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Executives

Neil Woodyer - Chief Executive Officer

Christian Milau - Executive Vice President, Chief Financial Officer

Attie Roux - Chief Operating Officer

Doug Reddy -Senior VP Business Development

Analysts

James Bell - GMP Securities

Tara Hassan - Haywood Securities

Raghu Gurram- Private Investor

Nicholas Campbell - Canaccord Genuity

Charles Paradise - Private Investor

Endeavour Mining Corp (OTCQX:EDVMF) Q3 2013 Earnings Conference Call (North American/European Market) November 13, 2013 11:00 AM ET

Operator

Greetings and welcome to the Endeavour Mining third quarter 2013 results webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

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

Neil Woodyer

Thank you, operator. With me today I have Attie Roux, our COO, I have Christian Milau, our CFO and also joined by Doug Reddy, our SVP Business Development.

If we turn to slide four, that gives the highlights for the quarter. I am very pleased to be able to report to you a successful third quarter in the year. We achieved record production of just over 88,000 ounces in the quarter, which is a reflection of the work that was done in the first half of the year finishing off the expansion of Tabakoto. So that's performed very well in this last quarter.

We have also been extremely busy, if not preoccupied with cost reduction measures taking effect and our all-in sustaining cost for the quarter was $1,057, which compares with the $1,086 for the nine months to September. So we are on a downward trend with our costs and we are going to try and maintain and keep it going down.

In the quarter, we invested $43 million in new mine development which includes $32 million at Agbaou. Agbaou itself is almost complete. Mining has started and milling should commence shortly, and all of the operational pieces are in place including, as you see, a photograph of the gold room. So that's progressing well to production in our first quarter of next year as scheduled.

On the financial side, as we reported, we increased our debt facility to $350 million and we have drawn down $300 million and our cash position at the end of the quarter was about $120 million. So our net debt is about $180 million at the moment. So we stand in a good financial position going forward.

So a good quarter for us. I will now take you through the details of that.

Christian Milau

Turning to slide five, looking at the nine months all-in sustaining cost and full-year guidance. We sold almost 91,000 ounces of gold for the quarter and that's almost 236,000 for the nine-months. It put us on track to deliver the full year guidance of 315,000 to 330,000. Looking at the breakdown of our all-in sustaining cost per ounce, particularly cash cost at $869 per ounce versus a slightly higher amount for the full nine-month period of $885 and then the corporate G&A sustaining capital and near mine exploration to come up with $1,067 for the quarter, which is slightly improved upon the $1,086 for the full nine-months and again puts us on track to deliver within the guidance range of $1,055 to $1,155 for the whole year.

Turning over to slide six, looking at Q3 and the nine-months all-in sustaining margin. Revenue was $121 million, bringing us to $339 million for the full nine-months. It gives a-margin of $35.5 million or almost 27,000 ounces of gold. Looking at the corporate G&A at $2.9 million brought in plus sustaining capital almost $5.5 million and $2 million of near mine exploration for $25 million or 21% all-in sustaining margin which is almost 19,000 ounces equivalent gold, which is slightly down from the nine-month 24% margin, which reflects primarily also a lower gold price for that period of time.

A couple other things to mention as well that come into our quarter three results as well. As we announced in our previous results, subsequent to the end of the quarter two period, we did our financing, and you will see the fees and the financing come in to $300 million financing come in to our quarterly results and also a put option program to protect against downside gold which also comes into our financials for the quarter. In addition, for the nine-months compared to financial statement period, we have amended those to record the second quarter impairment charge on a pretax basis instead of on a post-tax basis. So the non-cash changed and it doesn't affect adjusted earnings and the valuation recoverable amounts of our assets are totally unchanged as well.

Another thing as well which happened post the end of quarter three was Finkolo. We finally closed that transaction and received $17 million of proceeds. So that's on top of the $119 million we actually had in the bank at the end of Q3.

Turning over to slide seven just to give a quick highlight of reconciling our cash position and where we spent the money, I guess, for the quarter. At the beginning of the quarter, we had $62 million on June 30. When you add in the margin of $25 million we actually invested of the $43 million in new mining development, on the right-hand side box you can see that Agbaou construction was roughly $32 million and we have approximately $25 million, give or take, left to spend on a project from this point onwards. A small amount was spent on the other mines as well, as you see for a total of $43.1 million.

Gross proceeds of $100 million from the corporate debt facility. Then we paid some of our financing fees to complete the $350 million financing that we did in July. We also paid some amount, $3.5 million, for the gold put option program as you see there and the regular interest charge, as we see every quarter. So leaving a cash balance of $119.4 million plus the $17 million post quarter-end we got from Finkolo.

Now turning over to slide eight and pass it over to Attie Roux.

Attie Roux

Okay. Thanks, Christian. Let me take you through the operating summary of the mines. Let me start with Tabakoto gold mine on slide eight. With the expanded mill now fully commissioned, the tons improve to over 400,000 tons for the quarter at a grade of 3.35 grams per ton, producing a very healthy 40,500 ounces for the quarter, at a cash cost of $850 per ounce. As Neil mentioned earlier, this is in line with our cost reduction exercise and also the increased ounces obviously bringing the cost down steadily over the period.

The mine tons were marginally lower in September as we had some very heavy rains impacting on the open pit mining specifically and that together with the plant operating at and slightly above nameplate capacity necessitated us to process some of the lower grade stockpiles and we will continue to do so in the next couple of months until Segala is fully operational. The Segala decline is progressing very well and now extends to in excess of 900 meters from the portal. The Segala underground development ore, the first-order is scheduled to start in this last quarter of 2013 with stoping ore coming in the middle of the second quarter of 2014.

If we turn to page nine, Nzema gold mine in Ghana. Nzema processed just under 0.5 million tons through the quarter at a very good average gold grade of 2 grams per ton producing 28,000 ounces at a cash cost of $853 per ounce and also a nice reduction in the overall profile on the cash cost. During the quarter, the actual mine grade of the Nzema material was 1.3, very similar to the previous quarter. We have a mill grade being 2 grams per ton was mainly due to the increased volume of purchased ore during the quarter.

Of interest is that, per (inaudible), the mine grade improved to - the Nzema grade itself improved to 1.67 and that is in line with our expectation that the ore from the Adamus pit will start improving as from now onwards. For October the grade, including the purchased ore, was 2.4 grams per ton.

We turn to page 10. We will talk about Youga gold mine in Burkina. If you look at the numbers, the ore processed was marginally lower, also due to very abnormally heavy rains in September month which interrupted mining activity in the main pit which is our high grade material. I am happy to say that it is back to normal now and we are seeing some normal tons coming out of the mine. Equally the average gold grade milled was down because we had to process the lower grade materials and that also marginally affected the ounce profile down to 20,000 ounces for the quarter. The cash cost, obviously, increased to $869 per ounce because of the lower profile. We are expecting a normal quarter for the fourth quarter for Youga mine.

As we go to slide 11, just an update on the Agbaou gold project in Ivory Coast. The construction is now nearly 100% complete as Neil mentioned earlier and we are still on schedule for full commercial production during the first quarter of 2014. The delivery of mining equipment is on schedule. It includes the dozers, the initial requirement of the 777 trucks and both the Liebherr 9350 excavators have been arrived from South in a single and they, in fact, have started mining the South but in the middle part of October month.

Then to page 12. Just a continuation on Agbaou. The recruitment of the workforce is progressing very well and the training of the people in the new activities. It is obviously focused to concentrate on hiring as much as we can from the local communities. All the management positions have been filled and the people are on-site. Agbaou is scheduled to increase the production for the total Endeavour by 100,000 ounces as from next year onwards, generating a strong cash flow, mainly in the first couple years when we have free dig ore, we certainly hope to see quite a nice at cost profile for the mine.

Okay, at this point, I will hand over to Doug Reddy, who will talk through the Houndé project.

Doug Reddy

Thanks, Attie. We did a news release on November 6 where we released the results from the feasibility study that was completed. Houndé is located about 250 kilometers southwest of Ouagadougou, the capital city of Burkina Faso. This is a project that we acquired in October of 2012 through the acquisition of Avion. We completed a PEA in January of this year. We have done - initiated the work towards the feasibility study just about one year ago the.

So it has completed just last week and the result is that we have a proven and probable reserve of 24.6 million tons at 1.95 grams and containing 1.55 million ounces of gold. The feasibility study was based on processing at a rate of 3 million tons per year to produce approximately 180,000 ounces per year over the eight year life of the project. The CapEx estimate is $315 million of upfront capital plus $62 million of sustaining capital and $22 million of reclamation and closure cost.

The key advantages of the project are the robust economics. We get 22% after tax IRR at $1,300 per ounce and that's with less than $800 per ounce of all-in sustaining cost. We have excellent infrastructure at the project. You can see that is right beside the main highway that runs from Ouagadougou to the second-largest city in Burkina Faso. We have a power line that runs right beside the project as well. We also benefit from our own Agbaou mine building expertise to be able to utilize the same personnel on this project. We have also got the operating experience that we gained from having Youga mine in Burkina Faso.

Some of the feasibility study highlights include the use of owner operated mining and that's been built into the upfront capital expenditure estimate for the mining fees that would be required. The processing plant would be 3 million tons per year with a SAG and ball mill grinding circuit and it's a Gravity/CIL circuit. The project has excellent infrastructure, as I mentioned, with power coming from the Sonabel grid. It's a power line that runs from Côte d'Ivoire up to Ouagadougou. It is 2.7 kilometers from the paved highway that I mentioned earlier and there is a rail line that's operational and is about 25 kilometers from the site. The tailings facility is located 4 kilometers west of the plant and it's in a natural valley and the camp would be capable of housing 130 senior staff, the remaining workforce would be from nearby communities and housed in the nearby communities.

One slide 15, the base case has been taken at $1,300 per ounce. The IRR on that basis would be 22.4% with an NPV at 5% of $230 million. The cash cost per ounce is $636 per ounce. All-in sustaining cost of $775 per ounce and a life of mine production of just under 1.5 million ounces of gold.

On slide 16, we have put Houndé up against four other projects that are in Africa. Essentially Houndé ranks highly amongst the gold projects that are moving forward in today's gold price environment and it benefits, as I have mentioned, from robust economics, the excellent infrastructure, our mine building expertise and our operating experience in Agbaou and Youga with 178,000 ounces average production per year with the overall operating cost of $636 per ounce.

Neil Woodyer

Okay. Thanks, Doug. Turning over to slide 17, which is our conclusion slide. We continue, as I said, to deliver on what we said we would do in terms of operations. All-in sustaining margin of $83 million during the nine months. We did complete Tabakoto mill expansion as stated. We are very near the completion of Agbaou. We have completed the Houndé feasibility on schedule and now we are in the permitting phase for that.

So when we look for long-term profit improvements, we are looking at cost reductions taking effect and we expect this year's production and cost to be within guidance and we are also carrying out studies to increase potential of owner mining and demonstrating that potential and see if that make sense for us to lower our costs even further. So in that sense, we believe that the best hedge against gold price is lower costs and the focus on cash generation which is what we have been doing and what we will continue to do.

So that, ladies and gentlemen, was the formal part of the presentation and if I can ask the operator to come back on the line, we can go through the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of James Bell with GMP Securities. Please proceed with your question.

James Bell - GMP Securities

Thanks for taking my question, guys. Just a quick question on Tabakoto. Obviously, this quarter, you used quite a lot of stockpile material. I just wondered if you guys can guide us on how much of that stockpile material is left, what sort of grade is that and how much you guys plan on using in Q4, as Segala is completed?

Attie Roux

Okay, thanks. I will take the question. This is roughly about 200,000 tons of this material and it range in the order of about 1.5 grams per ton. As I mentioned, the current mining of the Nzema and Tabakoto underground materials, it's only two thirds of the new mill capacity. So we will be consuming roughly 1,000 tons a day of this sort of material, during the next few months and as Segala starts generating some development ore, obviously we will feed that in because it is higher grade and in due course early in the new year, the second quarter, Segala will start with stoping ore and then that will start displacing the lower grade materials from the stockpile.

James Bell - GMP Securities

Okay, that's great. Thanks, guys.

Operator

Thank you. (Operator Instructions). Our next question come from the line of Tara Hassan with Haywood Securities. Please proceed with your question.

Tara Hassan - Haywood Securities

Thank you, operator. Good morning, everyone. Just sticking on Tabakoto. Attie, could you maybe touch on what's required over the next six and nine months in terms of development at (inaudible) and stoping developments in terms of meterage to get to your commercial target in the second half of next year?

Attie Roux

Okay. As I mentioned, we have done about 900,00 meters from the portal now. We have total lateral development of about of the about two, two and half kilometers in total. We have started with one drive through the ore body and the plan is to do it another two drives really shortly in the next month or so to give us confidence of the ore body itself.

But we need to go down on another level or two so that we can get to the mining plan. We are going to mine four levels. So it really looks at about the middle of quarter two and after that we will be on full stoping.

Tara Hassan - Haywood Securities

Okay, and is the development that you are doing, I think about three meters a day of decline development. So is that a rate that you think you can sustain into Q4 as well?

Attie Roux

Yes, certainly. We have accelerated. We have a stable ground. So there is no problem anymore. We are actually advancing quite fast.

Tara Hassan - Haywood Securities

Okay, and then touching on the open pit. There was a comment in the MD&A on lower than expected availability of the mining fleet. Is this a particular issue or is it just as you transition into the owner operated on the pit side?

Attie Roux

Yes. That's just a short-term issue. Mechanical availability. Its not an issue. Its part of the transition from partial owner mining on the open pit now and its just a transition phase.

Tara Hassan - Haywood Securities

Okay. That's great. Thank you.

Operator

Thank you. Our next question comes from the line of Raghu Gurram, a private investor. Please proceed with your question.

Raghu Gurram- Private Investor

Hi. Thank you. Congratulations for a very strong quarter and a good 2013 on all fronts. I believe the management has done very well considering tough industry conditions. So my appreciation for everybody involved at Endeavour. I am a significant shareholder. I am very concerned, obviously, by the lack of performance with regards to stock price. So the question here is Endeavour at $1,300 gold price roughly, Endeavour can still generate good cash flows.

Why is our stock trading at all-time lows? All time, I mean, ever since the company was on, this stock was underperforming in gold industry as well as gold. There is something wrong here. I believe we went from net cash position of $200 million to roughly $180 million debt now. Of course we increased production. Also our share count went way beyond, like fully diluted, close to like $450 million or so. Now so my question is to the top management, what can we do to improve shareholder value because, and I am a very significant stockholder here, what's the point in pitching Houndé when the gold price is falling? Why are you wasting time in talking Houndé?

Our gold is in the ground there. That's going nowhere. That will be there when gold price improves, when conditions improve. We will be mining that. It's a great project. Everybody knows that. There is no need to talk again and again the same thing. Now I want to see what are your plans to take the stock price where it should be? And lastly, what if we buy all the Avion shares we issued, like 160 million for roughly $100 million cash today and consider that we saved, say, $300 million because our cost was $389 million when we consumed that acquisition. Right now we can buy those shares for $100 million and that's the opportunity we should be looking at those kinds of things. Not the new projects and scare potential investors. So I appreciate your comments and I thank you.

Neil Woodyer

Okay, well, thank you for the favorable comments you started with and we will try and follow on and try and answer some of the questions as best we can that you raised. I think one of the issues that we have is that we are doing an awful lot of things at the same time. We are integrating a business that was acquired over a three year period, three mines. We are building another mine. We have completed a feasibility study and we have expanded a mine at a time when the market atmosphere or market feelings change very significantly. So I think we are now in a position where we can not just talk about what want to do but show what we have done and I think when we get Agbaou finished that will be a very large step forward in improving capability and proving that we can do the things that we say. I think we have done some of that already. We have brought our cost down and we are recognizing realities of life and looking to conserve cash and bring our cost, as I said, as the best hedge against inflation.

Raghu Gurram- Private Investor

Yes, thank you, and I think I will have a last, I mean one more (inaudible) then. The question is regarding the Houndé project financing. You have got roughly $350 million. Our market cap is $250 million. It makes no sense, in my opinion. I mean you are very smart in this field yourself. You have a great career and the Board of Directors are eminent. I am sure you will make a wise decision but anyway there are no guarantees of any price. Forget about $1,300. There is no guarantee for even $1,000 price. So we should be focusing on how we survive the times we are in. Once the price is in our favor, we can always dig this gold out. Right now, I feel what our focus should be as you should be rightly focused on cost reduction and if you really want to venture, which is to be buy all the shares we issued for Avion and that's where, I think, our value is. Because we have $1 billion assets and we are trading for $250 million or so. Something like that. So the value is clearly visible in our own company. So with that I am done and I thank you for giving me the opportunity.

Neil Woodyer

I appreciate your comments and we are certainly thinking those issues through and we are not rushing in any particular direction at the moment except focusing on cash and costs. But I thank you for your points.

Operator

Thank you. Our next question comes from the line of Nicholas Campbell with Canaccord Genuity. Please proceed with your question.

Nicholas Campbell - Canaccord Genuity

Hi, guys. I just a couple of follow-ups questions to some of the other questions that were asked previously. On the Tabakoto mine, can you give us a little bit of a breakdown as to how much tonnage you are looking for to come from underground versus open pit and stockpiles over the next quarter?

Attie Roux

Nicholas, thanks. For the next quarter, we typically mine from the open bit about 1,500 tons a day and from the Tabakoto underground mine, about 1,500 tons a day. So that gives you 3,000 and the mill is a 4,000 ton mill. So we will be requiring 1,000 tons from somewhere. For now, that's coming from the stockpiles but we are obviously trying to squeeze the first development ore out of Segala and that will start supplementing the grades from the other two sources.

Nicholas Campbell - Canaccord Genuity

And how quickly do you see the Segala underground operation ramping up over the next six months?

Attie Roux

It is going to be slow. It's basically, for now it's development order will come out from the lateral development into the ore body but proper stoping will only come from the middle of the second quarter or somewhere in the second quarter.

Nicholas Campbell - Canaccord Genuity

Okay, thank you, and on Agbaou, you guys have done most of the work needed to start commissioning the mill. What sort of throughput rate you think we should expect over the first six month as the mine ramps up to full capacity?

Attie Roux

Yes, it's a difficult question. Now, typically, once we start commissioning, we hope that we will be up to resemble production fairly quickly but we will ramp up over a period of time you to keep the process a chance to stabilize and sort itself out. But certainly, from the second quarter onwards, we should be on full production.

Nicholas Campbell - Canaccord Genuity

Okay, great. Most of my other questions have been answered. Thanks a lot guys.

Operator

Thank you. Our next question is from the line Charles Paradise, a private investor. Please proceed with your question.

Charles Paradise - Private Investor

Thank you. I just wanted to remark that it has been a pleasure to learn about your company as I am new to studying your stock and your company. The only question I have today concerns that the $119.4 million was described as cash and cash equivalents. I am wondering, if you could for me, breakdown a bit, what those cash and cash equivalents consistent of? Thank you.

Christian Milau

Yes. It's Christian here. We take a policy of trying to protect the capital and not reach for yield of take risk with that cash. It can be used better if we invested eventually or return it to the debt providers but we intend to invest it in high-quality banks. We have our banking group which is five banks and they have several high-quality credit rating and we want to take the risks of either the other major sovereign nations and their debt credit or our bank. So we don't tend to invest in anything outside of that higher quality credits debt and cash balances. A lot of it is mostly actually in pure cash balances.

Charles Paradise - Private Investor

Thank you very much.

Operator

There appears to be no further questions at this time. I would like to turn the floor back over to management for closing comments.

Neil Woodyer

Well, thank you very much for attending the webcast. It's always a good opportunity to give you an update of what's happening and where we have been and some of the concepts of where we are going. I am sorry we can't be precise in where we are going next year but we are building a very solid cash generating base at a better quality than we had and we hope to entering next year with a 400,000 pound, four mines in production sometime in the beginning of next year and give a good diversification. But where we go after that is very much a question of where the markets are and good use of cash and sensible allocation of capital and recognizing the desires of shareholders. So thank you very much indeed.

Operator

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

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