Description

Endeavour Financial

Endeavour (EDV CN) is a Canadian merchant bank focusing on the natural resource sector.  At its current price of 1.40 per share, the company is trading at 66% of the cash and investments on the balance sheet at 3/31/09 (2.10 per share).  Sources of upside include a successful launch of the company's gold-focused investment fund and/or a recovery in the advisory business.

***All figures in CAD***

Cash and Investments

At 3/31, EDV had 115mln of cash on the balance sheet (1.18 per share) invested ST govt treasuries.  The company also had 89mln of investments, invested mainly in publicly traded equities (73.5% of Q3 09 investments, convertible debt (17.8%) and warrants (8.7%).  According to mgmt, more than 50% of the portfolio at 3/31 was held in 4 stocks, Pacific Rubiales (PRE CN), Gold Wheaton (GLW CN), Rusoro Mining (RML CN equity) and Baja Mining Corp (BAJ CN).  Based on the performance of these 4 known securities and using the TSX Venture Index as a proxy for the rest of the portfolio, it is likely that the current value of the investment portfolio is materially above the 89mln reported at 3/31.  However, assuming the 3/31 value, EDV has 2.10 of cash and investments per share.

Investment Fund

EDV is currently trying to raise a $500mln (400mln external, 100mln EDV cash) to create a fund to invest in junior gold companies and combine them into an intermediate producer.  In doing this, the company hopes to benefit from a valuation rerating by creating a gold producer of significant size as well as have upside from any increases in the gold price.  The exact details of this fund are still being worked out but EDV expects to receive management and performance fees on the outside capital and invest for a multi-year period.  If this fund is successful, the upside for EDV shareholders could be material through both the appreciation of EDV's investment as well as cashflow from the fees over the life of the fund.  As the specific details of the fund remain unknown, it is difficult to quantify this impact accurately but I think it is relatively apparent there could be significant upside if the fund is successful.

Advisory Business

EDV is a leading merchant bank for natural resource companies.  The advisory business has been struggling so far this year due to a dearth of natural resources deals in the past 3 quarters.  I estimate that the business has burned about 4-5mln of cash through the first 3 qtrs of FY 09.  However, if natural resource transactions resume this business could produce significant positive cash flow (+33mln EBITDA in FY 08).  Once again, while it is difficult to ascribe a specific value to EDV's advisory business, this value is likely to be greater than zero. 

Risks

The most obvious risk is that EDV's existing investments collapse and the companys loses most of the money that it invests in the gold fund and as well (perhaps gold prices crater).  However, I think the current discount to cash and investments helps mitigate this risk somewhat. For example, if EDV loses 50% of the cash that it invests in the fund and its existing investment portfolio declines 50% from now, then the company would have adjusted cash and investments of 1.05 per share which is 25% below the current share price and assumes 0 value for the advisory business.  As far as risks to the upside, I would also note that EDV has 32.5mln warrants outstanding with a 2.50 strike price, the dilution from which should be considered when thinking about upside scenarios. 

Conclusion

Overall, if EDV is successful in raising the fund, then you have 1.39 per share of remaining cash and investments and a free look on the success of the gold-focused fund and any potential recovery of the advisory business.  If the company is not successful in raising the fund, then you have a company trading at a significant discount to cash and investments which is not burning material cash with an advisory business that could benefit from an upswing in resource transactions.  Thus, I believe that while it difficult to pin exact values on the company, EDV appears to be a situation with limited downside and significant upside potential. 

Catalyst

Launch of fund

Recovery of Advisory business