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Executives

Neil Woodyer – President & Chief Executive Officer

Christian Milau CPA – Chief Financial Officer & Executive Vice President

Adriaan Roux – Chief Operating Officer

Analysts

Filipe Martins – GMP Securities

Mark Bentley – MAB Trading

Fletcher Tully – Goldman Sachs

Endeavour Mining Corp (OTCQX:EDVMF) Q2 2013 Earnings Conference Call August 19, 2013 11:00 AM ET

Operator

Greeting and welcome to the Endeavour Mining Second Quarter 2013 Results Call. At this time, all participants are in a listen-only-mode. A brief question and answer session will follow the formal presentation. (Operator Instructions).

It is now my pleasure to introduce your host, Neil Woodyer, CEO of Endeavour Mining. Thank you, Mr. Woodyer. You may begin.

Neil Woodyer

Thank you, operator. Thank you everybody for joining us on this management presentation on our second quarter results. With me I have Attie Roux, our Chief Operating Officer and Christian Milau, our CFO.

And we could turn to start with to slide four which gives the highlights of the quarter. It also shows a nice truck delivering some mining equipment to Agbaou in August. But from a point of view of production, we’ve delivered 75,000 ounces in the second quarter and therefore in the first half year produced 149,000 ounces. And based upon our production and also for our projections for the second half year, we're on track for our guidance of 310,000 to 345,000 ounces for the full year.

One of the major activities under way is the cost reduction program which is taking effect, which we started with Tabakoto acquisition last year and we are projecting that we produce an all-in sustaining cost in the second quarter of 10.38 which compared with 10.83 in the first quarter. And we are on track for our guidance of 10.55 to 11.55 for the year.

In fact looking forward, based upon the cost reductions that we are doing, we’re targeting about $1,000 an ounce for 2014. This would include some underground development expenses at operating mines that we are now treating as investment, but from next year onwards we’ll be looking at our operating mines underground and we should have Tabakoto and the expansion of Segala coming within about of $1,000 an ounce target.

During the second quarter of this year, we invested $59 million in new mine development, including $40 million at Agbaou. We were also able to increase our corporate debt facility to $350 million, $300 million of which is available to us now and additional $50 million when we complete Agbaou and that is with a syndicate of leading global mining banks. Previously we have the $200 million with one bank, but we now have five banks in our syndicate. And as of the end of July, we actually drew down the incremental $100 million for a cash balance of over $150 million.

If we turn to the next slide, looking at all-in sustaining margin generation, I’ll hand over to Christian to take us through that.

Christian Milau

Thanks Neil. Just to give you an idea of the all-in sustaining margin for the quarter in both millions of dollars and gold ounces. $101 million of gold revenue we generated, down slightly from the $117 million in quarter one, mainly due to the gold price fall that happened in April as well as at the end of June, but generated a mine cash margin of just over 430 million at $30.7 million which is a 30.4% margin, which again is down slightly from the first quarter that was 39%. And corporate EBITDA of $26.7 million or 19,200 ounces of gold and an all-in sustaining margin after sustaining capital and exploration of $25.4 million, which is a 25% margin, which is down slightly again from first quarter of about 33%. And overall for the six months to June we generated an all-in sustaining margin $64.4 million or 30% on average.

Turning over to slide number 6, it gives you an idea of the reconciliation of our cash position and where we spent the cash for the quarter. So we started at March 31st with $85 million, adding in the all-in sustaining margin of just over $25 million and the proceeds from the sale of the gold bullion that we held at the end of the year at last year of $37.7 million and adding in proceeds from the sale of Namibia Rare Earths so our total stake in that equity investment of $5.3 million. We used that money to invest in new mine development, which was $59 million, which you can see broken out there on the bar graph on the right. Most of that is expected to spend 40 million on Agbaou construction, which leaves us with roughly 60 million or so to spend for the rest of this year and leading into 2014.

Also, the two other major things we spent money on, our Tabakoto development of just over $10 million and Nzema development of $5.2 million. After that, there’s some money spent on working capital and corporate taxes paid. Our Youga taxes for 2012 were paid in the second quarter. So that makes up most as a corporate tax paid. And then some other minor items to end up with cash and equivalents of $62.2 million and when you add in marketable securities almost $63 million. And then when we add the $100 million from the new facility that was drawn, over $150 million currently. That gives us maximum liquidity and flexibility at this point in time.

Turning over to Slide number 7 now. One of the major things that you may have noticed in our financials for this quarter is a non-cash after-tax impairment charge which totaled $225 million. That eliminated all of our goodwill and this impairment charge we used the long-term and short term gold price of about $1,300 which we believe is a fairly prudent price in today's market and it’s a little more prudent than some of our peers over the long-term. I think the ranges were between $1,250 and 41,400 and we use 41,300 on average. As well the Nzema write down was $142 million almost as a result of the gold price, the non-inclusion of the Sulphides in the asset model that supported the valuation and slightly higher costs. And then the other small parts of the write down were $25 million at Youga primarily related to long-term gold price and some non-core exploration of $5.6 million which totaled $225 million.

I will pass over to Attie Roux for slide number eight.

Adriaan Roux

Thanks Christian. Let me take you through the operating summary for Tabakoto in Mali. If we look at the tons processed, quarter-on-quarter we’ve gone up in tons, mainly due to the month of June seeing the full effect of the mill expansion project, the tonnage coming through as the mill has now ramped up to nameplate capacity. The average gold rate has come down quarter-on-quarter and that's mainly due to speeding up on the mill, adding some stockpile material to the underground and the surface deposit that we have.

Gold ounces produced quarter-on-quarter is marginally down mainly due to April and May during the commissioning issues which we sorted out and we saw 12,500 ounces come through in June. And 15,000 ounces produced in July. Obviously (inaudible) with June as well, but production is on track now. If we look at the cash cost, that will start to come down as the ounce profile improves over the next period.

Segala, the main decline is progressing very well and is well over a kilometer from the portal now. With underground development ore starting towards the end of this year and stoping ore starting to produce towards the middle of next year.

Turn to Page 9, the operating summary for Nzema. Tons milled marginally down, mainly due to June being the peak of the rainy season in Ghana. The average grade is marginally up and that includes the purchased ore. Ounces are nicely up quarter-on-quarter, mainly due to improved recovery and higher grade. And the cash cost will start coming down as the ounce profile improves in the second half of the year. As we mentioned, the recovery rate has gone up quarter-on-quarter mainly due to the increased tonnage from the Adamus area and the decrease of the lower recovery settlement material in the total mix.

Then we turn the page to page 10, the operating summary for Youga mine. Youga again had a very steady quarter, slightly up on tons. Grade roughly in line with the projection (inaudible) ton and very good ounces produced for the quarter again, giving us very good cash costs overall for the quarter and for the half year.

Turn the page to page 11. I’ll give an update on the Agbaou gold project. Up-to-date we’ve spent $100 million on the project and the project is physically over 80% complete now with the ball and SAG mill installations just about complete, with gearboxes the mill is being floated and clusters on the site plans have been completed, the gravity concentrator installed and the lubrication systems installed on the mill. All civil work has been completed and the last item now that takes most of the (inaudible) is the electrical infrastructure, the 15 kilometer power line 91kV and it’s actually progressing very well and it should be on track in time for the schedule.

Turn to page 12, continuation of the Agbaou project. All the buildings have been completed with the reagents stores, the heavy vehicle maintenance workshops, the laboratory and the remaining structural steel is all on-site is currently being erected. And that includes the gold room and all the conveyer structures. As Neil mentioned earlier, some of the mining equipment therefore readily arrived on site, with some additional equipment deliveries expecting in the next couple of weeks in preparation for the mining to commence in the schedule.

I’ll now hand over to Neil who will do the conclusion.

Neil Woodyer

Thanks Attie. So if you look at the production schedule on page 13, we produced as I said 149,000 ounces in the half year at a cash cost of $888 per ounce. In the second half year, we’re projecting about a 15% increase, primarily due to the expansion of the Tabakoto mill, which we completed in June and also the anticipation of higher grades coming out in Nzema. So we’re looking at a 165,000, 180,000 ounces at a cost of $790, $820, bringing us up to our year's guidance of 315, 330 at the cash cost of about 840 to 880. So we’re very much on target there having done the expansions that were anticipated.

If we turn to page 14, we’re really focused on the cash flow from the company at the moment. And as I said we’re meeting our production and cost guidance. We’re delivering cash from our operations. Our all-in sustaining cash margin for the first half of the year was $64 million. And the current prices we can project an EBITDA for the year of approximately $150 million.

The Tabakoto mine has been expanded on schedule. It has increased production and it is reducing our operating costs. As Attie said, Agbaou is very much on schedule for the first quarter of next year. It should position us to reduce our average cost as it’s a relatively low cost producer.

The Houndé feasibility schedule is going ahead and we’re expecting completion of that during the fourth quarter of this year. And so far there are no large surprises from where we thought the PA was. But as I said, it's not yet finished and we'll have to face what decision to make when we have a better feel for the market and a little bit more precision on the numbers. So that's the decision we'll have to look for in the future.

We are undertaking a long-term profit improvement campaign to reduce costs. Our all-in sustaining cost for the second quarter was $1,038. We’ve reduced the number of employees quite dramatically. Tabakoto, we’ve reduced them by 25%, including a large expat contingent. Youga 9%, Nzema 23%. So from the people point of view, we’ve been focusing on that over the last several months.

We’re also looking each operation’s long-term plans to identify sustainable cost savings such as joint purchasing, re-tendering of major contracts, reducing dependency on sub-contractors and possibly increasing owner mining that we're doing. We’ve successfully done that at the Tabakota open pit and now we’re considering a possibility of doing it in other areas.

We have restricted our exploration to mine site resource and reserve improvements. We have reduced our land packages that we have that we’re not intending to pursue. And as Christian said, we’ve spun of some of our excess exploration properties. We’ve established a very strong target for next year for our planning purposes for $1,000 all-in sustaining cost per ounce including, underground development of developed mines. Very significant I think as we say, we are generating cash and through the increase credit facilities we have the financial resources needed to complete the construction of Agbaou and also to invest in other capital projects that could offer the benefits of economics and reduce operating costs and help de-risk the business. So we're in a strong financial position despite the markets to withstand lower gold prices and to carry out the expansions and profit improvements that we have.

That ladies and gentlemen is the formal part of the presentation and I would now ask the operator to come back online so that we can go through any questions that anybody may have.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question today is coming from Filipe Martins from GMP Securities. Please proceed with your question.

Filipe Martins – GMP Securities

I’ve just got two questions. The first one is, given that most of the CapEx is being sunk for Agbaou, combined with the cost reductions we’re starting to see in Tabakoto ramping up. Am I right in thinking that the additional debt is more like headroom rather than a necessity?

Neil Woodyer

Yeah. As we said -- sorry go on.

Filipe Martins – GMP Securities

Sorry. Do you want me to ask the questions all at once? The second one was just on the Finkolo payments, if there are any outstanding in terms of cash inflow. And the third was just on the high grades at Youga and how long you can keep those looking -- going forward.

Christian Milau

So I’ll take the first two. It’s Christian here. I’ll answer the first two. In terms of the debt and the flexibility in the headroom, yes, the extra $100 million is basically headroom depending on the gold price and at today's prices or so. Hopefully there’s no need to dip in to that much. It will depend on the second half of the year. But today's gold price we hope is just headroom really for now. And in terms of Finkolo, we’re very close to I think completing that. I believe we’ve got all the necessary approvals in country and are just waiting to go through the completion stages and process with our joint venture partner and knock on wood. We’re hoping that here in Q3 we'll actually be seeing the $17 million we expect to see from that.

Filipe Martins – GMP Securities

All in 3Q?

Christian Milau

Yes.

Neil Woodyer

Attie, do you want to take the Youga question?

Adriaan Roux

Yes. Let me take the Youga question. As far as Youga is concerned, we’re currently seeing some nice grades coming out of the three pits. Obviously the pits are ending the end of their lives. We are seeing marginally better grades than expected. And we hope to see this grade carry through to the middle of next year. But early in the New Year we will have to start exploring for opening up some of the satellite deposits around Youga to start supplementing the main pit that's ending the life now. So we can expect these grades to carry through for this year at least and then start easing off into next year.

Operator

(Operator Instructions). Our next question is coming from Mark Bentley from MAB Trading. Please proceed with your question.

Mark Bentley – MAB Trading

It’s Mark Bentley calling. I’m a shareholder in Endeavor. Taking a view as a straightforward shareholder, I see that all-in sustaining costs are $1,038 and the realized price is $1,385 on average over the quarter. So perhaps naively I’d expected a decent positive operating cash flow from that yet it is negative. And similarly, the adjusted profit also shows a loss. Could you just explain what needs to be taken into account to actually arrive at the real cash flow and profit figures that isn't in the sustaining costs?

Christian Milau

It's Christian here. I’ll answer that. One of the key things I think difference there is, there’s quite a bit of amount being invested in working capital as the mill expansion is being completed and a lot of those bills are being paid effectively. And as well with Agbaou as well coming along quite a bit of cash flow was spent on that. We’re in the highest period of spend as well there and also some corporate tax. And the corporate tax, pretty much the -- most of the year's corporate tax has been paid at Youga in the second quarter. So it was a fairly large amount. I think $8 million or $9 million out of the $10 million of corporate tax paid was paid in that quarter. Those are probably the main things that jump out.

Mark Bentley – MAB Trading

Can you quantify the working capital adjustment approximately?

Christian Milau

Yes. On page 6 actually we've included it there. There’s two line items in there. You’ll see it. It's about $17 million, $18 million there. And the corporate tax is another $10 million if you look at that on page six.

Mark Bentley – MAB Trading

In terms of the working capital, would you expect that to reverse as time moves ahead or just effectively not to affect future figures?

Christian Milau

I think what our goal is here with this capital or the c-cost improvement program, we're looking at things like joint purchasing. We're looking at rationalizing some of our inventories in that. So as we get into steady state here at Tabakoto and as Agbaou starts to get into an operational phase, we really would like to see those numbers go down and ideally see a bit of a reversal on them and then hold steady state when you get them to a level we’re comfortable with. And we’re paying -- as the companies were coming together different prices for example for cyanide and we hope to harmonize that at the lower end of the price ranges. We have more purchasing power. So we expect to see that reverse. And there is other specific items we’re looking at. One of them is potentially factoring or selling or VAT in one of the countries and maybe even two where you could see a nice one-time inflow of cash which we hope to see in the second half of this year.

Neil Woodyer

And we have retained an outside group to look at our working capital structure, our purchasing structure to give us advice on where costs and cash can be saved. They’ve just started that work now.

Mark Bentley – MAB Trading

Good I’m glad to hear that. And my second question is, again looking at the run rate in Q2, it looks like corporate G&A is running at around $20 million per annum, which seems rather high. Can that be reduced at all?

Christian Milau

Yes. I think we announced in late July we are cutting that. And I would say it would be more in $15 million, $16 million range on a run rate. And the first half of the year is a little higher. Q2 had a couple one-offs and some legal costs and a little bit related to our facility. So you’ll see those disappear and it will come into a more run rate of hitting that $15 million to $16 million range into the second half of the year.

Mark Bentley – MAB Trading

I’ll just observe, that still seems pretty high to me, but obviously anything you can do to improve it is warmly welcomed.

Christian Milau

Yes, absolutely. We’re definitely looking at that. And we have looked at some of our peers and we look at it on a percentage of revenue or dollar per ounce basis. And we do believe that we’re fairly competitive on that and continually trying to improve it.

Mark Bentley – MAB Trading

Okay. On page 9 of the quarterly report, there is some mention of needing to resettle folks in conjunction with moving to the new Adamus pits. Roughly how many people have you had to resettle there? And could you expand on that a little bit?

Neil Woodyer

Attie, would you like to take that?

Adriaan Roux

It will be close to 1,000 persons. And we’re in the process now of actually building the new resettlement village for them. So it will be towards the end of the year, early in the New Year that the total resettlement will be done.

Mark Bentley – MAB Trading

But work has already begun on the pit or not?

Adriaan Roux

Yes. We’re already doing work, correct.

Mark Bentley – MAB Trading

So what's happening with the people in the meantime (inaudible) if there’s as many as that, that's quite a lot of people.

Adriaan Roux

Yes. What's happening is that we’re working in a smaller area, what we call a starting pit area which is far enough from the people, where we can mine without impacting on them. As the pit grows by that time we will have moved the rest of the people. It’s a progressive feature.

Operator

(Operator Instructions). Our next question is coming from Fletcher Tully from Goldman Sachs. Please proceed with your question.

Fletcher Tully – Goldman Sachs

I was just wondering what the throughput is at Nzema -- sorry not Nzema, Tabakoto with your 70,000 to 75,000 ounces for the forecast in the second half. I was just wondering what assumption you’re making on the throughput there and also what you’re seeing so far in the third quarter?

Adriaan Roux

Okay, thanks. I'll take that. It’s Attie here. As we mentioned during the presentation, the mill is now breaking the nameplate capacity of the upright, which is double the tons that it did before. Currently we’re doing in excess of 4,000 tons a day, which is the nameplate capacity. And as far as the grade is concerned, we’re looking at a grade in the high 3.7 in that range towards the end of the year by the underground and the surface pit and then also a top-up from surface stockpiles. That will give us the overall blend that we need to make in the 12,500 ounces per month range towards the end of the year.

Fletcher Tully – Goldman Sachs

Apologies. I did dial in late so I didn’t catch the first half of the presentation.

Adriaan Roux

No problem.

Operator

(Operator Instructions). If there are no further questions at this time, I’d like to turn the floor back over to management for any further or closing comments.

Neil Woodyer

Thank you very much, operator. We appreciate that we’ve had quite a few phone calls and discussions with analysts and shareholders over the last few days since our results came out. So if there are no further questions we would just like to thank you very much for attending the call and your support as we move forward over the next six months to achieve what we think can achieve for you. Thank you very much indeed everybody.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We do thank you for your participation today.

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