Endeavour Mining Corporation (OTCQX:EDVMF) Q4 2019 Results Earnings Conference Call March 9, 2020 8:30 AM ET
Sébastien de Montessus - President and Chief Executive Officer
Louis Irvine - Executive Vice President and Chief Financial Officer
Mark Morcombe - Chief Operating Officer
Conference Call Participants
Fahad Tariq - Credit Suisse
Justin Chan - Numis Securities
James Bell - RBC Capital Markets
Raj Ray - BMO Capital Markets
Richard Hatch - Berenberg
Geordie Mark - Haywood Securities
Greetings and welcome to Endeavour Mining's Fourth Quarter and Full-Year 2019 Results Webcast. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Sébastien de Montessus, CEO of Endeavour Mining Corporation. Thank you, Mr. de Montessus. You may begin.
Sébastien de Montessus
Thank you, operator. Good morning, everyone. And thank you for joining our Q4 2019 and full-year results presentation. My name is Sébastien de Montessus. I'm the CEO of Endeavour Mining and it's a pleasure to be talking to you once again.
Please note today's call is covered by our disclaimer notice on forward-looking statements.
The format for today's call will be our usual quarterly format. I will provide an overview. Then Louis will review our financial performance, followed by Mark who will discuss the operations, and I will conclude before opening today's presentation up for questions. Our Head of Exploration, Patrick, is also with us here today and available to answer any exploration questions you may have.
Beginning with our usual format, I'm pleased to show that we have achieved strong results across all four of our strategic pillars in 2019. Most importantly, 2019 marks our successful transition from a period of intense capital investment to a cash flow generation phase.
In H2, we generated our first positive net cash flows in the investment phase, and we're able to reduce our net debt by $132 million by year-end. This is an incredibly exciting milestone for the company and I will delve deeper into the details of the following slides.
Another key achievement is our strong operational performance, which for the seventh consecutive year saw Endeavour achieve its production and all-in sustaining cost guidance. This is a significant accomplishment and I want to take a moment to commend our entire operating team.
Most notably, we've benefited significantly from the start-up at the Ity CIL mine following its commissioning in Q1. The mine was completed on budget and ahead of schedule and we are looking forward to seeing the results of a full-year production this year.
Exploration continued to be a strong focus for us as we look to build optionality throughout our portfolio. We saw over 300,000 meters drilled across the group in 2019 and discovered 2.1 million ounces of M&I resources.
Turning now to the next page. The health and safety of our teams remain our number one priority. LTI record remains well below the industry average, as you can see here.
However, we are very saddened to report incidents that occurred last week at our Karma mine. An employee died following an accident involving a heavy mining vehicle. Despite immediate emergency medical care, efforts to revive the employee were unsuccessful.
We are undertaking a comprehensive investigation to understand why this tragedy occurred, so that we can work to prevent similar incidents from happening again. Mark will come back to this in the Karma overview section.
As I mentioned a moment ago, Endeavour enjoyed another strong year from an operational standpoint, successfully meeting our guidance for the seventh consecutive year. On the graph here, you can see the production from continuing operations in blue and the gray shaded area represents production from discontinued operations.
Overall, production from continuing operation has increased by 6% in 2019 over 2018, many thanks to the Ity CIL project startup in late Q1. Looking ahead to 2020, we expect to see further increase as we benefit from a full-year of Ity CIL and the higher-grade Kari Pump at Hounde coming into production in the second half of the year.
Turning now to slide 7. You will see more details on our all-in sustaining cost. We have seen a continued decrease since 2013, hitting $818 per ounce in 2019 and meeting our guidance for the seventh year in a row.
In 2019, we benefited from the Ity CIL startup, which had all-in sustaining cost in the low $600 per ounce range. In 2020, we expect the AISC to remain low at $845 to $895 per ounce.
This translated to a strong increase in all-in margin. You can see just how marked this increase was in the chart displayed here as we added $62 million from our 2018 figure. It is interesting to note that we have generated 2.8 times all-in margin in H2 versus H1, a substantial increase thanks to a stronger gold price and the Ity CIL production.
Turning to slide 9. This illustrates the strong cash flow generated in 2019, really showing the increase in maturity of our portfolio. The main factor underpinning this is our successful transition from a construction phase to production phase. And as shown here, Q3 was really the cashflow inflection point for us.
We had finished building Ity in Q1, but we still had some cash outflow in Q2 due to upsize of the plant and accounts payable. This changed in Q3 when we made $52 million and then later $80 million in Q4, so a total $132 million for the second half of the year.
On this next slide, we show how we compare on free cash flow yield against peers in our sector. Before I comment on our own performance, I would like to commend the industry. For a long time, this industry has shown negative free cash flow yields, and this has been a key challenge in attracting generalist investors.
Today, a number of gold companies are now starting to focus on return on capital employed and cash flow, and with many of them starting to generate healthy yields. In turn, this will benefit the sector as a whole.
In our case, this graphic demonstrates both the work achieved on the portfolio and the re-rating potential of our stock. Because of the large cap expense in the first half of the year, our 2019 free cash flow yield was 1%. Based on 2020 consensus estimates, we're now trading at a 30% yield, amongst the highest within our peer group.
This remains a tough market and companies are normally rewarded only after they deliver, understandable given the prudent nature of investors. As such, we are confident that, as we continue to demonstrate strong cash flow, this performance will start to be reflected into our share price.
Now, we have reached a state of positive cash flow point. And this has translated into a strong net debt reduction, which was expected given the quick paybacks of our projects.
The bottom of the graph illustrates the cumulative CapEx for the business and what has been incurred in each period, both of which have been steadily decreasing as we completed the Ity CIL project. We decreased from a peak net debt of $660 million at the end of Q2 to $528 million by year-end. Year-over-year, we finished at a lower net debt and are significantly better on net debt to EBITDA ratio, which decreased from a peak of almost 3 times in Q1 to 1.48 times at year-end. This is expected to further decrease to be below 1 times by year-end.
As you see on this next slide, we show how this has ultimately translated into return on capital employed. A key target for us is to achieve a 20% return on capital employed and we can see that, when we annualize H2, which is a more than fair representation of what the group can generate, it stands at 14%. We expect this figure to continue to increase in 2020 based on a greater production within the group.
Turning to slide 13 now. I would like to discuss exploration, which remains a large focus for us and has been successful. The key priorities for us are twofold. Firstly, to extend mine lives at our flagship assets, Hounde and Ity. We've been successful with the Kari discoveries and the Le Plaque discoveries, respectively, both of which are being converted into reserves.
Le Plaque at Ity was converted into reserves two weeks ago. And at Hounde, we expect reserves on Kari West and Kari Center to be converted in Q2.
In parallel, we've been working on increasing optionality within the portfolio, mainly with Fetekro as it has grown from zero to 1.2 million ounces of indicated resources in less than 18 months.
In addition, we are starting to drill other greenfield areas, such as Guinea, which looks promising.
On slide 14, we have a reminder of our five-year exploration targets that we set for ourselves at the end of 2016. The objective was to find 10 million ounces to 15 million ounces of indicated resources at a cost of less than $20 per ounce. We felt that increasing our budget was easy, but we needed to show accountability. Just as the operations are accountable for their production and all-in sustaining costs and projects for CapEx and timeline, we felt that exploration also needed to be accountable.
We are pleased to show that, since late 2016, the team is tracking well against these targets and we have already found 6.3 million ounces at a cost of less than $12 per ounce.
The goal has been to find high-grade deposits and displace lower-quality production. Therefore, we have ensured this is the case for all major discoveries over the last three years.
What is even more remarkable is the time from discovery to production, as you can see on the chart here, which is exceptionally quick in the mining industry.
Looking at the various examples, Bakatouo at Ity was found for less than $10 per ounce and has been put into production within two years. We see a similar story with Le Plaque and Kari Pump. Because it's high grade, we're eager to start mining there.
Mining people have asked us what the secret for going fast. I guess I'm not supposed to give it away, but here it goes. First, it is a question of exploration mentality. We want exploration to produce. Therefore, we don't want to waste time on ounces which will never get mined or be mined in the next 10 years.
We test many targets. And once we are confident enough on the discovery, it is full steam ahead. Because of our large presence in West Africa, we can redeploy our human capital based on our strategic needs.
For example, when we made the Kari Pump discovery, it was all hands on deck to drill over 1,000 holes in a year, and we go straight to indicated status, bypassing the inferred category altogether. This means that when we have maiden indicated resource, we then just need to do engineering work to have reserves.
As for permitting, as soon as we have a strong conviction, we start the process.
Of course, having the right team and land package is the first fundamental step. So, the formula doesn't need copyrights.
Here, on slide 16, we want to show how we're planning to extend the mine life at Hounde in order to achieve our goal of 250,000 ounces per year over 10 years. For illustrative purposes, we're showing that we need to fill the gray areas you see in the chart on the right hand side. In total, this adds to 1.1 million ounces of reserves. The good news is that we have already added 710,000 ounces with the Kari Pump discovery, meaning we need approximately an additional 400,000 ounces to convert to reserves and achieve our target.
Of this latter figure, we have already identified above 1 million ounces of indicated resources at Kari Pump West and Kari Center, and we expect to convert these into reserves within Q2. Once this has happened, we'll update our mine plans and publish technical reports.
On slide 17, we show the same illustration for Ity. We also have similar objectives and then need to fill the gap and achieve 10 years of flat 250,000 ounces of production per year. In order to reach this target, we need to add half a million ounces of reserves. And we are well on the way to achieving that.
Le Plaque, where we announced reserves two weeks ago has already added 400,000 ounces. Again, we will be publishing updated technical reports in Q2 to show these new reserves and that the plant is running at 5 million tonnes per annum compared to the previous 4 million tonnes per annum in the study.
On the next page, you see a snapshot of the two projects that we have in the pipeline, Kalana and Fetekro. Also, our main focus is to reimburse debt, as I mentioned at the beginning. We are also seeking to build optionality in the portfolio, and this is being done through these two assets.
As you recall, we bought Kalana about two years ago, and we're now pleased that Kalana is competing with Fetekro for capital allocation. The idea is to advance both project studies this year.
On Fetekro, we target a PEA for Q2 of this year and further exploration to continue to grow the resource. On Kalana, we expect to complete an updated feasibility study in Q3. The idea is to be in a good position by year-end to compare both projects side by side.
Before I conclude this first section, I'd like to just take a moment to reflect on the turnaround we've achieved over the past four years. It has been a very busy and exciting journey. We have invested almost $1 billion into the business. And in turn, we've built two flagship mines and discovered 6.3 million ounces so far.
In addition to this, we have divested three non-core assets and acquired two. Thanks to this hard work, we are now ideally positioned to benefit from the stronger gold price environment.
Looking forward to 2020, our key focus is to deleverage the company, continue to extend the mine lives of our flagship assets and build portfolio optionality as we've just described. This is all in the aim of delivering stronger shareholder returns.
While we are therefore very proud of our turnaround over the past few years, this hasn't yet been translated into strong shareholder returns when looking at our share price. As shown on the left here over the last three years, we've been trading in line with the index. While frustrating, we have managed to identify and address the key risk to the business.
Looking at the right hand side, we've detailed this key risk. The largest overhangs have been the construction risk and its associated balance sheet risk. Over the past few years, we've gone from one construction to the next. And in doing so, we increased the overall risk of the business because we took on debt without demonstrating to the market our ability to generate cash.
Today, we believe this risk is largely eliminated as both mines built are performing well, and our net debt quickly declining to a healthy level.
The other key overhang has been mine lives, which we believe has also been addressed with Ity and Hounde now having plus 10 years. Moreover, the reserves addition being added have made us even more attractive from a [indiscernible] perspective.
Given our growth objectives and because we are seen as a natural consolidator in West Africa, there seems to have been an M&A overhang despite us proving time and time again that we are disciplined when looking at external growth.
As we have described, we've been working hard over the past four years and we will keep up the good work to increase shareholder return, thanks to our strong cash flow.
With this, I will now hand the presentation to Lis, who will walk you through our financials.
Thank you, Sébastien. On my first slide, I thought it would be interesting to provide you with a snapshot of how the business has performed. Given our time constraint, I will only comment on the full-year numbers in the upcoming slides.
On this slide, however, we have the key highlights for the quarter-over-quarter comparison. The key takeaway for the year is that adjusted EBITDA and operating cash flows were up 34% and 20% respectively. Most of this performance was weighted in the second half of the year, following the coming online of the Ity CIL project.
Let's turn to slide 23 where we have provided a breakdown of the major elements used to derive our all-in margin. In the tables, we have shown both the nominal amounts as well as the dollars per ounce impact as shown in the right-hand side columns.
The all-in sustaining margin came in at $400 per hour, up $56 over 2018. Given the increased gold sales and stronger gold price, in nominal terms, we were up 22% for the year. 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 as shown on the previous slide and work our way to the net cash inflow for the group. Overall, we had a $66 million inflow for the year. And as Sébastien mentioned, we were cash negative during the first half, with strong inflows during the second.
Diving into a bit more detail, I'd like to anticipate any questions you may have, therefore focusing on the two main variances. Starting with working capital movement, it swung to an inflow of $38 million during the quarter and we have provided details on quarterly movements in our news release. And this strong reduction contributed favorably to our cash inflow for the quarter, bringing the full year to a net outflow of $14 million.
The second line item relates to higher taxes paid. It increased compared to the previous year, mainly due to $39 million in tax payments made at Hounde, which comprised of $27 million for its 2018 income tax payment and $12 million for 2019 provisional income tax payments. This should now normalize at Hounde. We should be only be making regular provisional tax payments.
I would also like to point out that Agbaou now becomes liable to pay income tax for 2019 as the tax holiday ended in 2018. This has contributed to the higher tax expense in 2019.
Moving on to the next slide. Thanks to the cash generated in the second half of the year, the company's liquidity remains strong and we are in a healthy financial position with $310 million of available funding.
Our current leverage ratio, as Séb mentioned, stands at 1.48 times, which is a sharp decrease over the 1.97 times at the end of December 2018 and our peak of nearly 3 times at mid-year last year.
We now turn to the next slide, which outlines a breakdown of earnings and the adjusted EPS. Adjusted earnings increased by 40% in 2019, amounting to $74 million or $0.67 per share. All the adjustments made to derive our adjusted EPS figure have been explained on the slide. Total adjustments made amounted to $237 million.
The Karma impairment was mainly as a result of a reduction in reserves, which mark will elaborate on further in his section. It is worth pointing out that the net impairment impact is $105 million as we have credited our income tax expense with $22 million, representing the reversal of a deferred tax liability associated with the amount of a mineral property impaired.
I realize that we only published our Indian owned financials a few hours ago and it's a lot to digest. The team and I would be happy to address any specific questions in the Q&A session or in the coming days.
Moving on to slide 27, you can see that, on a quarterly basis, the adjusted EPS has steadily increased over the past four quarters.
My final slide is the starting point for future discussion and reporting. As a group, our objective is to achieve a return in excess of 20% on our capital employed, and this slide provides a summary of the return being provided across our portfolio of assets as a supplement to comments made earlier by Sébastien in his presentation.
Looking at the pie chart, it is interesting to note that nearly 20% of our capital employed is related to projects and exploration. While this is currently not generating a return, it is expected to provide returns in the future. And if we were to exclude the Kalana project and other exploration projects, as well as adjusting for some corporate assets, the return for producing assets would be approximately 14% for the 2019 full year.
To further understand the rationale behind these numbers, I have provided break downs per asset with projections for 2020.
That concludes the financial review. I'll now hand over to Mark to give us an update by mine.
Thanks, Louis. Before looking at the operational results, I'd like to focus on the evolution of our resources and reserves. Looking first at changes in resources, net of mine depletion, resources increased by 1.2 million ounces.
And as you see on the bottom right chart, most of the increase was at our flagship Hounde mine based on the Kari West and Kari Center discoveries, plus additions at our exciting Fetekro project. These more than offset the decline in resources at Karma and Agbaou.
On slide 31, we can see the incremental increase in reserves. Reserves amounted to 7.9 million ounces at year-end, remaining relatively flat year-on-year net of mine depletion.
As you see on the bottom right chart, reserves increased at both our flagship mines. This was due to the Kari Pump discovery at Hounde and Le Plaque discovery at Ity. Agbaou reserves declined in line with mining depletion.
At Karma, reserves decreased as we updated the resource model for GG1 and reran pit optimizations based on life-of-mine unit cost, geotechnical and recovery rate assumptions. Given Karma's low-grade nature, the updated resource models and reserves are better expected to be more robust and maximize profitability.
Despite the reduction in reserves, there is still the potential to further extend mine life as we will continue to assess new pit extensions at GG1 and Kao North, in particular.
Given the current higher gold price, Karma also offers optionality to reevaluate the sulfide resources beneath the current pits. This would require a CIL plan and as such would be evaluated alongside other internal growth opportunities.
Now moving to our operational performance. On the next slide, we have an overview of production by mine. Starting with the bridge on the top left, with the exclusion of Tabakoto, which was sold at the end of 2018, production from continuing operations amounted to 612,000 ounces. As you see from the waterfall chart, the year benefited from the Ity CIL startup.
On the bottom of the slide, we have provided insights per mine inclusive of 2020 guidance.
Starting off with the Ity mine on slide 33, production decreased slightly in the past quarter as processed grades and recoveries were partially offset by increased plant throughput.
The main thing to note is that, during the quarter, we successfully completed the processing plant upgrade to 5 million tonnes per annum. The process grade decreased as lower grade stockpiles were used to supplement mill feed, while the recovery rates decreased due to increased volumes of Daapleu fresh ore processed.
Turning to the next slide, on a full-year basis, Ity performed very well, hitting the top end of guidance. In 2020, Ity is expected to produce up to 255,000 ounces at an all-in sustaining cost of up to $675 per ounce.
The plant feed is expected to be sourced from the Ity, Bakatouo and Daapleu pits, while continuing to be supplemented with lower grade historic dumps.
I was at Ity last week, and I've been impressed with the significant progress made on open pit infrastructure associated mainly with the building of the haul road from Daapleu, which was the new pit constructed on the other side of the river, and reconfiguring roadways for more efficient operation of the CIL as opposed to the heap leach project.
As many of you will know, Ity is located in quite a high rainfall environment and adjacent to the Cavally River, meaning the use of mining fleet can be impacted by underfloor conditions.
With the commencement of the dry season in late Q4, focus was placed on the construction of the second lift of the TSF and improving ex-pit roadway conditions. This work is progressing well and we should be far better prepared for this year's wet season.
Moving on to Hounde on slide 35. Production in the last quarter remained flat as slightly higher throughput was offset by lower processed grades.
As we mentioned on the previous quarterly call, the third quarter was impacted by severe rains, which delayed the development of the high-grade Bouéré pit and waste capitalization activities at Vindaloo. This meant that we had to work hard to catch up in the fourth quarter of last year and continuing into this quarter.
Process grades decreased despite a 20% increase in mine grade as low grade stockpiles supplemented the mill feed and recovery rates remain flat.
In terms of full-year results on the next slide, production decreased and all-in sustaining costs increased due to low grade stockpiles supplementing the mill feed, and a shift to processing a higher proportion of harder fresh ore. By comparison, 2018 benefited from higher grade soft ore and a lower strip ratio.
Looking ahead to the rest of 2020, Hounde is expected to produce up to 250,000 ounces at an all-in sustaining cost of up to $895 per ounce. Mining is expected to be focused on the Vindaloo and Bouéré pits.
The top end of production guidance and low end of all-in sustaining cost guidance incorporates potential to start mining at the higher grade Kari Pump deposit in the latter portion of the year. The permitting process for this pit is well underway.
There have been a few changes in the past few months to the management team. And I can see that they are really working well together across all facets of the operation to ensure that Hounde can be a safe, consistent producer for many years to come.
Turning now to slide 37 for Agbaou. A higher recovery rate in Q4 compensated for low mill throughput and milled grade. Ore mined remained steady, with most of the ore being sourced from the west pit, while waste extraction progressed at the south pit.
In terms of processed grades, these decreased as low-grade stockpiles supplemented the feed.
In terms of the full year on the next slide, production decreased marginally due to lower mill throughput and grades, which were partially offset by a higher recovery rate.
Looking ahead, we expect the mine to produce up to 125,000 ounces in 2020 at an all-in sustaining cost of up to $990 per ounce. Mining is expected to focus mainly in the north pit, with contributions from the west pit in the first half of the year, and from the south pit extension in the second half.
Overall, throughput and recovery rates are expected to decrease marginally due to the harder ore blend. The team continues to perform well at Agbaou and is totally focused on maximizing performance over the coming years.
Finally, we turn to Karma on slide 39. Before talking to the Q4 production, I would like to take the opportunity to talk about the fatality that occurred there last week. We deeply regret the loss of life to one of our greater operators, Robert, who died following an accident in the Kao North pit.
Though the incident is still under investigation, we have taken this opportunity to really look hard at all of our mining operations across the group to ensure that we have all the right systems and processes in place and that everything is operating and being operated accordingly. As often happens following a tragedy like this, all of us get a second chance to really improve on how we operate.
Our hearts go out to Robert's family and colleagues as I mourn the loss of a husband, father and highly-respected workman.
Quarter-on-quarter production remained flat at 27,000 ounces as an increase in stack tonnage and recovery rates offset the lower stack grades. Mining activities focused exclusively on oxide ore and waste from the Kao North pit.
Processed tonnage increased following upgrades to the stacker system, while grades decreased slightly as low grade stockpiles supplemented the feed.
Turning to the last slide of the operations review, in terms of the full year, production decreased due to lower grades, associated with additional ore stack from stockpiles. This year, we are guiding production of up to 110,000 ounces for Karma, at an all-in sustaining cost of $1,050 per ounce.
Mining activity is expected to occur at the Kao North pit throughout the year, while the GG1 pit commenced production in Q1. As mentioned in the reserves and resources slide, we will continue to undertake definition rolling along strike in the GG1 and Kao North pits with the intent of extending the mine life of these pits.
And with that, I will hand over to Sébastien to conclude the presentation.
Sébastien de Montessus
Many thanks, Mark. As we have shown throughout the presentation, we have successfully moved from a period of intense capital investment to one concentrated on generating significant cash flow. This is a pinnacle moment in our company's history and a testament to the efforts of the team over the past five years, whether on the exploration, project or operational side.
Now that we have the strong foundation for the company, we are focused on two key initiatives – the strengthening of our balance sheet and ensuring optionality is built into our portfolio.
Following the portfolio repositioning, we now have strong fundamentals centered on high quality asset base, generating a strong free cash flow yield. We have demonstrated a strong capital allocation discipline with a 20% ROCE target, which we are approaching. And thanks to our exploration successes, we now have a strong organic growth pipeline.
I think that we now offer an even more attractive investment proposition to the one we did a few years ago when we were largely a turnaround story.
Before I take your question, I'd like to thank again the team for their tremendous efforts in both 2019 and over the past few years, which have ultimately resulted in this achievement.
Thank you as well to our shareholders who have supported us in this journey. This could not have been done without their support and we expect that they will now start seeing the support rewarded. Thank you very much.
[Operator Instructions]. Your first question comes from the line of Fareed Tariq (sic) [Fahad Tariq]. Please ask your question.
Hi. Good morning, This is Fahad from Credit Suisse. Thanks for taking my question. You talked a bit about capital allocation that you're seeing from pure gold companies that are trying to attract generalist capital. I'm curious, what are your thoughts on instituting a dividend, particularly as the free cash flow improves? You're quite along the way of deleveraging already. Maybe just your thoughts on the dividend. Thanks.
Sébastien de Montessus
Thanks, Fahad. Well, as we've been saying over the last few months, our key challenge is to demonstrate to the market the robustness of our cash flow generation, which I think we've done now for two quarters. The objective is to demonstrate in Q1 and Q2, which will give a 12-month rolling cash flow generation that we are now ready for putting in place a dividend policy. So, this is on our agenda for the July board meeting in order to have this 12-month sight to decide the type of dividend policy. But, clearly, that's in our mind. This is a way for us to demonstrate the robustness of the business going forward and, therefore, we're keen in putting that in place in in the second half.
Okay, great. That's helpful. And just on Fetekro and Kalana, remind us what is the gold price assumption that you're using to assess the economics right now. And is that gold price assumption something that you could change, given what's happening more recently with gold prices? Thanks.
Sébastien de Montessus
Yeah. The studies that we are currently running are done at $1300 gold price and we don't expect to change that. If you recall, for example, with Ity, we were also showing the economics for those projects at $1,000 gold price. So, the objective for us is to continue to be very disciplined on the way we look at gold price and making sure that we have 20% plus return on capital employed on those projects.
Okay, thank you.
Thank you. Your next question comes from the line of Justin Chan from Numis Securities. Please ask your question.
Hi, guys. Thanks very much for taking my questions. And congratulations on a couple great projects built and reaching this inflection point. My first question is on Hounde and kind of the medium-term profile. And I realize that the studies is probably coming soon. But bringing Kari Pump towards the end of this year, do you expect throughput to come back up in the next few years, driven by more oxides? And then, just on the cost profile there, costs are a little bit higher this year. Do you expect that to come down in the next couple of years?
Sébastien de Montessus
Sure. Justin, I think that this has been – we are expecting and you will see that in the technical reports that we will publish in Q2, which is being able to stabilize Hounde at 250,000 ounces for the next 10 years. Clearly, the fact that, by year-end, we should put in production at Kari Pump, which will be much higher grade and mostly also oxide, this will help a lot in both the throughput, but also in driving down the all-in sustaining cost. So, we're expecting some positives around that 2021 and going forward.
Okay. And in terms of your current thinking about – I guess from an approach standpoint, do you think it would make more sense to push throughput there? Or given the higher grade, would you just maintain an ounce target and keep throughput where it is?
Sébastien de Montessus
No. I think we mentioned last year that we wanted to see how the Kari area was moving in terms of size to see whether at some point we would have a potential call for an increase in the plant capacity. At this stage, with Mark, we're feeling that there is still some room for debate in making the current plants. And obviously, by improving the mix, we should be able to increase a bit this throughput compared to, obviously, what we had last year. So, we're most focused on that for the time being rather than adding some capacity.
I see. In absolute dollar million cost terms, is Hounde where you expect it to be going forward? Or is there sort of higher current stripping and that absolute number should come down?
Sébastien de Montessus
I think that 2019 and 2020, in particular, the first half of 2020, is higher than what we would expect compared to the midterm. So, I would expect some improvements, obviously, in H2. But more importantly, as Kari Pump gets in, you should see those improvements in 2021 and 2022.
Okay, thanks very much. And just my last one is on Karma. The reserves have come down there. At the current gold price, is your expectation that, if the gold price remains as it is into the medium term, that the reserve should come back up and, ultimately, that operation would continue? Or does the reserves now reflect your strategic view on it in the current price environment?
Sébastien de Montessus
I think we've taken, I would say, a cautious approach to the asset based on the gold price that we saw last year and some of the results that we got on recoveries, in particular in certain pits. But, obviously, given that it's a low grade operation, it's highly sensitive to the gold price environment. There are a number things that we haven't decided to do so far that could be revisited in a higher gold price environment. Exploration, for example, have been streamed down, given the environment in that north part. So, there was no real focus over the last 2 years, 18 months on exploration. Sulfide also has been something that we haven't pushed for, given the gold price environment in the past. Things, obviously, will change if the gold price stays where it is right now on spot and as well as extensions on the current pits. So, I think it's a conservative approach, and I think desirable also approach, but it doesn't mean that this asset is going to stay with this mine life. We expect that, hopefully, we'll continue to increase over the next 12, 18 months, in particular with this current gold price environment.
Okay, thanks very much. That's very clear. I'll free the line up for everyone else to get their questions in.
Sébastien de Montessus
Your next question comes from the line of James Bell from RBC Capital Markets. Please ask your question.
Yeah. Good afternoon. Just firstly on your guidance for next year, you've got quite a broad range in terms of your ounce and cost guidance. I just wondered if you could talk about the scenarios where you get towards the top end of that range and what we should be looking out for as the year goes ahead in terms of operational performance or maybe the early start at Kari Pump, et cetera.
Sébastien de Montessus
Thanks, James. I think you got it right. The reason of this range is mainly due to the timing of Kari Pump at year-end. Kari Pump would be, obviously, a very low cost operation and very high cash flow generation. And depending on where and when we'll be starting mining and getting answers from this pit will basically make the difference within the guidance. It's a very significant impact on the overall cost reduction and cost performance.
We're expecting for now to have the permit for Kari Pump to be delivered at the end of Q2, beginning of Q3. If things goes this way, then we're pretty confident that we should be in the year in the lower part of the guidance. If we're getting a bit of delays on that front, then we'll be probably more in the mid to the higher end of the guidance.
Okay, that's great. And then, just looking at return on capital employed, obviously, moving higher, heading for your targeted 20%. When we look at the asset breakdown you gave on slide 28 in terms of where the ROCEs are, you can see, obviously, Karma's lagging quite significantly there. How long are you sort of willing to tolerate that sort of level of ROCE before you kind of look at the potential for a disposal from that asset?
Sébastien de Montessus
The answer is not long. I think we've shown over the last three years that we want to be focusing on the assets that are bringing the level of returns that we are expecting, and therefore, if we feel that those assets can't deliver these type of returns, then they probably don't fit into our portfolio. So, I think that's fair to say that Karma is on the spot, and either we see based on the new gold price environment some prospective to increase significantly the returns there. Otherwise, Karma will become non-core for our portfolio.
Okay, that's great. And, obviously, 2019, you had an approach of another company. You talk about M&A risk as being a risk that's been addressed. Should we think about you maybe being slightly more conservative on the M&A front in 2020, given where the project pipeline is and the opportunities you've got to convert ounces there?
Sébastien de Montessus
I think we keep having the same approach, which is, given the portfolio that we have and the optionality that we have in the portfolio and also the cash flow that we're expected to generate in 2020, M&A is not a priority. We look at external growth more on an opportunistic basis. And I think that we've tried to demonstrate to the market and to our shareholders that, when it comes to looking at M&A, we try to be very disciplined in order not to do crazy things. And the fact that we are able to start and end the process when we feel that we're not able to create enough value for our shareholders should be somewhat some comfort to – give some comfort to our shareholders.
So, a lot is happening in the in the market. The good news is whenever you have to – whenever you feel that you can go to a negotiation table, you want to make sure that you're completely free to move out of that table if the conditions are not there. So, that's what we've shown with Centamin and we'll continue to be very disciplined on that front.
Okay, that's great. Thank you.
Thank you. Your next question comes from the line of Raj Ray from MBO Capital Markets (sic) [BMO Capital Markets]. Please ask your question.
Sébastien, it's Raj Ray from BMO Capital Markets here. Just a quick question on the Fetekro upcoming resource estimate and PEA. How are you looking at the capital intensity for Fetekro given that the development timeline seems to be aligning pretty well with the remaining mine life at Agbaou and whether there is scope for reuse of some of the equipment that you have at Agbaou and reducing the capital for Fetekro? How should we look at that?
Sébastien de Montessus
Well, I think that's right. That's exactly what we are looking at. It's a bit too early to be able to answer the question, but we've been looking at Fetekro as a nice transition from Agbaou to this new project, potentially, both in terms of our key staff and also as moving some of those key equipment potentially from one to the other. This is why we're moving now to a scoping study that we expect to publish in the next few weeks.
And, obviously, Fetekro is still early. Objective is to come up hopefully also with pre-feasibility study by the end of Q3, which will help in terms of guidance on what we can achieve there. The most important for us is to see what's the synergies between the two mines, the two assets. If there are some, then we'll be, I guess, mixing smartly the profile and the timing. If there is less synergies, then there is more freedom in terms of timing, but clearly that's something that we're looking carefully at.
Okay. Thank you. That's it for me.
Your next question comes from the line of Richard Hatch from Berenberg. Please ask your question.
Thanks. And thanks for the call. Much appreciated. And first of all, just on Karma, can you just remind us on the Karma stream if the reduction to the reserves shortens the mine life? And does that impact you in any way, shape or form in terms of any additional payments on that stream? Or is it simply that when it rolls over from the $100 million of payment, then it just goes to 6.5% of production thereafter and it doesn't matter if you cut that life short? That's the first one. Thanks.
Sébastien de Montessus
Yes, Richard. That's exactly the case. It doesn't impact. It doesn't change the streaming structure, which is moving from 6.5% on the remaining part.
Cool. Thanks, Séb. And the second one is, just on working capital – for Louis – so you had a strong performance in the fourth quarter and should we be expecting kind of a continuation of that, that the stock is earning? Any more sort of juice in the orange that you can squeeze?
Richard, definitely, we will keep on trying to drive down our working capital levels. I think fair to just flag the election year in Burkina Faso. We were very successful in our VAT receivables and getting those in towards the end of the year. That, I would say, is the only risk I might flag, but I think fairly confident that we'll continue along the veins that you've seen during the fourth quarter.
Cool. Thanks very much.
Your next question comes from the line of Geordie Mark from Haywood Securities. Please ask your question.
Yeah, good afternoon. Maybe we can start with – from the top and look holistically in terms of how you view asset portfolio management with the producing assets that you have and, I guess, the realized life of mine at Karma and potential segue from Agbaou into Fetekro perhaps. Just in terms if you can remind me in terms of the viewpoint there in terms of the key criteria that you look to employ when you're looking at assets from core to non-core and perhaps a viewpoint in terms of optimal structure in terms of number of assets under management or at least jurisdictions under management.
Sébastien de Montessus
Yeah, sure. Well, in terms of the way to look and manage the overall portfolio, it's really making sure that we focus the team on assets that are generating the right level of returns. We've set a target of 20% return on capital employed for the group. And therefore, when you deep dive, and I think this is why we wanted to show for the first time a bit of split between the return on capital employed for assets, you see that, clearly, some assets are not at the level of performance that we would like. And either we find a solution to get them to this level, or the answer will be that they don't fall into our portfolio and they might be in better hands somewhere else. So, that's the way we're looking at the portfolio and this is why we sold, over the last three years, three assets between Youga, Nzema and Tabakoto as those assets were falling short in terms of returns and, as you can imagine, still taking a lot of management time. So, that's probably the first point.
The second point in terms of overall portfolio, I think that, with the team that we currently have, we're geared to operate to six to eight mines, I would say. I don't want to be above those six, eight mines because otherwise you start having a strong and large team to run them and you don't necessarily benefit from the same level of synergies. What's important is to keep that focus over in West Africa where we have a lot of synergies and also it's very useful in terms of management in being very focused geographically. So, up to six to eight assets and continuing that focus over several countries in West Africa. That's the obvious strategy.
Great. Okay, thanks. Perhaps moving now to Ity in terms of understanding where Le Plaque sits and future productions may be added from there, so you expect just offset low-grade stock material over time or do you expect to see incremental improvements in throughput rates given what you achieved in Q4 versus nominal nameplate? Yeah. Yeah, we'll start there.
Sébastien de Montessus
Yeah, sure. Well, for Ity, Le Plaque we have some infrastructure to get to the asset. And, obviously, you want to do those infrastructures during the dry season, not the rainy season. We're expecting to get the Le Plaque permit by the end of Q2, beginning of q3, which means that infrastructure works will be done starting after the rainy season this year. So, you would be expecting Le Plaque to come in production in H2 – I would say H2 2021. But in any case, we'll be updating all that with our technical report in Q2.
Appreciate. Great. And perhaps some more detail in terms of, obviously, coming out of the wet season, I guess early in Q4 and moving into a number of operating pits, are you looking at changing mining or average mining equipment sizes?
Sébastien de Montessus
You mean at Ity?
At Ity, yes. That's right.
Sébastien de Montessus
Yeah. Well, no, I think that one of the key subject that we faced at the beginning with Ity and the multiple pits has been mainly the soft rock and, therefore, having to run mostly with ADTs rather than RDTs. So, as we move forward into the dry season, we're expecting to have better performance in those through RDTs. Somehow, it's good that we've kept those ADTs from the heap leach operation as they will serve during the rainy season in order to have a balanced approach between the DTs and ADTs, in particular during the critical season. But, clearly, the objective is to have a much better productivity during the dry season running with the DTs.
Okay, great. Good answer. And in terms of moving maybe over to Hounde, looking at the, I guess, the broader play in there for the objective for, I guess, the nominal sort of 10 to 12-year outlook. Outside Kari Pump, what are your main priority targets outside those that you'd look to fill that sort of future production gap?
Sébastien de Montessus
Sure. Well, I think that with Kari West, Kari Center coming into reserves in Q2, we should be able to demonstrate in the technical reports about 250,000 ounces for the next 10 years. But what's interesting is, when you look at, again, the exploration potential around Hounde, we still have big exploration targets, like Grand Espoir, Dohun/Sia/Sianikoui, which are north of Bouéré, which are very interesting, and that we'll start to drill this year. So, I'm quite confident that the success that we've seen in the Kari area, there is no reason why we don't continue to have some significant success in those new areas in the north part of Bouéré.
Great. If I can indulge one more question, in terms of leverage to oil price in terms of proportion of operating costs to get an idea of how oil costs fit in there. I guess corporately, in that sense.
I think that, for the time being, in average, our diesel price for the group is about $1.2 – between $1.1 to $1.2 per liter. So, we should see – as you know, a big part of this is also local taxes. So, we tend to see the impact after few months as it is on a rolling basis rather than just spot on the oil. But, obviously, it's going into the right direction for us in terms of overall cost improvements, but I would expect this to have significant impact only if it continues for a period of time, given that, again, all the taxes locally are mitigating a big part of those decrease in the oil.
Thank you. As we're out of time, I would now like to hand the conference back to Mr. de Montessus.
Sébastien de Montessus
Thank you very much, operator. Well, thank you all for attending this Q4 and year-end results and looking forward to present you our Q1 results in the next few months. Thank you very much. Have a good day.
That does conclude our conference for today. Thank you for participating. You may all disconnect.