Endeavour Mining plc (OTCQX:EDVMF) Q2 2022 Earnings Conference Call August 3, 2022 8:30 AM ET
Martino De Ciccio - VP, Strategy & IR
Sebastien De Montessus - President, CEO
Joanna Pearson - EVP & CFO
Mark Morcombe - EVP & COO
Conference Call Participants
Fahad Tariq - Credit Suisse
Amos Fletcher - Barclays
Alain Gabriel - Morgan Stanley
Anita Soni - CIBC Markets
Ovais Habib - Scotiabank
Wayne Lam - RBC
Don DeMarco - NBC
Carey MacRury - Cannacord Genuity
Raj Ray - BMO Capital Markets
Good day and thank you for standing by, welcome to the Endeavour Mining Q2 and Half Year 2022 Results Conference Call. [Operator Instructions] Today's conference call is being recorded, and a transcript of the call will be available on Endeavour's website tomorrow.
I would now like to hand the call over to management. Please go ahead.
Martino De Ciccio
Hello, everyone. I am Martino, Vice President, Strategy and Investor Relations, and I'd like to welcome you to our Q2 and half year results webcast. On the call, I am joined by Sebastien, Mark, Joanna and Patrick. Today's call will follow our usual format, where we will first go through our quarter's highlights, then the detailed financials. And then, we'll walk you through our operating results mine by mine.
We'll try to be as quick as possible to leave time for questions at the end. Before we start, please note the usual forward-looking statement. And I'll now hand it over to our CEO, Sebastien, to take you through our results highlights. Sebastien?
Sebastien De Montessus
Thank you, Martino, and hello, everyone. We are pleased to report that we have continued our strong momentum from Q1 into Q2, which has positioned us well for the rest of the year. We've noted 6 recurring themes as displayed on Slide 6, which summarizes where we are focusing our efforts. In summary, our strong operating performance in H1 has resulted in robust cash flow generation. This strong performance allowed us to continue to execute our capital allocation strategy, which is focused on strengthening our balance sheet, maximizing shareholder returns and investing in our growth.
Looking at the balance sheet first. During Q2, we increased our net cash position by $141 million, while also returning $108 million in the form of dividends and buybacks to shareholders. And speaking of our strong shareholder return commitment, we are pleased to declare today a H1 dividend of $100 million, which represents a 43% increase over last year's dividend. This is reflective of our improved financial position and confidence in our business outlook. Moreover, we are now targeting a minimum dividend of $200 million for the year, which is $50 million more than the initial minimum commitment.
We are also continuing to supplement our shareholder returns with ongoing share buybacks.In terms of investing in our business, our key focus is the Sabodala-Massawa expansion project, and we are very pleased with the progress that is being made as we remain on budget and on schedule. And at Lafigue the DFS is expected in third quarter of '22.We also made some exciting discoveries last year and into this year, and as such, our exploration program remains on track to discover 15 million to 20 million ounces of indicated resources over the next 5 years. On the ESG front, we recently published our fifth Sustainability Report, which showcase how we are leveraging our increased size and scaling up our ESG efforts.
Given, we are now the largest producer in the region, we firmly believe that we can have a positive and lasting impact.Moving to Slide 7. You can see we have performed well across our key operating metrics. On the safety side, we are proud to say that our lost time injury frequency rate remains lower and better than our industry peers at just 0.13 for the last 12 months.
We continue to work on improving this and aim to achieve 0 on performance.Looking at the quarter's production, you see that if you annualize it, we will exceed the top end of the full year guidance. Clearly, we are very well positioned against guidance, and we need to keep the momentum going through the remainder of the year. The same story can be seen with our all-in sustaining costs, which are sitting within the lower half of our full-year guidance range.
It's a great result given the industry-wide inflationary pressures, which, of course, we are not totally immune to, but we've been working hard to assess them with various initiatives.Johanna will provide more detail on our cost base in the next section, but at a high level, we've been helped by our long-term supply contracts, favorable exchange rate variation, the in-country fuel pricing mechanism and of course, our production and cost optimization initiatives.Turning to Slide 8. You see our production and cost trends on a half-year basis.
In gray, the portion related to our discontinued operation, which is comprised of the Agbaou and Karma mines, which were divested. Production was relatively flat between H1 this year and H1 last year, while it decreased slightly compared to H2 last year.In line with our mine plan, importantly, all in, importantly, our in sustaining cost is down $10 per ounce compared to H2 last year. To put this in context, as you see on Slide 9, we've quoted the AISC guidance and H1 realized costs for our sector using the relevant companies that have published so far.
As you can see, we are currently the lowest cost producer when ranked against senior and mid-tier producers. We firmly believe that this low-cost positioning is now a strong competitive advantage, and we are pleased on the hard work to reposition our portfolio over the recent years is now paying off.Moving to the next slide.
You see our all-in sustaining margin trend. Given that we have maintained a low cost base, we continue to benefit from the higher gold price environment, resulting in a 52% margin in the first half of the year.Next on Slide 11, you can see the trend of our operating cash flow before changes in working cap. We generated $622 million in the first half, which is nearly the same as the previous 6 months.On Slide 12, I would just like to highlight our operating cash flow after working capital. You see here the seasonality of our working capital outflows ahead of the wet season, when we typically stockpile transitional and fresh ore in preparation for the rain. Managing the rainy season is an area where we have shown significant improvement over the past few years, and I feel we now have a good handle on this.On Slide 13, you can see how strong cash flow generation has allowed us to continue to strengthen our balance sheet.
In H1, we added $141 million of net cash, while also returning around $110 million to shareholders during the period. Q2 marked our sixth consecutive quarter of shareholder returns following the payment of our maiden dividend in Q1 '21. And since then, we've paid $376 million in cumulative shareholder returns. That's a number that we are very proud of and will keep increasing.On Slide 14, you can see more detail on how we're tracking against our shareholder returns commitment. As you may recall, last year, we outlined a 3-year dividend policy to pay a progressive fixed minimum dividend, which increases each year with the aim of distributing a cumulative minimum of just over $500 million by the end of full year '23.
We are tracking well ahead of that target. And for '21, we exceeded our minimum dividend of $125 million, paying $140 million. For H1 this year, we've declared an interim dividend of $100 million. This is a 43% increase on last year's H1 dividend and to reinforce our commitment to paying supplemental returns, we've also increased our full-year dividend commitment from a minimum of $150 million to at least $200 million.
Turning to Slide 15, where we put our half year shareholder returns in context. For H1, the dividend declared and the buybacks totaled $138 million. This represents about 10% of revenue, 25% of operating cash flow or nearly 60% of adjusted net income.
On an annualized yield basis, it equates to just under 5%, and this is just assuming the minimum annual dividend of $200 million and only the buybacks done in H1. Perhaps more relevantly is that it equates to nearly $200 return for every ounce of gold produced in H1, would describe an impressive statistic, I think.
Turning to Slide 16. This shows that over the last 6 quarters, we've already delivered $469 million in total shareholder returns. For context, this is already about 10% of our market cap. In the waterfall chart, you'll see that if you only factor in the minimum dividend commitment for this year and next, it would represent over $750 million in shareholder returns.
And this amount could be higher, provided the gold price remains above $1,500 per ounce, and if Endeavor's leverage remains below 0.5x net debt to adjusted EBITDA as stipulated in our dividend policy. This amount is well above our minimum commitment of $500 million, so we believe it demonstrates the resilience of our business and shows how focused we are on delivering strong shareholder returns. In addition to delivering shareholder returns, given our balance sheet strength and our ongoing strong cash flow generation, we're also well positioned to fund our growth, and Slide 17 highlights our attractive pipeline of growth projects. As I set out earlier, our priority is the Sabadola-Massawa expansion, where construction commenced in the second quarter of '22. Progress is on track with the first goal post from the plant expected in early '24.As outlined in the DFS, this expansion will lift the Sabadola-Massawa complex to top-tier status. I'll let Mark provide more information within his section.
Our greenfield development projects are also progressing well as we continue to refine the Lafigue DFS, which is scheduled for completion in Q3. This would enable us to have a construction-ready project, which could be quickly launched once an investment decision is made. Ahead of that investment decision in order to not delay the project timetable and de-risk its construction phase. We are conducting minimal infrastructure investments. As such, the mine fans and the airstrip construction are now completed. The access road construction is nearing completion and the construction camp has been procured.
We haven't planned much, in fact, less than $7 million this year for both the DFS and infrastructure work, but these investments will greatly help us in the future. At Kanoumba we are advancing some of the desktop work that contributes to the DFS. While both projects look attractive, Lafigue is the priority because of its production profile, favorable infrastructure and economics, which have the potential to meet our capital allocation criteria. And thanks to the long production visibility we have from our portfolio, we have the flexibility to decide when the optimum time is to launch the project into construction.
Turning to Slide 18. You see the continued focus on exploration across our portfolio, with nearly $44 million spent in the first half of '22. Exploration activities were mainly focused on expanding resources and extending mineralized trends at existing operations.
In addition, given the long mine life visibility on our flagship assets, we are now able to dedicate significant efforts towards greenfield exploration opportunities. And given the success so far, the efforts are expected to continue to ramp up in H2 '22. Later this year, we expect to publish resource update, and we are pleased to reiterate that we remain on track to achieve our 5-year discovery target of 15 million to 20 million ounces of indicated resources at less than $25 per ounce. Next on Page 19, I want to briefly touch on a few of the highlights from our Sustainability Report that was published in Q2. For me, the key stat is that our '21 total contribution doubled to reach $2 billion. In doing so, we supported around 1,700 local businesses.
This shows that our activities can make an enormous difference to accelerating the economic and social development of the regions in which we operate. That local approach is important to us. We are one of the largest private employers in the region and as we take development of our local talent very seriously, I'm pleased that over half our senior operational management team are now nationals. And this is a number we expect to improve on further in the coming years. On the environmental side, we continue to be one of the lowest emitters amongst our peer group and are busy working on our pathway to a 30% reduction of emissions by 2030 as we have previously outlined. Crucially, we know how vital it is to align all our people with our ESG ambitions.
To drive the right actions and outcome, we've increased the weighting of the ESG-related confidence to 30% for the annual bonus and 15% for the long-term incentive plan. Before turning to the next slide, I just want to flag the pictures on this page. These are just a few examples of ongoing initiatives, which we are extremely proud of. To learn more, you can visit our website to read about the various case studies. Investing in Endeavor Mining is basically supporting impactful activities and investments. Continuing on the ESG team, we were delighted to recently receive a AA rating from MSCI, which marked a significant improvement in our rating over recent years. And I believe, a strong reflection of the hard work and progress we are making across the group.
This is particularly pleasing as this places us in the top quartile of our peer group. Before I hand over to Joanna and Mark, as we have just passed the first anniversary of our LSE listing, I thought this would be a good opportunity to recap on the progress we've made. It is good to see the progressive increase in volumes traded on the LSE and its associated exchanges.
Following the most recent 1,400 inclusion, we are now seeing over 40% of our total liquidity in the U.K. This is also a reflection of the change in our shareholder register as we continue to attract U.K. and European funds given our attractive investment proposition. We have also seen a significant portion of our shareholder register migrate their shares from Canada to the U.K.
In fact, 33% of our shares outstanding have moved shares over, and we are continuing to see share migrations. Given this step, we are very pleased with our LSE listing, the incremental demand it has driven for our shares and our overall positioning within the U.K. market. Now I would like to hand things over to Joanna, who will take you through the financial results in detail. Joanna?
Thank you, Sebastien. On Slide 23, we show our financial highlights. Given that we'll go into the details of the table in the upcoming slides, on this slide, I just want to draw your attention to our adjusted EBITDA margin, which, as you can see, remains extremely high at over 50%. This high margin allows us to generate significant cash flow, protects us against variations in the gold price. And as Sebastien mentioned earlier, gives us the financial flexibility to deliver our capital allocation strategy.
On to Slide 24, coming off a very strong Q1 our quarterly production in Q2 decreased 3%, while our all-in sustaining costs increased by 13%. This variation was as expected given the seasonality of our production and the associated mine plan. Mark will detail this in the next section, but at a high level, in Q2, we had lower production at some of our mines due to the preparation ahead of the rainy season. In some cases, we focus more on waste stripping activities, which resulted in lower grade ore mined. While in other cases, we mine more fresh ore from deeper levels in the pit, again, in preparation for the rainy season. On the cost side, we did experience some inflationary pressures.
But as I will detail on the next page, these variations were not the key driver for our cost increases. These efforts and the strong H1 performance mean that production and all-in sustaining costs remain on track for our full-year guidance. Moving to the next slide. We see in more details the breakdown of our all-in sustaining costs for the quarter, which increased by $106 to $954 per ounce. Over 90% of that increase was the result of operational factors during the quarter. As I mentioned on the previous slide, we were focused on waste stripping ahead of the wet season at Sabodala-Massawa, Boungou and Wahgnion, which led to lower gold sales and higher operating and sustaining capital costs, resulting in a $38 and a $61 per ounce increase in all-in sustaining costs, respectively. Market factors also played a part with increased fuel and explosive costs, which we highlighted in Q1, contributing to an additional $52 per ounce to the all-in sustaining costs.
This was offset by favorable foreign exchange rates as the euro continues to depreciate against the U.S. dollar and by reduced royalty rates as the gold price decreased during the quarter. You will remember in Q1 this year that we presented our cost breakdown, where we see inflationary pressures and how we are mitigating them, which we have reiterated on Slide 26.I will not walk you through the whole slide again. I just wanted to focus on the key inputs. Salaries make up approximately 17% of our own costs and are locked in for 3 years, giving us stability and visibility on salary inflation.
Fuel makes up approximately 16% of our all-in cost base. As you can see, since Q4 last year, average Brent prices have increased by 46%. While in-country pricing in Cote d'Ivoire has remained flat in Burkina Faso, LFO and HFO increases are 35% and 25%, respectively. And in Senegal, HFO prices have increased by 38%. In-country pricing continues to be partially filled by governments as pricing is revised only periodically.
This means that the price impact of Brent crude volatility is generally delayed and often not fully felt in country, and we are shielded from paying peak spot international prices. In addition, the fuel price increases detailed above have been largely offset by favorable FX movement as the euro has decreased 7% compared to the U.S. dollar in the first half of 2022.
Given that approximately 65% of the operating cost base is in local currency, which is linked to the euro, this is a significant mitigant to our higher costs. Touching upon our consumables, given we renegotiated key contracts across the group last year to leverage our larger size, we are currently well positioned with favorable terms. As we highlighted in Q1, the only area we are realizing any material cost increases is on explosives, where prices have increased by around 70% since Q1, resulting in approximately $13 per ounce increase in our all-in sustaining costs, which is in line with the $10 per ounce we flagged in our Q1 results and is not significant to our overall cost structure. Moving to Slide 27. You can see a breakdown of our operating cash flows, which was a quarter-on-quarter decrease.
Our quarterly operating cash flow before working capital decreased by $31 million to $253 million in the second quarter due to the lower realized gold prices and slightly lower production as well as the higher costs, all of which impacted our operating cash flows. The realized gold price from continuing operations decreased by $79 per ounce from $1,911 per ounce in Q1 to $1,832 per ounce in Q2. While at the same time, the amount of gold sold decreased by 26,000 ounces, resulting in an 11% decrease in operating cash flows.
On Slide 28, you can see an operating cash flow bridge. We typically pay increased income taxes in Q2 related to the final tax payments for the previous financial year upon filing of our tax returns in the second quarter. As previously mentioned, our operating cash flows were impacted by higher operating expenses and a decrease in gold production and the gold price.
The changes in working capital were negligible in the second quarter compared to an outflow in the prior quarter, primarily due to the increase in stockpiles and a decrease in payables in Q1. So on an overall basis, the operating cash flow decreased by $51 million during the quarter. Moving to Slide 29. I wanted to highlight how our net cash position has improved quarter-on-quarter. As mentioned, we generated $253 million of operating cash flows and invested $145 million in our operations and growth projects during the quarter. We also incurred $26 million in financing activities, which was largely associated with the shareholder returns in the form of share buybacks paid during the quarter.
The value of our cash on hand was impacted by the declining euro to U.S. dollar exchange rate. We ended the quarter with a net cash position of $217 million, well on our way to our $250 million targeted net cash position. At the end of the quarter, our liquidity remains strong, and we have $450 million undrawn on our RCF. Turning to Slide 30. We have a detailed breakdown of our net earnings. I won't go through every line item here, but I wanted to address a few of the more significant items.
Corporate costs decreased during the quarter primarily due to lower costs associated with employee and professional services as employee bonuses were paid in the prior quarter. The gain on financial instruments was $107 million in the second quarter of 2022, mainly due to an unrealized gain on our gold forward sales in gold collars as well as an unrealized gain on the revaluation of the conversion option on our convertible notes, offsetting much of the unrealized losses that were recognized in Q1 '22 as these same items -- on these same items as the gold prices decreased.
And the gains in Q2 were partially offset by foreign exchange loss of $39 million, which increased from the $20 million recognized in Q1. The majority of the above gains are unrealized and the realized gain in Q2 of this year related to our forward contracts was only $1.4 million. Adjusted net earnings remained -- were slightly lower than the prior quarter due to lower earnings from the mine operations, which were offset by higher gains on the financial instruments and lower income tax expense. So in summary, you can see that our financial performance is strong, and we are well positioned to continue funding our shareholder returns program and internal growth pipeline, while continuing to build our net cash position. This concludes my section, and I will now hand it over to Mark to walk you through the operational performance. Mark?
Thank you, Joanna, and hello to everyone on the call. Over the last 2 weeks, I have been in West Africa visiting our mines and projects, and I am pleased to report that the operations are performing well and projects are advancing on schedule. Our safety performance has been very encouraging for the first 6 months of the year with just the single lost time injury. We actively encourage and track leading safety indicators such as management walk around, task observations and job hazard analysis. In addition, we ensure that all of our contractors adopt the same general approach to managing safety, too.
As Sebastien and Joanna mentioned, our operational performance continues to be strong and reflects the benefit of having a diversified portfolio. The group is well positioned to meet full-year guidance. And on Slide 32, we have provided a breakdown of performance by assets. As you can see, our strong group production is driven by outperformances at our Hounde, Ity and Mana mine. From a production cost perspective, we are pleased to see that for the first half of the year, Sabodala-Massawa, Hounde, Ity and Mana are all well below their guided ranges, leaving them well positioned to achieve guidance. I'll now move on to the performance of each asset starting with Sabodala-Massawa on Slide 33.
At Sabodala-Massawa, we are transforming the mine from a CIL only operation, processing nonrefractory ore to a combined CIL and BIOX operation with the ability to process high-grade refractory and nonrefractory ores through 2 adjacent circuits. During the quarter, mining capacity shifted from the largely developed Sofia North pit to enable increased mining rates at the Sabodala and Massawa Central Zone pit. In addition, we commenced mining at the Massawa North Zone pit, which was predominantly waste stripping.
As a result of these stripping activities, all mining was focused on lower grade areas off the Massawa Central Zone pit as well as the Sofia North pit, which resulted in lower production this quarter compared to Q1.Similarly, all-in sustaining costs increased in Q2, largely due to the lower volumes of gold sold and the expected increase in fuel costs. Sabodala-Massawa is on track to achieve its full year production and cost guidance. Most notably, in the second half, grades are expected to increase given the access to the higher grade areas of the Massawa Central Zone and North Zone pits.
Moving to Slide 34, you can see an overview of our Sabodala-Massawa expansion project, where we are constructing a 1.2 million tonne per year BIOX plant adjacent to the existing CIL.
This will allow us to process the high-grade refractory ore from the Massawa deposits, which currently contain more than 1.3 million ounces of reserves that have significant potential to increase. We are happy to report that the expansion project is on track and activities are ramping up. We have finalized the EPCM contract, the powerhouse contract and the civil contract, which was awarded to a Senegalese contractor.
We have started to order long lead items, including the crusher and mills. Detailed engineering and design is progressing well. And on the ground, roads have been realigned and earthworks to prepare the full processing plant area are well underway.
Regarding the capital spend to date, approximately 37% of the $290 million project CapEx has been committed with $24 million spent. We are very pleased that the capital that has been committed so far is in line with our expectations, and we are tracking on budget and on time.
This has been the advantage of spending significant time on the DFS to ensure that we have properly scoped and priced the work and then launched the project and started to award major contracts and work packages before the numbers become out of date. Moving to Slide 35. You can see that the Hounde mine had a very strong quarter. Hounde continues to benefit from the high-grade ore source from Kari Pump, which is now being supplemented by ore from the Vindaloo Mine and Kari West.
All-in sustaining costs increased slightly during the quarter, while staying below the lower end of guided range, primarily due to higher mining and processing unit costs as a result of the expected increase in price for fuel and explosives, which were partly offset by the higher gold sales for the period. Through the remainder of the year, we will focus on Kari West and Vindaloo Mine for the majority of the ore feed as we continue the next stage of stripping at Kari Pump. We expect grade and recoveries to decrease in the second half as a result and cost to increase slightly.
The strong first half of the year has positioned Hounde very well. We expect production to continue to trend above the full-year guided range and all-in sustaining costs to achieve the full-year guidance. Turning now to Ity on Slide 36. We are very happy with the performance of Ity with another very strong quarter of production due to higher recoveries and higher grades milled following the completion of mining in the current phase of the Daapleu pit, which had lower associated recoveries.
We expect to maintain these high recovery rates as all mining will focus on the Le Plaque, Ity, Bakatouo and Walter pits in the second half where we expect to mine a higher proportion of oxide ore. All-in sustaining cost increased in Q2, primarily due to higher sustaining capital and higher mining and processing unit costs resulting from the expected price increases in fuel and explosives.
Following the strong start to the year, Ity is on track to produce near the top end of its guided range at an all-in sustaining cost within the guided range. Turning now to Slide 37 and the Boungou mine. Our focus continues to be on waste stripping in the West pit. As a result, during the second quarter, ore was mined from the lower-grade East pit, which resulted in lower production and higher production costs. After pre-stripping is completed in the West pit, we'll be able to start mining high-grade ore in the second half of the year, which will be blended with lower-grade stockpiles.
We currently expect full-year production to be near the lower end of the guided range, while all-in sustaining costs are expected to be within the guided range. Moving on to Slide 38 for Wahgnion. Here, we are focused on expanding the footprint of the existing deposits and adding new satellite deposits such as Samavogo to increase mining optionality and provide additional high-grade ore sources. This will allow us to continue to process ore well above nameplate capacity and introduce higher grade ore into the feed to increase production later in the year. During the quarter, production at Wahgnion decreased primarily due to the lower average grade milled as mining was increasingly focused in the Nogbele North pit as activity at the Fourkoura pit started to wind down. All-in sustaining costs increased as lower grade ore was mined and processed due to the sequencing of mining activities at the Nogbele North and Nogbele South pits.
As expected, we saw an increase in mining and processing costs due to a combination of higher fuel costs and increased electrical consumption as a proportion of fresh ore in the mill feed increased. In the second half of the year, we will start mining from Samavogo, which will introduce a high-grade source of oxide ore rate source of oxide ore into the feed. This satellite pit requires the construction of a 20-kilometer ore road and village relocation, both of which are progressing well.In the short term, ore will continue to be sourced from the Nogbele North, Nogbele South and for Fourkoura pits. Wahgnion is expected to continue to trend below its full-year production guidance and above its cost guidance with grades and costs expected to improve significantly with the introduction of Samavogo.Moving now to Mana on Slide 39. During the quarter, mining of the Wona open pit was completed.
We're now preparing the ore road to the Maoula satellite pit and conducting advanced grade control drilling to enable mining to commence later this year. Stope production in the Siou underground continued to perform consistently and comprised a combination of primary stopes, which are filled with a cemented rock fill and secondary stope extraction between the primary stopes. At the same time, we have been progressing the 2 underground declines at Wona with over 1,500 meters of combined advance achieved during the quarter. Production for Q2 was consistent with the previous quarter as lower grades from the Wona open pit were offset by higher planned throughput. All-in sustaining costs improved largely due to the lower strip ratio from the final ventures in the Wona open pit as well as slightly lower sustaining capital.
Mana has made a strong start to the year and looks set to produce near the top end of the guided range for the full year at an all-in sustaining cost within the guided range. As you can see, performance across our operations has been strong in Q2 and in the first half of the year, and we remain on track to achieve our full-year guidance. That completes my brief overview of the mine, and I'd be happy to go into more detail during the Q&A session. Sebastien, back to you.
Sebastien De Montessus
Thank you, Mark and Joanna. As you can see, we've made good progress during the first half of the year, and we are well positioned for the rest of '22. Beyond this, we believe that our progress across our key themes will continue to build the resilience of our business. To conclude, I'd like to leave you with the 3 key numbers which are presented on the right-hand side of the page. These summarize our business model and how we generate value to shareholders.
In summary, we discover ounces for $25 an ounce. We produced them for less than $900 per ounce, and then we have returned nearly $200 per ounce to shareholders. And our ability to continue to do this over and over again is supported by a track record of replacing our depletion through exploration. And by delivering our growth in production according to plan, where we are on track to meet guidance for the 10th year in a row. As always, I'd like to thank my team for their tremendous work and dedication. We are fortunate to have fantastic people within the organization that are pushing every day to make sure we hit or exceed our targets.
You can't imagine how lucky I am to lead this incredible team and supported by an amazing Board. With that, I'd like to thank you all for dialing in and open the line up to questions.
[Operator Instructions] We have our first questions come from the line of Fahad Tariq from Credit Suisse.
The Lafigue Cote d'Ivoire DFS, I noticed the time line changed a little bit by a quarter. And in the press release, you mentioned that it's continuing to be refined. Can you just provide some more details on what is the current status of the DFS, if anything is changing? And also, if you could provide an update on whether you still have the view that costs remain high that you could potentially defer or delay the project?
Sure. Thanks, Fahad. Yes, I mean on Lafigue, we're still convinced that this is a very attractive project for Endeavour, and that will fit well in our portfolio. As I mentioned beginning of the year, given the inflationary environment, we've been taking more time to reassess the DFS and optimize cost. What we want is to make sure that when we come out with the CapEx figure, this is the CapEx that everyone can trust.
And therefore, we continue to work on this. But as I mentioned in the presentation, in parallel, we are working already on the ground on some of the minimal but important and key construction elements such as the fencing, the air strip the road access in order to continue to target production in second half, I mean end of first half of '24. So we keep this in mind. The objective will be to publish in the Q3 -- into Q3. So yes, we are, I would say, weeks away to come out with the DFS and that will be a robust, again, DFS.
And I think that with some background on the Sabadola-Massawa expansion, we'll be able to illustrate that we have strong confidence on the CapEx number that will come out from the DFS.
And then maybe just one more on capital allocation. I noticed the pace of buybacks decreased from Q1 to Q2. Just curious, and maybe you can remind us how do you think about buybacks versus dividends. I was a little surprised that there weren't more buybacks done in the second quarter given the share price was lower. Any thoughts there would be really helpful.
Sebastien De Montessus
Sure. We have -- we mentioned that in '21 and up to Q1 '22, the preference was going to buybacks, in particular, in the midst of the changes with the listing in London. So I think it helped and supported it. We believe that we will continue going forward with the combination of more dividends and more buybacks. So I think that it's more a timing issue, and you should see more buybacks in H2.
Our next question comes from the line of Amos Fletcher from Barclays.
Just one question on all-in sustaining costs in the second quarter, we were running above the top end of the guidance range. So obviously, I guess, you're expecting an improvement in the second half. Could you just walk us through what are the main drivers of that?
Sebastien De Montessus
Sure. Amos, we usually have in Q2 and Q3, lower production numbers and higher all-in sustaining costs simply because of the rainy season. And we usually have strong Q1 and a strong Q4. And so I think that it's fair to say that we should see Q3 more in line with Q2 and Q4 more in line with Q1. And that's why, overall, we're confident that by the end of the year, we'll meet the initial guidance that we gave at the beginning of the year.
The next question comes from the line of Alain Gabriel from Morgan Stanley.
I have 2 questions. Firstly, Sebastien, you have been very active in managing your up your portfolio quality via acquisitions and disposals. Do you think that your portfolio today is fully optimized? And if not, which assets are drifting away from your quality framework or quality criteria? That's my first question.
Sebastien De Montessus
Sure. Thanks, Gabriel. I think we -- since 2016, we've always been managing carefully our portfolio. We do it by improving progressively the quality. There are a lot of exploration going on in some of the existing assets to continue to improve mine life, improve costs.
But at the same time, we like the pipeline growth that we have with the Sabadola-Massawa expansion, probably noted that Sabadola-Massawa is by far, I mean, the lowest production sites, production cost sites. So the expansion, we continue to drive all-in sustaining costs down. We believe that projects such as Lafigue, which will have all-in sustaining costs below $900 million will also drive in the right direction the portfolio. We're not shy, I mean, in taking out from the portfolio assets, which are underperforming or which are not meeting the targets that we want. We're currently happy with the portfolio.
Obviously, Wahgnion and Boungou are challenging assets, currently. But we see some opportunities, in particular, at Wahgnion starting from next year. And Boungou with -- it's more because of the current environment, some of the logistic issues and inability to do as much exploration as we wanted. But overall, we know we are pretty confident on the portfolio. Mana has been doing extremely well with this turnaround moving out -- ore moving out from Wona open pit and getting into the underground that will provide, I mean, strong feed, I mean, to the plant and allow us in parallel to do further exploration.
And obviously, I'm just emotionally attached to Hounde and Ity, which are original assets from the beginning, and wouldn't be surprised if those 2 assets might get close to 300,000 ounces of production this year, each of them, which is a significant recognition to what the team has been doing since in improving the quality of those assets since the beginning.
And my second question is on working capital. Here, you managed to avoid building up any working capital during the first half in spite of the raw material prices having grown sharply during that period. And this is in contrast to almost every other mining company. Can you elaborate on how you managed to keep working capital creep at bay? And how should we think about your working capital movements as we go into the second half?
Sebastien De Montessus
Sure. Well, the working cap, I mean, is really a direct translation of our mining activities, but also seasonality. So we're trying, I mean, to put as much pressure as we can on the team also in reducing inventories. So we've got more and more control, I would say, on the stock inventories with more work done with our suppliers in order to move progressively to stock consignment with a lot of them. So this helps us to, I think, to better control over time our working capital.
And how do you expect them to evolve in the second half?
Sebastien De Montessus
Joanna, do you want to comment on working capital dilution?
We expect changes in the working capital to be negligible for the next quarter. Any increases that we're seeing in inventories are largely being offset by reductions in our prepaids and our other payables. So we don't expect there to be significant changes quarter-on-quarter for the rest of the year.
Our next question comes from the line of Anita Soni from CIBC Markets.
Sebastien, could you talk about the implications of both Mana and Boungou going into 2023? Is there long-term sort of implications of the accounts that they've been having this quarter? Or do you expect them to reverse for '23?
Sebastien De Montessus
Sure. Thanks, Anita. I think for that --
Sorry, I think I misspoke when I meant Wahgnion and Boungou not Mana.
Sebastien De Montessus
Okay. Mark, do you want to comment, Mark?
So for Wahgnion, for 2023, we'll be winding up the mining activity at Fourkoura this year, and we'll be opening up the mining at Samavogo, which is a higher-grade ore source. So we are expecting to see some higher processing grades next year.
Sebastien De Montessus
And for Boungou?
And for Boungou, I mean, look, really, it is just going to be a continuation of how we're going there as we continue just balancing the stripping and opening up of the stages of the pits between the east and the west.
Okay. I guess with Goulagou, I was just wondering, you mentioned that you haven't been able to do exploration there. So is there sufficient ore grades going into the sort of medium term and the long term as you look at it across for Boungou?
I mean, look, the good thing is we've still got some headroom in terms of reserves. So what we're doing is we're focusing on everything around the pit and within the fence perimeter just to ensure that we fully understand everything there and have eked out all possibilities. And then there has been some just small advancements just immediately to the north. But as I said, at this point in time, we've still got a number of years of reserves ahead of us.
And then flipping that around, could you maybe talk about Ity and Hounde and then they're going to hit the top end of their guidance range. Is there anything that we could maybe track into 2023? Are you seeing positive grade reconciliation? Or is it all just as expected?
No. I mean, look, I think Ity and Hounde and Mana have all had exceptional years this year. Mana did have a nice combination of the Wona open pit and the Siou underground going forward, and we will have a lower grade satellite pit called Maoula that will be opening up. But then we'll also be opening up the Wona underground. For Ity and Hounde, we're not -- from a 2023 perspective, it will be similar probably to the guidance of this year.
We're still working through our updated life of mine plans, the reserves and planning and everything. [indiscernible] as Sebastien said, they have been great assets for us that we've had for a while, and we're very, very comfortable with how they're performing.
And then lastly, on -- if I could ask, since you mentioned reserve updates, do you plan on using the same gold price that you used previously? And can you remind me what that is? Or are you going to change your gold price?
We're going to use the same gold price as previously, which is $1,300 per ounce.
Our next questions come from the line of Ovais Habib from Scotiabank.
Congrats on a strong quarter and a first half. Great to see production and especially cost guidance maintained. Sebastien, most of my questions that I was looking to ask have been answered, but maybe a follow-up question on Lafigue. You kind of mentioned, obviously, the feasibility study coming in the end of Q3. You're really trying to tighten up the CapEx assumptions.
But maybe any sort of comments that you can make on -- maybe Mark, you can jump in here as well in terms of the scope, any sort of scope changes or mine life extensions that you're kind of thinking of within this feasibility study that you can point towards.
Sebastien De Montessus
Sure. Thanks, Ovais. I think that what's important for us on Lafigue is the quality of that project and the ability to control the CapEx. So this is why we're spending time. In terms of scope, we mentioned that we've increased the plant from 3 million to 4 million tonnes, which is obviously an important step and explain part of the delays compared to the initial plan.
The second part was in the current inflationary pressure. We've been taking our time to see where prices stabilize, and we're seeking to select all the right suppliers, ourselves to negotiate best the prices. We moved from an EPC contract to an EPCM contracts to be able to build ourselves much more. I think I gave you some examples. We had it in our initial CapEx camp construction for about $15 million.
Our guys have been able to identify a camp that was due for Rio Tinto for Guinea. That was a -- that was in the port in Turkey that we were able to take up for $6 million. So you see that when you are able to spend more time focused, you are able to significantly improve things, which is even more critical in this inflationary environment. So the reason why we're not rushing is because we want to make sure that at the end, the CapEx we're going to come up with meets the overall returns that we have on those projects, which is 20% return on capital employed. And at the same time that we have enough confidence and room in this CapEx that there won't be any surprise going forward.
And I think that we might be able, in Q3, to demonstrate that if we take the first projects we launched about now 3 months ago, which is the Sabadola-Massawa expansion that this CapEx is going well on track compared to what we announced and therefore, feel comfortable that the number we will put out for Lafigue is one that we will stand behind.
Yes, the thing I would add, Ovais, is Lafigue is important also for us as we want to continue to ensure that we have a diversified portfolio across the region. So you'll recall that we probably have a bit more than 50% of our production coming from Burkina today. Tomorrow with the Sabadola-Massawa expansion going to about 400,000 ounces, it should take 1.4 million, 1.5 million ounce annual production, means that Senegal will be close to about 1/3 of our production once the expansion is done. With Lafigue that would be doing between 200,000 and 250,000 ounces alongside Ity, which is about, again, 250,000 ounces.
That means that could be -- will be around 0.5 million ounces also. So that's another 1/3 and therefore, have an evenly spread production portfolio between Senegal, Cote d'Ivoire and Burkina Faso.
And just on the exploration side then, obviously, Lafigue was completely agreed to use discovery from Endeavor. Is there other Lafigues kind of in your back pocket that you can start talking about?
Sebastien De Montessus
So I'm not going to give the mic to Patrick who could spend hours on the back pocket options that we are building and preparing. But I think that's the beauty of this region. You'll recall that from a discovery standpoint, it's the biggest region for the last 10 years of discoveries. We've got one, 2, I would say, very promising greenfield exploration in Guinea and Cote d'Ivoire. And I think we will be making some announcements in Q3, beginning of Q4 around the results that we have on some of them.
And some of them are quite spectacular and very promising to continue to fuel, I would say, our organic growth pipeline.
Our next question comes from the line of Wayne Lam from RBC.
Just a question on Massawa. I was just wondering, have you moved into the Central and the North zones, can you give us an idea of how the grades will trend there relative to Sofia? And when do you expect to get into the transition material from those deposits? And what kind of impact on the recoveries do you expect once you get into those zones?
Sebastien De Montessus
Yes. Okay. Thanks for that. So the Massawa North Zone pit is a higher-grade pit than Sofia. The Central zone in the oxide is kind of similar.
In terms of the weathering surfaces, they are variable. So you do get -- you do start to see some transitional in parts of the pit earlier than others. It's not like, it's just a uniform line that you get to and you transition between the phases. So we are starting to see some transitional in occasion in the Central Zone pit that we've been mining since the start of the year. What we're doing is we're not processing any of the transitional ore that's all being stockpiled for the buyer.
And then maybe just on fuel. I think the detail that you guys provided was really helpful. Would you be able to help quantify the impact of the government subsidies in the various regions? And all else equal, should we expect cost to trend higher as prices start to reset?
Sebastien De Montessus
Sure. Very well, Martino, we can probably take this offline with you and go through it. As you probably saw, I mean, it's probably about close to $50 an ounce in terms of impact for H1 based on the current fuel prices of the different countries. There is no real, I mean, subsidies, I mean, direct subsidies for the industry. It's just the timing.
But the sense we have is that we probably reached a peak in terms of fuel prices in the different countries where we are and therefore, confident that our forecast, I mean, for H2 is under control.
And maybe just last one at Mana. Just curious how much more open pit material you expect to be able to supplement the underground on a go-forward basis? I know post depletion of the Wona open pit, there are a couple of smaller satellites, but just based on the outlook today, what proportion of work can we anticipate kind of adding to the underground profile?
So for the open pit, the immediate deposit is Maoula, we do have some other options that are, I guess, to slightly lower quality than Maoula and slightly further away that we're still investigating. From an underground perspective, the Wona underground. The strike length there is quite long. And we've started with 2 portals and that gives us the ability to mine in the order of basically 60,000 tonne a month per portal, and we're considering the ability to then go further along strike to then start to duplicate that.
But from the open pits specifically, like how much should we model in terms of tonnage.
Are you talking about over the course of the year or.
Yes, sure, over the next, call it, 12 months?
Sebastien De Montessus
Yes. So I don't have the exact numbers in front of me. But I think we are looking at -- clearly, the goal will be to fill the mill, if possible. One of the other things that is always something that we will balance is looking at the quality of the ore coming from underground is whether we do slow down the mill in future years. There is certainly nothing wrong with that, and I've certainly done that before in my career, where if you have a higher quality of feed from underground, the goal is not necessarily to fill the mill.
In the short term, we believe we will have enough feed for certainly '22-'23.
The next question comes from the line of Don DeMarco from NBC.
So yes, what we see here is very strong, consistent operations quarter-over-quarter. Now it's good to see. Maybe one little blemish in Q2 at Waghnion, can you maybe add a little bit more color on Waghnion then? Like what's different through the execution in H1 versus what your expectations were at the time of guidance? And what's the grade at Samavogo pit? And how much ore would you be expecting to mine from that, say, in Q4 and into 2023?
Sebastien De Montessus
Yes. So essentially, what we do in the different mining areas, Nogbele North, Nogbele South Fourkoura is we always start mining the higher value pits first, and then we progress into the lower value pits. And we were just in a situation where we're running multiple lower-value pits whilst we're establishing in particular, the Samavogo area. So we are definitely on track to be mining at Samavogo in Q4. In terms of the specifics of the detail, I don't have that, and I'm sure that that's something that Martino and team can take you through.
So Samavogo is a bit more than 2 grams per tonne in terms of upgrade. So it's a bit higher than what we currently have. And this is why we're confident that we should see higher production numbers and therefore, so lower all-in sustaining costs going forward at Wahgnion.
Maybe another continuation of a previous question. So you've got a couple of up-and-coming resources in your pipeline, Bantou, [Castle] Golden Hill. Is there any timing on a technical report on any of these? I know some of these are actually pretty substantial in terms of the magnitude of balances.
Sebastien De Montessus
No, I think that Bantou is expected to be drilled in H2. I mean, we started, I mean, at the end of Q2 to do some drilling there. So we start getting some results around that in H2. Same for Golden Hill, which obviously was not a priority in the short term, given some very good results that we had around Hounde. As you know, Golden Hill, we still view Golden Hill as a potential satellite pit for Hounde.
So it just goes through the highest priorities and move forward progressively. There has been also some very interesting discoveries recently in Q2 that we've decided to shift, I would say, the -- some of the drilling programs to those highly new attractive areas, in particular in Cote d'Ivoire. So this is why, I mean, it's changing a bit some of the work plans, but the good thing is to have so many options in the portfolio. So in any case, we intend to do a full update on the exploration as part of our Q3 results in November.
Our next question comes from the line of Carey MacRury from Cannacord Genuity.
Most of my questions have been answered. But maybe just on the production guidance. With H1 performance, you're tracking to the high end of the guidance range. Is that more or less what we should be expecting for the year now? Or should we expect a bit of a slowdown on some of the assets?
Sebastien De Montessus
We're always cautious, Carey, simply because we are into now on the rainy season. We don't know what's going to be the magnitude of the impact of the rainy season and up to which date, I mean, we'll have some impact. Obviously, we are preparing ourselves by stockpiling in H1, in particular in Q1 and in Q2. But so far, so good. And this is why we felt confident to reiterate current guidance, both on production and cost because we see that we're trending well and the plan is working as anticipated.
And maybe similarly on the ASIC guidance. A lot of your peers have at least indicated they expect cost to come at the high end of guidance, you're tracking right in the middle. I know there was a lot of pluses and minuses over the last quarter, but it is still in the middle of guidance, still a reasonable place to target obviously, barring changes on the rainy season.
Sebastien De Montessus
Sure. Well, we would like -- I mean, the entire sector has been performing well so that -- to attract overall investors rather than being just an outlier. At the same time, I keep feeling that when you've got strong inflationary pressure, you still have leverages, I mean, to compensate some of them. Probably the worst thing to hear from your ops guys, is, it is what it is. And it's not -- it is what it is.
And that's what we work on. It's not because you've got a $50 impact on your fuel cost that you can improve things elsewhere. You can reduce G&A, you can do improvements here and there. You have continuous improvement. So you always have leverage. It's just a question of, are you putting the right efforts at the right place to ensure that you are able to compensate for that?
Our next question comes from the line of Raj Ray from BMO Capital Markets.
Base. My first question is more general in turn. So the one thing we are continuing to hear from the mining sector is skilled labor shortage, high attrition levels and related inflation. Now being in West Africa, I'm guessing you're shielded from a lot of that compared to other assets in Australia and Latin America. But just wanted to get a sense of how you see that in West Africa.
Are you seeing some of the same pressures or it's -- you are shielded again to most of that. And then my second question is on the converts. So they mature next year. And there's an option of either paying cash or taking delivery of shares now. I just wanted to get -- or remind us if you -- whether the option is on the company's behest or the convertibles, on whether they take cash or shares.
Sebastien De Montessus
Sure. Thanks. Good to speak. I mean on the people side, I think that that's the beauty of being in West Africa, and that's why we love this region. We've been working for years and years, as you know, our program of growing local talents.
So we have, in fact, access to a significant pool of people attracted, I mean, to move into the mining sector. They don't necessarily have the same background and experience than in other regions, but they are willing to learn. And we've been seeing some amazing success story internally on growing local talents. So yes, I think that we have that flexibility given the region where we operate. And that has been a success so far.
On the other side, on the convert, yes, I mean, we always said that the objective given the cash flow generation that we have and in particular, in the current gold price environment, is to settle the convert into cash if need be a mix of cash and shares. But the time being, clearly, the target is to sell it in cash. And we're getting prepared. I mean this is why you see a significant amount of cash on the balance sheet, in order to be prepared for this in March next year. And through this avoid any dilution to our existing shareholders and demonstrate through that again, that we were right when we did the convert back a few years ago and being able to finance our key projects with a 3% coupon, which if we have gone through other instruments, the debt level and the interest rate would have been closer to 7% or 8%.
Our next questions come from the line of [Karmen Tully] from Bank of America.
I just had a question on your 2023 dividend. You increased your minimum dividend this year, but does the 2023 dividend still stand at $175 million? And would you revisit that at some point? And what's the thinking of -- what sort of would drive that?
Sebastien De Montessus
Sure. Well, we said that what we wanted is to have a progressive dividend that will continue to increase. So I think that we said that next year, the minimum would be at $175 million providing -- given that this year, we should reach a minimum of $200 million. Obviously, we should expect a dividend in '23 that should be in line with this or higher. But again, this will depend on where gold price is and the performance.
Thank you. We will conclude today's question-and-answer session. I would now like to turn the call back to Martino De Ciccio for any closing remarks.
Martino De Ciccio
Thank you, everyone, for joining the call today. I realize that there are still pending questions, so we remain available to answer these offline. Thank you, and have a good day.
And that will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.