Endeavour Mining CEO Discuses Q1 2013 Results - Earnings Call Transcript

| About: Endeavour Mining (EDVMF)

Endeavour Mining Corp. (OTCQX:EDVMF) Q1 2013 Earnings Call May 16, 2013 1:00 AM ET


Neil Woodyer - President and CEO

Christian Milau - EVP and CFO

Attie Roux - COO



Greeting and welcome to Endeavour Mining's Second 2013 Q1 Results Webcast. At this time, all participants are in a listen-only-mode. A live question and answer session with management will follow the formal presentation which is a playback of the first webcast presentation recorded earlier today. (Operator Instructions).

I will now begin the presentation playback.

Neil Woodyer

Thank you operator and with me I have Attie Roux, COO and Christian Milau our CFO. Before I start the formal part of the presentation, can I just apologize to those U.S. shareholders whom I was supposed to meet with last week but unfortunately, I had to go done to Ivory Coast and meet with the President of Ministry of Mines and 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 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 can to slide four, 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 costs were $897 an ounce. And our-all-in sustaining cash cost was $1,083. Now obviously we are in 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 over next nine months compared with our original forecast which we prepared at $1,600.

And that effects our revised sustaining margin and the schedule on the left shows the original forecast based at 16 and it shows the subsequent forecast based upon $1,400 and that's also based upon the midpoint of our guidance for production cost and also for production.

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 are good things to do anyway. But if you look at slide 5, the cost reduction and cash flow optimization program which is now our primary focus and we're doing this re-budgeting at mine level; at mining, operating costs, CapEx working capital at the mine level and we are also looking at non operating costs and cooperate 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 the 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 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 would 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 are reviewing our staffing structures and staffing levels.

We are particularly emphasizing working capital where we think we can, I guess, 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 we’ll see those results so far and we are 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 under way and we expect to have that fully complete by the end of the quarter as scheduled and Attie will talk to that little bit later on. So anticipating an annual rate of about 150,000 ounces a year in the second half of the year.

The other development projects of course is Agbaou where the construction is proceeding on schedule towards initial production for the first quarter of next year. The project is over 60% physically complete. We still have about 100 million of actual cash pending remaining.

We have 128 billion of cash and we also have operating cash flow coming through. So we are pushing ahead with the construction of Agbaou, knowing that we can finance it, not only at these prices and recognizing today's price but also at level prices and recognizing that we have significant cost reduction program going forward. So, we feel comfortable that we can implement expansion plans during the course of the 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 quarter. The margin was about $39 million which is equivalent of 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 in 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 the next slide to slide 9, just provide little bit more detail on natural investments. As you can see on the left of the graph, there is $39 million margin. Agbaou makes up the vast majority of the spend there it’s almost $30 million, a little bit of almost, I think almost $3 million is spent on Nzema development.

Tabakoto, we’ve included mill expansion and the development capital and they’ve almost 15 million. Hyundai continues along with $2 million of spend. Since then 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 the slide 10, just to give you an idea of our starting point and our ending point on the cash equivalents and volume position. We started with the $150 million of the 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 is a small account of shares issue 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 gold was a $2 million reduction and then small amount of working capital outflow, some interest paid of almost $2 million and small other amount 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 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 here is obviously the $5.3 million from the sale of Namibia Rare Earths which came in into 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 permanent issue to the current company and now we need to transfer it over the resolute.

So we need the same sort of signatures on the transfer from the minister and prime minister to transfer this exploitation permit across and we hope to complete that hopefully during this quarter. And that would 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, the $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 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 sensible increased 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 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 on the gold price and share prices moving. So basically did that thing we just over $15 million, almost $16 million there to adjust the net earnings.

As well you see the few other small items like the gold bullion write down as well there is the share loss in the write down of investment in Namibia Rare Earths is 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 obviously any write-downs. So that will make the P&L a little bit cleaner. There is some stock-based payments, 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.

Attie Roux

Thanks, Christian. We 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 rate of 4.6, which is above target, and also a very good recovery giving us 280,000 ounces for the quarter, which projecting 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 about $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 milled 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. These 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 increasing 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, really 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 re-budgeting of the 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 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 prepaids, on stockholding. We're going to look at consignment stocks and the power of the group now with at least four mines, the purchasing power and the negotiating power, when we start negotiating long-term and big buyers.

We're going to effectively 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're also going to tackle 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 elution circuit, the reagent circuit and upgrades relating to that and the introduction of the new gold 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 a brand expansion is a bit more pretty 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 treated 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 gain the experience on this new circuit. We realized that the second quarter's production will be affected by the slower ramp up, but we expect the second half of the year to be good and the 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 (ph), with an 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 already started drilling to get the resource and finishing drilling of the ore body grid.

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 on the low range 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 mined is $3.82, processing $13.27 and G&A at $6.80 for ton load.

Just a 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 depicted by the resource model, we should start seeing better grade coming through in the next bench. We have started grade control drilling 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 is an excellent cash cost because of the higher ounces and that put them in a good position to be in the guidance range.

If you look at the unit costs on the mine, big ton mined $4.41, big ton load $25.70 and G&A at $10.50. So Youga had a very big quarter again and they produced some good cash margin for 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 over 60% physically complete. And if you look at the photograph, you will see some of the structural steel being assembled. It's steel that goes on top of the leach tanks that holds the agitators and all the other ancillary equipment.

The CIL tanks are totally complete. They're hydro-testing 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 mills are on the ship. So everything is on schedule to arrive on course.

Turning to Page 19 -- just to carry onward project, the Tailings Storage Facility is more than 95% complete. We potentially clean-up underway before hand over. The clearing off the two main pits have commenced, and the clearing of the south pit is already complete, the elevation 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 takes me to the end of the production update. Neil, if you want to carry on with the conclusion.

Neil Woodyer

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 a cash cost guidance of $840 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 review of operating costs, which is an 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 of the 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 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 to 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 Instructions). There appear to be no questions at this time. I would like to turn the floor back over to management for closing comments.

Neil Woodyer

Thank you very much, operator. So I think in conclusion, where we stand is that we had an encouraging quarter. We see a lot of hard work ahead of us in cost reduction program but I think we are on track to achieve our guidance for the year and also to increase our production and cash flow next year by the addition and expansion of Tabakoto and the addition of Agbaou.

And I think at these prices and even at lower prices we can see our way through to finance that expansion. So on that basis, I would like to thank you all for attending and listening to us and if anybody does have any questions they would like to call us about, or email us about we will be more than happy to answer those. So thank you very much indeed ladies and gentlemen.

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