Hello, ladies and gentlemen, and welcome to Endeavour Mining third quarter 2019 results conference call and webcast, which is being recorded. A copy of the presentation is available on Endeavour's website. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I will now hand over to your host, Sébastien de Montessus, CEO of Endeavour Mining. Please go ahead.
Thank you, operator. Hello, everyone, and thank you for joining our Q3 2019 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, this time from our operational hub in Abidjan, where we are hosting our board for their second annual site visit. I'm delighted to say also that our new Independent Non-Executive Director, Sofia Bianchi, is with us on this trip and on the call. Please note today's call is covered by a disclaimer and notice on forward-looking statements. The format for today's call will be our usual quarterly format. I will provide an overview of the results, then Louis will review our financial performance, followed by Mark, who will discuss the operations, and I will conclude before opening up for Q&A.
Now on to the first slide of the presentation, I'm excited to announce that our net free cash flow is finally positive. This marks the transition from our high capital-intensive investment phase to a cash flow generation phase. If you remember, I told you back in 2016 that the turnaround would be completed after our three-year strategic plan, I'm pleased to confirm that this quarter we have generated our first net cash flow positive quarter. Before we dive into the presentation, I'd like to thank the team for their tremendous efforts over the past three years, which have ultimately resulted in this quarter. Thank you as well to our shareholders.
This achievement could not have been done without their support, and we expect that they will now start seeing their patience rewarded. On this page, we have laid out the key takeaways for the quarter. I think it is safe to say that it has been a strong quarter despite the challenges brought by the severe rainy season. The strong operating results and a higher gold price led to our operating cash flow doubling, and most importantly, the business reduced its net debt by $52 million as we have completed our investments during the previous quarter. Looking ahead, our objective is to generate strong cash flow so we can continue to deleverage the business and demonstrate a robust return on capital employed. In addition, I believe that the business is very well positioned to continue to grow in the short term with very low CapEx requirements.
In Q4, we expect Ity's ramp up to 5 million tons per annum to be complete. This means that 2020 will benefit from a full year production at Ity at an increased plant size. This is not arm-waving, wishful thinking. As you know from our announcement, we have found deposits which are at least one gram per ton richer at both our flagships, Ity and Houndé. We are therefore moving quickly to get permits so that we can start mining them in late 2020, early 2021. As you can imagine, we are delighted because it's rare to be able to have both debt reduction and growth at the same time. Finally, based on the exploration success we have had, it is now part of our DNA to have a strong exploration focus.
This will allow us to continue to build low-cost optionality within our portfolio. Turning now to the next page. Safety. Safety continues to be our top priority. We were disappointed to record one lost time injury during the quarter at our Ity Mine, the first in over 23 months across the group. Although our safety record remains well below the industry average at 0.06, it is a reminder to all us that we must continue to be vigilant about our safety. The safety teams at all our mines are redoubling their efforts to ensure all our workers take the necessary safety precautions at all time. Moving to the next one. As I mentioned, we have had a strong quarter despite the rainy season, as production increased by 6% over Q2 and all-in sustaining costs remain low at $800 per ounce.
On this page, you can see that in fact, this has been our second-best historical quarter after the record set in Q4 last year. Turning to slide seven, you will see that we were up against this quarter in Burkina Faso. The left-hand side of the page illustrates the average rainfalls during Q3 over the past four years, up four times versus when we first started operating in that country. The rain undoubtedly impacts production cost if we assume all other factors are constant. It is not the only factor to consider. By incorporating the lessons we've learned, we are able to better plan for the rainy season with the goal of maintaining a production profile that is as flat as possible. Every rainy season has its challenges, and this year was no different.
The main challenge this year was starting a high-grade Bouéré deposit at Houndé during the rainy season, and also at the same time ramping up our Ity mine in soft material. Quite a challenge. As I like to tell the team, our job is to be problem solvers and make sure we have backup solutions in place. As such, we've been able to mitigate the impact by mine scheduling and building up stockpiles in the dry season. Cost tends to increase during the rainy season because more water pumping is needed, mining efficiency is lower, and we use stockpile lower grade ore to maintain plant throughput, which is why we place a greater emphasis on maintaining production levels to net this out. In the current gold price environment, this is even more beneficial. Moving to the next one.
As I mentioned earlier, the Ity CIL project has been the big driver for Endeavour's performance this year. As you know, it was completed four months ahead of schedule, $10 million below budget, and without a single LTI. The ramp-up has also been quick, lasting only three weeks. Since then, the CIL plant has been performing extremely well. Production continued to increase in Q3, and we now expect the mine to achieve the top end of the 2019 annual production guidance range. Just a reminder, we deliberately gave a wide guidance range at the beginning of the year as the lower end was based on the nameplate capacity and the top end already included upsides such as the plant running above its nameplate. During the ramp-up, we identified the ability to further increase the mill throughput by 25% to five million tons per annum for minimal CapEx.
Those upgrades are progressing well and on track for completion before the end of the year. Moving to slide nine. Now that we are three-quarters of the way through the year, we are adjusting our 2019 full year guidance for production and all-in sustaining cost. To walk you through our thinking, let's look at production first. We've already produced 473,000 ounces, and as I just mentioned, we expect Ity to meet the upper end of its guidance. The lower end of the group's guidance has been increased slightly by 35,000 ounces. Concerning the other mines, we expect Agbaou to perform well in the final quarter too, offsetting Houndé where the severe rain slowed the development of the high-grade Bouéré pit.
The group all-in sustaining cost guidance has also been adjusted upwards slightly by 4% to reflect the higher royalties associated with the stronger gold price environment, which equates to around $15 an ounce. In addition, the adjusted estimate to take into account the Ity's all-in sustaining cost, which is expected to be near the top end of its guided range, as mentioned during our Q2 call, driven by the increased production at a lower average grade. Overall, we expect Agbaou to offset Houndé and Karma. Now I'd like to give an overview of our financial performance, focusing on what I consider are the three important metrics for the business, operating cash flow, net debt reduction, and return on capital employed. This quarter, we doubled operating cash flow compared to Q2 as we benefited from both an increase in production, thanks to Ity, and the stronger gold price.
Again, this is why it's important that we hit our production targets whatever the weather. Turning to slide 11. This graph makes me very happy as thanks to both our operational performance and our financial discipline, we can now boast strong per share metrics. This is the reward of managing to fund our growth without diluting our shareholders. As we have now transitioned to being a cash flowing business, it is interesting to see that our annualized cash flow yield is in the double digits, which is high for any industry and particularly for the gold industry. In the context where we are competing for capital across industries, I believe that this is important for the gold industry to show it can be benchmarked across industries on all relevant metrics.
As you see on this next slide, the gross capital spend since 2016 has been significant, amounting to over $800 million. This represents almost half of our market cap. With only the Ity upsides remaining, CapEx decreased to $6 million in Q3. Delivering our projects on time and on budget is great, but ultimately, the most important is to show a return on capital employed. As you see on slide 13, this metric has improved substantially this quarter to 15% on an annualized basis. Moving to slide 14. With the high capital investment phase now behind us, we have pivoted to reach the cash flow inflection point in the business. It was announced, it is finally there. We will now accelerate our deleveraging. I think this graph sums it up nicely, and you can see the different elements on the bottom side in particular.
Now as you can see for this quarter with the CapEx spend pretty well finished, we can start focusing on debt reduction. This quarter, we decreased net debt by $52 million compared to Q2. As you can see from the orange line, the net debt to EBITDA ratio decreased from 2.75 times at the end of June to 1.94 times at the end of September, which represent a 30% decrease in just one quarter, which is very pleasing to see, and we expect this ratio to keep decreasing quickly over the next quarters. Turning to exploration now. As part of our strategic plan, we did invest a lot during the last three years in exploration, in the same spirit as for the project. We are also now starting to benefit from the exploration successes we have had and converting progressively our discoveries into reserves.
As you may recall, the main goals set three years ago were twofold. First, to extend mine life to more than 10 years, and second, to advance greenfield discoveries to build optionality within the portfolio. Over the first two years, we focused mainly on near mine exploration. This year, we started to ramp up greenfield efforts, which now represent nearly 20% of the spend. We are very pleased with the results as both Ity and Houndé now have demonstrated potential to have tenure mine lives, and we have started to see delineation of new greenfield discoveries. The icing on the cake is that our discovery cost stands at less than $15 per ounce. Let's look at Houndé quickly in some more detail. Our target is to have at least a 10-year mine life at an average 250,000 ounce per annum.
The graph on the right-hand side shows the production gaps in gray that we need to fill to achieve this, and this is how we calculated our target on needing an additional 1.1 million ounces of reserves. While this sounds a big number, we have already discovered 710,000 ounces, which we published as a maiden reserve for Kari Pump back in June. Not only did we add reserve ounces, it was also a considerably higher grade of just over 3 grams per ton. During the quarter, we've been finalizing the resource calculation for the Kari Center and Kari West discoveries and expect to announce a maiden resource and reserve estimate in the coming weeks and demonstrate once more that we'll be reaching the target we had set for Houndé. Moving now on to Ity, the same principle applies.
We want a 10-year mine life at an average 250,000 ounce annual production. To achieve this, we only need to add 500,000 ounces of reserves. We have already discovered 500,000 ounces of indicated resources, so we are confident we can meet this target as the discovery keeps growing. Similar to the Kari areas for Houndé, we are also seeing above three grams per ton at Le Plaque. We expect to announce again a maiden reserve for Le Plaque based on the current resource in Q1 2020. Turning to our greenfield exploration efforts in Côte d'Ivoire, we are very excited about the Fetekro deposit. In September, we increased the indicated resource to 1.1 million ounces at a good grade of 2.54 grams per ton, and we will be commencing a 10,000-meter extension drilling program shortly, which we expect will increase the project's resource base further. Solid, Patrick. Thanks.
That concludes my quarterly overview, and I will now hand over to Louis for a detailed review of our financial performance.
Hello, everyone, and thank you, Sébastien, for the introduction. From my side, I'm very pleased to be joining Endeavour at this important juncture as the business matures into a cash-generating gold company. With the current strong gold price environment, I think I may have timed it perfectly to join the sector at this point in time. On my first slide 20 in the presentation, I thought it would be interesting to provide you with a snapshot of how the business has performed, both on a year-to-date basis and comparing the current quarter versus the previous one. Starting on the year-to-date results, the company's financial performance has improved across all key metrics. On the financial side, adjusted EBITDA and EBIT margins are up 24% and 35% respectively, with operating cash flow up by 52%.
As Sébastien has mentioned, the key driver has been our increased production for continuing operations and a stronger gold price, which more than compensated for the slightly higher all-in sustaining costs year-on-year. Considering the significant change to our asset base over the past nine months with the CIL plant coming on stream at Ity and the growth CapEx phase now essentially over, I will focus on our quarter-on-quarter performance for the balance of the presentation, and we will be happy to address any further questions you may have later. Let's turn to slide 21, where we have provided a breakdown of the major elements used to derive our all-in sustaining margin. In the tables, we have shown both the nominal amounts as well as the dollars per ounce impact. The all-in sustaining margin came in at 44%, up from 38% reported in the previous quarter.
Lower non-sustaining capital for both mining and exploration resulted in a $305 per ounce improvement in the all-in margin of the company. This is due to significantly less non-sustaining capital required by the business during the third quarter. To explain that point, on the mining side, we did the pre-stripping at our new deposits at Houndé and Karma earlier in the year, and on exploration, most of the drilling was done ahead of the rainy season. Unit cash cost decreased over the previous quarter, which was, however, offset by higher royalties and sustaining capital spend. For reference, we have provided additional insight on each of the mainline items on the slide. On the next slide, we start from the all-in margin and work our way to the net cash inflow for the group.
As Sébastien mentioned, the bottom line shows a positive inflow for the quarter, which is a turning point for the company. Diving into a bit more detail, I'd like to anticipate any questions you may have on the larger quarter-over-quarter variances. Starting with working capital, it has swung to an outflow during the quarter, mainly due to payables related to the construction of the Ity CIL plant winding down, which was somewhat offset by a very large VAT recovery during the third quarter. Approximately $15 million of that has been recovered in the quarter. Taxes came down slightly as the second quarter also included a provisional tax payment of $6 million at Houndé for the 2019 financial year, and growth project capital decreased significantly, as you'd expect to see now that the Ity CIL plant is commissioned.
We have provided more insight on the page, and I'd be happy to address questions during the Q&A session. Moving on to the next slide, where we show the drivers for our opening and closing cash position. You can see that we started the year with $124 million of cash, to which operating activities have added another $178 million year to date. Since the beginning of the year, we have invested $211 million into the business for growth projects and sustaining, and non-sustaining expenditures. As you see with the insert, this represents a 60% decrease over the previous year. These activities were bridged by an inflow of financing activities, notably the drawdown of the RCF earlier this year, which was partially offset by interest payments and finance lease obligation repayments as well. No further drawdowns are currently expected given our strong cash-on-hand position. To the next slide.
The company's liquidity remains strong, and we are in a healthy financial position. We have available funding of $240 million at the reporting date. Our current net debt to adjusted EBITDA ratio stands at 1.94 times, which Sébastien referred to earlier. This is calculated on a trailing last 12 months adjusted EBITDA basis, which is a sharp decrease over the 2.7 times at the end of June. What we have included in the slide is a calculation where we've annualized the quarter three adjusted EBITDA. Arguably, this is most probably a more relevant metric in this higher gold price environment and with Ity now ramped up. On that basis, the leverage ratio should be around 1.24 times. Looking ahead, we expect net debt to EBITDA, the ratio to continue declining on the back of reduced growth capital expenditure requirements. Turning to my final slide.
You can see that on a quarterly basis, adjusted net earnings per share increased considerably in quarter three to $0.30 per share. This being the benefit of funding our growth in a manner that has avoided equity dilution for the shareholders. That concludes my review. I will be happy to answer any questions at the end, and will now hand over to Mark.
Thanks, Louis. It's great to have you in the team. I'd like to start my operational review with the Ity Mine. Commissioning of the new processing plant in the lead-up to the wet season has gone pretty well. As you can see from the graph on the right-hand side, the difference in production between the old heap leach and the new CIL operation is considerable. Essentially three times the production at a lower all-in sustaining cost and good validation to support the capital investment made. Production for the quarter continued to increase despite the heavier than normal rainy season.
On the mining front, we continued to open up the Daapleu and Ity Flat pits, which extended down into the transitional and fresh rock in places, which, as most of you know, for Ity, is a benefit as we can use the larger mining fleet with more solid underfloor conditions rather than the smaller Articulated Dump Trucks. Additional ore sources came from the spent heap leach near the CIL plant and a low-grade dump, which is being mined to make way for planned TSF lifts. The production rate has continued to ramp up based on the debottlenecking work being conducted, and we expect to be in a position to process at an annualized 5 million tons per annum during the fourth quarter. The mine's all-in sustaining costs decreased during quarter three, mostly due to a lower strip ratio, greater production volumes, and lower G&A costs.
These factors helped to more than offset higher mining-related costs due to the rainy season and increased royalty costs. Patrick and his team have done a great job discovering and modeling the high-grade Le Plaque deposit. Though there is still more resource to be drilled, we are in the process of converting the initial resources into reserves and incorporating this into our life of mine plan. Due to the grade profile of Le Plaque, our goal is to work through the permitting and planning process and bring this into the mine plan as early as possible. Looking ahead to the final quarter of the year, Ity is on track to achieve the upper end of 2019 production guidance.
For the all-in sustaining cost, as guided during the second quarter results, we expect the mine to finish near the top end of guidance to account for the lower average grade mined and processed in taking the plant beyond nameplate capacity. Turning to Houndé on the next slide, the mine delivered a good performance for quarter three despite the severe rainy season, with only a slight decrease in production. We started to mine the high-grade Bouéré deposit during the second quarter. This continued at a higher rate in the third quarter, which helped maintain the process grade profile, as we also blended this with Vindaloo ore and lower grade stockpiles. Ramping up of production at Bouéré was slow due to the more severe rainy season, which is the main reason we now expect to be at the lower end of 2019 production guidance and above the all-in sustaining cost guidance.
As you may have seen, the guided $25 million of sustaining capital for the second half of the year is considerable compared to the $10 million in the first half. Of this amount, $15 million is planned for the fourth quarter. The strip ratio is well above the life of mine ratio at roughly 15 to one, and is expected to remain high in quarter four. Looking at the big picture, the company pushed Houndé very hard in its first two years of production in order to support the funding of the Ity CIL project. With Ity now in production and operating well, we plan to complete the guided capital stripping during this second half of the year to place us in a good position for next year.
Similar to Ity, the exploration team have done a great job discovering and extending our knowledge of the high-grade Kari Pump deposit, which is also expected to make a contribution to Houndé's life of mine production profile. We're therefore looking forward to incorporating this into the mine plan as soon as possible. Moving on to slide 29, to our Agbaou Mine in Côte d'Ivoire. The maturity of this operation was highlighted by the smooth transition from our expat GM to the new Ivorian general manager. The team has embraced the change and neither production nor performance has missed a beat. Mining operations continued in the north and west pits during the quarter as the primary ore sources. Towards the end of the period, waste mining recommenced in the south satellite pit. Processing throughput was supplemented with some low-grade stockpiles, and production was steady quarter-on-quarter through the rainy season.
All-in sustaining costs decreased as a result of a reduction in both processing and G&A unit costs, as well as an increase in gold sold. The higher gold sales helped to offset higher unit mining costs and royalties. Looking ahead to the final quarter, Agbaou is on track to meet the higher end of full production guidance and expected to come slightly below the all-in sustaining cost guidance for the year. Lastly, to Slide 30 for our Karma asset in Burkina Faso. Production increased as forecast despite the effects of the rainy season. Mining activities focused almost solely on the newly commissioned Kao North pit as we finished mining the Kao main pit in early Quarter 3. The higher-grade Kao North oxide ore contributed to the significantly higher stack grade, which more than compensated for lower stack tonnage.
All-in sustaining costs decreased mainly due to increased gold sales, which more than offset higher unit mining and stacking costs and higher royalties. Looking ahead to Quarter 4, we expect Karma to meet the lower end of 2019 production guidance and finish slightly above all-in sustaining cost guidance. This is mainly due to higher royalties as guidance was based on a lower gold price of $1,250 per ounce. That concludes my operational review, and I'll be happy to address questions after Sébastien's concluding remarks.
Thanks, Mark. In conclusion, ladies and gentlemen, I think this quarter demonstrated the successful execution of our strategy. We have completed the growth investments required to build a strong, diversified portfolio. With this project now in production, we have de-risked the business and can now focus on harvesting the cash generated by these investments. Just to remind you of our four upcoming near-term catalysts. First, we expect to publish maiden resources at the new Houndé discoveries in the coming weeks. Second, we're looking forward to completing the Ity CIL upsize before year-end. Third, we're looking forward to publishing maiden reserves for the new Houndé and Ity discoveries early next year. This will be followed by updated technical reports where we aim to demonstrate 10 robust years of production across both assets. Last and most important, continuing to generate cash flow.
As Thomas Edison taught me 100 years ago, having a vision is not enough. Vision without proper execution is hallucination. Well, I'm pleased to say that after three years of discipline in executing our plan, near $50 million of net cash flow after everything, this quarter is not a hallucination, but just the beginning of a new chapter. Thank you very much for your time, and we're now happy to answer any questions you may have.
Thank you so much. Ladies and gentlemen, we will now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question and the hash key to cancel your request. The first question comes from the line of Michael Stoner from Berenberg. Please go ahead.
Hello. Thank you very much for the call. On the Ity growth CapEx, in the announcement, you flagged you've spent $4 million of the $10 million-$15 million budget, and that the bulk of the work left is on the tailings. Can we assume that the CapEx is tracking towards the lower end of the range or better than that range, or is there a big ramp-up in spend through Q4?
Thanks, Michael. Yeah, I confirm. The objective is tracking towards the lower end of that guidance.
Okay, perfect. On to Houndé at Bouéré. Forgive me if I missed it in the call, but do you expect to have that fully ramped up in Q4, or is that more of a Q1 event?
Sorry, say that again, Michael.
Sorry. For Houndé and the ramp-up of high-grade feed from Bouéré, is that expected in Q4 to a full production rate, or is that going to be happening early next year?
It's going to start at the end of the quarter and mainly in Q1.
Okay, perfect. On Agbaou, the better-than-expected mining unit costs, are those now anticipated to sustain? Were there a few one-off beats there?
I'm always cautious when we have better-than-expected results. It would be probably brave to think that's the standard. Yes, we hope that the performance of the team and following the change of the GM has laid out strong foundation for the future. We hope to continue in the same territories. Yeah.
Okay, that's not down to a change of contract terms or anything that you can.
No, absolutely not.
it's performance-based.
Yeah, it's performance-based. Exactly.
Okay, perfect. The final one from me is on the working capital outflow. Louis flagged that it's payables washing through at Ity. Is there much of that to expect for Q4, or is that effect largely done now?
Michael, thank you for the question. That effect is basically done now. It was Ity CIL accruals at the end of the year that have now are winding down.
Perfect. Okay. That's all for me. Thank you very much, Vital.
Thank you, Michael.
Thank you so much. The next question comes from the line of Ovais Habib from Scotiabank. Please go ahead.
Hi, everyone. Thanks for taking my question. Firstly, Sébastien and team, congrats on a strong quarter and achieving free cash flow despite the rain season. Was worried there for the quarter. Just on that, Sébastien, obviously, you guys got hit with rain in Q3, but how's that looking going into November and going into Q4? Was November still weak in terms of rain, or are we seeing a relief there?
Thanks, Ovais. Surprisingly this year, the rain has been quite late. October has still been a rainy month. Again, we hope that November and December should now start to be the dry season. If you recall, we tend to have record Q4 each year as we enter into those dry season. We're confident going forward for Q4.
Excellent. Okay. Just moving a little bit on to exploration. Just want to know where Patrick is focusing his efforts now, and is it Fetekro? Is it still at Houndé, or can you give us a little bit color on that?
Yeah. Patrick, you want to answer the question?
Hi, Ovais. Right now, the main point for us is to concentrate on Fetekro first, because we started the study for a PEA to be possibly issued at the end of the first quarter. We want to involve as many answers as possible on this Lafigué deposit. This is my first priority right now. We are still working a little bit now. Now the rainy season has finished on Le Plaque extending Le Plaque southeast. That's basically the priority we have now. Until the end of the year, that will be the priority.
Are there any other targets or kind of greenfields that you're working on right now? This is just the target for right now?
No, for right now, in the next coming two months, it's going this. That being said, for next year, we are preparing additional and other greenfield target, well let's say in different country on our portfolio.
Okay, perfect. Guys, that's it for me. Thanks for taking my questions.
Thank you, Ovais.
Thank you. The next question comes from the line of Justin Tenz from Numis Securities. Please go ahead.
Hi guys, congrats on a strong quarter and the first majorly positive free cash flow quarter as well. My first one's just on, in terms of now that your balance sheet's deleveraging, you have a lot more sort of strategic options. How do you evaluate, I guess if you'd give us an update on Kalana, on Fetekro, and just how you evaluate projects going forward, and I guess, what if any criteria cutoffs do you have for what makes an Endeavour project? Perhaps at what gold price do you evaluate for that?
Thanks, Justin. Same with back in Denver during my presentation, we said that the key objectives through the next two years, 2021 is really to focus on deleveraging and generating strong cash flow. That's really the priority, which give us time, I mean, to continue to grow the optionality into the portfolio for our next mine, whether it's Kalana or whether it's Fetekro. We have this optionality in the portfolio. Obviously, if the gold price continue to be strong, we should be deleveraging faster than expected, which will give us even more flexibility on the next options. Really, I want to insist on the fact that the next two years, 2021, are really focused on generating as much as we can cash flow in the portfolio.
I see. In terms of cash flow and how you view balance sheet management, that's arguably already at a healthy level relative to what your EBITDA will be going forward. I guess, when thinking about a dividend or a capital return or simply just getting debt to zero, could you just run through those options and how they're viewed by your team right now?
Well, I think that we'll have, I don't want to precipitate discussions with our board on the subject. We're just completing the first quarter of net cash positive. I think we'll have, as we move forward and accelerate this deleveraging, we always said that our target was to be below 0.5 times net debt to EBITDA. Depending on the gold price, that's something that we will reach quite rapidly. We always said that as soon as we're ready, our objective is to be in a position to move to giving back some of this cash flow to shareholders. This is clearly a subject that we intend to address with the board in 2020.
Okay, thanks. Just my last one, on Q4, this is a bit more of an operational cash and cost question. Are there any accruals that we should be aware of that tend to occur in Q4, and will that be a one-off effect on cost?
Say that again. Sorry, Justin.
I was just wondering if there are any year-end accruals that we should be aware of in terms of how they may impact cash costs or costs in general for Q4?
Justin, I don't believe there should be any. If there are, we'll let you know, but I don't think that's the case.
No reason for.
Yeah.
Okay, all right. Thanks very much, guys.
Thanks, Justin.
Thank you. The next question comes from the line of James Bell from RBC Capital Markets. Please go ahead.
Yeah, good afternoon, and thanks for the call. Just firstly, on the permitting for the Kari targets and Le Plaque, you talk about needing those late 2020 or early 2021. Do you see any risks around that process, or do you think that these are going to be relatively straightforward to secure?
Thanks, James. I think the good thing is we're talking about permits of new pits. It's not permitting for a new mine. This tends, in our experience, to go quite fast. There is still a process to be followed. I'm this week with the board, and for example, we met the Minister of Mine yesterday, and he confirmed that he was supporting to get us as quick as possible the Le Plaque permitting. About two weeks ago, I was with the Minister of Mine in Burkina Faso, who is also committed to help us get the permits for Kari Pump as early as possible. We're quite confident that end of the year is the latest date we are expecting those.
Okay, that's great. Then on the cost side, I think it's pretty clear what's happened in Q3, but when we start thinking about looking into 2020, are you seeing any headwinds in the underlying business or any inflation coming through that you think could impact your cost base as you start to look into next year?
Obviously, we'll be going through the budget process in the next two, three weeks, I have a better understanding of 2020. Based on the robust, I would say, life of mine plans, in particular at our two flagships, Houndé and Ity, pretty confident on the outlook for 2020 and 2021. In terms of supply chain, we haven't seen yet any significant increase in supplies. Even more, as we said, now that we're having a much more global approach to our procurement and our supply chain, we will see in 2020 some improvement on the inventories and consumables as we are moving towards better control, in particular, having stock containment with a lot of our suppliers to continue to improve our working capital, and therefore our return on capital employed.
Okay, that makes sense. One just final one. When you look at your return on capital employed, it screens pretty impressively on an annualized basis. Do you have an internal target for where you would like that figure to be on a go-forward basis? Does that feed into your view on projects or potential asset purchases in future?
I think that as a group in terms of philosophy, we always said that we wanted to be as close as possible to a 20% return on capital employed. 15% is a first step. We hope that we'll be able to continue to improve this number. Again, I don't want to preempt the short-term future given that this is our first quarter of net cash positive. I think that based on the full year 2019 and the budget 2020, we'll be able to give some even better guidance to the market.
Okay, that's perfect. Thanks very much.
Thanks, James.
Thank you. The next question comes from the line of Chris Thompson from PI Financial . Please go ahead.
Yeah, good morning. Or good day, guys. Congratulations on a great quarter. Yes, very, very nice to see the free cash flow there. Just a couple of quick questions. I think a lot of my questions have already been answered, but just moving to [ Houndé] right now with Bouéré. What sort of mill grade are you anticipating when you do bring that pit fully on?
Mark, you want to?
The Bouéré pit should get better in grade as we go. By the end of the year, we'll be just under three grams average for the year. We expect it to improve in 2020 by another gram.
Great. As far as the blender grades, the mill, what should we be anticipating?
Are we talking for this year or for next year?
Just generally for the steady state run rate, I guess, in the near to medium term with Bouéré on.
It's in the low twos.
Okay, great. Thank you. Just moving on quickly. Great performance from Agbaou. Just focusing in, I guess, on Ity here. Nice to see that you guys are on track for meeting the 5 million tons per year. Do you anticipate an improvement in grade, or are you pushing and continue to push on the tons rather than the grade there? Can we anticipate a +2 gram mill grade there?
No, with the increased throughput, that will keep the grade lower. Yeah.
Okay, perfect. Thanks. Finally, at Karma. Again, nice to see the good grade coming in there from Kao North. When can we anticipate an uptick in those tons?
Yeah, we're doing some work on the stacker right now, and we're expecting that to be finished in this quarter, so that come 2020, we'll be improving our throughput.
Yeah, as you might remember, Chris, for us, 2020 is a turning point for Karma in terms of cash flow, as we'll be finishing the last CapEx with the stacker, which is about $24 million this year. Next year is the end of the first high level of Franco-Nevada stream. That will allow us to start working on Karma for us rather than just for Franco-Nevada.
Great. Thanks for that, Sébastien. Good, guys. Keep it coming. Thank you.
Thank you very much, Chris.
Thank you. The next question comes from the line of Geordie Mark from Haywood Securities. Please go ahead.
Yeah, good day, guys. Just to follow on from other questions there. Focusing firstly at Ity, very nicely done through the wet. Just trying to get an idea of how you're looking for mining fleet capacity now that you're coming out of the wet season. Are you rotating out of the ADTs and into other equipment, and how that's going to affect, ultimately, the balance of your mining fleet, and hopefully that should have some reflection on unit costs as well.
Yeah. At this point in time, we're still using quite a number of ADTs, and that's also just looking at the kind of activity that we've got on. We've got TSF construction underway and sourcing adequate fresh rock for that. Certainly, Q4, Q1, we'll still have quite a number of ADTs. Obviously, as we get into any fresh rock and our ability to use the dump trucks, we'll certainly take that opportunity.
Right. You're seeing, in terms of broader scale of reconciliation, are those numbers coming in line at the moment, or is it too early to tell?
It's probably a little bit early to tell, ramping up and also going through wet seasons because mining is not always as easy in the wet season, so probably wait another quarter or so on that.
Okay, mate. Probably this question Sébastien gets all the time is, obviously the ramp-up through nominal nameplate capacity to 5 million, you're close to there already on an average in Q3. What are you thinking the ability to be able to exceed that going into next year? Should we just say 5 million, and be conservative on that basis?
I think we should be conservative for the time being. We know our ability to go above nameplate capacity. Let us just settle one or two quarters. Then we'll be able to draw lines on where the effective capacity is.
Sure. Okay. While we're on exceeding capacity design, let's go over to Houndé. It's running at four. Well and truly above that, I guess. That's well above the initial nameplate. With the guidance of, obviously, 250,000 ounces a year, that's what you want to try and achieve. Are you looking at moderating grade on that, or are you looking at a combination of invested capital or look at plant expansions to achieve that sort of 10-year objective?
One of the things with Houndé is we can get the 4 million tons when we've got a nice blend of oxide and hard rock. At times, the profile will change, and we'll just have hard rock. When we're in hard, we're down at the 3.6 range. The 4's not a given over the life of mine profile.
Yeah. Obviously, if we continue to discover high-grade deposits like Kari Pump, which are mainly oxide, then it helps to improve the blend, both in terms of throughput and in terms of average grade. This is where we're expecting to maintain this type of profile over the next 10 years.
Right. Okay. In terms of maybe adding to a question earlier, as you've shown, in terms of trying to rotate around assets or organic growth and allocation of capital within your portfolio. Obviously, you've got some assets that are at the start of their lives or rejuvenated, and others that are nearing the number of years at the end of their mine life are decreasing there. Just thinking about how you go about looking at those assets with fewer years on their lives. We've got a few assets there in the portfolio. What you do with those, sell those or close them up? Just trying to get an idea of asset allocation within that portfolio.
I think that's the beauty of mining. It's a never-ending story. You need to move from one asset to the next one. We always said that we have no emotions and string attached to any assets. What we want is those assets to generate the level of cash and returns that we expect. If at some point they're not generating those returns, then it's probably that they are not assets for us to be owned. We've demonstrated over the last three years that ability to sell non-core assets and either acquire, build new assets. The pleasing thing is to see that our exploration strategy to prepare for the next project is getting traction with now in the portfolio, two optionalities that we're building with Kalana and Fetekro. This gives us confidence that there is still ways to continue to improve and maintain a quality portfolio for Endeavour going forward.
Again, looking at the mine life of Karma and Agbaou. When you look at the Agbaou performance in particular this year, we're very happy to have this asset and very happy with the team over there. If at some point someone shows up with the right price, we have a disciplined approach to capital employed. We'll just look as long as it's the right thing for the company.
Okay. Well said. Maybe just some housekeeping, last question on Ity there. In terms of looking at 2020, what are you thinking the balance of feed is looking to be there? Feed supply?
Sorry, you're meaning for Agbaou?
No, for Ity. What sources there, just to try and get an idea of where the blends are coming from?
Daapleu is a fairly main contributor to Ity over its life of mine. Bakatouo is going to be there. Ity Flat will have some contribution, then there will be some contribution from low-grade stockpiles.
Okay, great. I'll follow on from that a little bit later. Okay, thank you very much for the time.
Thanks, Jordi. Just to avoid receiving 25 phone calls about whether we are sellers of Agbaou, the answer is no. Today, we're not sellers of Agbaou, in particular, as we see a natural extension for Agbaou with this Fetekro new projects where there might be a lot of synergies between the end of Agbaou later on and the beginning of Fetekro.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. The next question comes from the line of Mark Bentley from ShareSoc. Please go ahead.
Good afternoon, gentlemen. Thanks once again for an excellent quarter. Just one quick question relating to slide 15 of the presentation. You mention in there Guinea Greenfield exploration. I don't recollect licenses that you have in Guinea. Could you clarify that, please?
Sure. Yes, we did announce last year, taking some licenses, about four licenses in Guinea. That's in the Siguiri area, not far from the Anglo asset in that region. Last year was more a theoretical analysis on the ground and the prospectivity of this area, which I think Patrick and the team are quite excited about. Therefore, they are this year starting some preliminary drillings.
Thanks very much. That was all from me.
Thank you, Mark.
Thank you. The next question comes from the line of Justin Tenston, Numis Securities. Please go ahead.
Hi. Just for the aggregators out there, it's Numis Securities. Anyway, thanks for taking my follow-up. Just one, it's been sort of a theme this year, especially in the security situation, especially in Burkina, continuing headlines there. Are you noticing any sort of increased difficulties in the operating environment? I know that you've got very good protocols in country and people aren't generally on the roads from your company. I was just wondering from a directionality perspective and from a difficulty or ease of operating perspective, is there any trend that we should be aware of? Anything you can share on that?
Well, thanks for the question. Obviously, it's something that we are monitoring, I would say nearly on a daily basis for the team here and on the security side. We haven't seen any to date, whether at Karma or at Houndé, any implications of those security issues in our ways to operate. At least nothing has changed or affected because of security, our ways to operate at both Karma and Houndé. On a regular basis, we do reassess, and in particular, we increase from time to time, the security protocols around some of our mines, and in particular, Karma, which is in the north part of the country. So far we haven't been in a position where we had to take radical decisions.
We still feel, and I do feel, taking that responsibility that our employees are operating in safe area, and that we have the right protocol in place to maintain those operations.
Okay, thanks. Just for maybe a bit of color on that. Has there been a ramp-up in government involvement in some of the outlying areas? Is that responsible for the increase in incidents? I guess, is there any more you can share on that?
Well, I think that what is evident is that there has been an increased level of attacks, in particular in the north and the east part of Burkina. Overall, if you look and take a step back on the region, you see that there has been some movements from north of Mali to south of Mali at the border of the three countries, Mali, Niger, and Burkina Faso. What we see also is an increasing presence, which probably explains those different attacks, increasing presence from the G5 Sahel. The five countries from the Sahel, which are putting joint forces to tackle the subject, and also increased forces from both the U.S. and France.
Okay, thanks. That's very helpful. Thanks very much.
Thank you. There are no further questions at the moment, so please go ahead.
Great. Well, thank you very much, operator. Thank you, ladies and gentlemen, again for attending this quarterly results. I'll meet you again for our next year-end results. Thank you very much, and have a good day.
Thank you so much. That does conclude our conference for today. Thank you for participating. You may all disconnect.