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Endeavour Mining Corp (EDVMF) CEO Sebastien de Montessus on Q3 2019 Results - Earnings Call Transcript

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About: Endeavour Mining Corporation (EDVMF)
by: SA Transcripts
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Earning Call Audio

Endeavour Mining Corporation (OTCQX:EDVMF) Q3 2019 Earnings Conference Call November 5, 2019 8:30 AM ET

Company Participants

Sebastien de Montessus - CEO and President

Sofia Bianchi - Independent Non-Executive Director

Louis Irvine - CFO

Mark Morcombe - COO

Patrick Bouisset - Head of Exploration

Conference Call Participants

Michael Stoner - Berenberg

Ovais Habib - Scotiabank

Justin Chan - Numis Securities

James Bell - RBC Capital Markets

Chris Thompson - PI Financial

Geordie Mark - Haywood Securities

Operator

Hello ladies and gentlemen and welcome to Endeavour Mining Third Quarter 2019 Results Conference Call and Webcast which is being recorded. A copy of the presentation is available on Endeavour's website. At this time all participants are in a listen only mode. The brief question and answer session will follow the formal presentation. [Operator Instructions] I will now hand over to your host Sebastien de Montessus, CEO of Endeavour Mining. Please go ahead.

Sebastien de Montessus

Thank you, operator. Hello everyone and thank you for joining our Q3 2019 results presentation. My name is Sebastien de Montessus, I'm the CEO of Endeavour Mining and it's a pleasure to be talking to you once again.

This time from our operational hub in Abidjan, where we are hosting our board for the second annual site visits. I'm delighted to say also that our new Independent Non-Executive Director, Sofia Bianchi is with us on this trip and on the call. Please note Today's call is covered by our disclaimer and notice on forward looking statements.

The format for today's call will be our usual quarterly format. We provide an overview of the results then Louis will review our financial performance, followed by Mark who will discuss the operations. And I will conclude before opening up for Q&A. Our Head of Exploration Patrick is also with us here today and available to answer any exploration questions you may have.

So now on to the first slide of the presentation; and I'm excited to announce that our net, net, net, net, net, net, net free cash flow is finally positive. This marks the transition from our high capital intensive investment phase to a cash flow generation phase. If you remember I told you back in 2016 that the turnaround will be completed after our three year strategic plan. And I'm pleased to confirm that this quarter, we have generated our first net cash flow positive quarter.

Before we dive into the presentation, I'd like to thank the team for their tremendous efforts over the past three years, which have ultimately resulted in this quarter. Thank you as well to our shareholders. This achievement could not have been done without their support and we expect that they will now start seeing their patients rewarded.

On this page, we have laid out the key takeaways for the quarter. I think it is safe to say that it has been a strong quarter despite the challenges brought by the severe rainy season. The stronger operating results and a higher goal price led to our operating cash flow doubling. And most importantly, the business reduced its net debt by $52 million as we have completed our investments during the previous quarter.

Looking ahead, our objective is to generate strong cash flow so we can continue to leverage the business and demonstrate the robust return on capital employed. In addition, I believe that the business is very well positioned to continue to grow in the short term with very low CapEx requirements.

In Q4, we expect Ity's ramp up to 5 million tonnes per annum to be complete. This means that 2020 will benefit from a full year production at Ity at an increased plant size. We also expect the exploration success to generate further growth. And this is not arm waving, wishful thinking. As you know from our announcements, we have found deposits which are at least one gram per tonne richer at both our flagships Ity and Hounde. We are therefore moving quickly to get permit so that we can start mining them in late '20, early '21.

As you can imagine, we are delighted because it's rare to be able to have both debt reduction and growth at the same time. And finally, based on the exploration success we've had it is now part of our DNA to have a strong inspiration focus. This will allow us to continue to build low cost optionality within our portfolio.

Turning now to the next page, safety, safety continues to be our top priority. We were disappointed to record one last time injury during the quarter at our Ity mine, the first in over 23 months across the group. Our safety record remains well below the industry average at 0.06. It is a reminder to all us that we must continue to be vigilant about our safety. The safety teams at all our mines are redoubling their efforts to ensure all our workers take the necessary safety precautions at all time.

Moving to the next one, as I mentioned, we have had a strong quarter despite the rainy season, as production increased by 6%, over Q2, and all in sustaining costs remain low at $800 per ounce. On this page you can see them in fact, this has been our second best historical quarter after the record set in Q4 last year.

Turning to slide seven, you will see that we were up again this quarter in Burkina Faso. The left hand side of the page illustrates the average rainfalls during Q3 over the past four years run rate four times versus when we first started operating in the country. The rain undoubtedly impacts production costs, if we assume all of the factors are constant. However, it is not the only factor to consider.

By incorporating the lessons we've learned we are able to better plan for the rainy season with the goal of maintaining a production profile that is as flat as possible. Every rainy season has its challenges, and this year was no different. The main challenge this year was starting a high grade Bouere deposit at Hounde during the rainy season and also at the same time ramping up our Ity mine in soft material quite a challenge.

As I like to tell the team our job is to be problem solvers and make sure we have backup solutions in place. As such we've been able to mitigate the impact by mine scheduling and building up stockpiles in the dry season. Costs tend to increase during the rainy season because more water pumping is needed. Mining efficiency is lower and we use stock pile lower grade ore to maintain plant throughput, which is why we place a greater emphasis on maintaining productions levels to net this out. And in the current goal price environment this is even more beneficial.

Moving to the next one. As I mentioned earlier, the Ity CIL project has been the big driver for Endeavour's performance this year. As you know it was completed four months ahead of schedule $10 million below budget and without a single LTI. The ramp up has also been quick, lasting only three weeks. Since then the CIL plant has been performing extremely well. Production continued to increase in Q3. And we now expect the mine to achieve the top end of the 2019 annual production guidance range.

Just a reminder, we deliberately gave a wide guidance range at the beginning of the year as the lower end was based on the nameplate capacity, and the top end already included upside such as the plant running above its nameplate. During the ramp up, we identified the ability to further increase the mill's throughput by 25% to 5 million tonnes per annum for minimal CapEx. Those upgrades are progressing well and on track for completion before the end of the year.

Moving to slide 9, now that we are three quarters off the way through the year, we are adjusting our 2019 full year guidance for production and all in sustaining costs. To walk you through our thinking, let's look at production first. We've already produced 473,000 ounces. And as I just mentioned, we expect Ity to meet the upper end of its guidance. So the lower end of the group's guidance has been increased slightly by 35,000 ounces. Concerning the other mines, we expect Agbaou to perform well in the final quarter 2 offsetting Hounde where the severe rain slowed the development of the high grade Bouere pit.

The group all in sustaining cost guidance has also been adjusted upward slightly by 4% to reflect the higher royalties associated with the stronger gold price environment, which is equates to around $15 an ounce. In addition, the adjusted estimate to take into account the Ity's, all in sustaining costs which is expected to be near the top-end of its guided range, as mentioned during our Q2 call, driven by the increased production at the lower average grade. Overall, we expect to Agbaou to offset Hounde and Karma.

Now I'd like to give an overview of our financial performance. Focusing on what I consider are the three important metrics for the business. Operating cash flow, net debt reduction and return on capital employed. This quarter we doubled operating cash flow compared to Q2 as we benefited from both an increasing production thanks to Ity, and the stronger gold price. Again, this is why it's important that we hit our production targets whatever the weather.

Turning to slide 11, this graph makes me very happy. Thanks to both our operational performance and our financial discipline we can know those strong per share metrics. This is the reward of managing to fund our growth without diluting our shareholders. As we have now transitioned to being a cash flowing business, it is interesting to see that our unrealized cash flow yield is in the double digits, which is high for any industry and particularly for the gold industry. In the context, where we are competing for capital across industries, I believe that this is important for the gold industry to show it can be benchmarked across industries on all relevant metrics.

As you see on this next slide, the gross capital spent since 2016 has been significant, amounting to over $800 million. This represents almost half of our market cap. With only the ETFs size remaining CapEx decreased to $6 million in Q3. Delivering our projects on time and on budget is great. But ultimately, the most important is to show a return on capital employed. As you see on slide 13, this metric has improved substantially this quarter to 15% on an annualized basis.

Moving to slide 14. With the high capital investment phase now behind us, we have pivoted to reach the cash flow inflection point in the business. It was announced it is finally there. We will now accelerate our deliberating [ph]. I think this graph sums it up nicely. And you can see the different elements on the bottom side in particular.

And now as you can see for this quarter with the CapEx spend pretty well finish, we can start focusing on debt reduction. This quarter we decreased net debt by $52 million compared to Q2. As you can see from the orange line, the net debt to EBITDA ratio, decreased from 2.75 times at the end of June to 1.94 times at the end of September, which represents a 30% decrease in just one quarter, which is very pleasing to see and we expect this ratio to keep decreasing quickly over the next quarters.

Turning to exploration now. As part of our strategic plan, we did invest a lot during the last three years in exploration in the same spirit as for the project. We are also now starting to benefit from the exploration successes we've had and converting progressively our discoveries into reserves.

As you may recall the main goal set three years ago were twofold. First to extend mine life to more than 10 years; and second, to advance greenfield discoveries to build optionality within the portfolio. Over the first two years, we focused mainly on near mine exploration; this year, we started to ramp up greenfield effort, which now represents nearly 20% of the spend.

We are very pleased with the results at both Ity and Hounde, now have demonstrated potential to have 10 year mine life and we have started to see delineation of new greenfield discoveries. The icing on the cake is that our discovery cost stands at less than $15 per ounce.

Let’s look at Hounde quickly in some more details, our target is to have at least a 10 year mine life at an average 250,000 ounce per annum. The graph on the right hand side shows the production gaps in gray, that we need to fill to achieve this and this is how we calculated our target on meeting an additional 1.1 million ounces of reserves.

While this sounds a big number, we have already discovered 710,000 ounces which we published as a maiden reserve for Kari Pump back in June and not only that we have reserve ounces, it was also a considerably high grade of just over 3 grams per tonne. During the quarter, we’ve been finalizing the resource calculation for the Kari Center and Kari West discoveries and expect to announce a maiden resource and reserve estimate in the coming weeks and demonstrate once more, that we’ll be the reaching the target we had set for Hounde.

Moving now on to Ity, the same principle applies. We want a 10 year mine life at an average 250,000 ounce annual production. To achieve this, we only need to add 500,000 ounce of reserves. We have already discovered 500,000 of indicated resources so we are confident we can meet this target as the discovery keeps growing. Similar to the Kari areas for Hounde, we are also seeing about 3 grams per tonne at Le Plaque. We expect to announce again, a maiden reserve for Le Plaque based on the current resource in Q1, 2020.

Now, I'm turning to our greenfield exploration efforts in Côte d'Ivoire. We are very excited about the Fetekro deposits. In September, we increased the indicator resource to 1.1 million ounces, at a good grade of 2.54 grams per tonne and we will be commencing in 10,000 meter extension drilling program shortly, which we expect will increase the project resource base further. Solid, Patrick, thanks [ph].

That concludes my quarterly overview and I will now hand over to Louis for a detailed review of our financial performance.

Louis Irvine

Hello, everyone and thank you Sebastien for the introduction. From our start, I'm very pleased to be joining in this important juncture as the business matures into a cash generating gold company. With the current strong gold price environment, I think I might have time the perfectly to join the system at this point in time.

On my first slide, slide 20 in the presentation, I think it would be interesting to provide you with a snapshot of how the business has performed both on a year-to-date basis and comparing the current quarter versus the previous one. So starting on the year-to-date results, the company’s financial performance has improved across all key metrics. On the financial side, adjusted EBITDA and EBIT margins are up 24% and 35% respectively, with operating cash flow up by 52%.

As Sebastien has mentioned, the key driver has been our increased production for continuing operations and the stronger growth drive which more than compensated for the slightly higher all-in sustaining cost year-on-year. Considering the significant change to our asset base over the past nine months, with the CIL plant coming on-stream at Ity and the growth CapEx phase now especially over, I will focus on our quarter-on-quarter performance for the balance of the presentation and we’ll be happy to address any further questions you may have later.

So, let’s turn to slide 21, where we have provided a breakdown of the magic elements used to derive our all-in margin. In the tables, we have shown both the nominal amount as well as the dollars per ounce impact. The all-in sustaining margin came in at 44% up from 38% reported in the previous quarter. Low and non-sustaining capital for both mining and exploration resulted in a $305 per ounce improvement in the all-in margin of the company.

This is due to significantly less non-sustaining capital required by the business during the third quarter. And to expand that point, on the mining side we did the pre-stripping at our new deposits at Hounde and Karma earlier in the year and on exploration, most of the drilling was done ahead of the rainy season. Unit cash cost decreased over the previous quarter, which was however offset by higher royalties and sustaining capital spend. For reference, we have provided additional insights on each of the main line items on the slide.

On the next slide, we start from the all-in margin and work our way to the net cash inflow for the group. As Sebastien mentioned the bottom line shows a positive inflow for the quarter, which is a turning point for the company. Diving into a bit more detail, I'd like to anticipate any questions you may have on the larger quarter over quarter variances. So starting with working capital, it has swung to an outlet during the quarter mainly due to payables related to the construction of Ity CIL plant winding down, which was somewhat offset by a very large debt recovery during the third quarter, approximately $15 million of that has been recovered in the quarter.

Taxes came down slightly as the second quarter also included a provisional tax payment of $6 million at Hounde for the 2019 financial year, and growth project capital decreased significantly, as you'd expect to see now that the Ity CIL plant is commissioned. Again we have provided more insights on the page and I'll be happy to address questions during the Q&A session.

Moving on to the next slide, where we show the drivers for our opening and closing cash position, you can see that we started the year with $124 million of cash to which operating activities have added another $178 million year-to-date. Since the beginning of the year, we have invested $211 million into the business for growth projects and sustaining -- and non-sustaining expenditures.

As you see with the insert this represents a 60% decrease over the previous year. These activities were bridged by an inflow financing activities, notably the drawdown of the RCF earlier this year, which was partially offset by interest payments and finance lease obligation, repayments as well. No further drawdowns are currently expected given our strong cash on hand position.

To the next slide, the company's liquidity remains strong and we are in a healthy financial position. We have available funding of $240 million at the reporting date. Our current net debt to adjusted EBITDA ratio stands at 1.94 times, Sebastien referred to earlier. And this is calculated on a trailing last 12 months adjusted EBITDA basis, which is a sharp decrease over the 2.7 times at the end of June.

What we have included in this slide is a calculation where you -- where we've analyzed the quarter three adjusted EBITDA. And arguably this is most probably our more relevant metric in this high gold price environment and with Ity now ramped up. And on that basis, the leverage ratio should be around 1.24 times. Looking ahead, we expect net debt to EBITDA the ratio to continue declining on the back of reduced growth capital expenditure requirements.

Turning to my final slide, you can see that on a quarterly basis, adjusted net earnings per share increased considerably in quarter three to $0.30 per share, this being the benefit of funding our growth in a manner that has avoided equity dilution for the shareholders.

That concludes my review. I’ll happy to answer any questions at the end and will now hand over to Mark.

Mark Morcombe

Thanks, Louis. It's great to have you in the team. I'd like to start my operational review with the Ity mine. Commissioning of the new processing plant in the lead up to the west season has gone pretty well. As you can see from the graph on the right hand side, the difference in production between the old heap leach and the new CIL operation is considerable, essentially three times to production at a low all-in sustaining costs and good validation to support the capital investment made.

Production for the quarter continued to increase despite the heavier than normal rainy season. On the mining front, we continue to open up the [indiscernible] and Ity flat pits, which extended down into the transitional and fresh rock in places, which as most of you know, Ity is a benefit as we can use the larger mining fleet with more solid underfloor conditions rather than the smaller articulated dump truck.

Additional all sources came from the spent heap leach near the CIL plant and a low grade dump which has been mined to make way for plenty asset fleets. The production rate has continued to ramp up based on the debottlenecking work been conducted and we expect to be in a position to process at an annualized 5 million tonnes per annum during the fourth quarter.

The mine's all-in sustaining costs decreased during quarter three, mostly due to a lower strip ratio, greater production volumes and low G&A costs. These factors help to more than offset higher mining related costs due to the rainy season and increased royalty costs.

Patrick and his team have done a great job discovering and modeling the high grade Le Plaque deposits. But there is still more resource to be drilled. We're in the process of converting the initial resources into reserves and incorporating this into our life of mine plan. Due to the great price with Le Plaque, our goal is to work for the permitting and planning process and bring this into the mine plan as early as possible.

Looking ahead to the final quarter of the year, Ity is on track to achieve the upper end of 2009 in production guidance. For the all in sustaining cost as guided during the second quarter results. We expect the mine to finish near the top end of guidance to account for the lower average grade mine and process in taking the plan beyond nameplate capacity.

Turning Hounde on the next slide, the mine delivered a good performance for quarter three despite the severe rainy season, with only a slight decrease in production. We started to mine the high grade Bouere deposit during the second quarter discontinued at a higher rate in the third quarter which helped maintain the process great profile, as we also blended this with Vindaloo and lower grade drop off. Ramping up of production of Bouere was slowed due to the more severe rainy season, which is the main reason we now expect to be at the lower end of 2019 production guidance and above the all in sustaining costs guidance.

As you may have seen the guided 25 million of sustaining capital for the second quarter -- second half of the year is considerable compared to the 10 million in the first half. Of this amount 15 million is planned for the fourth quarter. The strip ratio was well above the loss of mine ratio roughly 15 to 1, and is expected to remain high in quarter four.

Looking at the big picture the company pushed Hounde very hard in the first two years of production in order to support the funding of the Ity CIL project. With Ity now in production and operating well, we plan to complete the guided capital stripping during the second half of the year to place us in a good position for next year. Similar to Ity the exploration team have done a great job discovering and extending our knowledge of the high grade Kari Pump deposit, which is also expected to make a contribution to Hounde's life of mine production profile. And therefore looking forward to incorporating this into the mine plan as soon as possible.

Moving on to slide 29, to our Agbaou mine on in Cote d'Ivoire. The maturity of this operation was highlighted by the smooth transition from our expert GM to the new Ivorian General Manager. The team has embraced the change and now the production [indiscernible]. Mining operations continued in the north and west pits during the quarter as the primary old sources.

Towards the end of the period west mining recommends [indiscernible]. Processing report was supplemented with some low grade stockpiles, and production was steady quarter-on-quarter through the rainy season. All in sustaining costs decreased as a result of reduction in both processing and G&A unit costs as well as an increase in gold sold. The higher gold piles help to offset higher unit mining costs and royalties. Looking ahead to the following quarter, Agbaou is on track to meet the higher end of full production guidance and expected to come slightly below that all in sustaining cost guidance for the year.

And lastly to slide 30 for our Karma asset in Burkina Faso. Production increased as forecast despite the effects of the rainy season. Mining activities focus almost solely on the nearly commissioned Kalana pit, as we finished mining the Kalana pit in early quarter three. The higher grade Kalana ore contributed to the significantly highest debt grade, which more than compensated for lowest tech tonnage.

All sustaining costs decreased mainly due to increase gold sales, which more than offset higher unit mining and staffing costs and higher royalties. Looking ahead to quarter four, we expect Karma to meet the lower end of 2019 production guidance and finish slightly above all in sustaining cost guidance. This is mainly due to higher royalties as guidance was based on a lower gold price of $1,250 per ounce.

That concludes my operational review, and I'll be happy to address questions after Sebastien's concluding remarks.

Sebastien de Montessus

Thanks Mark. So, in conclusion ladies and gentlemen, I think this quarter demonstrate the successful execution of our strategy. We have completed the growth investments required to build a strong diversified portfolio. With this project now in production we have de-risked the business and can now focus on harvesting the cash generated by these investments.

Just to remind you of our four upcoming near term catalyst. First, we expect to publish maiden resources at the new Hounde discoveries in the coming weeks. Second, we're looking forward to completing the Ity CIL upsize before year end. Third, we're looking forward to publishing maiden reserves for the new Hounde and Ity discoveries early next year. This will be followed by updated technical reports where we aim to demonstrate 10 robust years of production across both assets.

And last and most important continuing to generate cash flow. As Thomas Edison told me 100 years ago, having a vision is not enough, vision without proper execution is hallucination. Well, I'm pleased to say that after three years of discipline in executing our plan, near $50 million of net cash flow after everything. This quarter is not hallucination, but just the beginning of a new chapter.

Thank you very much for your time, and we're now happy to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you so much. Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] And the first question comes from the line of Michael Stoner from Berenberg. Please go ahead.

Michael Stoner

Hello, thank you very much for the call. So on the Ity growth CapEx, in the announcements like you spent $4 million of the $10 million to $15 million budget, and that the bulk of the work left is on the tailings. Can we assume that the CapEx is tracking kind of towards the low end of the range or better than that range or is there a big ramp up and spend through Q4?

Sebastien de Montessus

Thanks, Michael. Yeah, I confirm. I mean the objective is tracking towards the lower end of the guidance.

Michael Stoner

Okay, perfect. And then on to Hounde at Bouere, forgive me if I missed it in the call. But do you expect to have that fully ramped up in Q4 or is that more of a Q1 event?

Sebastien de Montessus

Sorry, say that again, Michael.

Michael Stoner

Sorry at Hounde and the ramp up of high grade feed from Bouere, is that expected in Q4 to kind of the full production rates or is that going to be happening early next year?

Sebastien de Montessus

It's going to start at the end of the quarter and mainly in Q1.

Michael Stoner

Okay, perfect. And on Agbaou, the better than unexpected mining unit costs, are those now anticipated to sustain or were there kind of a few one off bits there?

Sebastien de Montessus

I'm always cautious when we have, better than expected results. So it would be probably brave to think that [technical difficulty]. But yes, I mean, we hope that the performance of the team and following the change of the GM has laid out strong foundation for the future. So we hope to continue in the same territories. Yeah.

Michael Stoner

Okay. But that’s now down to a changer of contract terms or anything that you can illustrate its performance based?

Sebastien de Montessus

Yeah, it's performance based. Exactly.

Michael Stoner

Okay, perfect. And the final one for me is on the working capital outflow. You flagged that its payable's washing through at Ity. Is there much of that to expect for Q4 or is that effect largely done now?

Sebastien de Montessus

Michael, thank you for the question. That effect is basically done now. So it was, Ity CIL accruals at the end of the year that now are winding down.

Michael Stoner

Perfect. Okay. That's all for me. Thank you very much for your time.

Sebastien de Montessus

Thank you, Michael.

Operator

Thank you so much. And the next question comes from the line of Ovais Habib from Scotiabank. Please go ahead.

Ovais Habib

Hi, everyone. Thanks for taking my question. Firstly, Sebastien and team congrats on a strong quarter and achieving free cash flow, despite the rain season was very bad for the quarter. So just on that, Sebastien, obviously, you guys got hit with rain in Q3. But how's that looking going into November and looking in going into Q4? Was November still week in terms of rain or are we seeing a relief there?

Sebastien de Montessus

Thanks Ovais. Well, surprisingly, this year the rain has been quite late. And October has still been a rainy, rainy month. So that again, we hope that November, December should now start to be the dry season. And if you recall, we tend to have record Q4 each year as we enter into those dry seasons. So, I mean yeah we are confident going forward for Q4.

Ovais Habib

Excellent, okay. And then just moving a little bit on to exploration, in terms of -- just want to know where Patrick is focusing his efforts now and is it Fetekro or is it still at one day or can you give us a little bit color on that?

Sebastien de Montessus

Yes. Patrick, you want to answer the question?

Patrick Bouisset

Hi, Ovais. Right now, the main point for us is to concentrate on Fetekro first because we started to study for PA to be possibly issues at the end of the fourth quarter. So we want to involve as many answers as possible on the Le Plaque deposit. So this is of my first priority right now. And we are still working a little bit now to initiate and I'll finish on the black extending the Le Plaque services. But that basically is a priority we have now. Until the end of the year that will be the priority.

Ovais Habib

Are there any other targets or kind of greenfields that you're working on right now or -- I mean, this is just the target for right now?

Patrick Bouisset

No. Right now in the next coming two months is going this. That being said, for next year, we are preparing additional and other greenfield target, while let's say in different country or portfolio.

Ovais Habib

Okay, perfect. Guys, that's it for me. So thanks for taking my questions.

Sebastien de Montessus

Thank you, Ovais.

Operator

Thank you. And the next question comes from the line of Justin Chan from Numis Securities. Please go ahead.

Justin Chan

Hi, guys. Congrats on a strong quarter and the first majorly positive free cash flow quarter as well. My first one is just on in terms of now that your balance sheet deleveraging you have a lot more sort of strategic options. How do you evaluate? I guess if you could give us an update on Kalana and Fetekro and just how you evaluate projects going forward? And I guess what if any criteria cut offs do you have for what makes an Endeavour project and perhaps what cold pressed you to evaluate that?

Sebastien de Montessus

Thanks, Justin. I think with back in Denver during my presentation. We said that, the key objectives through the next 2 years or 2021 is really to focus on deleveraging and generating strong cash flow. So that's really the priority, which gives us time I mean, to continue to grow the optionality into the portfolio for our next mine, whether it's Kalana or whether it's Fetekro.

So we have this optionality in the portfolio. Obviously, if the gold price continue to be strong, we should be deleveraging faster than expected, which will give us even more flexibility on the next options. But really, I want to insist on the fact that the next two years 2021 are really focused on generating as much as we can cash flow in the portfolio.

Justin Chan

I see. And then in terms of cash flow and how you view balance sheet management, that's arguably already at a healthy level relative to what your EBITDA will be going forward. I guess, when thinking about a dividend or a capital return or simply just take debt to zero, could you just run through those options and how they're viewed by your team right now?

Sebastien de Montessus

Yes, well, I think that, we'll have -- I don't want to precipitate discussions with our board on those subject. We are just completing the first quarter of net cash positive. I think we'll have as we move forward and accelerate this deleveraging, and we always said that our target was to be below 1 -- below 0.5 times net debt to EBITDA. So depending on the gold price, that's something that we will reach quite rapidly. And we always said that, as soon as we are ready, our objective is to be in a position to move to giving back some of this cash flow to shareholders. So this is clearly a subject that we intend to address with the board in 2020.

Justin Chan

Okay, thanks. And just my last one, on Q4, this is a bit more of an operational cash and costs question. Are there any accruals that we should be aware of that tend to occur in Q4 and will that be sort of a one off impact on cost?

Sebastien de Montessus

Say that again, sorry, Justin.

Justin Chan

Yeah, just -- I was just wondering if there are any year-end accruals that we should be aware of in terms of how they may impact cash costs or just ore costs in general for Q4.

Sebastien de Montessus

Justin I don't believe there should be any and if there are we will let you know, but I don't think that's occurring.

Mark Morcombe

No reason for.

Sebastien de Montessus

Yeah.

Justin Chan

Okay. All right. Thanks very much, guys.

Sebastien de Montessus

Thanks, Justin.

Operator

Thank you. And the next question comes from the line of James Bell from RBC Capital Markets. Please go ahead.

James Bell

Yeah. Good afternoon, and thanks for the call. Just firstly, on the permitting for the Kari targets and Le Plaque. You talk about meeting those sort of late 2020 or early 2021. Do you see any risks around that process, or do you think that these going to be relatively straightforward to secure?

Sebastien de Montessus

Thanks, James. I think the good thing is we are talking about permits of new pits. It's not permitting for a new mine. So this tends in our experience to go quite fast, there is still a process to be followed. But I am this week with the board and for example, we met the Minister of Mine yesterday, and he'll confirm that he was supporting to get us as quick as possible. He looked like permitting. And about two weeks ago, I was with the Minister of Mine in Burkina Faso who has also committed to help us get the permit for Kari Pump as early as possible. So we quite confident that end of the year is the latest date, we are expecting those.

James Bell

Okay, that's great. And then, on the cost side, I think it's pretty clear what's happened in Q3. But when we start thinking about looking into 2020, are you seeing any headwinds in the underlying business or any inflation coming through that you think could impact your cost base as you start to look into next year?

Sebastien de Montessus

Well, obviously we'll be going through the budget process in the next two, three weeks, so I have a better understanding of 2020 but based on the robust I would say life of mine plan in particular our two flagships, Hounde and Ity pretty confident on the outlook for '20 and 2021.

In terms of supply chain, we haven't seen yet any significant increase in supplies. And even more as we said now that we are having a much more global approach to our procurement and our supply chain, we will see in 2020 some improvements of the inventories and consumables as we are moving towards better control in particular, having stuck containment with a lot of our suppliers to continue to improve our working capital and therefore our return on capital employed.

James Bell

Okay, that makes sense. And one just final one. When you look at your return on capital employed, screens pretty impressively on an annualized basis. Do you have an internal target for where you would like that figure to be on a go forward basis? And does that feed into your kind of view on projects or potential asset purchases in future.

Sebastien de Montessus

Well I think that as a group in terms of philosophy, we always said that we wanted to be as close as possible to 20% return on capital employed. So 15% is a first step, we hope that we'll be able to continue to improve this number. But again, I don't want to preempt the short term future given that this is our first quarter of net cash positive. And I think that based on the full year 2019, and the budget 2020 we'll be able to give some even better guidance to the market.

James Bell

Okay, that's perfect. Thanks very much.

Sebastien de Montessus

Thanks James.

Operator

Thank you. And the next question comes from the line of Chris Thompson from PI Financial. Please go ahead.

Chris Thompson

Yeah, good morning, or good day guys, congratulations on a great quarter and yes very, very nice to see the free cash flow there. Just a couple of quick questions. I think a lot of my questions have already been answered. But just moving to Hounde right now with Bouere, what sort of mill grade are you anticipating when you do bring that pit fully on?

Sebastien de Montessus

Mark, you want to..

Mark Morcombe

Yeah. So the Bouere pit should get better in grade as we go by the end of the year. It will be sort of just under 3 grams average for the year. And then we expect it to improve in 2020 by another 1 gram.

Chris Thompson

Great. I mean it's -- as far as the blender grades the mill what should we be anticipating?

Mark Morcombe

We talking for this year or for next year?

Chris Thompson

Just generally for the with the sort of steady state run rate I guess in the near to medium term with Bouere on.

Mark Morcombe

Sort of -- it's in the low 2s.

Chris Thompson

Okay, great. Thank you. Just moving on quickly great performance for Agbaou. But just focusing and I guess on Ity here. Nice to see that you guys are on track for meeting the 5 million tonne per year. Do you anticipate an improvement in grade or are you pushing, continue to push on the tonnes rather than the grade there? Can we anticipate a plus 2 gram sort of mill grade there?

Mark Morcombe

No. With the increased throughput, that will keep the grade lower.

Chris Thompson

Okay, perfect. Thanks. And then finally a Karma. Again, nice to see the good grade coming in there from Kalana. So when can we anticipate an uptick in those tonnes?

Mark Morcombe

Yes, we were doing some work on the stacker right now and we're expecting that to be finished in this quarter. So that come 2020 will be improving our throughput.

Sebastien de Montessus

And, as you might remember, Chris, for us, 2020 is a turning point for Karma in terms of cash flow as we will be finishing the last, CapEx with the second, which is about $24 million this year. And next year is the end of the first high level of company led stream that will allow us to start working on Karma for us rather than just for Franco, Nevada.

Chris Thompson

Great, thanks for that, Sebastien. Good guys. Keep it coming. Thank you.

Sebastien de Montessus

And I thank you very much, Chris.

Operator

Thank you. And the next question comes from the line of Geordie Mark from Haywood Securities. Please go ahead.

Geordie Mark

Hey, guys. Just a follow on from other questions there. Focusing firstly at ADT very nice result through the west. Just trying to get an idea of how you're looking for sort of mining fleet capacity now that you are coming out of the wet season a sort of rotating early ADTs and into other equipment? And how that's going to affect ultimately the balance of your mining fleet? And hopefully that should have some reflection on unit costs as well.

Sebastien de Montessus

Yeah. At this point in time, we're still using quite a number of IDTs and that's also just looking at the kind of activity that we've got on. We've got TFF construction underway and so in adequate fresh rock for that. So certainly Q4 and Q1 will still have quite a number of ADTs. And obviously, as we get into any fresh rock in our ability to use the dump trucks we will certainly take that opportunity.

Geordie Mark

Right. We are saying, I mean in terms of broader scale, reconciliation. They seem nice, sort of those numbers sort of coming in line at the moment or is it too early to tell?

Louis Irvine

It's probably a little bit early to tell ramping up and also going through wet seasons. Because mining is not always as easy in the wet season. So probably we wait another quarter so on that.

Geordie Mark

Okay. And probably this question is going to take all the time. So obviously, the ramp up through nominal nameplate capacity to 5 million, you're kind of close to there already on an average in Q3. What are you thinking, the ability to be able to exceed that going next year or should we just say 5 million sort of to be conservative on that basis?

Sebastien de Montessus

I think we should be considered for the time being. We know our ability, I mean to ramp up on that capacity. Let us just settle I mean, one or two quarters and then we would be able to draw lines on where the excess capacity.

Geordie Mark

Sure. Okay. And more on exceeding capacity design was given to Hounde. It's running at 4 million tonnes at the moment truly, about that I guess. And that's well above initial nameplate. We see the guidance of obviously 250,000 ounces a year. Sort of that's what you want to try and achieve. I mean, what sort of are you looking at moderating grade on that or are you looking at a combination of continuing to invest capital into plant expansions to achieve that sort of 10 year objective?

Louis Irvine

One of the things with Hounde is we can get the 4 million tonnes when we've got a nice blend of oxide and hard rock. And at times, the profile will change and we'll just have hard rock wind room hot, we're sort of down at the 3.6 range. So it's -- full is not a given over the life of mine profile.

Sebastien de Montessus

And obviously if we continue to discover high grade deposits, it's like Kari Pump and which are mainly oxide. And it helps to improve the blend, both in terms of throughput and in terms of average grades. So this is where we're expecting to maintain this type of profile over the next 10 years.

Geordie Mark

Got it, okay. And in terms of maybe adding to a question earlier, in terms of -- and as you've shown in terms of showing a rotate around assets or organic growth and allocation of capital within your portfolio. Obviously, with some assets that are started a lot or rejuvenated. And now that they are nearing the number of years at the end of the mine life is sort of decreasing.

Just thinking about how you go about looking at those assets with few years on their lives, a few assets in the portfolio. And where the sort of -- what will you do with those, sale those or close them out? Just trying to get an idea of asset allocation within that portfolio.

Sebastien de Montessus

I think that's the beauty of mining, it's a never ending story. You need to move from one asset to the next one. And we always said that we have no emotions and string attached to any assets. What we want is those assets to generate the level of cash and returns that we expect. If at some point they are not generating those returns then it is probably that they are not assets for us to be owned.

And we have demonstrated over the last three years that ability to, sell non-core assets and either acquire/build new assets. The pleasing thing is to see that our exploration strategy to prepare for the next project is getting traction with now in the portfolio, two optionality that we're building with Kalana and Fetekro. This gives us confidence that there is still ways to continue to improve and maintain quality portfolio for Endeavour going forward.

And again, looking at the mine life of Kama and Agbaou. When you look at the Agbaou performance in particular this year, we're very happy to have this asset and very happy with the team over there. And if at some point someone, shows up with the right price we have a disciplined approach to capital employed. So we'll just look as long as it's the right thing for the company.

Geordie Mark

Okay. Well said. And then maybe just some housekeeping last question on Ity there. In terms of looking at 2020, what are you thinking the balance of feed is looking to be there for feed supply?

Sebastien de Montessus

Sorry, you meaning for Agbaou?

Geordie Mark

No, for Ity. What sources there? Just to try and get an idea of where the blends are coming from.

Sebastien de Montessus

So Le Plaque is fairly main contributor to Ity over loss of mine. [Indiscernible] is going to be there. Ity flat will have some contribution and then there will be some contribution from low grade stockpiles.

Geordie Mark

Okay, great. I'll pull it on from a little bit later. Okay, thank you very much for the time.

Sebastien de Montessus

Thanks, Georgie. And just to avoid receiving, 25 phone calls about whether we're sellers of Agbaou, the answer is no, today we're not sellers of Agbaou. In particular as we see a natural extension for Agbaou with this Fetekro new projects where there might be a lot of synergies between the end of Agbaou later on and beginning of Fetekro.

Operator

Thank you. [Operator Instructions] And the next question comes from the line of Mark Betley from ShareShack [ph]. Please go ahead.

Unidentified Analyst

Good afternoon, gentlemen. Thanks once again for an excellent quarter. Just one quick question relating to slide 15 of the presentation. You mentioned in Guinea greenfield exploration. I don't recollect licenses that you have in Guinea, could you clarify that please?

Sebastien de Montessus

Sure. Yes, we did announce last year taking some licenses, about four licenses in Guinea; that’s in the Siguiri area, not far from the Anglo asset in that region. Last year was more theoretical analysis on the ground and the prospectivity of this area, which I think Patrick and the team are quite excited about. And therefore they are this year starting some preliminary drillings.

Unidentified Analyst

Thanks very much. That was all from me.

Sebastien de Montessus

Thank you Mark.

Operator

Thank you. And the next question comes from the line of Justin Chan from Numis Securities. Please go ahead.

Justin Chan

Hi. Just for the aggregates there, that’s Numis Securities. But, anyway thanks for taking my follow up. Just one, it's been sort of a theme this year, especially in the security situation, especially in Burkina, continuing headlines there. Are you noticing any sort of increased difficulties in the operating environment? I know that you’ve got very good protocols in country and people are not generally on the roads from your company. But I was just wondering, from a directionality perspective and from a difficulty or ease of operating perspective, is there any trend that we should be aware of? And anything you can share on that?

Sebastien de Montessus

Well thanks for the question. Obviously, it’s something we are monitoring I would say, nearly on a daily basis for the team here and on the security side. We haven’t seen any to-date whether at Karma or at Hounde, any implications of those security issues in ways to operate and at least nothing has changed or affected because of security ways to operate at both Karma and Hounde.

But on the regular basis, we do reassess and in particular we increase from time-to-time the security protocols around some of our mines and in particular Karma which is in the north part of the country. But, so far we haven’t being in a position where we had to take radical decisions. We still feel, and I do feel, taking that responsibility that our employees are operating in safe area and that we have the right protocol in place to maintain those operations.

Justin Chan

Okay, thanks. And just maybe a better color on that. Has there been a ramp up in sort of government involvement in some of the outlying areas, is that responsible for the increase in expense or I guess is there anymore you can share on that?

Sebastien de Montessus

Well, I think that what is evident is that there has been an increased level of attack in particular in the North and the East part of Burkina. Overall, if you look and take a step back on the region, you see that there has been some movements from North of Mali to South of Mali at the border of the three countries, Malinesia and Burkina Faso. But what we see also is an increasing presence which probably explains those different attacks, increasing presence from the G5 Sahel, for the five countries from the Sahel which are putting joint forces to tackle the subject and also increased forces from both the U.S. and France.

Justin Chan

Okay, thanks, that’s very helpful. Thanks very much.

Operator

Thank you. And there are no further questions at the moment, so please go ahead.

Sebastien de Montessus

Great. Well thank you very much operator. And thank you ladies and gentlemen again for attending this quarterly results. And I’ll meet you again for our next year end results. Thank you very much and have a good day.

Operator

Thank you so much. That does conclude our conference call today. Thank you for participating, you may all disconnect. Speakers please continue to stand by.