Growth Stocks Weekly
Junior Gold and Natural Resource Sector Report

Endeavour Mining Capital
The Smart Money

Richard Reinhard
rreinhard@shaw.ca
written May 8, 2008
published May 22, 2008

Richard Reinhard understands that the most precious commodity in this bull market is people. He says that's why he has been so keen on Endeavour Mining Capital (EDV-TSX) since this commodity market started to run in 2001. The company's leadership team, Neil Woodyer, Frank Holmes and Frank Giustra, has generated billions in shareholder value by creating some of the most successful metal producers of this decade - Wheaton River Minerals, Northern Orion Resources and Urasia Energy among others. Reinhard updates the recent activities of this management brain trust in his usual detailed style, and adds that they now own a significant position in the company.

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 worrying about being accredited investors, or making the connections necessary to access such timely opportunities, and pay a steady dividend.

Last summer Endeavour Mining [Capital] Corporation acquired 100% of sister company Endeavour Financial Corporation, a privately-held investment banking firm. [read pdf] 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 from the current environment except that commodity prices are 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 various specific-resource-driven 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.

The 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 generated its revenue primarily from monthly retainers and transaction-oriented success fees. The acquisition provides a further lift and some 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.

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.

Endeavour Mining Capital
Current Price: C$6.85 (May 8, 2008)
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 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 traded up to 12 times book.

written May 8, 2008
Richard Reinhard
email: rreinhard@shaw.ca
website: http://www.gsweekly.com

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