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Executives

Neil Woodyer - Chief Executive Officer

Adriaan Roux - Chief Operating Officer

Christian Milau - Chief Financial Officer

Analyst

Nicholas Campbell - Canaccord

Magda Ogrodowska - GMP Securities

Fletcher Tully - Goldman Sachs

Endeavour Mining Cor (OTCQX:EDVMF) Q1 2013 Earnings Call May 15, 2013 11:00 AM ET

Operator

Greetings and welcome to the Endeavor's Mining first quarter 2013 results webcast. (Operator Instructions) I would now turn the webcast over to Neil Woodyer, Endeavor's CEO.

Neil Woodyer

And with me I have Attie Roux, our COO; and Christian Milau, our CFO. Before I start the formal part of the presentation, can I just apologize to the U.S. shareholders, whom I was suppose to meet with last week, but unfortunately I had to go down to Ivory Coast to meet with the President of Ministry of Mines, to discuss the convention. But I am pleased to say that both agreed, we would have the Agbaou convention within the next few weeks and that it would not have a negative economic impact on the project. So that's very good. And I'd just like to apologize to the shareholders and also to John and Brad.

So moving, if we turn to Slide 4, this gives us the overview of what happened in the last quarter. Encouraging results, we produced 73,627 ounces of gold and our all-in sustaining margin was $39 million. The price we achieved in the quarter, realized price was $1,626 and our cash cost were $897 an ounce and our all-in sustaining cash cost was $1,083.

Now, obviously we had a new gold price environment from where we were last quarter and that $1,400 gold, we're down about $50 million of revenue for the next nine months compared with our original forecast, which we prepared at $1,600. And that affects our revised sustaining margin and the sketch on the left, shows original forecast based at $1,600 and it shows the subsequent forecast based upon the $1,400, and that's also based upon the midpoint of our guidance for production cost and also for production.

And as a result we are of course focusing on the core operations and key growth projects, and limiting our spending in other areas and all those things is a good thing to do anyway. But if you look at Slide 5, the cost reduction and cash flow optimization program that is now our primary focus, and we're doing this by rebudgeting at mine-level, at mining, operating cost, CapEx, working capital at the mine-level and we're also looking at non-operating costs and corporate costs.

From a corporate point of view, we've reduced our budget for the year for G&A from $20 million to $15 million and we're making those savings now. We've also reduced our exploration budget for the year from $20 million to $15 million. But very importantly, we are maintaining our expenditure at Tabakoto and Kofi, because we believe they have very good potential. And we are not getting back on the underground drilling exploration program that we have at Tabakoto.

For historic and acquisition purposes, Endeavour owns one of the largest land positions in West Africa. Before the Avion transaction, we were the third largest. I hate to think what we are now. So one of the things we are doing is reducing that position over the next period of time to about 50%, so we can focus on what makes sense and bring it back into a more reality level.

We're also looking at the sale of non-core assets. We have so far this month sold our position in Rare Earths and that generated $5.3 million. We're also putting pressure on to get Finkolo closed and we hope to do that shortly. So we are certainly seeing at least $20 million from non-core assets coming in this next couple of months or so.

If we turn the page now to Page 6, where we're looking at the cost reduction and operation cash flow improvements from our operations, and Attie should be talking to this in a bit more detail later on in the presentation. We've started at bottom-up review of all our costs. We are reviewing all our major contracts, both our supply contracts and also our contractor mining contracts. We're reviewing our staffing structures and staffing levels.

We are particularly emphasizing working capital where we think we can, I guess, start substantial reductions in inventory and then VAT payables or receivables rather. We're looking at other ways to maximize our cash flow. We are certainly emphasizing joint purchasing across the mines and looking to see how we can increase our power efficiency and we're also looking at producing the level of overheads of the operation.

So a very significant bottom-up program of rebudgeting and looking at a new profile of costs going forward. We are very pleased with the progress that we're making on the Tabakoto cost reduction and restructuring plan, and we'll see those results so far. And we're also intensifying the focus in that area as well.

Looking at Page 7, we look in terms of our growth plans for the year. First of all, looking at the Tabakoto mill expansion, it has been complete. Ramp up is underway and we expect to have that fully complete by the end of the quarter as scheduled, and Attie will talk to that a little bit later on. So we're anticipating an annual rate of about 150,000 ounces a year in the second half of the year.

The other development project of course is Agbaou, where the construction is proceeding on schedule towards initial production in the first quarter of next year. The project is over 60% physically complete. We still have about $100 million actual cash spending remaining. We have $128 million of cash bullion and we also have good operating cash flow coming through.

So we are pushing ahead with the construction of Agbaou, knowing that we can finance it not fairly at these prices and recognizing today's price, but also at lower prices, and recognizing that we have significant cost reduction program going forward. So we feel comfortable that we can implement our expansion plan during the course of this year.

I'll now hand over to Christian, who will take you through the numbers in more details for the quarter.

Christian Milau

Thank you, Neil. Turning to Slide 8, the all-in sustaining margin generation for the first quarter, the margin was about $39 million, which is equivalent to the 33% or 24,000 ounces of the total ounces sold. Of that we've also invested $56 million in new mine development exploration, and we'll go through that on the next slide. And ultimately that results in cash flow of negative $17 million. We've invested a little bit more than we've actually generated in the quarter.

Turning over to the next slide to Slide 9, that just provides a little bit more detail on the actual investments. As you can see on the left of the graph there, the $39 million margin. Agbaou makes up the vast majority of spend there at almost $30 million. I think almost $3 million spent on Nzema development. Tabakoto, we've included the mill expansion and the development capital in there for almost $50 million. Houndé continues along with $2 million of spend. Some spend on Kofi, Ouaré and some regional exploration was a little bit allocated to the corporate G&A to make up the negative $16.6 million cash flow.

Turning over to Slide 10, just to give you an idea of our starting point and our ending point on the cash equivalents and bullion position. We started with $151 million at beginning of the year, adding the negative cash flow based on the margin, less the investments of $16.6 million. And then some small other items, there was a small amount of shares issued and $2.5 million of cash received on those issuances after the Avion transaction. Some of the options, I think we're exercised.

The change in the market value of the gold bullion was another $2 million reduction. And then a small amount of working capital outflow, some interest paid of almost $2 million and small other amounts to end up with $128 million at the end of the quarter. And then, on top of that there is some marketable securities of $7.3 million. And since quarter end, we've actually liquidated a small amount of that as well, so that's down a little bit.

On top of this, which is not included in here is obviously the $5.3 million from the sale of Namibian Rare Earths, which came in the second quarter, so you'll see that coming through next set of financial statements. And also as Neil alluded to the Finkolo proceeds, we've completed the first stage of hopefully closing that transaction, where we've got the permit issued to the current company and we now need to transfer it over to Resolute. So we need the same sort of signatures on the transfer from the Minister and Prime Minister to transfer this exportation permit across. And we hope to complete that in hopefully during this quarter and that would be another approximately $15 million, $16 million of proceeds as well.

It's also worth just mentioning on here, the debt facility that we have in place for $200 million revolver, we mentioned previously that we are negotiating with a group of global banks. We are continuing that and we hope to come to a conclusion in the near future. And we're getting very close to getting credit approvals and moving forward on that in the near term here. And we're looking for sort of a sensible increase to the amount and an extension of the term should make some sense in the current environment.

Turning over to Page 11. Just to give you an idea of the adjusted net earnings and reconciliation. So the net earnings to Endeavour shareholders were $15 million. As we've seen in last few quarters of course, the hedge and the warrants had a reasonable impact based on the gold price and share prices moving, so basically deducting just over $15 million almost $16 million there to adjust the net earnings.

As well, you'll see a few other small items like the gold bullion right down as well as there would be share in loss and the write-down of the investment in Namibian Rare Earths, it's in there for $1.4 million going forward. After part away through Q2, we'll no longer be picking up any share of losses or if any write-downs, so that will make the P&L a little bit cleaner. There is some stock-based payment options of $3 million in there in deferred tax, which shows up each quarter of $3.1 million for adjusted net earnings of $9 million or $0.02 a share.

And turning over to Slide 12, just to give you an idea of the detail on the all-in sustaining cash cost per ounce. Almost 72,000 ounces sold and the breakdown of $1,083 cash cost is royalties of $87 per ounce, cash cost of almost $900 there, corporate G&A attributable to the operations of $47 and then sustaining capital and near-mine exploration of just over $50 an ounce for a total of $1,083.

And I think I'll pass it over to Attie Roux on the next slide on Tabakoto.

Adriaan Roux

Thanks, Christian. We'll go Page 13. I'll take you through the operating results for the various mines, starting with Tabakoto gold mine in Mali. Tons processed for the quarter was 200,000 tons, which is slightly above target at a grade of 4.6, which is above target, and also a very good recovery giving us 280,000 ounces for the quarter, which projected in our guidance of the 135,000 ounce to 150,000 ounces for the year.

The total cash cost, looking from where we started when we acquired the mine around that $1,250, we're shipping at $950 at the moment. And to get us down to the guidance, we need to further look at the cost reduction exercise that's Neil's alluded to and I'll come to that in a second. And also the increase in tonnage with the mill expansion, will further give us more ounces and operative cash cost per ounce.

Just talking about the unit costs on the mine for a second. If you look at open pit mining, you're looking at about $2.30 per ton. Underground mining is about $45 per ton. Processing cost at $33 per ton of tons milled. And G&A of $28 of tons milled. Now if you look at the process cost and G&A, obviously as we ramp up the processing plant now to the loaded tons, the dollars per ton load and G&A tons load will come down as the tonnage goes up.

Just talking about the cost initiatives at Tabakoto. Initially, after the acquisition of the Avion mine, we looked at restructuring the total mine, and in particular we looked at the quick gains in the cost reduction exercise. This included labor and especially the experts on the mine. We had an overall 23% reduction in the phase II tranches of looking at the labor and that exercise will carry on.

We looked at casual labor hire and especially we got rid of the labor hire company and started recruiting our own people. We got rid of the poor performing open pit mining contractor and we started to add that system with, where we've gone partially undermining, doing the supervision ourselves and the management ourselves, using the hire equipment from contractor. And we will review that shortly to see which way we want to go now, but certainly it's been a really very good exercise.

If we try to look at allocation and utilization of vehicles, looking at capital reductions, especially fleet rates and we had to relook at rebudgeting of OpEx and CapEx at the Tabakoto mine as well. And the last thing we did in initial exercise was the alignment of the accounting practices with the labor practices. So that gave us the result, we've moved from $1,200, to the $930 currently.

And I think at this point, before I want to move on to the next mines, I'll think there will be opportunity to talk about the mixed trends of the cost reduction strategy that Neil alluded to earlier. This affects all the mines, and I will not talk about it at the individual mines again. But with the new gold price environment, where we sit in today, we had a very good session with all the mines and all the given strength to the party.

We launched a cost reduction program, where we targeted reductions in OPEX, CapEx, and especially in working capital with the aim to improve the cash flow. Again, we were reviewing the information to see where we've landed as a first step, and we're going to take the next step now, after analyzing the information to see what else we need to do before republishing numbers.

The areas we're targeting again is labor. Again looking at contract labor, casual labor and experts, which is the expensive portion of the labor. We're looking at the use of contractors and potentially going away from the contractors and doing our own business. We're going to aggressively target the working capital as Neil mentioned, specifically on upfront buying, on pre-paids, on stockholding.

We're going to look at consignment stocks and the power of the group now with actually at four mines, the purchasing power and the negotiating power, when we start negotiating long-term and the big buyers. We actively chase receivables, which Neil and Christian mentioned, things like that recoverable, and the disposition of underutilized or non-core assets. And one of the big things, we will also did in Tabakoto is negotiations with the suppliers, vendors and contractors, so they can start leading with us.

If we carry on to Slide 14, I will talk about the Tabakoto mill expansion. All the major components has been installed and commissioned. We currently believe that the ancillary equipment associated with the project, which includes the recent elution circuit, the regeneration circuit and upgrades relating to that and the introduction of the new gold (inaudible) and associated equipment. The questioning has been done very well. The ramp up has actually gone a little bit slower than we anticipated.

And actually sometimes the gravity of expansion is a bit more tepid than a brand new installation. But we have all the help from the other mines at Tabakoto to assist and keep the ramp up as quickly as we can. Currently, we drilled on the lower piece of that, two-thirds of capacity, so it's going really well and we will continue to ramp up as the people going to experience on this new circuit. We realized that the second quarters will be affected by the slower ramp up, but we expect the second half of the year to be good chance of recovering some of the slower production currently.

If we look at Slide 15, I will talk about the Segala underground development quickly. That's gone very well since we've gone out of the poor ground condition area and currently we're nearly 550 meters down the decline. We have the extra 150 meters of lateral development into like bays exit through the ventilation area, and the installation of two drilling platforms from where we've really started drilling to get the resource and finishing drilling of the ore body grades.

Moving on to Slide 16, an update on the Nzema gold mine. Tons load for the quarter was 536,000 tons at an average of 1.58%, giving us 22,500 ounces. That's still under lower end of our guidance, but we hope that at this point in time that we will get there. The cash cost, obviously effected by the lower ounces, and if you look at the unit costs on the mine, the cost per tons mine is $3.82, processing $13.27 and G&A at $6.80 for ton load.

So just to comment on that, initially we started mining the Adamus pit, and as we expected we started initially lower grade material at the top bench, we're into the second bench of the material now. And as committed by the resource model, we should start seeing better grade coming through in the next bench. We have started grading program and we will start analyzing that information, so that we can gather when that higher grade will start coming through.

As we move to Slide 17, an update on the Youga Gold Mine. Tons load 241,000 tons of 3.26, so that is a good grade and good recovery for the quarter. Getting 23,000 ounces, so they're well in range in the guidance and that really an, excellent cash flows because of the higher ounces and that put us under good position to be in the guidance range.

If you look at the unit costs on the mine, the ton mine $4.41, but ton load $25.70 and G&A at $10.50. So Youga had the very good quarter again and they produced some good cash margin for the Endeavour.

Moving on to Slide 18. A quick update on the Agbaou Gold Project. Neil mentioned some of the numbers earlier, but at this point in time we've committed 70% of the construction budget at $160 million and the project is well on its way with only 60% physically complete. And if you look at the photograph, you will see some of the structural steel being assembled, which is steel that goes on top of the leach tanks that holds the agitators and all the other ancillary equipment.

The CIL tanks are fairly complete. They're hydro-testing the all the joints. The overhead electrical power line, the 91kV line is under construction and it's progressing well. And the major equipment, the mill shells, the crusher it's already on the site, and most are on the sea. So everything is on schedule to arrive on course.

Turning to Page 19, just to carry onward project. The tailing storage facility is more than 95% complete. We potentially clean-up underway before hand over. We're clearing out the due main pits, I have commented, and the clearing of the south pit is already complete, the vegetation clearing and the north pit is underway at the moment. And the relocation of the residents from the affected area has been complete where the 250 people have been relocated to the new village and that was done within the scheduled budget.

So that gets to me the end of the production update. Neil, if you want to carry on with the conclusion.

Adriaan Roux

Thanks Attie. So with the anticipated ramp up in Q2 at Tabakoto and the anticipated access to the high grade at the Adamus pit, we're on track to deliver the full year guidance in terms of production of 310,000 to 345,000 ounces at the cash cost guidance of $842 per ounce to $880 per ounce. And as I said earlier, our focus is on core operations and constructing Agbaou, while restricting and limiting our spend in other areas.

From a profit improvement point of view, we've already talked about the corporate savings and G&A and exploration and the bottom up revenue of operating costs, which is a exercise that we're carrying out now, looking at operating costs, working capital and CapEx spend and with the mill expansion in the second half year, that should reduce our operating costs anyway. Obviously, we have a reduction in sustaining cash, simply because with reduction in gold price, but we're doing everything possible from a cost reduction and profit improvement to replace that.

From a construction point of view, our key assets is, of course, Agbaou, and as Attie said we're on schedule to make a meaningful cash contribution next year and which will also reduce our average operating costs for the group, diversifying ourselves into four mines in four countries so reducing our risk.

From operating cash flow in terms of funding, growth during the first quarter of the year, our sustaining margin funded about 70% of our new mine investment and for the full year, we will have the sustaining margin of $127 million plus the cash of $128 million. So that's sufficient to cover our growth plans, before we look at the cost reduction exercise. So we think we're in a strong position to implement our expansion, to achieve our stated guidance for the year and we're targeting to actually improve our cash flow.

So that ladies and gentlemen, is where we stand and where we're going in the short and medium term for the year. And I will ask the operator to now the start the second part of the presentation, the question-and-answers.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Nicholas Campbell with Canaccord.

Nicholas Campbell - Canaccord

I've just got a few questions as to finalize the model a little bit. You indicated that the ramp up of Tabakoto is taking a little longer than expected. I'm wondering if you can just give us a little more clarity in terms of what sort of throughput you're expecting in Q2 through the end of the year at Tabakoto.

Adriaan Roux

Nicholas, currently I think we have about two-thirds of capacity. If we remain with the original plan, it was 2,000 ton per eight blocks. We are running well in excess of 3,000 tons at the moment. About 3,300 currently and we are ramping up towards the 4,000 tons per day, which is the design for the ramp up. So we trust that in the next month, we will up to the 4,000 tons per day and then we'll carry on like that for the rest of the year.

Nicholas Campbell - Canaccord

And the grades at Youga were pretty nice this quarter. Obviously, I think we're expecting to see the grades tipper off over the course of the year. Can you give us an idea of what sort of grades you should expect at Youga going forward?

Adriaan Roux

If you look at Youga, at the end of the life of the mining pit and the waste pit area, so we really being the higher grade portion of the mine. So we're not deliberately high grading for the betterment of the future, we're just in that area now and the grades are quite nice as you see. We're expecting the grade to remain in that sort of ballpark for the rest of this year and I think it will start tailing up towards the middle of next year as we will expect, when the main pit finishes and we start with the satellite pits and the continuance of the waste in the east pits.

Nicholas Campbell - Canaccord

And how about, Nzema, I know you are working to get into the better grades at the Adamus pits. What sort of grades do you think we should see for Q2?

Christian Milau

For Q2, I think it will be very similar to Q1. We're essentially still in the second bench working through that bench towards the northern side. We have started building the southern section now. The third state of the grade control, and as soon as we start analyzing that information, the original resource model show that we can start expecting there grading the next (inaudible). So I think for the second quarter, we will see the same sort of grade and the same sort of ounce as in the first quarter.

Operator

Our next question comes from Magda Ogrodowska with GMP Securities.

Magda Ogrodowska - GMP Securities

Just going back to some of the things that were mentioned earlier. Now, we've backed concreted the recoveries at Nzema and we see that they were quite a bit lower than in the previous quarter. Can you give any indication now whether there was a one-time item or is there going to be lower volume or lower grade ore?

Adriaan Roux

If you look at the Nzema compared to the budget, we are still having a different mix to what we budgeted it to process at this point in time. In the sense that we have to process a little bit more of the Salman material, which is now in transition zone. And as we know the transition has got significantly lower recovery than the oxide zones. So as we move into more tons and higher grades from the Adamus pit and start digging ore on the treatment of the Salman transition type material, you will see that the recovery will start to improve. We are already seeing this month significant improvement in the overall recovery.

Magda Ogrodowska - GMP Securities

And then just Tabakoto, can you give any indication of what proportion of underground and open pit split you are going to see for the rest of the year? I think this quarter it was 40 underground, 60 open pits. Is this kind of reasonable for the rest of the year?

Adriaan Roux

I think for the rest of the year, nothing will change at Tabakoto. You know the development of Segala really comes in towards the end of the year, in the last month or two and then start ramping up into the New Year where the underground portion will significantly increase as far as tons and grades concerned. So for the rest of the year, I can see the ratio of treatment being rejected the same as we currently do.

Operator

Nicholas Campbell, did you have a follow up question?

Nicholas Campbell - Canaccord

I just wanted to ask on the debt side. How much of an expansion of the facility were you looking to do?

Neil Woodyer

We have talked to several international banks. We're waiting for their response on that question. We want to maintain our flexibility and we want to protect ourselves against any further erosion of income and make sure that we can carry on profitably. So we just have to wait and see what makes sense. What their responses are and what we think make sense. We hope to know as, Christian said, probably shortly.

Nicholas Campbell - Canaccord

I did have another question on the Agbaou. I read an article about how you had met with the President of Côte d'Ivoire and you are confident that you are going to see a stability agreement in place shortly. So are you expecting to see some news out of Côte d'Ivoire on the stability agreement for you guys?

Neil Woodyer

We have seen a draft, that the Minister of Mine, said he would present us a draft by the end of the month. I invited them to the mine next month to celebrate the signing and he accepted that. We have already received a draft from the Ministry of Mining convention, which includes a stability agreement. It has a lot of blanks in it, but we would expect we have the right structure now, which was always a concern in the past. We have the right structure to go forward and I do believe that statement about timing and no adverse economic effect to be quite correct. So we are very confident about that.

Operator

Our next question comes from Fletcher Tully with Goldman Sachs.

Fletcher Tully - Goldman Sachs

My question was just around the CapEx for FY '13. Are you still comfortable with the 230, around that mark?

Christian Milau

We have made couple of adjustments as you've seen in the release. But we're actually going through that exercise as we look through the operating cost and we will be giving some more guidance on that in the next number of weeks, so let's say, so we will probably bringing that down a bit. I'd hesitate to comment on specific number now and disappoint you later on something.

Operator

Gentleman, there are no further questions at this time.

Neil Woodyer

Thank you, operator. Well, we're encouraged by our first quarter's results and we're encouraged by the fact that we're seeing our production level guidance and operating costs guidance staying as we projected it. And we have work it out to maximize our cash flow, which is what we're focusing on. And I thank you very much for attending and if anybody has any additional questions or email questions, please contact us and we will do our best to answer. So thank you very much indeed for your presence. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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