. So having visibility allows you to control your destiny.

Then on the all-in sustaining costs, being able to be below US$800-US$900-US$850 per oz. is basically the bare minimum required so that whatever the gold price - obviously when gold prices are US$1,800 it is a different story - but we know that this is an extremely volatile market and there are some ups and downs and the down can go down as low as US$1,000 per oz., as we saw three years ago, so with US$850 per oz. AISCs it allows you to continue to generate cash, and be able to allocate the cash you generate to your four pillars and those four pillars are: sustaining and non-sustaining capex to maintain your current operations; so obviously you need to continue to invest every year in your existing operations; the second pillar is exploration. You need to be able to build and prepare your greenfields and discover the next ounces that will help extend your mine life or build your next projects. The third pillar is having the capacity to build your next mine, if you've got financial constraints and don't have the balance sheet to develop your next mine, then you've got a problem. And the fourth one is being able to reward shareholders who are backing you across cycles, by providing the right returns to them, either through dividends or through buy-backs.

So the only way to address those four pillars on a regular basis, irrespective of the gold price, is to ensure your costs remain below US$850. That's the only way. Otherwise what happens is that you usually have to make some compromise; and usually those compromises start by stopping exploration; stopping dividends for shareholders; not being able to build you next mine; and ultimately die. So those criteria are extremely important to build what I would call a resilient business across cycles, and that's what we're trying to do and I'm trying to achieve with Endeavour, is making sure this company can be resilient across cycles for the next 20 or 30 years.

TNM: Your AISC guidance for 2021 is a bit higher - at about US$900-US$950 per oz. How can you get those AISCs down to your goal of US$850 per oz.?

SdM: The current guidance was including Agbaou and Karma, and we've announced that those assets are becoming non-core as part of the Teranga transaction. So if you take out Agbaou and Kama, and you include Teranga's two assets, Wahgnion and Sabodala-Massawa, you will see that this portfolio is around US$850 per oz. or below in terms of AISCs. And we'll come up with updated guidance as soon as we close the Teranga transaction.

TNM: In November you announced Endeavour's first ever dividend. How did that feel?

SdM: I'm extremely happy to reward shareholders that have been backing us. Back five years ago when I took over Endeavour, it was a US$300 million market company with US$300 million of debt, and not able to fund the construction of Hounde, which was an amazing project. Since then, we've basically invested close to US$1 billion to build Hounde and Ity, plus on top of that spending US$40-45 million a year on exploration. We went to a peak of US$660 million net debt in mid-2019 and in less than 18 months we've been able to eliminate all that debt and come up with a US$70 million net cash position at the end of 2020. So it just feels like all the efforts we've put in and the strategy that we planned is paying off and therefore we're extremely happy to be able to reward the shareholders that have been backing us for the last four or five years.

TNM: Endeavour is one of the few companies that has announced hard targets on finding gold ounces. You said your company under VP Exploration Patrick Bouisset would find 10 to 15 million oz. of gold over five years. And then between 2016 and 2020 you discovered 8.5 million oz. through drilling, is that correct?

SdM: Yes we said back in 2016 we said: 'Let's be ambitious in terms of exploration strategy and we said we can be ambitious because West Africa, and in particular the Birimian Greenstone Belt that we are targeting across West Africa, is extremely prolific, and this is why so much of the region has potential for new discoveries. Why are we focusing on Africa? The most obvious reason is that over the last ten years it's been the biggest region worldwide in terms of ounces of discoveries and we knew that through the portfolio we had between La Mancha and Endeavour, when we joined Endeavour and La Mancha, that we had an amazing portfolio. And we said, which was a bit unusual, we said to ourselves, in the same way that operations are accountable in delivering yearly budgets, in terms of production, costs, and so on, the same way projects are accountable within our team in delivering on time and on budget. Exploration needs to be also accountable to the budget we are allocating. And therefore we agreed with Patrick that the objective was to find between 10 and 15 million ounces of indicated resources over that five year strategic plan.

But we went even further in defining where we expected those ounces would come from and this has all been proven right, progressively. At the end of 2020 we reached 8.5 million oz. and the last year of this plan was 2021, and we are expecting to find again, between two and three million oz., at least of indicated resources in 2021, which will put us right where we expected five years ago. It was a bit unusual to say we're going to invest in exploration ... Being able to say we're going to invest in exploration and this is what we're going to find over the next five year period, that was, I would say, brave - but we knew we had all the elements demonstrating that we should be able to reach that number and it's pleasing to see that delivered.

The mining camp at Boungou in Burkina Faso. Credit: Semafo

TNM: Before you joined the mining industry you worked as an investment banker at Morgan Stanley. Had you worked on mining deals there?

SdM: No not at all. I started in M&A and capital markets, but it was more on technology and telecom, so that was more the background. In fact, I discovered the mining industry when I joined the Areva group - the world nuclear leader. It had a mining division and when I was 32 years old I was offered the helm of the mining division. We were at that time the largest uranium producer - with in fact a lot of mines in Saskatchewan. So I spent five years with mines across Australia, Central Asia, Africa and Canada, including Saskatchewan, with different mines and joint-ventures we had with Cameco, so at that time I was very close to Cameco. Then in 2012 I decided to leave that group following the Fukushima accident. I didn't see a lot of future in the short term in the nuclear sector, and at that time I had a small junior gold company within my portfolio at Areva, that Areva decided to sell and met with Naguib Sawiris, this Egyptian billionaire, entrepreneur [in the telecom sector] and together we decided to buy this company from Areva, and this is how we started in gold. So we had assets at the time in Australia, Sudan, and Cote d'Ivoire, and the first thing we did was grow our Australian business and we vended into Evolution Mining, and we became with Naguib the largest shareholder of Evolution with 30% of Evolution, and Naguib and I were on the board of Evolution and we helped Evolution to grow from a mid-tier or a junior company to the second- or third-largest gold producer in Australia, and then my side was from an operational standpoint to focus on Africa, and to be able to build a leading African gold producer, which we did, by taking over Endeavour, back in 2016.

And I must say I'm passionate about this industry and leading management teams on site. I'm passionate about this industry and leading management teams on site through those challenges. It's fascinating in my job to be able to change worlds, I would say, between having a headquarter in London, and doing road shows in New York and Toronto, and at the same time spending a lot of time on the ground with the team next to geologists in exploration, or next to the plant and the mine, or talking to presidents and prime ministers at the same time, and having amazing community projects or working on bio-diversity and protecting lions. The wealth and the spread of subjects that you are able to deal with in my position is completely amazing and I love my job and am so blessed with this opportunity and that's thanks obviously to Naguib Sawaris, who gave me his trust and empowered me to make those developments at Endeavour, but also our board, and ultimately the amazing team I have.

TNM: You've always said that you believe you can operate safely in West Africa - not everyone would agree with you. What do you tell people who say it's not a safe jurisdiction?

SdM: What we tend to say is that security is obviously a very key element, this is a commitment that we take to our employees, our contractors and our suppliers, so we take it extremely seriously. We are investing a lot in security. We work very closely with our host countries and that's the key. You don't manage security at the mine site in the middle of Burkina Faso without having very very storn ties and relationship with the Burkina Faso government. We have a dedicated security unit, which is structured as a business unit, and which is led by ex-French military, which has all the right connections and network, which is ex-colleagues, which are working in particular with the region with the French army.

But we are also working very closely with other foreign governments which are involved in the region, whether it's the U.K. or the U.S., in terms of intel. We've made as a part of our model for all our mines, we have airstrips on site at each of our sites to avoid using roads for our staff and in particular all our expats, and we've got our own planes to ensure that we are able at any time to move people around. So yes, it's a question of taking this subject extremely seriously, and being able to anticipate, I would say, security issues rather than react. We know that the day you start being in reaction, you are too late, so it's all about getting all the right intel and information to be able to adjust and adapt your system to the potential threat.

TNM: You must be one of the younger CEOs in the business. Last year when you finessed those deals you were just 45 years old.

SdM: I just passed 46 a month ago!

TNM: That's pretty young in the mining business, wouldn't you say?

SdM: I can't say. I had a boss in the past who told me that age is irrelevant, it's more a question of maturity and ambition, and I guess I was at the right place at the right time.

TNM: People I have spoken to about you say you have a good sense of humour, which can be a great asset in the mining business.

SdM: Yeah. And I think if you want to enjoy life you can't be too serious. This is a business where you're facing problems every day; there's not a single day where I don't receive a call about a tax issue, a security issue, a safety issue, an operational issue, every day. So if you're too stressed by that I don't think you can stay long in this industry. So you need to be able to step back a bit and focus on your strategy and get the right people around you to master all those subjects. At the end of the day I like to say, I tend to be, I don't know what the proper word is in English, but I'm a wolf leading a wolf band. Some CEOs are known to be with a big ego and it's their company and it's a one-man show. This is not me. It's all about the team. We're doing all that with the right team. I'm spending a lot of time with them, and this is what allows you to do bigger things.

TNM: How do you de-stress? How do you spend any free time you have?

SdM: I spend time with my family and my kids, which is essential, and doing a lot of sports. This helps probably take out some of the stress that you get. I'm doing a lot of skiing, a lot of sailing, a lot of golf, trying to be outdoors, and spending more and more time with my kids. I have four kids, the eldest is 18 and the youngest is eight.

TNM: What is one of the most satisfying things about working in the mining sector?

SdM: When you go into a village that doesn't have electricity and you put in place projects to bring electricity, and then you are part of the day when you're switching on, for the first time, lights in that village, and you've got hundreds of people around you, kids, women, who are just cheering and dancing because they are so happy with what we've just done - this is an emotion that is sometimes difficult to explain to people in London, for example, because this is so far away from what we're used to. And that's the simple joys that I love so much about this industry, is that we are impactful. Sometimes I'm annoyed by comments I hear about the mining industry around ESG. There are not many industries that are so impactful in terms of having the ability to change peoples' lives, and this is what is great about this industry. On the one side it's about managing a business, leading a team, and on the other side, it's about being impactful and changing peoples' lives.

TNM: What is left on your to-do list?

SdM: We've got a lot going on. First thing is do a successful integration of both Semafo and Teranga, and I guess the immediate big challenge for us is getting the London listing that we're targeting for June this year. And then it's going to be all about preparing the next projects that we want to build in 2022. The aim is to launch two in construction in 2022. So there's still a lot to be done, which is exciting for me and for the team.