Greetings, and welcome to the Endeavour Mining Second Quarter 2019 Webcast. 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 and Zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Sébastien de Montessus, CEO of Endeavour Mining plc. Thank you. Mr. de Montessus, you may begin.
Thank you, operator. Good morning and afternoon all. Thank you for joining our Q2 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. Before we kick off, I would encourage you to note the disclaimer and notice about forward-looking statements here. We are following the usual format today, and here with me are Vincent and Patrick, as well as Mark Morcombe, our new COO, and Louis Irvine, our new CFO. I'm delighted to welcome them both to their first Endeavour Mining results call. As you know, Mark joined Endeavour a few months ago as COO, and since then he has been very busy and has spent a lot of time at our various sites.
Vincent will walk you through the financial and answers your questions today before he hands over the CFO role to Louis later today. Before we begin, I'd like to thank Vincent on behalf of Endeavour Mining and its board for his dedication and contribution to the company since 2016, and I wish him every success in his new role at La Mancha with, as most of you know, is our main shareholder. Before diving into the results, I'd like to say that the team is very proud of what we have achieved so far. We have now completed the first part of our strategy, which was based on portfolio turnaround and asset construction.
We were very much in a startup mode, now that we have completed our Ity CIL build, our focus has shifted to the next stage of our journey, which put simply is to generate cash and demonstrate strong shareholder returns. Given the high quality of our portfolio and the exciting future this brings, we have been also able to attract experienced executives and key managers with a strong focus on operating and financial efficiency, which provides me great comfort in our ability to deliver our strategy. Let's now begin the formal part of the presentation by turning to slide four. We have successfully delivered across all four strategic pillars during this half year period, we remain on track to meet our 2019 guidance for both group production and costs. Project development remains central to our strategy continue to be the main catalyst during the half year period.
Most importantly, commercial production at Ity CIL began ahead of schedule with strong operating results in Q2 and 58,000 ounces produced at the very low all-in sustaining cost of $585 per ounce. Additionally, we continue to work on increasing the Ity CIL plant capacity by 1 million ton to 5 million ton by Q4. Our exploration program has been successful so far this year and remains one of our key priorities for the rest of the year, with over 307,000 meters drilled across the group in H1. This year is an exciting one for us on the exploration front as we see our efforts over the past three years translate into mine life extensions with reserve additions, particularly at our flagships Ity and Houndé. Finally, our balance sheet remains strong with financing and liquidity sources of $198 million at the end of Q2 and minimal capital requirement outstanding.
Turning to the next slide, you can see that as I just mentioned, we are on track to meet our 2019 guidance. We have experienced no lost time injuries this year, allowing us to maintain our position as one of the safest operators in the industry. Moving to group production, we remain on target to meet our full year guidance as we begin to benefit from production at Ity CIL in H2, as well as higher grades across the rest of our mines. The same is true for our cost. At Ity CIL, we continue delivering low-cost answers, which we will benefit from fully in H2. Safety remains the top priority, and we continue to reinforce our strong safety record in H1, which remains well below the industry average. We are particularly proud that Q2 saw a group loss frequency rate of zero.
On top of this, we experienced 600 days without any LTI on Houndé, Ity, Agbaou, Karma and all our projects. Turning to the next slide, I'd like to showcase our increasing efforts to grow local talent. In line with this strategy, we have steadily increased locally sourced employees across our workforce, as shown in the pie charts. Our key focus, however, remains the promotion of locals to head of department and general manager position. As such, I'm pleased to announce we recently promoted the group's second West African general manager, Kassoum Ouattara. Now both at Agbaou and Ity have West African general managers, and I'm very proud of that. Turning now to a highlight of 2019 so far, the Ity CIL project. It was completed four months ahead of schedule, $10 million below budget, and with zero LTI in the 8.5 million man-hours worked.
The plant is now operating at full nameplate capacity. Most importantly, the operation is running well, achieving all-in sustaining cost below $600 per ounce and an annualized run rate of roughly 250,000 ounces. We are now in a good position to say that we have de-risked Ity startup, our number one priority of 2019. Looking ahead, there is a lot to be excited about as the plant upsize to 5 million tons per annum is completed in the first quarter, and exploration success continues to add significant high-grade ounces. Turning to the next page, we see our quarter-on-quarter production and all-in sustaining cost variation. The gray shaded area relates to the Ity heap leach operation, which ceased in the fourth quarter. Overall, in Q2 2019, production increased by 50,000 ounces, nearing our record production level of Q4 2018 as a result of Ity CIL commissioning.
Production cost decreased alongside this by $87 an ounce to $790 an ounce overall. We look forward to a stronger second half of the year as we continue to benefit from production at Ity CIL, and also higher grades at Houndé as we will be processing the Bouéré deposits. Moving to the next slide, we see the resulting impact on our all-in sustaining margin, which is up 87% over Q1, as shown in the top graph, while the all-in sustaining margin increased by 109%, as shown in the bottom graph. We are close to our record highs and believe we should break our record in the second half of the year. On slide 11, we see that exploration continued to be our top focus, and rightly so, as we continue to see strong exploration success across the group.
Importantly, we are on track to achieving our five-year discovery target of 10-15 million ounces at a cost of below $15 per ounce. For the first half of the year, the efforts have been huge, with over 300,000 meters drilled across the group, mainly on our flagships, Ity and Houndé. You will note that we have already spent nearly 80% of the full-year budget. This was expected, as we normally drill intensively during the first six months of the year, prior to the rainy season. It also places us in a good position to continue the drilling in H2 and make the required analysis to publish maiden resources and reserves. In the third section of this presentation, Patrick will go into more depth on the exploration activities by mine. Before he does, I'd like to explain what all this exploration success means for us.
Turning to the next slide, we look at the current mine plans as per the last published studies and the exploration success, which is expected to ultimately result in mine life extension. To make it simple, our goal with exploration is for both our flagship assets to have at least 10 years of production. By this, I mean robust, flat production, not low tail-end production. We want 10 years of at least 250,000 ounces per year at both assets. I'm pleased to say that following the exploration results published over the past few weeks, we are very confident in our ability to achieve this. Let's take a closer look at the charts quickly. Starting with Ity in the top right, in white, you can see the feasibility study production profile, which is based on 4 million tons per annum, while we are upsizing to 5 million tons per annum.
In gray are the ounces required to lock in 10 years of flat production at 250,000. This shaded area represents half a million ounces of reserves. Now, looking at the first column on the table to the right, you see that we have already discovered half a million ounces of indicated resources with Le Plaque, and we expect this area to continue to grow. This is why I'm confident we can achieve the targeted mine plan at Ity and lock in at least 10 years of flat production at 250,000 ounce per year before year-end. It's the same at Houndé. The gray area shows that we need at least 1.1 million ounces of additional reserves. While this number seems high, exploration success has already converted 720,000 ounces with the Kari Pump discovery, as shown in the third column of the table.
With a maiden resource and reserve expected to be published for the new Kari West and Kari Center discoveries, I'm equally highly confident that we can achieve the targeted mine plan at Houndé before year-end. To top it all, the low discovery costs are below $15 an ounce, and both discovery are of much better grades compared to the reserve grade. I think it's a good use of our capital allocation to continue to invest in our exploration ground. I must therefore congratulate Patrick and the entire exploration team. They have done a tremendous job so far, helping us provide a strong future for the company. As we've seen on this next slide, as a result of our exploration efforts, we have generated strong organic growth opportunities. For example, next year the group will benefit from a full-year production at Ity and its plant upsize.
At the same time, both Ity and Houndé are expected to see the newly discovered higher-grade deposits commissioned. This represents a very low capital-intensive growth opportunity, as this new deposit are at least a gram per ton higher in grade than the current reserves. Exploration has also generated optionality on projects. While 18 months ago, we only had Kalana as an option, today Kalana is competing against other organic growth opportunities, which we will consider pursuing once we de-leverage our balance sheets. In addition, our organic growth pipeline now includes Fetekro, a greenfield discovery made in Côte d'Ivoire last year. We expect Fetekro to quickly grow to over a million ounce over the next weeks at good grades, and the option to further optimizing our flagship assets based on continued exploration success.
Overall, we are happy to have generated such strong optionality within the portfolio, and it supports our belief that one of the most effective and efficient means of adding production ounces is through the drill bit. I will now turn over to Vincent, who will take us through the financial summary. Vincent?
Yes. Thank you, Sébastien, good morning, good afternoon to all. I would like to start by taking a closer look at our production metrics. Production increased in Q2 roughly 40% from Q1, following the successful commissioning of Ity CIL. Production from continuing operation decreased only slightly by 2%, mainly due to Ity leach operations ending in Q4 2018, and our decision to use lower grade stockpile at Houndé and Karma in addition. In addition, we need to keep in mind that Houndé had very low all-in sustaining cost and high production in H1 2018, as it was running on main high-grade oxide ore. On page 16, I will walk you through the main line items from revenue to all-in margin. Overall, the all-in margin decreased due to lower gold sale, increased production cost, higher sustaining cost, and higher non-sustaining exploration.
Looking into some of the details, at point one, you can see that the sale decreased. It is mainly due to the transition period in Q1 2019 between the Ity CIL and the heap leach, combined with declines across the other mines, mainly due to the use of low-grade stockpile, as well as the strong Houndé performance in H1 last year. On point number two, the realized gold price includes the impact of the Karma stream. The realized gold price excluding the gold stream was $1,311 per ounce for H1 2019 and $1,316 per ounce for H1 2018. On point number three, the sustaining CapEx was higher, again due to an increase at both Agbaou and Houndé. It was also partially offset by a decrease at Ity. On point number four, the non-sustaining capital increased mainly due to an increase at Houndé for Bouéré pre-strip and Karma for the pre-stripping activities.
Finally, on point 5, the non-sustaining exploration remained high due to our strong exploration focus. As Sébastien mentioned, exploration expenditure is higher weighted in the first half of the year. Page 17. Here, you can see the company's cash flow over the H1 2019 period compared to the same period last year, starting from the $16 million all-in margin we just discussed. Focusing on a few key points, Q2 2019 expands a positive working capital of $6 million, thereby reducing the overall working capital outflow to $20 million. We have inserted the main components on the slide for reference, and we expect in H2 working capital to be an inflow again.
Moving to the second point, tax paid increased mainly due to Houndé, as the amount paid in Q2 2019 was for the full year 2018, whereas the amount paid for Q2 2018 was only for two months of 2017 production as commercial production began 1st November 2017. We look at paying those taxes in quarterly installments in the future to avoid one-off payments. It was difficult to set up quarterly installments before we have a full year of production at Houndé. On point number three, you will see that the increase is mainly attributed to the increased level of group debt and leasing pertaining to a change in accounting standards. Point four shows how the gross project capital was comprised, mainly of $79 million for the Ity CIL project and $7 million for Kalana.
Finally, on point five, we drew down on the SCF over the half year period to fund the Ity CIL project. Moving on the change in cash based on more traditional cash flow metrics, you can see that we started the year with $124 million of cash, to which operating activities have added another $85 million for H1 2019. Since the beginning of the year, we have invested $178 million into the business for growth projects and sustaining and non-sustaining expenditures. These activities were bridged by an inflow of financing activities, with notably the drawdown of the SCF, which was partially offset by interest payments and finance lease obligation repayments. On the next slide, you will see that our net debt has increased by $25 million from its Q1 level to $660 million, and this is after investing $69 million in the business.
Our pure net debt to adjusted EBITDA ratio stands at 2.75 times based on the trailing last 12 months adjusted EBITDA. It is 1.76 times based on analyzing Q2 2019, which, due to the recent addition of Ity, may be considered as a more relevant metric. We expect net debt level to quickly decline over the rest of the year as we begin to benefit from increased cash flow from Ity and are targeting to be at a net debt to adjusted EBITDA ratio below 1.5 times by year-end, assuming still a $1,250 per ounce gold price. It is worth noting that by prudently using and managing debt to grow the business, we have protected the equity and avoided significant dilution while achieving meaningful organic growth, as seen with the chart on the right.
The main dilution of 2% relates to the purchase of 5% interest in the Ity mine. On slide 20, the company's liquidity remains strong, and we are in a healthy financial position with available funding of $198 million. To be prudent, early in the quarter, we increased our total commitment capacity on the RCF by $80 million to $430 million, to provide increased financial flexibility. We don't, however, expect to draw more on it, as we now expect to generate a healthy cash flow and significant decrease of the debt in the second part of the year. Page 21. On this slide, you will see our revenue protection program. As you know, we have used short-term collar strategies to protect our cash flow generation during our construction phase. We believe this is a sound business practice with a minimal cost to mitigate the risk.
The collar put in place during the Houndé construction cost us $8.5 million, while the one used for the Ity collar represented a net gain of $5.1 million. Our priority is to reimburse the debt in the short term, we entered into another short-term program starting July 1st and ending June 2020 to maximize cash flow certainty. The program covers 360,000 ounces, which represent less than half of our expected production. The floor is $1,368 per ounce, the ceiling is $1,500 per ounce. Once the programs end, we will return to a position where our gold production is fully exposed to spot gold prices. Next slide. On this slide, it gives you the net earnings breakdown. A few points to note on the slide are the loss of financial instrument on point one.
This includes a $12 million loss on the gold revenue protection program, of which 9.4 relates to the new collar as a premium is expensed up front. On point two, the increase is mainly due to the no longer capitalizing the finance cost in Q2 2019 as construction on the Ity CIL project has been completed. As you see here, the adjusted net earnings per share for H1 amounted to $0.03, with the adjustment relating mainly to non-cash and other adjustments, other expense deferred tax recovery, stock-based expenses, and loss on financial instruments. Before I hand back to Sébastien and Mark to run you through the operations, I would like to take this moment to thank the Endeavour Management team for the shared experience in 2016 and during our turnaround of the company.
As you can see from the result, Endeavour is in a very strong position to generate a lot of cash in the near future, and I'm very proud to have participated in this success. I wish a lot of success as well to my successor, Louis Irvine . I want also to thank each of you for the support and for the quality of the relation we had, and I hope to meet you again in my new role. I will, of course, continue to be watching from close as I move to La Mancha, which is, of course, a strong long-term supporter of Endeavour. Thank you, and I hand over to Sébastien.
Thank you very much, Vincent, both for the financial review and your kind words. I would now like to hand over to Mark Morcombe, our new CEO, who will take us through our individual mine operations and the main takeaways. Mark?
Thanks very much, Sébastien. It's been a very busy three months, during which time I've been to each mine at least twice, and to Ity four times, given that it is ramping up operations. I've thoroughly enjoyed my time thus far and have spent quality time with many of our key staff in the corporate and regional offices and at each of our operations. Going through three-month end reviews and the half-yearly results and forecast processes has given me opportunity to understand our businesses better, including risks and opportunities. My first impressions count, and the high quality of the construction at each of the operations that the Endeavour team built from scratch is immediately evident. Equally as impressive is the high level of dedication and enthusiasm in our workforce at every level of the organization.
Our safety record is excellent. We will continue to improve our safety and training systems and managerial and supervisory approaches to ensure that we never become complacent. We have some amazing assets and growth projects. I look forward to understanding how we can best develop these to their true potential. Starting with Houndé. The Houndé operation is very well laid out. The processing plant is probably the neatest I have seen, which is a credit to the team given that it is running at 1 million tons per annum above nameplate. The owner mining operations are performing well, and the team are improving equipment productivities in the fresh rock through improved drill and blast practices. The establishment of mining activities and ramp-up of production at Bouéré has been smooth.
Production increased this quarter compared to the last due to the planned higher average grades milled on account of both increased high-grade contribution from the Vindaloo North pit and increased total ore mined, requiring a lower contribution from stockpiles. Mining was accelerated in the small high-grade Vindaloo North pit in order to complete this ahead of the wet season. Pre-stripping of the Bouéré pit commenced in March and remained steady through quarter two, with some high-grade ore mined and stockpiled. The newly constructed haul road traverses through the new Kari project area, and both haulage and processing of the Bouéré ore commenced in early quarter three.
The all-in sustaining cost increased mainly due to the planned higher capitalized waste stripping and the TSF wall raise, coupled with increased drill and blast activity in the Vindaloo pits and higher processing costs due to increased fresh rock, which impacts on both reagent usage and electrical consumption. Looking ahead, we expect strong production in the second half of the year as the mine benefits from high-grade ore from the Bouéré deposit, which began processing in early quarter 3. Now I'll hand over to Patrick to talk about the exciting Houndé exploration.
Thank you, Mark. Hi, everybody. Turning now to focus on our exploration effort at Houndé. After publishing Kari Pump 1 million ounces maiden indicated resource late last year, we were indeed very pleased to publish the maiden reserve in June. This reserve increase demonstrated the value creation done through exploration. We are very proud of the stats placed on this slide. Firstly, in term of efficiency, over 98% of the maiden resource were in the indicated category. As some of you know, I don't really care about much for inferred resource at that stage. Based on a $1,250 per ounce gold price, we converted 89% of the indicated resource to reserve. The reserve grade is overall 50% better than the current Vindaloo grade. Half is oxide versus only 10% for Vindaloo. We are very proud of our discovery cost, which is very low.
We are only talking about $13.50 per ounce of reserve, which is, in our view, really outstanding. Lastly, while the strip ratio is higher, the grade largely makes up for it, as its production costs are expected to be $700 per ounce are implied by our exploration strategic plan. The long year environmental study on Kari Pump should be finished later this year, and an application for a mining license is scheduled to be submitted later in 2019, with the goal of initiating mining activity as quick as possible in late 2020 or early 2021. On the next slide, following our last year's success, Houndé remains this year the largest exploration focus for us, with a tentative 195,000 meter to be drilled in 2019. We expect to see further exploration success in the Kari area.
Indeed, since the beginning of the year, mineralization has been significantly extended at all the three discovery made in this Kari area. Kari Pump, near surface mineralization has been extended some 700 meters to the northeast and 900 meters towards Kari West. We still need to expand and to infill drilling this area in the next coming months. Kari Center was significantly extended and is now composed of two mineralized zone, and the southern new one exceed two kilometer long. We are excited to start delineation later on this year and to prolongate that next year. Looking ahead, we target at least 90,000 meter additional drilling to be performed. The drilling is going on with the aim of delineating a maiden resource and reserve for the Kari West and Kari Center discovery in Q4 2019. Mark, back to you.
Turning to our Agbaou mine and to prove that miners do have a soft side, when you drive into Agbaou, you just get a good feeling. The mine is set in a very picturesque location, and being longer established, the vegetation has recovered well where there is no activity. It's a very special mine with a dedicated team who are really working well together and with the local community and broader stakeholders. This is evident in the fact that there's no fence around the property. There is a great working relationship with all contractors, which is a big contributor to their consistent good results over the last few years. Production increased from quarter one due to the planned increase in average grades milled, which helped offset the lower mill throughput.
This was due to substantially more higher-grade ore being mined from the west pits as new ore blocks were accessed. The all-in sustaining cost also increased, though it remained below the guided range, mainly due to an increase in drill and blast costs and the impact on reagents and electricity consumption as more fresh rock was mined and milled. The TSF wall raise was also commenced in the period. Looking ahead, we expect to increase the hard ore blend and expect all-in sustaining costs to increase with the completion of the TSF wall raise and associated changes to parking and pumping. Moving now to Ity. It was an outstanding achievement by the projects and operations team to balance the heap leach production in parallel with the construction of the new CIL and associated infrastructure, both of which are in and around the same footprint.
I attended the official opening of the CIL just two days after starting with Endeavour, and over that and three subsequent visits, I've seen the operation start to settle down into a good operating rhythm. They've quickly overcome a number of small commissioning challenges whilst consistently improving throughput and reagent consumption as they come to terms with the various ore blends. The team have utilized smaller articulated dump trucks in a number of the shallow oxide pits during the start of the wet season and until it is possible to transition to the rigid body trucks. The Daapleu pit, which is the main deposit for Ity, is opening up nicely, and mining of the old Aries heap leach has been a priority in order to establish a larger ROM pad per the project design.
Credit goes to the team for transitioning a large number of the former heap leach personnel into this new operating environment while maintaining good safety performance. Looking at the CapEx spend, the main takeaway is that the plant has been built for $402 million, as shown on the top right graph. This means that the CapEx amount incurred for the year is $54 million, which matches closely with the guided number. The remaining spend of $10 million-$15 million is for the planned upgrade, which is well underway and planned for completion during the fourth quarter. The ramp-up phase was very quick as the plant achieved nameplate throughput in less than one month. Now for the first time, looking at the Ity CIL on the operational front. The team achieved a very good first quarter of production where mill availability, throughput, and recovery rates were better than planned.
Unit costs are within 10% of the study estimates and are expected to come down over the remainder of the year. Processing costs were higher due to increased reagent consumption to maintain higher recovery rates for some ore sources containing high cyanide soluble copper. This has decreased as the blend has stabilized. Mining costs were higher due to the requirement to run articulated dump trucks in two of the pits as we mined through oxides during the rainy season, as already mentioned. This is expected to improve as we access the fresh ore and as we establish boreholes and improve water management around the wider pit perimeters. Our processing rates will increase over the remainder of the year as the various tie-ins are completed with the upgrade project, enabling us to achieve the top half of our guidance production.
I will hand over to Patrick to talk about the progress with exploration.
Thanks, Mark. As you know, exploration efforts at Ity have also been very strong and will continue to be strong with the Le Plaque maiden indicated resource increasing from 85,000 ounces to 476,000 ounces at a quite high grade. After intensive drilling, the Le Plaque deposit is now composed of 3 main zones, all of which are open at depths and in multiple directions. We do believe Le Plaque is a high-quality deposit, and you may find additional detail in the recent press release we published about it. Furthermore, the drilling encountered a number of very high-grade intercepts of 10 gram per tonne over at least 5-10 meters, including, for us, a company-wide record intercept of 11.7 meters at 106 gram per tonne, including two meters at 620 gram per tonne.
The drilling campaign at Le Plaque is going on with at least 20,000 meters planned for the rest of the year, where the aim is to delineate further resource and reach reserve status by year-end. Now turning back to Mark.
Looking at Karma. As you all know, the initial Karma project was not built by the Endeavour team, but they've completed numerous improvement projects which are evident. The stacker and agglomerator upgrades are well underway and are due to be completed in stages in quarter four 2019 and quarter one 2020 respectively, which is expected to increase stacking capacity. The owner mining team are achieving very good productivities and high quality of mining. The processing team are working well to improve throughput and to reduce reagent consumption and unit costs. Production decreased slightly despite higher stacking grades and better recovery rate due to temporary buildup of gold in circuit ounces due to an issue with the elution column, which is being addressed. The previous quarter also benefited from the release of gold in circuit ounces. Otherwise, all key indicators were up with better grades and recovery rates.
Mining of the Kao Main pit was largely completed in the quarter ahead of the wet season, mining of the Kao North pit has progressed steadily. This pit will be the mainstay of production for the remainder of the year, we expect to see production increase with increased mining and stacking grades. Over to Patrick now.
Let us take a closer look at our Kalana project in Mali, where we have been focusing on increasing the resource base for the project. To date, in 2019, a total of 20,500 meters was drilled on nearby target, we're just receiving the first result, and most results are still pending. Further exploration is underway here with a goal of delineating additional satellite deposit and updating the feasibility study to give the project the required scale to fit Endeavour investment criteria. Once complete, the Kalana Project investment case will be reviewed against other internal growth opportunity and compete with them for capital. Turning to slide 33, about our greenfield Fetekro property in Côte d'Ivoire. We have been very active on this property since announcing the discovery last year and some initial resource number also at the end of last year.
Actually, this year, we plan to spend a $5 million exploration campaign totaling 43,000 meters in 2019, with the aim of delineating additional indicated resource at the Lafigué deposit and also to test other nearby targets. To date, a total of over 37,000 meters was drilled over the Le Plaque deposit and the close vicinity in the first half of the year. As said by Sébastien, we expect an update resource to be published in Q3. Indeed, we are very excited with this discovery as it fits the objective we set as part of our exploration strategy defined late in 2016. The first was to extend mine life to over 10 years, and Sébastien commented on that. The second one for us was to bring to the company a new project to develop through exploration.
Fetekro is on a good way to it, and I look forward to advance this project also. I now hand back the work to Sébastien, who will wrap up the presentation.
Thank you, Mark and Patrick. To sum up where we expect to be at year-end, we are on track to meet our production, cost, and safety guidance. Due to better grades at Houndé and the Ity CIL startup, we expect a strong second half of the year. Although it is of minimal CapEx, our construction team remains busy with the upsize of Ity, which is expected to be completed in Q4. As mentioned earlier, we are excited about our exploration prospects and look forward to increased resources and reserves at both Ity and Houndé, also increased resources at Fetekro that Patrick just went through. As you have seen in this presentation, we have made significant progress over the past three years, and we are now turning the corner. Our priorities for the next six months are very simple, as shown on the right.
Now that our capital-intensive phase is over, our priorities are to generate strong cash flow, to accelerate de-leveraging, and to increase the reserve mine life at Houndé and Ity to lock in 10-year plus of robust mine life at 250,000 ounce for each of those assets. That's it for our formal remarks, and we would now like to open the floor up to any questions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. As a reminder, if you wish to ask a question, please press * and 1 on your telephone and wait for your name to be announced. Your first question's coming from the line of Ovais Habib from Scotiabank. Please go ahead.
Hi, everyone. Just want to say congratulations on the ramp-up of Ity. Just a couple of questions from me, in regards to how the rainy season has come in in the early part of Q3. Just want to know how that's going to affect Q3 and specifically at Ity. Is that going to hamper any sort of production that you're looking at, specifically mining fresh rock or even getting to the fresh rock?
Thanks, Ovais. Thank you for your question. Martino has a gun on me, he doesn't want me to comment on July. I won't give too much of the headlines on July. Despite, I would say, a normal plus rainy season, we're very happy so far with how all our mines are behaving, in particular Ity, which is still beating every month on all fronts. I think the team, as Mark mentioned, he went there probably four times over the last six weeks or eight weeks, there has been some very good progress. I don't know, Mark, if you want to comment more on the ground, what's happening there.
Yeah, I guess the good thing with Ity is we do have flexibility. We've got three pits and the heap leach, the old heap leach that we're mining, so we can balance our production through that. We actually do have a forecast that's based around that.
Okay. Just in terms of mining-wise, is that going according to your expectations? Is that holding in well?
Oh, definitely. Yeah.
Okay, good to hear. Just moving to Houndé, in terms of Kari West and Kari Pump, obviously, we are expecting reserve updates. Are we also looking at getting some new mine plans there as well in terms of incorporating Kari West and Kari Pump with the Vindaloo by the end of the year? Is this something of a moving target?
No, I think it's clear. We expect, in fact, Kari West and Kari Center indicated resources and reserve by year-end. The objective will be to have beginning of next year in Q1, hopefully technical reports for both Houndé and Ity that will include those new reserves and therefore will bring the new life of mine plan. As I mentioned earlier, the objective is to demonstrate that now those two flagship assets have their 10-year plus 250,000 ounce coming up.
Perfect. Just last one from me, just for Patrick. I missed the part in terms of, Patrick was talking about a little bit more upside coming from additional drilling around the Kari West and Kari Pump. Can Patrick give us a little bit more color on those two aspects, please?
Sure. Patrick?
Okay. Yes, indeed. As you may have seen on the press release we published for the updated status of exploration, we have been extending a little bit to the northeast and northwest Kari Pump deposit. Today is still quite wide drilling, so we need to infill it to understand exactly what could be the extension and the additional resource we could bring to Kari Pump. We have been actually extremely happy with the result we found on Kari West, because according to what we did, we extend significantly the footprint of Kari West compared as it was last year. On top of that, Kari West remain open. We plan to do drill some extension on that. More especially, I'm quite happy with the new extension we found on Kari Center, which we call internally Kari Center South.
This is quite a new area and more or less on the prolongation of Kari Center, but not exactly with the same direction. This is a structural trend that has almost the direction of Vindaloo, so we are quite happy with that. This is quite significant in term of footprint. We are talking about 2 kilometers at least extension of that. Our goal is simply to book as much as possible at the end of the year, resource and new reserve to build a new plan. We are confident that next year we'll be adding also other stuff. On top of that, we plan to start some drilling nearby Vindaloo itself, targeting the Vindaloo Deeps section, where we have been building a new structural model, and we are hoping to have good result there, and also to target the Vindaloo South.
Overall, what we want to do is to achieve the best vision that we can have at the end of the year to better plan what we are going to do in the future as far as the Houndé project is concerned.
That's great.
Ovais, I'll just probably to come back on your earlier question, it's probably fair to say that depending on the reserve announcement that we'll be doing on both Houndé, well, Kari West, Kari Center, Le Plaque, and also updated on Fetekro. The objective will be to have year-end, beginning of next year technical reports on Ity and Houndé outlining the new life of mine plan. The study updated on Kalana, depending on the results at Fetekro, we might be even with a PEA on Fetekro, which will show all the optionalities that we have in our portfolio once the deleveraging is done.
Okay, perfect. Guys, that's it for me. Sébastien, Patrick, Mark, really appreciate your comments.
Thanks, Ovais.
Thank you. Your next question's coming from the line of Michael Stoner from Berenberg. Please go ahead.
Hi, guys. Just to follow on some of the kind of reserve and resource expansion theme. Do you have any kind of notional target on where you would need to get reserves or resources to consider an expansion at Houndé?
Hi, Michael. No, I think it's a bit too early for different reason. Why? I think that on Houndé, first of all, as you probably saw through our comments, we believe that we should be able, by year-end, with the addition of Kari West and Kari Center, to add this three, four, 500,000 ounces of new reserves to get to this 1.1 million ounces of additional reserve required to show a 250,000 ounces of steady mine life at Houndé from year-end. To go above, I think it will depend on the exploration potential that we see beyond Kari West and Kari Center.
Also we've asked Mark, who just joined, to first of all, his sense is that there is still a lot of debottlenecking that can be done easily at both plants, both Ity and Houndé, to increase the capacity on both plants in terms of throughput without any significant CapEx. We need to go through this exercise first, while in parallel, Patrick will continue to grow his number on the exploration side so that we can probably come up with better views, I'll say, in Q1, beginning of next year when we come up with the new technical reports.
Okay, that sounds quite exciting on a potential kind of debottlenecking. Actually, one probably one for Mark. Since you've joined and you've kind of bedded in, do you see any potential for shifts in the strategy around how the operations are run? Or do you think you've inherited a business in obviously quite good shape and growing, but do you see any opportunities to make some tweaks or improvements? Or is it too early to share anything with us?
If you're talking about mining particularly, or just more-
Well, no, kind of mining procurement, kind of ways to maximize synergies between the operations. I mean, it could be kind of anything. Is there much potential for change, or do you think it's all in very good shape?
Look, it's all in pretty good shape, and I think it's more about just tweaking or enhancing the strategy rather than changing it.
Okay. Yeah, no. Understood. Then on the financial side, you've increased the size of the RCF. Given that CapEx is now rolling away free cash flow coming through, is that just because you've got capacity to have a larger facility given Ity being ramped up, and do you just want the financial flexibility, or is there any kind of financial policy or strategy around that otherwise?
I think it's exactly the case, Michael. The objective with our banks are getting more and more confident on our business, in particular with the end of the construction phase at Ity. They were very open in supporting this incremental $80 million, which is not required when you look at our cash flow as it is coming and starting to increase significantly. It's always good to have, so they offered and we took it.
Yeah, no, makes a lot of sense. Is there a kind of an undrawn cost on that facility?
Vincent?
Yes, there is a cost for the undrawn portion of the RCF. It's minimal. It's 0.5%, I guess.
Okay, perfect. Thank you. At Kalana, kind of even long before you guys acquired the asset, there were issues with the elution column.
Is there anything you can do to finally address those issues? It sounded like they recurred a bit this quarter.
You mean Karma, not Kalana you said?
Sorry. Yeah, sorry. Karma, yes.
Yeah. Okay. Mark, you want to comment on the elution column?
Yeah. It's a different column to the CIL one that was there previously. It's the same as what we've got at the other mines. It was just something that was picked up, just in terms of a faulty valve that we hadn't realized the issue that it was causing. We're getting that sorted in the next few months. We should be right. We'll just make sure we've added it to our maintenance practices so that we don't have it reoccurring.
Okay, perfect. I was on the wrong track there. It's no recurrence of previous issues. It's entirely separate, it sounds like.
No, yeah. It's one of the new ones. Again, this is being fixed. The only impact was a short-term impact.
where about 1,500 ounces that we were expecting to produce in Q2 has been deferred. We'll recover that in Q3, Q4.
Okay. All of that should wash through this year?
Yeah. Completely.
Okay, perfect. Then final one from me. You talked about transitioning from that one-off tax payment to quarterly payments. I missed whether you said when that transition might take effect.
It's just that you can discuss with government to do provisional upfront payments, which I think make it smoother in our overall cashflow quarter per quarter. Having this $25 million tax paid one-off on one quarter is not necessarily the best way to manage that. We just want to try, probably starting next year, to engage with the government in order to pay that on a quarterly basis rather than on a one-off in one quarter.
Yeah, makes sense. We're probably looking at that change happening in 2020?
Yeah, exactly.
Yeah. Perfect. Okay. That is all from me. Thank you very much for your time.
Thanks, Michael.
Thank you. Your next question is coming from the line of Justin Chan from Numis Securities. Please go ahead.
Thanks, everyone, very much for being on the call. Congratulations, Vincent, on your new role, and welcome Louis and Mark.
Thank you.
My first question is just in terms of capital allocation and looking forward at your balance sheet and how you plan it. I guess, what, if any, growth projects can you share with us? What are your forecasts in terms of growth CapEx over the next couple of years? Perhaps if you could just give us any color on what you've set aside for Kalana, Fetekro, potential Houndé. Should we just look at it as no growth projects budgeted for now, all cash flow pays down debt and/or could be eligible for a dividend?
Exactly. I think that the latter is the right answer at this stage. I think what we want is to be in a position in 2020, based on thorough analysis on expansion, for example, if any, for Houndé, Fetekro, and also Kalana, to see what is the best in terms of capital allocation and return on capital. Nothing will be planned in terms of growth CapEx for 2020, and we'll keep the options ready depending on where we are in terms of de-leveraging.
Okay. That's quite helpful. I realize it's preliminary as the de-leveraging stage has already begun, I guess what can you share with us in terms of your thoughts on a formal dividend policy and when that might be announced or when that might be clarified to the market?
I think that Q3 and Q4 will start showing the type of level of cash flow that we can expect for this business based on those four assets going forward. I would say that Q1, Q2, being able to clarify our strategy on capital allocation, in particular a potential dividend policy, will be a good timing. Obviously if gold price continues to stay where it is, it's basically going to even accelerate this de-leveraging. We're very pleased with the current environment to be in the position we are today in this current market.
Okay, perfect. Just two more from me. One is at Karma, just an operational question. In the second half, do you expect the gold ounces tied up in the column to wash through, i.e. a catch-up there? Just a question on inflation in West Africa, what you're seeing right now, how does that track versus your budget, and are you seeing higher fuel costs flow through?
Yeah, I think on the column side, as mentioned with Michael just before, there was about 1,500 ounces that were stuck there and that we will see in Q3, Q4. We don't see any further impact from this column issue in H2 and recover those 1,500 ounces. That's one. On the second question, which was Sorry, I just got lost on the second question, Justin.
It was just on, in terms of inflation in West Africa, what are you seeing right now?
Yeah.
How is that tracking?
Well, we haven't seen major inflation so far. To be frank, we are in a good position because, as Mark hinted a bit, we have now a new supply chain group that has been working over the last 12 months on re-tendering all our major suppliers across the group, so that it is a group approach rather than a site approach. Therefore, through that, we've been able to either freeze or decrease the prices that we were getting so far. We haven't seen any significant inflation so far.
Okay. With regards to fuel, are you seeing much of a flow-through in terms of higher fuel prices? Also, how well-protected are you in the case of future increases?
You know that in most of our sites, we connected on the grid. The electricity price is the biggest driver, and the electricity price doesn't vary that much. I think last year we were quite heavily exposed to fuel because of Tabakoto, which was a big fuel consumption on site over there, which we don't have anymore this year. Yeah, I think we have a pretty good control on our electricity cost. On the fuel side, for the mining fleet and for the redundancy of the fuel plant and backup, I think that given that they are quite high regulatories in both Côte d'Ivoire and Burkina Faso, with a big part of taxes, which are, in fact, local taxes, an increase of 10% or 15% of the oil price doesn't get 10%, 15% increase right away in the fuel price in country.
It's much lower because a big part of it is absorbed through the tax, which varies. Otherwise, we don't have any hedging policies currently on oil and fuel.
Okay. Thanks very much. That's very helpful. That's it for me. Congrats on a good quarter.
Thank you, Justin.
Thank you. Your next question's coming from the line of James Bell from RBC. Please go ahead.
Yeah, good afternoon. Thanks for the call. Just one around the portfolio. If we look at the numbers, it looks like you are going to de-lever pretty rapidly, particularly if spot gold persists. When you're at a lower gearing level, lower leverage, does that change your views on the portfolio in terms of assets that may not be sort of core to you? Secondly, I just wondered if you could give us a quick update on your feelings on the security situation in Burkina Faso, particularly around Karma.
Sure. Thank you. Well, on capital allocation, yes, I think it's fair to say that based on what we've been doing over the last three years, we continue to have a very thorough approach to the quality of the portfolio that we have. We've been insisting on the fact that we today have two main flagships, Ity and Houndé, which means that as we go towards better return and also return on capital employed, we might consider divesting at some point other assets which we believe are non-core.
I think what would be fair is to be able to compensate any divestment by bringing a new asset, and we count on the project pipeline that we have to help us get to a point where if we have a better asset in construction in our portfolio, it will help us to probably divest one which is less attractive in the current portfolio. That's something that we will continue to obviously do over the next months and years. On the security side, I think that we are confident so far in the Burkina Faso environment. There have been some significant changes made by the government of Burkina Faso beginning of the year, with the new prime minister, in particular, the new minister of defense who was appointed.
There was a major proactive, I would say, operations led by the Burkinabe Army and government on one side, on the east side, which was mainly during Q1. Since the beginning of Q2, they are having big operations also in the north alongside with the French Army. Our current assessment is, despite the news flow, things are improving in terms of security. More importantly, the Burkina Faso Government tends to have a much better control environment. In order to react, I would say, to those strong push that the Burkinabe Army are making in both the east and the north, you will see from time to time, I would say, spot attacks from terrorist groups elsewhere in the country in order to try to make a diversion from the Burkinabe Army to try to make less pressure on the north and the east.
I think overall, it's really going into the right direction, thanks to the support also of the French and the U.S.
Okay. That's perfect. Thank you.
Thank you. We have no further questions at this time. Sébastien, over to you.
Thank you, operator. Well, thank you all for attending this quarterly results and first half. I'm very excited about the second half now that we have Ity CIL up and running, and I think that you should see over the next few quarters some strong cash flow allowing to demonstrate that the strategy that we've put in place three years ago is now paying off. Thank you very much for attending this call, and looking forward to the next quarter. Thank you very much.
That does conclude our conference for today. Thank you for participating. You may all disconnect.