Endeavour Mining's (EDVMF) CEO Sébastien de Montessus on Q2 2016 Results - Earnings Call Transcript

| About: Endeavour Mining (EDVMF)

Endeavour Mining Corporation (OTCQX:EDVMF) Q2 2016 Earnings Conference Call July 29, 2016 8:30 AM ET

Executives

Sébastien de Montessus - President and Chief Executive Officer

Ota Hally - Chief Financial Officer

Adriaan Roux - Chief Operating Officer

Jeremy Langford - Executive Vice Presiden Construction Services

Analysts

Rahul Paul - Canaccord Genuity

Nana Sangmuah - Clarus Securities

Chris Thompson - Raymond James

Tara Hassan - Haywood Securities

Mark Bentley - ShareSoc

Sébastien de Montessus

Good morning and thank you for joining Endeavour Mining. It’s a pleasure for me to represent our Second Quarter and my first quarter as CEO, as well as half-year 2016 Results Call. Here with me today are Attie Roux, our Chief Operating Officer; Ota Hally, our CFO; Vincent Benoit, our Executive VP for Strategy and Business Development; Jeremy Langford, our Executive VP Construction Services; and Patrick Bouisset, our Executive Exploration VP.

I will first take you through the highlights of the first-half of 2016, and then I will hand over to Attie, who will take you through our month-by-month performance in more detail. We will then open up for questions.

But before we begin, I just wanted to take a moment to give you a quick overview of our strategy, which most of you will be familiar with from now on. Our goal is to build a premier African gold producer, and we have a very clear strategy to help us reach this objective. In fact, we have began to execute this strategy and are in the path to achieving total production of more than 900,000 ounces of gold by 2018, and an all-in sustaining cost of less than $800 per ounce, while maintaining more than ten years of mine life at each of our core assets.

The two first objectives, production and all-in sustaining cash cost are just the good execution of the ramp up of Karma and the delivery of Houndé at the end of 2018, which both aim to operate around $700 per ounce. This should be done by the end of 2018.

The third objective to increase current life of mine would probably take a bit more time, but I’m pushing hard since I arrived to set up an ambitious exploration program that we are finalizing. Patrick Bouisset and myself would be pleased to present it to you once fully finalized.

And as you know, what we are doing here is not chasing growth for growth shake. What we’re chasing is value across the entire portfolio by adding profitable ounces, while increasing all-in sustaining cash cost margin per ounce.

Now, to deliver on these growth ambitions, we will focus on our six key strategic levels, delivering operational excellence, developing projects; such as our flagship low-cost Houndé mine in Burkina, unlocking further exploration value, improving our management and governance model, taking on a proactive approach to our asset portfolio management, while ensuring we keep a healthy financial structure.

I will give you on my future presentation and during our Investor Day plan in November, more insights and progress about each of those levels. As a new CEO of Endeavour, I also have a number of management principle that I share regularly with all the teams. I don’t want to spend too much time on it, but I would like to share it with you.

First and foremost safety comes first in whatever we do at Endeavour. No task is so important that it cannot be done safely. I will continuously iterate and review with all the teams our safety procedures to be sure that we are constantly improving them. I’m also keen to push for more agility in our business, which if we can anticipate issues and take advantage of opportunities at each mine sites.

Cash focus, do I need to comment. EBITDA or sustaining margin are nice, but I want mines to be able to provide good and sustained level of true net cash flow. Management hands on. It’s the people on the ground who do the hard work. And my philosophy is that, executive management’s key role is to support them. I tend to be very hands on since as CEO. I believe my first role is to make sure that operations run well.

Every month, I’ll spend time in Abidjan, where I have relocated our operations office to be at the heart of our operations and within an hour fly to each site. We take two hours to review each site performance and then I personally visit, at least, one site a month. All meetings start with venues first to make sure no one is tempted to ignore it, or fail to address any issues.

Last but not least, I want our organization to remain lean and powered people do worse and advisors. We have today one of the lowest G&A cost per ounce in the range of $35 to $40 per ounce, and I want to maintain this level.

Last year, we had identified a number of value creating drivers, and we have worked diligently since the close of the La Mancha transaction to remove hurdles impacting Endeavour’s market valuation. We deleverage our balance turning cash positive following a successful bought deal we closed in July. Endeavour, I’ve shown that it can both operate well in West Africa and build project. We are also focusing on increasing investment in exploration across our portfolio to extend mine life.

Our Houndé mine is now fully funded and construction has started in April. We have improved our governance over the past few months and reduced the number of Board members from nine to seven. The Board and I think that we can further improve our governance practices. It is also important to proactively manage our portfolio to divest assets that no longer fit with the strategy.

As such, we’re starting to see the benefit of selling our end of life high-cost Youga mine in acquiring the low-cost long life Karma mine. Financial communication has been also an important area of assets to clarify our equity story, be more transparent on our quarterly communication and give you more insight on our business outlook.

With that, we’ve seen a significant market rating, closing of the valuation gaps since the start of the year, driven by strong performance and a better understanding of the Endeavour story by the investment community and unlocking some of the value drivers previously discussed.

Now, moving to our operational and financial summary for H1, we are pleased with our performance in the first-half, as we’re able to maintain our initial production guidance due to the benefit of having a diverse portfolio of mines. The impressive outperformance at the Agbaou and Ity mines compensated for lower than expected production at Nzema and Tabakoto. We have revised our guidance upward for the full-year to between 575,000 and 610,000 ounces, which now includes additional production from Karma.

Our group all-in sustaining cost continue in line with our guidance range for the year, achieving $896 per ounce from our current operations in H1. We expect to be in a similar level for the second part of the year. This provides a solid foundation from free cash flow generation. This stood at $59 million for the first-half, which is well above our guidance due to stronger gold price. It’s, however, important to note that free cash flow is in line with our initial guidance, when rebase to the budgeted gold price of $1,150.

We have increased our forecast for the second-half of the year, and I expect full-year cash flow to be in the range of $135 million. Most importantly, we are now net cash positive, which is a significant shift compared to a net debt position of 242 million at the same that last year, putting us in a good position to fund our growth.

While Attie will go through each mine in more detail in the next section of the presentation, the slide on guidance provides a group of review and trends for the second-half of the year. Production from continuing operations in Q2 totaled 138,000 ounces of gold, which represents an increase compared to the previous quarter. This excludes Youga, which we sold earlier in the year, but includes pre-commercial production from Karma.

Looking ahead, we expect group production to further increase in the second-half of the year as Tabakoto and Nzema should better perform and add two quarters of full production from Karma, which supports our decision to increase full-year production guidance. Our all-in sustaining cost continue on a downward trend, averaging $901 per ounce in the second quarter and we remain on track to achieve our range of $870 to $920 per ounce guidance for the full-year.

Looking ahead to the second-half of the year, we expect all-in sustaining cost to decrease with improvements expected at Nzema and Tabakoto. While it is interesting to analyze on a quarterly basis our results, looking at the bigger picture, we are currently ramping up Karma and Houndé project, which we expect to drive the group all-in sustaining cost to $800 per ounce by 2018.

That strong all-in cost performance continues to translate into an equally solid cash flow profile, our all-in sustaining cost per ounce decreased from $931 in H1 to $896, bringing the margin up to $82 million this versus $59 million a year ago. So it is a plus 40% cash flow improvement from the mines.

On the left-hand side, we have shown how to compare these results to our yearly guidance, if we adjust the gold price to $1,150, which was our budget assumption, we would have generated $39 million of cash quite in line with our guidance. Then the gold effect in H1 amounts to around $20 million. We expect to significantly increase our cash generation in the second-half of 2016, due to the increased expected production and continued decrease all-in sustaining cost.

Now, Ota, if you want to explain in particularly on the net free cash flow breakdown.

Ota Hally

Sure. Thank you, Sébastien, for that. So looking at Slide 14, our group from top to bottom, first line item is the Houndé project cash out, which Jeremy will cover in a little more detail later on $15 million is the cash at the door, but commitment level is considerably higher.

On the Karma mine, newly acquired, we see the net cash flow is negative $2 million. Of course, because its pre-production right now it all goes to the balance sheet. The sales and OpEx, they’ll go to our P&L. We realized net proceeds of $17 million in the quarter, capitalized the mining cost of $9 million, and had additional project expenditures of $10 million.

Turning to the working capital change. These have cyclical natured accounts in Q1. We saw an outflow in Q2 that actually turned positive, and that should continue to turn positive and up for the year near neutral.

Taxes paid up from the prior year the – with the acquisition of the Ity mine in Q4 is a mature profitable taxpaying mine. And so, we see the increase in the taxes paid year-over-year, the majority of which is typically paid in the first-half of the year.

And the other items there, we do have primarily with our legacy hedge programs from prior times. Going forward, our policy is not to hedge unless it is a very required strategy for something like financing the Houndé project with which we set up the color gold protection strategy.

The legacy hedges are expected and will are scheduled to come off in Q3. So all we will have going forward is the Houndé color cost at less than $2 million per quarter. And there is those that have gone ahead to the P&L, there’s a mark-to-market non-cash impact of the color, but to the extent that gold remains between $1,200 and $1,400 an ounce. We expect not to have to pay anything out on that.

Moving down to the free cash flow before other items, the cash for the Youga mine, as well the bridge loan were reported to you in the first quarter, when those two transactions occurred. Upon acquisition day acquiring True Gold at the end of April, we took on $10 million of cash that was in the bank. There was a change of control payments to be made that became immediately due and payable. We settled those for a net contribution of $4 million.

Transaction and restructuring costs, there were certain transaction costs associated with True Gold around the P&L, as well as the – moving of our Vancouver office to Paris across to Abidjan as well the change of CEO from the prior CEO to Sébastien for the net P&L of $18 million, $7 million of which was paid out in the quarter and that’s what we see here as a cash flow effect.

And the final item, with the True Gold’s acquisition closing at La Mancha exercising at anti-dilution right. We issued and received $65 million of cash from La Mancha, as well as $7 million from the exercise of options in the quarter.

We could now quickly turn to the next slide and then Sébastien really already mentioned this since the start of the year and really a continuation of what we did in 2015. We made net debt reduction, a significant, or a debt reduction of significant priority, and we are now very pleased to be net cash positive with the gold we have the bought deal. We saw that previous debt burden is blocking our ability to further develop projects and make exploration a priority, and we believe we’ve unlocked that.

Our cash on the balance sheet at the end of the period, $134 million, and with the bought deal on a pro forma basis turned to $238 million at the end of June. And debt, the RCF drawn amount is $200 million. We now have total liquidity and financing sources totaling approximately $440 million, which allows us to build Houndé accelerate the exploration efforts and with our free cash flow generation puts us into a good position to finance the upcoming Ity CIL project.

And with that, I’ll turn it over to Sébastien and Attie.

Sébastien de Montessus

Yes, Attie, you want to take us through the mine by mine.

Adriaan Roux

Okay. Thanks, Sébastien. If we turn to page 17, I’ll start with the Agbaou mine in Ivoire Coast. If we look at the first-half year with the optimized mill throughput, the plant continued to run significantly above nameplate, and that’s mainly the benefit of continuing to process only oxide material during this period.

If we look at the all-in sustaining cost, it’s well below the guidance level. And that’s because of the benefit we got from the enhanced mill throughput, but also a nice reduction in contract rights on the mining contract, which was done during the first quarter.

We obviously decided to install the secondary crusher and the pebble crusher. The secondary crushing unit was commissioned in July, it was on-time and well under budget. And that’s now providing us much increased processing flexibility in terms of – we can decide, if you have oxide material to process any oxide, or any hard rock ore combination, it gives you total flexibility now, so that’s a good position to be in.

If we look at the outlook for the second-half of the year, we’re expecting gold production to increase on the first-half. And that’s mainly due to the continuation of having maximum oxide available. But we also now have the flexibility of starting to introduce the higher grade transitional ore in the last quarter of this year. Therefore for the – thus we have decided to increase the guidance on ounces to just above the 180,000 ounce mark for the year. And the all-in sustaining level, we have lowered between the range of $550 to $600, obviously to match the ounce profile as well.

Now, if you look at the little picture on the right-hand side, you can see that newly installed conveyor systems that’s associated with the secondary crushing circuit and they’re running nice improved capacity.

If we turn to Slide 18, I’ll talk about the exploration on the various mines. But Patrick will be available at the end of the presentation to answer more detailed questions if anybody has some.

During 2016, our focus is to look at the extensions, mainly around the mine, where we’re currently mining and also on generating new targets beyond the current resource boundaries for the future. We had a bit of a late start this year due to some issues with the communities on compensation, and ground reclamation. But we started drilling in April, and to-date, we’ve already drilled up 20% of the initial program, so it’s going quite well at the moment.

The initial results suggest that the current mineralized zones extends and we will test in further – with a further ground program towards the end of the year now. This will be backed up by additional studies on geochem, the resistivity, and also magnetic surveys. And if you look at the map on the right-hand side, the green areas are the areas that we’re currently targeting to drill still for the rest of the year. And the yellow areas are the areas of future interest showing a lot of potential around the Agbaou area.

If we turn to Slide 19, a Tabakoto mine in Mali. If we look at the first-half of 2016, the quarter two compared to quarter one has been fairly steady, despite the fact that, we had two incidence for a total of eight days. The National Unions had a strike against the state, and it’s got nothing to do with the mine, it’s a government issue. That has limited the areas that we could mine during these times, and obviously, during those times, keeping the process plant online new processing low-grade stockpiles. So that had a negative effect on the amount of gold that we wanted to process during that time.

However, that’s been backed up by good performance from especially Segala and Kofi – the Kofi mine, which had a positive impact on the grade that we processed. Although the quarter two all-in sustaining cost is in line with quarter one, it’s still high according to our liking. And that was mainly because of the Tabakoto underground, which was restricted to mining lower grade areas due to the development that was lagging behind.

If we look at the forecast and the outlook for the second-half of this year, we’re expecting an improvement in both ounces and in all-in sustaining cost, as we can see Tabakoto underground ramping up to get a material, where we can mine. And the focus is on the mining, improving the areas of equipment availability, the underground flexibility and that it relates to the amount of development that we do. And the optimization of the organization and in terms of restructuring the organization, mainly reducing the number of expatriates that we have onsite and improving on our localization of the Malian nationals.

So overall, we’re looking at maintaining the guidance at 155,000 – 165,000, sorry, 155,000 to 175,000 ounces. While with the increase in cost, we’re guiding a slight increase in all-in sustaining cost to $970 to $1,050.

If we turn to page 20, talking about exploration potential at Tabakoto mine. The exploration is currently aimed at extending the mine lives of the two underground mines and testing new,but potential for the surface sources.

If we look at Kofi B, we’ve done an extensive drilling program, that’s been completed since the beginning of the year. And we’re currently receiving and analyzing the data, so that we can model it. And if you look at the drawing on the right-hand side, the green star is the Kofi B in the middle, and that’s right on the little trend, quite perspective trend in the area.

We have also tested surface extensions in the Tabakoto area, especially around the Tabakoto mine. Also including the Fougala trend and Kreko trend, which has intercepted some structural materials. And we’re obviously receiving and analyzing the information, which we’ll then analyze further and develop a drilling program.

If we turn to Slide 21, the Ity mine in Ivoire Coast, quarter two had a similar profile – production profile to quarter one. And as we all know, Ity is in a very high rainfall area. The production is quite cyclical depending on their rain cycle and the amount that can stack and irrigate during the rainy seasons. And normally, H1, the first-half of the year is normally better than the second-half of the year, mainly due to the cycles of rainfall.

We had a good first-half of the year, as we can see from the data. And the cost remain fairly stable, the all-n sustaining cost was marginally higher in quarter two. And that was due to planned delivery of mobile equipment that we received onsite.

If we look at the outlook for the second-half of the year, although we’re projecting a lower production in ounces. We have decided to improve our guidance to between 70,000 and 80,000 ounces to take in account the good performance we had in the first-half of the year. The all-in sustaining cost will remain with the guidance at between $800 and $850. I think something that’s quite important to talk about as well is that, the Ity CIL DFS study is well on track, and it’s due for delivery at the end of the third quarter, beginning of the fourth quarter this year. So that we can look at it and decide how we progress that further.

If we turn to Slide 22, talking about exploration around the Ity mine. The main aim for the drilling in 2016 was to identify oxide targets to prolong the life of the current heap leach operation during the time that we do the study for the CIL project. And this is also to identify new targets, which will enhance the potential for the CIL project as well.

We’ve applied for strategic alliances next to us, the tenements are joining the current properties that we own, and we’ve had some success in that over the years. In the Greater Ity area, we’ve had quite an extensive drilling program on both RC and diamond core. These results are currently coming in and are being analyzed.

We’ve also done quite an extensive auger drilling program that was completed, and that’s mainly to identify several new targets in and around the area that will be the focus of drilling in the latter half of this year and going forward into 2017 and 2018.

If you turn to Slide 24, sorry, 23, the Nzema mine in Ghana. The quarter two had a similar ounce profile to quarter one, and that was mainly due to the continuing and lower volumes and grades as well from the purchased ore that we get from the outside suppliers.

The owner mining on our own material is actually performing slightly above expectations at the moment. And I’ll talk about that just now. The all-in sustaining cost for the quarter was impacted negatively by the higher volume of low grade material from the stockpiles that we had to process during the time that we did not get enough of the purchased ore coming into the mine.

Currently, the pushback that we’re doing at the Adamus pit is progressing on the revised schedule. And we’re pushing to get it finished towards the end of the year and into the first quarter of next year.

If we look at the outlook for the second-half of the year, we’re expecting production to be improving quite significantly as the quantities of purchased ore improve in terms of volume and better grades. And as you can see on the graph on the right-hand side, we’ve had a significant improvement in July, and we’re seeing those numbers going forward in the late July and into August as well.

We also believe that during quarter four, we will start accessing some of the better grade and more volume from the Adamus as we pushback get into some shape with the original start-up pit. Although we’re expecting a better H2, we’ve revised the forecast upwards as of the ounce profile downwards and the cost upwards to take account for the poor first-half performance, but we expect the second-half to be much better.

If we turn to Slide 24, I’ll give an update on the Karma acquisition. Since Endeavour took over Karma in late April, we continued to complete the building of the mine and the commissioning that’s substantially done, there’s a few things still to do. The construction, operations and exploration teams of Endeavour has reviewed the situation at Karma. And we had concluded that Karma has got the potential in terms of the production capacity, the all-in sustaining cost, and the mine life to validate the original acquisition assumptions.

What’s good at the moment is that, the mining is very good. It’s showing positive reconciliation on ounces of around 10% to 14%, and it’s got a very good cost profile as well in terms of mining cost. On the future, we’re looking at the possibility in the short-term to revise the mine plan slightly to start increasing some of the Rambo material into the current schedule to boost up the profile in quarter four this year.

On the processing side, we have identified some challenges in various sections of the plant. However, the good news is that, we know what they are and it’s definitely fixable. So if you look at where we’re, the major constraint really is on the FEED side of the plant the feeder-breaker that feeds the run-off mine material into the process plant is not the great equipment for the plant, and it’s limiting the current throughput to about three quarters of nameplate capacity.

What’s really encouraging and early indication of what’s coming is that, the recovery of the material, the leach recovery is above 85% at the moment, the first two cells that boost that. And they saw some gold coming out of the – solution coming out of the pit. So we believe that the recovery rate eventually will be in the line with the 37% estimated in the DFA study.

We’re currently looking at reviewing the options that we’re looking at for implementing a new front-end design with the main aim to increase the throughput to nameplate capacity. And we believe that we could have this all done by mid-2017, early second-half of 2017. We’re currently looking at assessing how much the capital would be, and we will look at it in due course.

If you look at the production section, the mine is in production. For the quarter, half of the commissioning is 14,000 ounces. The mine is now producing gold at an equivalent rate of about 80,000 ounces per year. So we’re expecting that with the modifications that we want to do that we would reach nameplate by the middle of next year, or early in the second-half of next year.

Due to the slice up and the constraints that we currently have, we’re anticipating that 2016 production somewhere between 50,000 to 60,000 ounces at the all-in sustaining cost of around $750 to $850 an ounce. At this point, we will decide when we will declare a commercial production somewhere later in this year. And we will look at the exonerations and tax benefits to determine that.

The Karma area is quite a sensitive area in terms of security. And security being one of our main aims to protect our people. It’s very important to us that we relocate the people as strictly as we can to a onsite camp, where we can properly manage and protect them. So we will potentially go and do a temporary camp and then both the permanent camp.

To conclude on the Karma, we believe that we can get Karma to produce at the design capacity and credit cost structure. And that will be done by making the necessary changes over the next period, and we will certainly do it as fast as we can.

If we turn to the next slide, Slide 25, just something on the exploration potential at Karma. The target is to get to a ten-year life at Karma by the end of this year. That will be at the extensive drilling – infill drilling program on the Kao North property, with the aim to get the extra 2.5 years onto the current resources. And that’s mainly converting first into measured and indicated resources.

The Markoye area, the regional structure that was somewhat the highly prolific geochem anomalies in the area. And that will be the target that we can esteem to focus your exploration to get make sure that Karma remains at a 10-year life.

At this point, Sébastien, I will hand back to you and Jeremy.

Sébastien de Montessus

Yes, thank you, Attie. I mean, Jeremy, do you want to comment on Houndé, page 26?

Jeremy Langford

Well, thanks, thanks, Sébastien, thanks, Attie. Generally Houndé is tracking very well. Construction is progressing on-time and on-budget, and the project targeting short-term milestone achievements. We are moving very heartily through these sorts of target actually. Procurement is currently 30% complete overall with long-lead items having been ordered, and the critical path of the project cope out the Agabaou mills is scheduled to arrive in April 2017.

Recently, I’ve gone into agreements with Komatsu Ltd. these have been finalized. Our new fleet arrives in Q3 2016, actually next month. We are restoring Komatsu mining fleet synergies also between Houndé and our new situ operation Burkina Faso, which is Karma.

The power off-take agreement with the national high volumes provider Sonabel is complete and all proven to be finalized. We are scheduled to commence construction of this 38 kilometer power line, 91 kilovolts during Q4 this year. Generally, the choice to wait for Q4 is due to the wet season in Burkina Faso.

Front End Engineering and Design of the processing facility is effectively complete and detailed design is moving very, very well actually. We look forward to pouring our first concrete pour in the process facility, which will be the CIL tank area and this pour is scheduled to occur within the next three weeks.

Land compensation across the project charter is effectively complete with the resettlement activity commencing one or two weeks ago and we also have all approvals in place to do these activities. Currently, we have over 300 people onsite. I think our headcount today as I sit here is about 342. Our skills and development programs are underway and very pleasingly over 90% of our staff here at this very early stage in the project of Burkinabe.

With that, I’ll buzz off, and hand back to you. Thank you, Sébastien.

Sébastien de Montessus

Thanks, Jeremy. Now turning to our outlook and guidance for the full-year. As you can see here, we have benefited from the portfolio asset with a strong performance at Agbaou and Ity expected to offset slightly weaker than expected production from Nzema. Therefore, we’re expecting to meet our initial 2016 production guidance.

With the efforts currently being done, we expect the third quarter to improve, but to see the real benefits in the fourth quarter and in 2017. And Nzema will benefit from a head back to Q4. Agbaou, we’ll process a portion of higher-grade transitional ore. Tabakoto will benefit from great underground availabilities, and Karma will be in full commercial production.

Having reviewed the acquired operations at Karma, we are now in a position to increase our group 2016 guidance to between 575,000 to 610,000 ounces of gold from the initial guidance of 535,000 to 560,000 ounces of gold. Our Group all-in sustaining cost objectives remain unchanged. Agbaou’s outperformance counterbalanced the increase cost at Tabakoto and Nzema in the first-half, and we expect this will improve in the second-half, leading to unchanged guidance of our range between $870 and $920 per ounce.

We also increased our sustaining exploration budget. We’ve also revised our free cash flow guidance to reflect increased production rates and higher forecast gold price of $1,250 for the second-half of 2016. Free cash flow before any CapEx on Houndé and Karma will be higher at $135 million. Our forecast spending is around $80 million on the construction of Houndé and $15 million on the ramp-up of Karma, which includes pre-commercial production in 2016.

Now, before I open up for questions, I would like to conclude by saying that the management and Board of Endeavour are very pleased with our progress and our result for the first-half of the year. We have identified the six key transformational levers required to implement a strategy and move our business forward. Each one is being action and the collective benefits are clearly demonstrated across our business. Group production continues to perform well, while we continue driving our all-in sustaining costs down, optimizing our assets, and generating positive cash flow.

Houndé is advancing on-track and on-budget and optimization efforts at our recently acquired Karma mine are progressing. Karma’s potential and contribution is in line with our expectations. And once the improvements are made on the front-end, we should achieve above nameplate numbers.

A renewed emphasis has been placed now on exploration and a companywide plan to unlock value through the drill bit will be communicated later in Q3. Our balance sheet has now been strengthened. The governance and management model is evolving and with that we are actively managing our portfolio of assets.

In addition, we’re continuing to execute a strategic plan and enhance our investor relations activities. Looking at the upcoming events, I wanted to highlight that, we will be holding an Investor Day in Abidjan on the week of the 14th of November with site visits to our Agbaou and Ity mines for any interested investors and analysts.

The main purpose will be to describe the incredible potential of our exploration portfolio and the Ity, CIL, DFS. I believe Endeavour has demonstrated in the past its ability to operate and build mines. My objective is now to add great success in exploration, and I’m confident we will surprise people. We are now immune to good news in that area.

Now with that, I would like to open the floor for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. We’ll take our first question from Rahul Paul from Canaccord Genuity. Please go ahead. Your line is open.

Rahul Paul

Hi, everyone. At – question at – question on Karma. You spoke about the 14% positive reconciliation on ounces, the DD2 , is that on grades, or tonnes, or on both? And do you have sufficient data to comment on the reasons and whether this could continue going forward?

Sébastien de Montessus

Attie, do you want to answer that?

Adriaan Roux

Okay. Thanks, Rahul. And yes, it’s essentially on both. I don’t think at this point in time, we can predict whether it’s going to go forward, because the way we’ve mined [indiscernible] we mined down and now we’ve come back up to the top levels during the rainy season. So, I think, once we go back to the bottom, we will have a better answer to see whether that’s going to continue.

Rahul Paul

Okay, fair enough. I’ll wait for. And, Karma, again, mining cost of $1.40 a tonne, that looks really low and even better than what you’re doing at Ity, Agbaou as well. I mean do you see that being sustainable?

Sébastien de Montessus

Attie?

Adriaan Roux

Okay, shall I take that? Thanks, Rahul. Yes, look it is quite low, but it is in line with the sort of estimates that the mine has done. And bear in mind that we’re mining very high on surface. We’re mining very close to the plant, so the transport cost and so on is fairly low, and it’s brand-new equipment. So we can expect it to marginally move up a little bit.

Rahul Paul

Okay, perfect. And then, I guess, last question for me at Karma, again. How much of pad space do you have ahead of you right now?

Adriaan Roux

Okay, I’ll take that on as well. Yes, we progressively are building the first stage of the pads, which are the first 10 pads. The second stage will be started shortly. But to answer your question, there is enough space well in front of ourselves. We’re creating enough aggregate to prepare the future pads. So, there’s not a problem, there’s plenty space there for ourselves.

Rahul Paul

Okay. Thanks a lot. That’s all that I had.

Sébastien de Montessus

Rahul, I will just add on the mining cost that, obviously, Karma is right now a free-dig operation. So clearly, not having the blasting cost helps a lot.

Rahul Paul

Oh, okay. Okay, clear. Thanks.

Operator

Thank you. We’ll take our next question from Nana Sangmuah from Clarus Securities. Please go ahead. Your line is open.

Nana Sangmuah

Thanks, operator. A couple of questions for me, guys. In terms of the 2016 guidance, if we should just consider commercial production from Karma, what range just should we be looking at?

Sébastien de Montessus

We basically are expecting, at least, the Q4 to be a commercial production. And we’ll see if we’re able to get September months within the commercial production. I don’t have the number, but I think that, we should be around 7,500 average during that period.

Nana Sangmuah

Yes.

Adriaan Roux

So we have assumed only a three-month of production and three-month of – of three months of cost in our all-in sustaining guidance – scope guidance, okay? So it will – we’ll declare as Sébastien and Attie has underlined, we will declare commission projection somewhere between September and October.

Nana Sangmuah

Great. And still on Karma, in terms of the mine and cost, I assume it’s currently a free-dig. When do you think you probably get into harder material? When would require some grow in blast? And why would the cost be going from the 1.4?

Sébastien de Montessus

Attie, you want to take that?

Adriaan Roux

Okay. Yes, and I know the – this – once we start getting into transition, most of the transition or the top section of transition will be ratable. So I think the – a portion of the transition that is – that requires blasting. And then obviously, once you’re going to the facing period, that is essentially old blasting. There’s not a lot of that. So, this year, there’s definitely nothing to be blast at this year. We will, obviously, get into that in the New Year.

Nana Sangmuah

That’s great. And on the ramp-up, I mean, you have suggested that you’ve got to fix the front? And any indication what the capital requirements will be?

Adriaan Roux

At this stage it’s very difficult to do that assessment. We’ve got a few variations that we’re looking at. So we need to finalize, which of those variations that we want to install and that will be costed. So it’s a bit too early to make an assessment now.

Nana Sangmuah

Great, okay. And then moving on to Nzema, how much of the CapEx of the Adamus pit pushback has been committed? What is left? And where should we – when should we be expecting grade spec up and to what level does it go?

Adriaan Roux

Okay. I think we’ve spent about half of the cutback money. We’re accelerating now towards the year-end to get the rest of the cutback done. We’re unfortunately limited by vibration constraints and noise constraints because of the proximity of surrounding population.

So the plan is that the cutback will start approaching the bottom of the starter, but towards quarterfour. And then in the first quarter of next year, somewhere in the first quarter of next year, we will be getting to a position, where we can do full-fledged mining on – as an operating pit. So we can expect to start seeing better grades in quarter four already and also some improvement in volumes in quarter four already, but full bore, I mean, quarter one next year.

Nana Sangmuah

And the red grades like what are we looking at right now, like in Q4?

Adriaan Roux

The red grades – yes, in Q4, we should start getting close to the two grams per tonne material and possibly beyond that as well towards the 2.5.

Nana Sangmuah

Great. And moving on to Tabakoto now, I noticed that the underground cost per tonne came up to $72. Is that what we should be expecting going forward? I mean, I know that there was a bit of equipment availability issues and development issues. Where should steady state be and when should we expect that?

Sébastien de Montessus

Yes, I think, you’re right. You’ve seen a bit of a bump up. I think it will settle back in the high $50s, maybe $60, in that sort of ballpark.

Nana Sangmuah

And would it be in this Q3, or we should expect that much later in the second-half?

Sébastien de Montessus

Yes, I think, much later in the second-half. This was quite a bit of work being done at the moment, especially on the availability of space and the maintenance on the machine. But it should start stabilizing towards the end.

Nana Sangmuah

Great. And finally, on Agbaou, the crushing capacity expansion is complete, and you guide it for incremental ounces. How would the – what is the blend going to be if you like going forward? And what should we be looking at in terms of recovery, as the mix between sulfides and oxides that’s stringing around?

Sébastien de Montessus

Sounds good, sort of a pretty interesting question. The aim has always been to treat as much oxide as we can, because that’s a material that runs the easiest through the processing facility. Now, we realized that at some point, the material will change – the mix will change. We’re expecting in quarter four that we will get somewhere between 15% and 25% of more competent rock in the mix. So currently, we’re essentially running the secondary crusher in the open circuit.

So we will close the circuit later in the year, possibly in the last quarter when we start putting the higher grade more competent rock. And so it’s a mix of whether you want to process higher grade versus small volume on the most soft material. But definitely, we will start seeing a proportion in the fourth quarter. And then in next year, it will potentially go up to the 35%, 40% mark, as far as the more competent material is concern.

So at that point in time, the throughput will decrease. And as you quite correctly say, the recovery will also decrease from that current very, very high levels, and more towards the lower 90s, I would guess.

Nana Sangmuah

Great. Thanks a lot, guys. That’s it for me.

Sébastien de Montessus

Okay.

Operator

Thank you. We’ll take our next question from Chris Thompson from Raymond James. Please go ahead. Your line is open.

Chris Thompson

Good morning, guys. I just want to complement you guys on a great presentation and really good disclosure, really good job. Just a couple of quick questions, a number of mine have been answered. But just, I think, could you just give us a sense at Agbaou? What sort of, I mean, what’s your sort of mill throughput are you looking at by way of achieving with the correct sort of mix as far as blend?

Sébastien de Montessus

Okay. If you look at the – the original process design was 1.3 million tonnes, 1.4 million tonnes of hard rock. We obviously have – the plant has treated more than that, more than the design capacity on the soft material. So, with us installing the secondary crusher, it is a very good installation. We have scoped it appropriately. So, I think, we will be in the high, maybe 1.6 to 1.8 million tonnes of an appropriate mix of materials.

Chris Thompson

Great, that’s good. Thank you. Just moving on to Nzema. How much stockpiles have you got left?

Sébastien de Montessus

Not enough. No, we still have some stockpiles. Although the – this – the stockpiles grade, the overall remaining grade is coming down and down, and down, obviously as you treat more of it. With us getting back into the bottom portion of Adamus towards the end of the year, we will mine obviously a little bit more than we can process and we will go for the higher grade. So the lower grade will be stockpiled again. So we want to move back the stockpile which has just eaten away.

Adriaan Roux

Yes, I might add – Chris, also I might add on this one is, you probably noticed on our slide in Nzema that we gave the trend on a monthly basis of purchased ore. What’s interesting, in particular, and that’s why we added July is that, we already reached above 50,000 tonnes of purchased ore at – in July, and basically have been able since January to move from two suppliers to eleven suppliers, which is giving much more flexibility in the coming months for Nzema to deal with the right grade coming from those different suppliers.

Chris Thompson

Okay, great. Thank you. And then finally, just Tabakoto, Kofi B just remind us again what’s the development schedule there?

Sébastien de Montessus

Okay. Kofi B we will start opening up towards in the last quarter, we will start the striping and the preparations, the site logistics and so on. So that it will phase in early in the New Year and so towards the end of the first quarter. As Kofi C eases out of the system, Kofi B needs to be developed to start producing at that point in time. So we’ll definitely start towards the end of the year to do a better free strip and to do logistics site development.

Chris Thompson

Perfect, guys. Thanks a lot.

Operator

Thank you. We’ll take our next question from Tara Hassan from Haywood. Please go ahead. Your line is open.

Tara Hassan

Yes, thank you so much. Most of my question have been answered. But just following on Chris’s question on Nzema and the discussion on the projects, or can you maybe touch on actually what the guidance includes for the second-half of the year in terms of assumption or the quantity of purchased ore?

Sébastien de Montessus

Okay. For the second portion of the year, we have reduced the grade of purchased ore from the original estimate in the first of the year. We – so we’re targeting 50,000 tonnes per month at about putting all grams minimum grade.

Tara Hassan

Okay, that’s great. And similarly at Agbaou on your – your guidance increased there, obviously you’ve been really pushing the throughput there, or what should we be sort of modeling for the second-half of the year? And is this sort of a mix of grade increase and throughput increases there?

Adriaan Roux

I think for the rest of this year, the first quarter now, the third quarter will essentially be oxide material at current grade at current recovery rates. If you look at the last quarter of the year, we will start getting somewhere between 15% and 25% of more competent material at maybe a gram or so higher grade. And we believe the recovery will come down a couple of a percent, 2% or 3%. So I can’t tell you offhand now, but I can give you the exact numbers later on.

Tara Hassan

Yes, that’s great. Thanks, Attie. And just a final question on Tabakoto underground that seemed to be the most challenging part of the operation to deliver on? So can you maybe touch on what’s going to change to improve your underground developments rate and access to stoping areas?

Adriaan Roux

Okay, thanks. Yes, Tabakoto, as you know, it’s got a North and a South section. The South section, although the individual vents are high-grade, they are very thin. And the way you model it and the way you actually mine it, you create quite a bit of dilution. The Northern section, obviously, a bit thicker orebody, much easier to mine because of less dilution. Now, with the unavailability of equipment, you have to develop and mine, where you’ve got access. And we were a bit in a corner with, I think, most of the development previously done in the Southern section of the mine, which is the lower-grade after dilution.

So a lot of development has gone into the northern side now. And the focus on equipment – maintenance and equipment availability has taken a different scope. So we believe that from now until the end, we will be in a much better position as far as mining at Tabakoto in terms of volume and grade.

Tara Hassan

Okay, that’s it. Thank you so much.

Sébastien de Montessus

Tara, I will just add again on Nzema, and I think it’s important and this explains why we’re quite comfortable on the guidance that we’re putting for the full-year is looking at the numbers for July at Nzema, in particular, who has been the one hurting us on the first-half. And clearly the fact that, we are, at the end of July above 50,000 tonnes and above 3.8 grams per tonne give us comfort on being able to achieve what we plan.

Tara Hassan

Okay, that’s great. Thank you Sébastien.

Operator

Thank you. [Operator Instructions] And now we’ll take our next question from Mark Bentley from ShareSoc. Please go ahead. Your line is open.

Mark Bentley

Good afternoon, gentlemen. Let me also thank you for a very comprehensive presentation. I’m afraid, I do have quite a number of questions, so I hope you don’t mind bearing with me. My first layer of questioning concerns the strategic review of exploration. Can I confirm that we can expect to see a news release when the results of this are done?

Secondly, is the Liguidi prospect included in the targets you’re examining?

And thirdly, at this stage, which of the targets that you’re looking at do you believe is most likely to be most material?

Sébastien de Montessus

Thanks, Mark. Well, basically, we will be preparing some quarterly news on the exploration as results will come up. The presentation in mid-November will clearly describe all the priorities and the ranking of our portfolio. The particular tenements that you are referring to precisely is, why we’ve been pushing the release of this communication to mid-November, so that we could include the review of the Karma portfolio and finalizing some of the ex-La Mancha in our portfolio tenements. In terms of most, I would say, attractive areas, clearly Houndé, Ity and North Tabakoto, I mean the Kofi area are the three key areas of focus and the most attractive.

Mark Bentley

Thank you. My second question, I was interested to read that you’ve been consolidating your offices, and you mentioned that corporate offices moved to London. Could you just put a little color on that, which offices have been closed and how many staff do we have in the London office? It’s not yet shown on your website, I wondered if you could give an indication of where that is.

Sébastien de Montessus

Yes, obviously we started the beginning of the year to close the Vancouver office. And we were left, I mean, with basically two corporate offices in Paris coming from La Mancha and one in Monaco coming from the historical Endeavour. And for a number of tax reasons for Endeavour, we decided that we wanted to relocate everyone in one single area. There were some comments in the past that Monaco had been perceived as a bit of a lifestyle issue. So clearly London was for us the obvious area to – as far as the corporate team. But most important is, we are ensuring that we have a very lean corporate team in London that will be around 20 people maximum in this office.

The rest of the team being really in Abidjan around the head of operations, head of exploration, and the construction services, which are all based in Abidjan at an hour flight from each of our mines. And the intention of the corporate team, including myself is to spend a lot of time in Abidjan and on site.

Mark Bentley

Thank you. And my next question is a technical financial one studying the detailed results announcement. I want to check my understanding the Karma streaming facility is only reflected in the balance sheet, not as a liability, but by a reduction in the mining properties valuation. Does that mean that the costs of that facility will appear in the cost of sales in the P&L going forward? And is that reflected in the Karma AISC?

Ota Hally

Yes, it’s Ota here. So on the first part you are absolutely right. The net stream value is netted against the mineral property, which is one of the two standard treatments of such streams. So that’s why there is not a deferred revenue item of approximately $100 million otherwise on the balance sheet. And yes, the effect of the stream where we get paid on that portion of ounces $400 – approximately $400 an ounce, it will go through the P&L.

Mark Bentley

And is that reflected in the AISC you are guiding on?

Ota Hally

No, it is not. The cost of producing an ounce is whatever the cost is. The fact that in this case that the revenue is reduced is not in the AISC.

Mark Bentley

Okay, thank you. And then a couple of high-level strategic issues. I’m very happy with your growth plans for Houndé and then hopefully subject to the DFS we’ll be moving on to the Ity CIL after that. We have a major capital commitment for Houndé, of course. So we’re not looking at dividends until that’s done, but clearly the objective for Endeavour is to move it into the upper tier of mining companies. But I think to move into that tier, you will have to start paying dividends. Are shareholders, obviously subject to market conditions likely to be able to anticipate a dividend after Houndé is completed?

Sébastien de Montessus

Yes, I think, Mark, it’s a fair point. And clearly the objective of Endeavour is to move toward the ability to distribute on an annual basis a dividend. What we need is to reach steadily position once we have passed our CapEx requirements to be able to enter into this program. But clearly, and that’s one of the key objectives that has been set also by our significant shareholder, La Mancha, to be able to move quickly Endeavour into being able to distribute dividends back to here shareholders.

Mark Bentley

Thank you. And then finally, you do mention that you wish to enhance Investor Relations and I’m pleased with the various initiatives that you are doing. Now that you have an office in London, there is a potential to meet with individual UK investors, is that something you might be prepared to do? Should I contact your Investor Relations team about possibly setting up a meeting for individual shareholders in London?

Sébastien de Montessus

Of course. I mean, that’s also one of the reasons why we decided to relocate the corporate office in London rather than being elsewhere in Europe to be in the same time zone as Abidjan for our West African operations. We wanted to locate as we are traveling a lot in a city where we could at the same time do some Investor Relations. So clearly London was the obvious choice. But also spending a lot of time in North America and which is what we’ve been doing since the beginning of the year as this is our listing.

Mark Bentley

Thank you very much.

Sébastien de Montessus

Thanks, Mark.

Mark Bentley

Okay. Thank you.

Operator

Thank you. [Operator Instructions] As there are no further questions on the phone queuing, I would like to hand the call back to Mr. Sébastien de Montessus.

Sébastien de Montessus

Thank you, operator. Well, I would like to thank again all of you for attending this quarterly and half-year results and look forward to talk to each of you again soon. Thank you very much.

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