Greetings, and welcome to the Endeavour Mining Second Quarter 2019 Webcast. At this time, As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Sebastian De Mont Sou, CEO of Endeavour Mining Corporation. Thank you.
Mr. De Montesou, you may begin.
Thank you, operator. Good morning and afternoon all. Thank you for joining our Q2 2019 results presentation. My name is Sebastian De Montesu. 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 Whistairline, our new CFO. I'm delighted to welcome them both to their 1st Endeavour Mining Results Call. As you know, Mark joined Endeavour a few months ago as CEO.
And since then, he has been very busy and a lot of time at our various sites. Additionally, Vincent will walk you through the financial and answers your questions today before he hands over the CFO role to Luis later today. Before we begin, I'd like to thank Vincent on behalf of Endeavour Mine and his 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 1st part of our strategy, which was based on portfolio turnaround and asset construction. We were very much in startup mode, but 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 siding future this brings, we've 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. But let's now begin the formal path of the presentation by turning to Slide 4.
We have successfully delivered across all four are strategic pillars during this half year period. And we remain on track to meet our 2019 guidance for both group production and costs. Project development remains central to our strategy and 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 $5.85 per ounce. Additionally, we continue to work on increasing the Ity CIL plant capacity by 1,000,000 tonne to 5,000,000 tonnes 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 3 years translate into mine life extensions with reserve additions, particularly at our flagships, Ity and Hounde. Finally, our balance sheet remains strong with financing and liquidity sources of $198,000,000 at the end of Q2, and minimal capital requirement outstanding. Turning to the next 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 months. The same is true for our cost as Ity CIL delivering low cost ounces, which we will benefit from fully in H2. Safety remains the top priority and we continue to 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 0. On top of this, we experienced 600 days without any LTI on Hounde, 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 light with this 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 2nd West African General Manager, Casum Watara, 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 4 months ahead of schedule, $10,000,000 below budget and with 0 LTI in the 8,500,000 man hours worked. And the plant is now operating at full nameplate capacity. Most importantly, the operation is running well, achieving all in sustaining costs below $600 per ounce, an annualized run rate of roughly 250,000 ounce. We are now in a good position to say that we have derisk ity startup, our number one priority of 2019. Looking ahead, there is a lot to be excited about as the plant up size to 5,000,000 tonnes per annum is completed in 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 heating heap leach operation, which seized in the fourth quarter. Overall, in Q2 2019, production increased by 50,000 ounce, nearing our record production level of Q4 2018, as a result of Ity CIL commissioning. Production costs decreased alongside this by $87 an ounce to $7.90 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 Hounde as we will be processing the Bouere 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 sorry, exploration continued to be our top focus and rightly so as we continue to see strong exploration success across the group, And importantly, we are on track to achieving our 5 year Discover target of 10,000,000 dollars, $15,000,000 at a cost of below $15 per ounce. For the first half of the year, the assets have been huge with over 300,000 meters drilled across the group, mainly on our flagship city and Hounde. 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 1st 6 months of the year, higher 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 reserve. In the third section of this presentation, Patrick will go into more depths on the exploration activities by mine before it does, I'd like to explain what all this exploration success means for us. So 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 flagships assets to have at least 10 years of production. By this, I mean, robust flat production, not low tail and production. We won 10 years of at least 250,000 ounce 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 4,000,000 tonne per annum, while we are upsizing to 5,000,000 tonne per annum in gray are the answers required to lock in 10 years of flat production At $250,000, this shaded area represents 500,000 ounces of reserves. Now looking at the first column table to the right, you see that we have already discovered 500,000 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 homes per year before year end. It's the same at Hounde.
The gray area shows that we need at least 1,100,000 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 the maiden resource and reserve expected to be published for the new Carri West and Carri Center discoveries, I'm equally highly confident that we can achieve the targeted mine plan at Hounde before year end. And to top it all, the low discovery costs are below $15 an ounce, And both discovery are of much better grades compared to the risk of grade. So 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.
Opportunities. For example, next year, the group will benefit from a full year production at Ity and its plant up size. At the same time, both Ity and Hounde had expected our 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 calendar as an option.
Today, calendar is competing against other organic growth opportunities, which we will consider pursuing once we deleverage our balance sheets. In addition, our organic growth pipeline now includes Fetekro, a greenfield discovery made Cote d'ivoire last year. We expect Fetekro to quickly grow to over a media launch over the next weeks at good rates and we, 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, Sebastian, and 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 breach operations.
Ending in Q4 'eighteen. And our decision to use lower grade Stock pallets in the end Java in addition In addition, we need to keep in mind that Hounde had very low all in sustaining cost and high production in H1s18. 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 growth sell, increased production costs, higher sustaining costs and higher non sustaining exploration.
Looking into some of the details, at 0.1, you can see that the sale decreased. It is mainly due to the transition period in Q1 twenty nineteen 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 Hounde performance in H1 last year. On point number 2, the realized gold price include the impact of the Karma stream. The realized gold price including the gold stream was $13.11 per ounce for H1 2019 and $13.16 per ounce for H1 2018. On point number 3, the sustaining CapEx was higher, again, due to an increase of both Hounde at both Hackbaou and Hounde.
Also, it was also partially offset by a decrease at Ity. On Monday before, The non sustaining capital increase mainly due to an increase at Hounde for Guaray Presti and Karma for the prescripting activities. Finally, on point 5, the non sustaining exploration remained high due to our strong exploration focus. As Sebastian 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 $16,000,000 all in margin we just guess.
Focusing on few key points, Q2 twenty nineteen expense a positive working capital of 6 $1,000,000, thereby reducing the overall working capital outflow to $20,000,000. 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 increase mainly due to Hounde as the amount paid in Q2 twenty nineteen was for the full year 2018 whereas the amount paid for Q2 twenty eighteen was only for 2 months of 2017 production as commercial production began 1st November 2017.
We look at paying those quarterly installment before we have the full year of production at Hounde. On point number 3, you will see that the increase is mainly attributed to the increased level of group debt and leasing pertaining to a change in accordion in accounting standards. On 4 shows how the gross project capital was comprised, mainly of $79,000,000 for the Ity CIL project and $7,000,000 for Karuna. Finally, on 0.5, we drew down on the RCF over the half year period to form 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 $124,000,000 of cash to which operating activities have added another $85,000,000 for H1 2019. Since the beginning of the year, we have invested EUR 178,000,000 into the business for growth projects and sustaining and unsustaining expenditures. These activities were bridged by an inflow of financing activities with notably the drawdown of the RCF, 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 1,000,000 from its Q1 level to EUR 660,000,000. And this is after investing EUR 69,000,000 in the business.
Our current net debt to adjusted EBITDA ratio stands at 2.75 times based on the trailing last 12 month adjusted EBITDA. However, it is 1.76 times based on annualizing Q2 2019 which due to the recent addition of it may be considered as more relevant metrics. 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 net debt to adjusted EBITDA ratio below 1.5 times by year end, assuming still a $12.50 per ounce gold price. It is worth noting that by prudently using and managing that to grow the business, we are 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 number 20, the company's liquidity remains strong and we are in a healthy financial position. We have with available funding of EUR 198,000,000. We present early in the quarter. We increased our total commitment capacity on the by EUR 80,000,000 to EUR 430,000,000, a healthy 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 copper put in place during the Hounde construction cost us $8,500,000, while the one used for the ity collar represented a net gain of $5,100,000. As our priority is to reimburse the debt in the short term, we entered into another short term program starting July 1 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 $13.58 per ounce, and the ceiling is $1500 per ounce. Once the program ends, we will return to a position where our gold production is fully exposed to spot gold prices. Next slide. Finally, on this slide, it gives you the net earnings breakdown. A few point to note on the slide are the loss of financial instruments on point 1.
This includes a $12,000,000 loss on the God revenue production program, of which 9.4 relates to the new collar as a premium is expensed upfront. And 0.2. The increase is mainly due to the no longer capitalized capitalizing the finance costs in Q2 twenty nineteen. As construction on the Ity CIL project has been completed. As you see here, the adjusted net earnings per share for H1 amounted to $3 with the adjustment relating mainly to noncash and other adjustments, other expense differ income tax recovery stock based expenses and loss on financial instruments.
Before I hand back to Sebastian and Mark, to run you through the operations. I would like to take this moment to thank the end of our management team for the shared experience in 2016 and during our turnaround of the company. As you can see from the result, Endoval is in a very strong position to generate a lot of cash in the near future, I'm very proud to have participated in this success. I wish a lot of success as well to my successor with our line. I want also to thank each of you for the support and for the quality of the ration that 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 Sebastian.
Thank you very much, Vincent, and both for the financial review and your kind words. I would now like to hand over to Mark Marcon, our new CEO, who will take us through our individual mine operations and the main takeaways. Mark?
Thanks very much Sebastian. It's been a very busy month, 3 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 so 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 3 months 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 the construction at each of the operations that the Endeavor team built from scratch is immediately evident. Equally as impressive, is the high level of dedication and enthusiasm in and 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, and I look forward to understanding how we can best develop to lead to their true potential. So starting with Hounde, the Hounde 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 1,000,000 tons per annum above nameplate.
The owner mining operations are performing well, and the team are improving equipment productivities in the Freshrock through improved drill and blast practices. The establishment of mining activities and ramp up of production at Bore has been smooth. Production increased this quarter compared to the last due to the planned higher average grades milled on account of waste increased high grade contribution the Vindaloo North pit and increased total ore mined, requiring a lower contribution from stockpiles. Mining was accelerated in the school high grade Vindaloo north pit in order to complete this ahead of the wet season. Pre stripping of the Bore pit commenced in March and remained steady through constructed haul road traverses through the new Kari project area and both haulage and processing of the Bora you all commenced in early quarter 3.
The all in sustaining cost increased mainly due to the planned higher capitalized waste stripping and the TSF ore raise. Coupled with increased drill and blast activity in the bins and lupids and higher processing costs due to increased fresh rock, which impacts on both reagent usage 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 Borate deposit which began processing in early quarter 3. And now I'll hand over to Patrick to talk about the exciting Hounde exploration.
Thank you, Mark. Hi, everybody. Turning now to focus on our exploration effort at Hounde. After publishing a Kari Pump, 1,000,000 ounces made in indicated resources late last year. And 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 you some of you know, I don't really care about much of our inferred resources at that stage. Then based on a 12 50 Dollars per ounce gold price, we converted 89 percent of the indicated resource to reserve. The reserve grade is overall 50% better than the current vinyl blue grade and alfisa's oxide, versus only 10% for Vindaloo. We are very proud of our discovery cost, which is very low.
We are only talking about 13.5 dollar per ounce of reserve, which is an in our view, really outstanding. And lastly, while the strip ratio is higher, the great large makes up for it as its production costs are expected to be $700 per ounce are implied by our strategic plan. The long year environmental study on Caripon should be finished later year and an application for a mining license is scheduled to be submitted later in 2019 with a goal of initiating mining activity as quick as possible in late 2020 or early 2021. Following on the next slide, following our last year success, Hounde remains this year the largest exploration focus for us with already, with a tentative 195,000 meter to be drilled in 2019. We expect to see further exploration success in the career area.
Indeed, since the beginning of the year mineralization, has been significantly extended at all. The 3 discovery made in this carrier area. Kari Pump near surface mineralization has been extended some 7 hundred meters to the Northeast and 900 meters to the, to Warkkari West. We still need to expand to infill drilling this area in the next coming months. Cary Center was significantly extended and is now composed of 2 mineralized zone and the southern new one exceed 2 kilometer alone.
And we are excited to start delineation later on this year and to prolongate that next year. Looking ahead, we target at least 9 1000 meter additional drilling to be performed. The drilling is going on with the aim of delineating a maiden resource and reserve for the carry and Cary Center Discovery in Q4 2019. Mark, back to you.
So 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 rest location and being longer established that 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. And 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 result over the last few Production increased from quarter 1 due to the planned increase in average grade 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 all blocks were accessed. The all in sustaining cost also increased though it remained below the guided range, mainly due to an increase in drilling blast costs and the impact on reagents and electricity consumption as more fresh rock was mined and milled. The TSF ore 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 All Reyes and associated changes to parking and pumping.
Moving now to Ity. There was an outstanding achievement by the projects and operations team to balance the heap leach production in parallel with 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 2 days after starting with Endeavor. And over that and 3 subsequent visits, I've seen the operation start to settle down into a good operating rhythm. They quickly overcome a number of small commissioning challenges whilst consistently improving throughput and reagent consumption as they come to terms with the various oil blends.
The team have utilized smaller articulated dump trucks in a number of the shallow oxide pits during body trucks. The DAPler pit, which is the main deposit for Ity, is opening up nicely and mining of the old airy heap leach, has been a priority in order to establish a larger on pad for 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 that the plant has been built for $402,000,000, as shown on the top right graph. This means that the CapEx amount incurred for the year is $54,000,000, which matches closely with the guided number.
The remaining spend of $10,000,000 to $15,000,000 is for the planned upgrade, which is well underway, and plan for completion during the fourth quarter. The ramp up phase was very quick as the plan achieved nameplate throughput in less than 1 month. And now for the first time, looking at the ITCIL on the operational front, where mill availability, throughput and recovery rates were better than planned. Unit costs are within 10% of the study estimates 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 is decreased as the blend has stabilized. Mining costs were higher due to the requirement to run articulated dump trucks in 2 of the pits as we mine through oxides during the rainy season. As already mentioned. This is expected to improve as we access the fresh ore and as we establish bore holes 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'll hand over to Patrick to talk about the progress of exploration.
Thanks, Mark. As you know, exploration efforts at Ity have also been very strong and will continue to be strong. With all the Black maiden indicated resources increasing from 85,000 ounces to 476,000 ounces at a quite high grade. After intensive drilling, the reproc deposit is now composed of 3 main zones, all of which are open at depths and in multiple direction. We do believe Le Plaque is a high quality deposit, and you may find additional detail in the recent press release we publish about it.
Furthermore, reading and compared a number of very high grade intercept of 10 gram per ton over at least 5 to 10 meters, including for us, a company wide record intercept of 11.7 meters at 106 grams per ton, including two meters at 6.20 gram per tonne. The drilling campaign at Le Plaque is going on. With at least 20,000 meter plan for the rest of the year, where the aim is to delineate further resource and reach research status by year end. Now turning back to Mark.
So looking at Karma, as you all know, the initial Karma project was not built by the Endeavor team, they've completed numerous improvement projects, which are evident. The Stasher and agglomerator upgrades are well underway, and are due to be completed in stages in quarter 42019quarter12020 respectively. Which is expected to increase stacking capacity. The owner mining team are achieving very good productivity and high quality 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 temporarily buildup of Golden Circuit ounces due to an issue with the Allusion column, which is being addressed.
The previous quarter also benefited from the release of Golden Circuit ounces. Otherwise, all key indicators were up with better grades and recovery rates. Mining of the cow main pit was largely completed in the quarter ahead of the wet season and mining of the cow north pit has progressed steadily. This pit will be the mainstay of production for the remainder of the year, and we expect to see production increase with increased mining and stacking grades over to Patrick now.
Thanks, Mark. Now let's 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. And we start we just receiving the first result most results are still pending.
Further exploration is underway here with a group goal of delineating additional satellite deposit and updating the feasibility study to give us to give the project the required scale to fit and develop investment criteria. Once complete, The Kalana project investment case will then be reviewed against other internal growth opportunity and compete with them for capital. Now turning to Slide 33, about our greenfield Fetekro property in CODIvoire. 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 $5,000,000 exploration campaign totaling 43,000 meters in 2019, with the aim of delineating additional indicated resource at the Lafigue deposit and also to test other nearby targets.
To date, a total of over 37,000 meter was drilled over the Le Plaque deposit and the close vicinity the first half of the year. And as said by Sebastian, we expect an update resource to be published in Q3. Indeed, we are very excited with this discovery as it feels the objective we set as part of our exploration strategy defined late in 2016. The first was to extend Mindlife to over 10 years and Sebastian commented on that, And the second one for us was to bring to the company a new project to develop through exploration. FETechro is on a good way to it.
And I look forward to advance this project also. I now hand back the word to Sebastian with 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. And due to better grades at Hounde 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. And as mentioned earlier, we are excited about our exploration prospects and look forward to increased resources and reserves at both Ity and Hounde and also increased resources that Fetek hold that Patrick just went through.
As you have seen in presentation, we have made significant progress over the past 3 years and we are now turning the corner. Our priorities for the next 6 months are very simple, as shown on the right. Not that our capital intensive phase is over, our priorities are to generate strong cash flow to accelerate deleveraging, and to increase the reserve mine life at Hounde and Ity to lock in 10 year plus of robust mine life at 250,000 homes 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. You. Your first question from the line of Ovahedeep from Scotiabank. Please go ahead.
And just want to say congratulations on the ramp up of Ity. Just a couple of questions from me. In regards to how the rains have or the rainy season has come in in the early part of Q3. Just want to know how, you know, how that's going to affect you 3 and specifically at ity. You know, 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, Avay. Thank you for your question. Martino has a gun on me and he doesn't want me to comment on July. So, I won't give too much headlines and on July. But, despite, I would say, a normal plus rainy season, We're very happy so far with how all our minds are behaving and in particular ity, which is still bidding every month on all fronts.
So I think the team and as Mark mentioned, and he went there probably four times over the last 6 weeks or 8 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.
Yes, I guess the good thing with ity is we do have flexibility. So we've got 3 pits and the heap leach. The old heap leach that we're mining. So we can balance our production through that. And we actually do have a forecast that's based around that.
Okay. So in terms of just in terms of mining wise, is that going according to your expectations? Is that kind of holding in well?
Oh, definitely. Yes.
Okay, good to hear. And just moving to Hounde, in terms of Kari West and Kari Pump, obviously, we are expecting reserve updates But are we also looking at getting some new mine plans there as well in terms of incorporating Kari West and Kari Pump with the Win Duluth? By the end of the year or is this, something of a moving target?
No, no, no, I think it's clear. We expect, in fact, Kari West and Kari Center, you know, indicated resources and reserve by year end. And the objective will be to have beginning of next year in Q1. Hopefully, technical reports for both Hounde and Ity that will include those new reserves and therefore will bring the new life of mine plan. And as I mentioned earlier, the objective is to demonstrate that now those 2 flagship assets have their 10 year plus 250,000 on coming up.
Perfect. And just last one for me, just this is 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 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 North Sea and Northwest Kari Pump deposit. Though today is still a quite wide drilling, so we need to infill it to understand exactly what could be the extension the additional resource we could bring to Kari Pump.
We have been actually extremely happy with the result found on Kari West because according to what we did, you know, we extended significantly the footprint of Kari West compared as it was last year. And on top of that, carry waste remain open. So we plan to do drill some extension on that. And more especially, you know, I'm quite happy with a new extension we found on Cary Center, with we call internally Cari Center South. This is quite a new area and more or less on the prolongation of Carrie Center, but not exactly with the same direction.
This is a structural trend that has almost a direction of Indalo. So, we are quite happy with that. This is quite significant in term of footprint. We are talking, we are talking about 2 kilometer at least of that. So our goal is simply to book as much as possible at the end of the year, resource and new reserves to build a new plan.
But 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 Deep section where we have been building a new structural model and we are hoping to have good results 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 project is concerned.
That's great. And
I'll just probably to come back on your earlier question. It's probably fair say that depending on the reserve announcement that we'll be doing on both Hounde, 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 Hounde, outlining the new life of mine plan, the study updated on Kalana, but also depending on the results Fetekro, we might be even with a PA 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 from me. Again, Sebastian and Patrick, Mark, really appreciate your comments.
Thanks, Faiza.
Thank you. Your next question is coming from the line of Michael Stoner from Berenberg. Please go ahead.
Hi, guys. Just to follow on on some of the kind of reserve and resource expansion theme. Can you do you have any kind of notional target on where you would need to get reserves or resources to consider an expansion at Hounde?
Hi, Michael. Now I think it's a bit too early for different reasons. Why I think that on Hounde, 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 3,000,000 dollars, 4,000 dollars, 5 100,000 ounce of new reserves. To get to this 1,100,000 ounce of additional reserve required to show 250,000 ounce steady mine life at Hounde from year end. Then to go above, I think it will depend on the exploration potential that we see beyond Kari West and Kari Center.
And also we've asked, Mark, who just joined to, 1st of all, his sense is that there is still a lot of debottlenecking that can be done easily at both plants, both ity and Hounde. Increase the capacity there, the capacity on both plants in terms of throughput without any significant CapEx So 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 the potential kind of debottlenecking. If I actually, while 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 kind of do you think you've inherited business in obviously quite good shape and growing, but do you see any opportunities to make some tweaks or improvements? And or is it too early to share anything with us?
If you're talking about, are you talking about mining particularly or
just Well,
no, kind of mining procurements 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, understood. And 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 is he being ramped up? And do you just want the financial flexibility or is there kind of any kind of financial policy or strategy around that otherwise?
No, I think it's exactly, Michael, the objective was our banks are getting more and more confident on our business in particular with the end of the construction phase at Ity. So, they were very open in supporting this incremental $80,000,000, which is not required when you look at our cash flow as it is coming and starting to increase significantly. But it's always good to have. So they offered and we took it.
Yeah. No, it makes a lot of sense. And is there a kind of an undrawn cost on that facility?
Vincent?
Yes. There is a cross, for the undrawn portion of the RCF. I will, that is minimal, it's 0.5%, I guess.
Okay, perfect. And then at Kalana, kind of even long before you guys acquired the asset, there were issues with the illusion columns. Is there anything you can do to kind of finally address those issues, because it sounded like if kind of they recurred a bit this quarter.
You mean, you mean Karma, not Carolina? Sorry.
Yes, sorry. Karma, yes.
Yes, okay. Mark, you want to comment on the Elition comments?
Yes, it's a different column to the the Senate, 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, the issue that it was causing. So we're getting that sorted this in the next few months. And, then we should be right.
We'll just make sure we've added it to our maintenance practices so that we don't have it reappearing.
Okay, perfect. So I was on the wrong track there. It's kind of no recurrence of previous issues, kind of entirely separate sounds like?
No, yes, it's one of the new ones, but again, the, this is being fixed. The only impact was a short term impact where about 1500 ounces that we were expecting to produce in Q2 has been deferred. So, we'll recover that in Q3, Q4.
Okay, but all of that should wash through this year?
Yes, yes. Completely.
Okay, perfect. And then final one from me, you talked about transitioning from kind of that one off tax payment to quarterly payments. I missed whether you said when that transition might take effect?
It's just you can discuss with government, I mean, to do provisional upfront payments, which I think is, make it, I mean, smoother in our overall cash flow quarter per quarter, because having this $25,000,000 tax paid 1 off on 1 quarter, is not necessarily the best way, I mean, to manage that. So, 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 1 quarter.
Yes. Makes sense. So, we're probably looking at kind of that change happening in 2020?
Yes, exactly.
Perfect. Okay. That's 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 and congratulations, Vincent, on your new role and welcome Louis and Mark. 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 can you kind of share with us? And what are your forecasts in terms of growth CapEx over the next couple of years? And perhaps if you could just give us any color on what you've set aside for Calana, Fetekro, potential Hounde?
Or should we just look at it as no growth projects budgeted for now, all cash flow pay and debt and or could be eligible for dividend?
Exactly. I think that's 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 Hounde, Fetekro and also Kalana to see what is the best in terms of capital allocation and return on capital. So nothing will be planned in terms of gross CapEx for 2020. And we'll keep the options ready depending on where we are in terms of deleveraging.
Okay. That's quite helpful. And I realize it's preliminary as the deleveraging stage has already begun, but I guess can you share with us in terms of your thoughts on a formal dividend policy and when we might, 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 4 assets going forward. So, I would say that, Q11, Q2 being able to clarify our strategy on capital allocation in particular potential dividend policy will be a good timing. And obviously, if gold price continues to stay where it is, it's basically going to even accelerate this deleveraging. 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 for me. One is that 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. Catch up there. And then 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?
I think on the cotton side, as mentioned with, with Michael just before, there was about 1500 ounces that we're stuck there and that we will see in Q3, Q4. So we don't see any further impact from this colon issue in H2 and recover those 1500 ounces. That's one on the, Second question, which was, sorry, I just got lost on the second question, just in
It was just on in terms of inflation in West Africa, what are you seeing right now? And how is that tracking?
Yes, 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 on over the last 12 months on re tendering all our major, major suppliers across the group, so that it is a group approach rather than a site approach. And therefore, through that, we've been able to either freeze or decrease the prices that we were getting so far. So, so we haven't seen any significant inflation so far.
Okay. And with regards to fuel, are you seeing much of a flow through in terms of higher fuel prices and also how well protected are you in the case of future increases?
So you know that in most of our sites, I mean, we connected on the grid. So it's the electricity price is the biggest driver and the electricity price doesn't vary that much. We, 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. So, 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 in backup.
I think that given that they are quite high in regulatory in both Cote d'Ivoire and Borkina Faso, with a big part of taxes, which are in fact local taxes, an increase of 10% or 15% of fuel of the oil price sorry, doesn't get a 10%, 15% increase right away in the fuel price in country. It's much lower because a big of it is absorbed through the tax, which varies. But otherwise, we don't have any hedging policy is 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 is coming from the line of James Bell from RBC. Please go ahead.
Yes, good afternoon. Thanks for the call. Just one around the portfolio. So I mean, if we look at the numbers, it looks like you are going to delever pretty rapidly, particularly if spot gold persists. So I mean, when you're at a lower gearing level or lower leverage, does that change your views on the portfolio in terms of assets that may not be sort of core to you?
And then 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 3 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 2 main flagships, ity and Hounde, which means that as as we go towards a better return and also return on capital employed, we might consider divesting a some points, other assets, which we believe are noncore.
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 1, which is less attractive in the current portfolio. So that's something that we will continue to obviously do over the next the next months and years. On the security side, I think that, we are confident so far in the Bakken FSO environment.
There has 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. Was appointed. Since then, there was a major proactive, I would say, operations led by the Borkina Bear Army and government on one side on the east side, which was mainly during Q1. And since the beginning of Q2, they are having a big operations also in the north alongside with the French army So, our current assessment is, despite the news flow, things are improving in terms of security And more importantly, the booking officer government tends to have a much better controlled environment, in order to react I would say to those strong push that the Borkina Bay RB are making in both the east and the north. You will see from time to time I would say, spot attacks from Teodoris groups, elsewhere in the country in order to try to to make a diversion from the Borkina Barmi to try to make less pressure on the north and the east.
But I think overall, it's really going into the right direction, thanks to this report also of the French and the U. S.
Okay, that's perfect. Thank you.
Thank you. We have no further questions at this time. Sebastian 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 3 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. Thank you for participating. You may all disconnect.