Thank you, operator. Good morning, good afternoon, everyone. Thank you for joining Endeavour Mining's Q1 2019 results presentation. I'm Sébastien de Montessus, CEO of Endeavour Mining, and it's a pleasure to be talking to you once again. I encourage you to note the disclaimer and notice about forward-looking statements. We will be adopting the usual format today, and here with me, Vincent and Patrick. The next quarter, we'll have Mark Morcombe, our new COO, joining us, as he's joining us next week. I'll start by talking you through some of the highlights from Q1, before the team go into the financials and exploration opportunities in greater detail. We will then open the call for questions. We successfully delivered across all four of our strategic pillars this quarter, and we remain on target to meet full-year guidance for both production and costs.
Project development remained a key focus for us and was the main catalyst during the quarter. The commercial production at Ity CIL began four months ahead of schedule in early April. Importantly, we declared commercial production at full nameplate capacity, and in addition, we're now working to increase the Ity CIL plant capacity by 1 million ton to 5 million ton per annum. Our exploration has also continued to enjoy success with over 115,000 meters drilled across the group in Q1. That's already a third of the total plan for the year. We expect to provide updates on the drill results on Houndé, Kari West, and Kari Center discoveries, as well as updating our resources at Le Plaque in the coming months.
In terms of our balance sheet, our liquidity sources remain strong at $144 million, and we are excited as we are now entering a period of sustaining strong cash generation as a result of Ity CIL entering full production. As you can recall, at the beginning of the year, we have also increased our ownership stake in the Ity mine from 80% to 85%. Looking at this next page, as I just mentioned, we're on track to meet our 2019 guidance. We have experienced no LTIs this quarter, maintaining our position as one of the safest operator in the industry. In terms of production, despite the mathematical calculation based on production this quarter, we remain on track to meet full-year guidance, with higher production expected for the remainder of 2019, due to the CIL, Ity CIL plant commissioning and ramp-up, and higher grade across the rest of our mines.
The same is true for cost, as the Ity CIL contributes exceptionally low cost ounces to the group. On this next page, we see our safety stats in a bit more detail. Safety is the number one priority for us, and this quarter, we have reinforced our strong safety record with a 12 months loss frequency rate of 0.04, well below the industry average. The only LTI on the past 12 months occurred at Tabakoto, which was sold last year. As such, looking at our continuing core operations, we experience over 500 days at Houndé, Ity, Agbaou, and Karma and in our projects without a single LTI. Turning to the next page, we see our quarter-on-quarter production and all-in sustaining cost variation. We shaded in gray the portion relating to the Ity heap leach operation as it ceased in the fourth quarter.
Overall production decreased by 53,000 ounces from the record level in Q4 2018, ending more in line with Q2 and Q3 levels of last year when excluding Ity. Production decreased due to the mining of lower grade stockpiles in anticipation of a much stronger performance across the group over the rest of the year. As we are illustrating with the dotted arrows, we are expecting strong growth to begin in Q2 as the Ity CIL project continues to operate at full nameplate capacity, and due to high expected process grades across the group. On this next page, we see in a bit more detail the utilization of low-grade stockpile across our operating assets. As outlined in our guidance press release, this year's strategic focus was the reduction of working capital in stockpiles. You can see that around 30% of the total mill feed this quarter was from low-grade stockpiles.
This, in turn, helped release almost $8 million of non-cash inventory adjustments, equivalent to about $64 per ounce. This allowed us also to push forward waste CapEx efforts so we can access higher grade materials in the coming quarter. Going into more detail by mine on this next page. As previously mentioned, only residual ounces were recovered at the Ity heap leach operation, and no further production occurred. While the Ity CIL mine had pre-commercial production in Q1, and we expect to strongly benefit from its recent commissioning in early Q2. At Houndé and Karma, production decreased and all-in sustaining costs increased in line with expectation as we used low-grade stockpiles to supplement the stack feed.
We are expecting a stronger performance at both in H2 once the high-grade Bouéré deposit at Houndé is commissioned and operations at Karma benefit from the stacking of oxide ore from the North Kao pit. Similarly, production at Agbaou also decreased in line with expectation as low-grade stockpiles temporarily supplemented the plant feed. Looking forward, production is expected to remain flat, while all-in sustaining costs are expected to increase slightly to the guidance range. As you can see, the combined impact across the group is stronger upcoming production and lower cost.
As shown on this next page, despite the 57,000 ounce production decrease, operating cash flow has only declined by $6 million since Q4 2018. Turning now to an update of the Ity CIL construction. As you know, we are pleased that the project was completed four months ahead of schedule. We are immensely proud of how this project has progressed. It began processing ore on February 20 and achieved its first gold ore on March 19. Commercial production was declared at the beginning of April at its full nameplate capacity following a quick ramp-up phase. This continued on the ramp-up track record of Agbaou and Houndé. The plant is performing well, with all key metrics meeting their targets, including a process rate exceeding 11,000 tons per day.
Looking forward, Ity is expected to produce 160,000 to 200,000 ounces of gold in 2019 at an all-in sustaining cost between $525-$590 per ounce. Additionally, a plant upgrade from 4 million tons to 5 million tons has been launched and will be completed over the next six months during the scheduled plant maintenance shutdown. I would like to hand over briefly to Patrick to give us an update on the company's Q1 exploration efforts.
Good morning, good afternoon, everybody. Many thanks, Sébastien. As you can see, we undertook stronger exploration effort this quarter with around $15 million already spent, which is more or less one-third of our full-year exploration budget. Overall, we drilled more than 115,200 meters during the first quarter. Zooming into the effort at particular mine, we should note that over 61,000 meters were already drilled at Houndé, where we have focused our activity with the Kari West and Kari Center area, which are our main priority for the first semester in Houndé. A possible extension was defined southwest of Kari Center, which we are going to investigate further during the Q2. We expect this drill result to be published later in Q2. Second, at Ity, we have been drilling over 26,000 meters with seven rigs active over the greater Ity area, including on and around the block with five rigs operating.
Finally, the third most significant operation was dedicated to Fetekro, where we have been drilling 27,400 meters, and on Fetekro we expect an update resource that will be published in Q3 2019. Elsewhere, indeed, 26,000 meters has been planned to be drilled for 2019 at Kalana, while drilling at Agbaou and Karma has been delayed to later in the year as the team focuses on higher priority exploration target at Ity and Houndé. I would like to turn the call back to Vincent.
Thank you, Patrick. Good morning, good afternoon, everybody. On page 14, as previously discussed, there was a production decrease in Q1, mainly due to the Ity heap leach operation ending and our decision to use low-grade stockpiles mainly at Agbaou and Houndé, as discussed earlier. As noted, we expect stronger production going forward, even if the use of low-grade stockpile will continue in the second quarter as planned. On the next slide, I will walk you through the main line items from revenue to all-in margin. Those numbers are only reflecting continuing operations and therefore exclude Tabakoto numbers for 2018. Our all-in margins from continuing operations were also impacted by the decrease in production as well as the lower gold sales and the lower realized gold price of $1,252 per ounce compared to $1,293 per ounce in the same period in 2018.
Gold sold from continuing operation decreased mainly due to the reasons I explained on the last slide, the heap leach operation ceased activity and declines across other mines because of the use of low-grade stockpiles. Royalties decreased both due to the lower gold sales and the lower realized gold price, while sustaining CapEx was higher due to the increase at both Agbaou and Houndé, which were slightly offset by a decrease at Ity. Non-sustaining capital decreased mainly due to a $3 million decrease at Agbaou. This was partially offset, however, by an increase at Houndé due to the waste capitalization activity, which give us future access to the high grade Bouéré deposit. Non-sustaining exploration also decreased but remained at a high level in line with our focus on unlocking exploration potential and value this year. This all led to an all-in margin of $22 million for the period.
On the next slide, you see the cash flow over the period compared to the last year, starting from the $22 million all-in margin I mentioned earlier. Of particular note are the items circled on the page. At point 1, you can see the working capital outflow of $25 million. This was mainly due to a receivable outflow of $3.9 million, which is linked with the increase of VAT receivable at Houndé, which was slightly offset by a decrease in gold sales receivables.
Inventories were an outflow of $4 million due to the delivery timing of spare parts consumable in anticipation for scheduled plant maintenance at Houndé. There have also been gold in circuit increase at Karma due to the higher volume stacked, which impacted cash flow by $2.4 million and is expected to be received in Q2 2019. Stockpile volumes have been reduced as low-grade material was fed to the plant to supplement production. Prepayment were $1.2 million outflow due to the prepayment made during the normal course of business, trade and other payables were $16 million outflow, which is partially linked first with the payment of the in Q1, as well as other accruals made at the end of last year. At point 2 relates with the recognition of long-term receivable for Baboto permit as agreed in the sales of the Tabakoto mine.
At point 3, you see the interest in financing increase due to the increase in debt outstanding. At point 5, the growth project capital was comprised mainly of $62 million for the Ity CIL projects and $4 million for Kalana. Lastly, at point 6, you see that we have drawn down on the RCF during the quarter to fund the CapEx spends. On next page, you see the change in cash based on more traditional cash flow metrics. You see here, we started the year with $124 million of cash, to which operating activity added a further $23 million. We then invested $110 million into the business for growth projects, but also sustaining and non-sustaining capital. These activity were bridged by an inflow of financing activities, with not only the drawdown on the RCF, which was partially offset by interest payment and financings obligation repayments.
On slide 18, while our net debt has increased over the quarter, mainly due to the Ity CIL construction, we expect this to quickly decline as we benefit from Ity CIL's production capacity and strong free cash flow generation. Our net debt to EBITDA, last 12 months EBITDA as a reference ratio, increased to 3 times due to both lower last 12 months EBITDA and increase in net debt. The lower last 12 months EBITDA is mainly due to the cease of Ity heap leach operation, the sales of Tabakoto, but also we had a very strong EBITDA achieved by Houndé in the first quarter 2018, which was its first full quarter of production. Due to the change in our production profile, it is, however, difficult to use the trailing data as a benchmark for debt repayment. On the forward EBITDA, based on our full-year guidance, it stands about 1.8 times.
As we rebalance debt and increase EBITDA, we expect to be well below 2 times by year-end. At quarter-end, our available sources of financing and liquidity remain strong at $144 million, specifically considering the minimal CapEx required going forward. Finally, on slide 19, the slide gives the net earnings breakdown. There was an adjusted EPS of negative $0.04 per share for the quarter. The gains on financial instrument was due to a $0.9 million loss on the gold revenue protection program and the $8.3 million unrealized gain on the convertible senior note. The finance costs are related to charge for the RCF as well as costs associated with the convertible bond, net of interest capitalized for Ity CIL project.
The increase in income tax expense was primarily due to Agbaou becoming a taxpaying entity in Q1 2019, as the five years tax holiday period came to an end in the fourth quarter last year. Now I will hand back to Sébastien.
Thanks, Vincent. I'm now going to talk you through our individual mine operations and the main takeaways for each for this quarter. Starting with Houndé, production decreased in line with our expectations while all-in sustaining cost increased. All-in sustaining cost increased to $781 per ounce, mainly due to the anticipated lower process grade, higher unit processing cost and sustaining CapEx, which were partially offset by lower unit journey costs. Looking forward, Houndé is on track to meet its full-year guidance of 230,000-250,000 ounces and its all-in sustaining cost guidance of $720-$790 per ounce. We expect the mine's production to increase in H2 2019 as the pre-stripping activities of the high-grade Bouéré deposit are progressing as planned, with commissioning expected to occur in late Q2. Reserves are also expected to increase later in the year as the Kari Pump resource is converted into reserves.
Turning now to Agbaou, production also decreased in line with expectations for this quarter. As emphasized earlier, this was mainly due to the low-grade stockpile being used to temporarily supplement plant feed as mining was focused on waste strip activities. The mine is on track to meet its full-year guidance, while waste strip efforts are expected to progress throughout the year, with lower grade stockpiles continuing to supplement the mill feed. Production at Karma also decreased for the same reasons as Houndé and Agbaou.
The production and cost were also impacted by the lower recovery rate associated with the low-grade stockpiles temporarily used to supplement stack feed. We expect Karma to meet its full-year guidance for both production and all-in sustaining costs, as the mine is expected to enjoy a stronger performance in the second half of the year due to the benefit of stacking oxide ore from the North Kao pit. Ity, as noted earlier, mining and stacking activities for the Ity heap leach operation ceased in mid-December, as the focus shifted to commissioning and ramping up the CIL plant. Production declined to 2,700 ounces as the final ounces were recovered from the heap leach operations. I would like to run through our strong upcoming catalysts before taking your questions.
Q2 is expected to benefit particularly from the start of commercial production at Ity CIL, while the commissioning of the high-grade Bouéré deposit at Houndé in late Q2 will also bring growth. For upcoming press release, Houndé Kari Pump reserves are expected in Q2, as well as the Houndé drill results for the ongoing exploration campaign at Kari West and Kari Center discoveries, with a maiden resource expected for those in Q4. While in parallel, an updated resource for Ity's Le Plaque will come in Q2 and the maiden resource in Q4. We are very excited for the remainder of the year as there are many catalysts, all of which are the fruit of the hard work done by the team over the past three years. If you have any questions, I will be happy with the team to answer them now. Thank you very much.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, star and one if you would like to ask a question. Your first question comes from the line of Justin Chan, Nomura Securities. Please go ahead. Your line is open.
Hi. Thanks very much for hosting the call. My first question is just on Ity. Can I inquire as to what throughput is right now? Just in terms of the ramp-up to 5 million tons, is that expected to be relatively smooth, or is that more of a step change once equipment's installed?
Hi, Justin. Thanks for the question. Right now, the plant is ramping up fast and pretty well. We are at 460 tons an hour, around 11,000 tons per day, and in particular with Daapleu getting processed. I would say that we are expecting for April, which ended up yesterday, close to 18,000 ounce, which is a good start for the first month. Overall, pretty happy with the way the plant is moving forward.
Perfect. On Houndé, depending on Kari West and Center and how the resources go there in Q4, do you expect to be able to advise on a potential plant upsize towards the end of the year, or is that something that's going to come into next year?
I think that's something that we'll be reviewing in Q3 in particular, once we come up with Kari Pump reserves, and once we have a first understanding of the potential of Kari West and Kari Center. As we mentioned in the past, we believe that if we continue to have very good success on the Kari area, then there might be an opportunity for us to investigate further the expansion at Houndé. Nothing has been taken on this, and we'll be looking based on the reserves and the Kari drilling results.
I see. Okay. That makes a lot of sense. This is sort of related to that. You've come through a very successful phase where you developed Houndé and Ity and you revamped the portfolio. Just going forward, how do you see the next phase for Endeavour? Is it primarily deleveraging? You've got a couple of growth projects in Kalana and potentially Fetekro. Just how would you characterize strategically where you are right now?
I think, Justin, 2019 is the turning point for us. We are basically ending in Q1, Q2, the significant CapEx program that we started three years ago in building Houndé and Ity. Now it's time for cash flow generation to demonstrate the ability of those two core assets, how much cash flow they can generate. You should expect in particular, in Q3 and Q4 with the full ramp-up, to be significant cash flow driven. I think that based on the current leverage that we have, the key focus over the next two, three years is really on deleveraging and mastering the cash flow. We'll see in parallel whether there are some opportunities in the market.
As we just discussed on the Houndé potential expansion, I think that internally, people will compete for CapEx and will have to come up with highly accretive return on capital employed for projects. Clearly, an expansion of Houndé would be more attractive than launching a new phase of building a new mine like Kalana. Time is really on cash flow generation and optimization on our return on capital employed.
Okay. Thanks very much for that, guys. Very much looking forward to coming to CIT later this month.
Great. Thanks, Justin.
Thank you. Your next question comes from the line of Jock Garman from Pareto Securities. Please go ahead. Your line is open.
Good afternoon, guys. Thanks for hosting the call. I guess one or two questions from me. On Agbaou, I noticed that exploration's been postponed. I was wondering, I guess, could you give us an update and what's been tested, what is left to test, and what's the long-term plan, I guess, with Agbaou?
Sure. Patrick, you want to comment on the Agbaou?
Well, on Agbaou, indeed, we have some plan to work on Agbaou later on this year. The fact is, this year we have been focusing a lot on Ity and Houndé. That's why the Agbaou team want to work both on Ity and Fetekro project, which are in much more need to deliver results very quickly, and also on Houndé, where we are operating around the clock, and the Karma team has been joining the Houndé team. It's mostly a matter of synergy and prioritization in target, but both in Agbaou and Karma, we have planned to work in exploration in the second semester this year.
Okay. In terms of reserve life, and I guess additional resources, it's quite limited. You need to effectively discover something significant, right? What's the target there?
Well, I think it's more on Agbaou, we've been saying that we continue to see some potential extensions. We're not going to discover suddenly a 500,000 ounce new deposit. We believe that there are enough targets to increase year on year the mine life over there. We are also testing the underground part below the main pit, where we see some, based on the preliminary results that we had, seems to be attractive. We definitely have a plan for Agbaou. Although it is not as attractive as the Houndé and the Ity success, there are some plans there to be able to extend progressively the mine life there.
Okay. Thanks very much, guys.
Thank you, ladies and gentlemen. As a reminder, if you wish to ask a question, please press star and one on your telephone keypad. Your next question comes from the line of Chris Thompson, PI Financial. Please go ahead. Your line is open.
Hi, good morning, guys. Congratulations on a good quarter. Just want to really just focus in on Houndé. Just one real question. Can you speak to the makeup of the ore type being mined at the moment? When do you see a complete transition to fresh ore, which I guess will be influenced by Bouéré?
Sure, Chris. As we have Riaan, you want to give a quick update on that?
Yeah. Currently, we're still blending around 20% fresh ore in our blend. With us moving to the waste stripping at Bouéré, the bulk of our ore in Q2, Q3 coming from Vindaloo North and Vindaloo mine pit stage 2 and 3, our fresh component will increase probably over 30%. As we start accessing the ore at Bouéré towards Q4, early or late Q3, we'll start seeing the fresh component come down. For the year, we'll still range between the 20%-25% fresh ore component in our blend. Going into 2020, you'll start seeing the fresh portion of our blend increasing beyond 30% as we start progressing deeper in Vindaloo mine stage 2 and 3. Obviously, we'll start accessing the fresh ore in Bouéré towards the end of the year, early next year as well.
Great. Thanks for that. I'll just quickly sneak another quick question in here. How much low-grade stockpile do you have on hand, and how do you see that playing a part in your mill feed?
I don't have that information right with me at the moment. I can answer that offline if you want. We do have a fair amount of low-grade stockpiles in our long-term stockpiles, which we can blend going forward as well. We have, obviously, with us carrying out some of the waste stripping in Q1. We've had to draw from our stockpile, as Sébastien explained. The actual figure, what lies ahead, I'd have to get to you offline.
Chris, Martino here. In our end of year results press release, we provided the stockpile information for year-end for each mine. We will provide more information offline.
All right. Perfect. I will look at that. Thanks, guys.
Thank you. Your next question comes from the line of Mark Lanes from Credit Suisse. Please go ahead. Your line is open. Hello Mark, your line is open.
Hi. Sorry about that. The majority of my questions have already been asked. I was just wondering if you know what the remaining stockpile grade is at Houndé?
Yeah. Let me check. I must have that.
We have the number. In total, in terms of stockpile, at the end of March, we have 46,000 stockpiles, 46,000 ounces of stockpiles.
The average grade is?
The average grade, I don't have it here.
One gram
A bit lower, it's 1.5 gram, something like that.
Okay, great. Thank you very much.
Thank you. Your next question comes from the line of Justin Chan, Nomura Securities. Please go ahead. Your line is open.
Hi, guys. Thanks. Just one more from me. I had a question on VAT and it went up this quarter. I was just wondering if you're noticing any trends there in terms of refunds taking longer to get back, or is there any stickiness there, or is that just a one-off incident? Because I know in some other countries it's become an increasing issue.
Fair point, Justin. In fact, we've been late in collecting our VAT for this quarter. In fact, beginning of April we received part of that, so it's been really a timing effect rather than anything else. Also we have, in total, quite a significant amount of VAT recoverable in Burkina Faso. We haven't experienced difficulties. It takes time, it's painful, but we haven't taken a lot of difficulties to recover that.
Okay, thanks very much. That's it for me. Really appreciate the call.
Thanks.
Thank you. There are currently no further questions. Please continue.
Great. Well, thank you very much, operator. Thank you all again for attending this quarterly conference call. Have a nice and lovely day.