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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to Endeavour Mining Second Quarter and Half Year 2020 Results Webcast. [Operator Instructions] 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 Corporation. Thank you, Mr. De Montessus, you may begin.
Thank you, operator. Hello, everyone, and thank you for joining our Q2 2020 Operational and Financial 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 all once again. Before we start, I'd like to ask you all to please note today's call is covered by our disclaimer and notice on forward-looking statements. The format for today's call will follow our usual format for quarterly results. I will provide an overview of the results, including our response to COVID-19. Our interim CFO, Henri, will review our financial performance, and Mark and Patrick will provide a review of our operations and exploration. I will conclude the presentation, and we then take your questions. For those of you who don't know our interim CFO, Henri has been our EVP for People, Culture and IT since October 2016 and has been instrumental in building the Endeavour culture devising our values, the 4 Ps, managing our COVID-19 response and most recently, closely involved in the Semafo integration process. Henri has previous CFO experience, and I would like to thank him for stepping into this role until we conclude our CFO search, which I expect to be done in the next couple of weeks. Starting on Slide 6. We have included the usual recap of highlights across our key pillars for the first half of the year. As I look at this slide, I realize that we've had the same layout for the past few years. The fact that we always have different key achievements across our pillars on a quarterly basis is, I believe, testament to how fast our business keeps evolving. This has been particularly true over the last quarter where in spite of the additional challenges presented by COVID-19, the team has done a great job delivering and continuing to find ways to improve our business. We have much to be proud of as the team has quickly adjusted to this current operating environment to ensure business continuity. We remain on track to achieve our full year production and all-in sustaining cost guidance in particular due to the collective efforts of our team and partners to obtain the mining permit and commence mining operations at our high-grade Kari Pump deposit at Houndé. On the project development front, we have made significant progress at Fetekro with an updated mineral resource due to be published shortly and a PEA expected during Q3. It has also been full steam ahead on the exploration front as we completed 85% of the guided full year exploration spend during H1. As you know, exploration is a key value driver for us, so we are pleased with the progress made ahead of the rainy season and particularly our 2 recent announcements at Houndé and Ity, and more is expected later this year. Finally, we completed the Semafo acquisition shortly after the quarter end, with the integration process now almost complete. Regarding the balance sheet, we aim to fully deleverage it in order to further derisk the business. And in the coming quarters, we expect to move to a net cash position, at which time, we will begin paying dividends. As you see, it is exciting time ahead. Turning now to Slide 7. As we look at our COVID-19 response, our team, local communities and our host governments have managed extremely well in responding to this crisis. As you can see from the slide, we have 3 levels of response planned as part of our business continuity plan. Our operations are continuing to operate at Level 1, which is near-normal operations with a range of enhanced preventive measures in place, such as temperature checks, restricted access to sites, social distancing, increased hygiene standards and mandatory quarantine periods for employees arriving in country. Level 2 is designed to be initiated should COVID-19 become more prevalent. And under these circumstances Endeavour mines would be isolated, but mining operations and the shipments of gold would continue. And Level 3 involves the full or partial suspension of mining and processing operation. COVID-19 has presented various challenges at each of our mines in different ways, and Mark will talk in some more detail about what we have done at site to mitigate these challenges. On Slide 8, our top priority is the safety of our people. While our safety record remains better than industry standards, I'm unhappy to see the slight increase in LTIs over the last 12 months. We need to continue to be prudent. Our largest threat is now fatigue management, and we are taking appropriate actions to ensure roster changes and proper rest periods alongside our regular safety briefings and toolbox meetings. Before diving into our results, I want to give you a brief update on the integration of the Semafo asset as it has been a significant focus of the management team over the past several months. Shortly after the transaction announcement in March, we started working with the Semafo team on the integration process. As Endeavour has developed a robust operating platform in West Africa over the past decade, it has been relatively straightforward and quick to slot in these new assets. Our operating model and philosophy are very different to that of Semafo. As you can see from this org chart, our GMs are empowered and placed at the center of our business, which enables them to be as hands-on, as reactive as possible. They are supported by strong technical and support functions and a network of experts across our business. Put simply, for every function at site level, say mining or supply chain, the local manager can rely on a group expert to leverage synergies and experience. We're not trying to reinvent the wheel every time we have a new mine, and this helps to integrate the newly built assets such as Ity and Houndé and also newly acquired ones such as Boungou and Mana. We are already starting to see the benefits for Mana and Boungou. I visited both sites last week and spent time there to welcome the teams to the Endeavour family. I was pleased to see everyone wearing the Endeavour shirts with our values, the 4 Ps, which stands for performers, partners, pioneers and proactive. I could feel on the site how everyone was extremely enthusiastic about joining the Endeavour family and being part of building a leading African gold producer. I also spent about 36 hours in Wagadugu, the capital city of Burkina Faso, and met with 5 ministers: Minister of Mine, Minister of Finance, Minister of Infrastructure, Minister for Foreign Affairs, the Prime Minister, and also a one-to-one meeting with the President during that visit, which I believe shows the quality of the relationship that we have in-country and the stronger partnership we have. As we move to Slide 10, you can see that we are on track to meet full year guidance for both production and all-in sustaining cost. We expect the second half of the year to be strong, and we will explain why on the next slide. The Semafo assets are also performing well and are on track. We have therefore maintained both Endeavour's and Semafo's guidance figures and aggregated them to obtain our pro forma guidance. Overall, we expect the combined entity to produce over 1 million ounces at below $900 per ounce all-in sustaining cost. On Slide 11, we see the production and all-in sustaining cost trend per quarter. Following a stronger-than-expected first quarter, production declined slightly in Q2, although overall production for the first half of the year is broadly in line with our expectation, and we are on track for a stronger second half of the year as initially guided. For reference, we have inserted small charts on the right-hand side of the page to illustrate expected outlook by asset. And as you see with the arrows, we expect a stronger performance across all mines. But Mark will run you through the mine-by-mine detail later in the presentation. Now on Slide 12, you can see the trend of our all-in margin over the last 4.5 years. For reference, the all-in margin is revenues, less all-in sustaining cost and less nonsustaining costs. Our margin increased by over 2x compared to the same period in '19 due to the benefit of higher production and a higher gold price. As you can see, last year, we had a very strong second half of the year, and this year, we expect to have a similar pattern. On the right-hand side of the slide, we have outlined why we have reason to believe that H2 will be very strong. First, we expect an increase in production at lower cost, as described on the previous slide. Second, as we have guided, our nonsustaining CapEx was largely H1-weighted, with already 65% completed. Likewise, for exploration, we have already spent 85% of the full year budget. And lastly, we will be better placed to take advantage of the higher gold price environment as nearly half of our production was capped at $1,500 per ounce under the hedging program which expired at the end of June. On Slide 13, we show the evolution of our balance sheet and leverage. As you can see, our net debt has steadily decreased over the last 12 months after we completed our investment phase. We currently have a very healthy balance sheet, as shown in gray, which is the pro forma amount with Semafo and the La Mancha placement included. Given our stronger-than-expected free cash flow profile, we expect to transition to a net cash position in the upcoming quarters, at which point, we intend to start paying a dividend. Turning now to exploration on Slide 14. You can see a breakdown of our exploration expenditure for the first half of the year. The largest spends were at Houndé, Ity and Fetekro. We recently published a dated resource for Houndé and Ity and are working to convert these to reserves, which we'll publish shortly alongside the dated mine plans. As for Fetekro, we expect to publish a new resource in the next coming days. I will let Patrick comment on Fetekro later in the presentation. The next slide shows our evolution of exploration success over the last several years and how we have created value through the drill bit. In 2016, you might recall, we set a long-term target of adding 10 million to 15 million ounces of additional resources over a 5-year period. Since then, we've added 7.1 million ounces, and we expect to add additional resources in the second part of the year, particularly with Fetekro. With the opportunities identified to date, we continue to believe that we are well on track to achieve our target at a very efficient exploration cost of less than $15 per ounce of gold discovered/indicated. Many of you will recognize on Slide 16, the bottom axis is mine life and the right-hand Axis is all-in sustaining cost, while bubble sizes represent production. With the addition of Boungou and Mana, we now have 4 long-life, low-cost assets that are underpinning our business, and we are focusing on extending mine lives of each of them. Boungou, in particular, has the best opportunity for a positive impact in the short-term as we aim to restart mining operations in Q4 of this year. We are making good progress as the air strip is completed -- to be constructed, and we are well advanced with discussion with contract miners to take over the mining operations. That concludes the overview. And I'd now like to hand over to Henri to take you through the financials in greater detail.
Thank you, Sébastien, and hello, everyone on the call. The financial summaries of today's presentation starts with the key financial highlights for the quarterly and half year results, which I will go through on the following slides. The key takeaway in H1 2020 begins being much stronger versus the same period last year, and this is mainly due to the higher gold price and the start-up of our CIL plant in Ity in late Q1 last year. As you recall, Q1 this year was a record quarter for us in terms of operating cash flow. This level came down in Q2 following expected lower level of production, payment of taxes and the company's CapEx being weighted in the first half of the year. It's fair to say that we haven't seen the full advantage of the gold price environment yet due to our hedging program, which finalized in June, as Seb mentioned earlier. Turning to Slide 19. We have analyzed the number included in our all-in margin. And if we go straight to the bottom line, we see that on our half year basis, we are up $85 million compared to the same period of 2019, while on a quarterly basis, we are down $7 million compared to Q1 this year. This is mainly driven by 3 factors: Production, gold price and cost. In the interest of time, I will go through the H1 comparison, but the same logic applies for the quarterly analysis. So in the second row, we present the ounces of gold sold, which are up 32,000 ounces. In the row below, you see the realized gold price, which is $341 per ounce higher. We have then provided the cost analysis in dollar per ounce to see exactly how this all translates into an improvement of $238 for the all-in margin. You can see that the benefit of the gold price was offset by higher royalties and higher sustaining and nonsustaining capital expenditure. Regarding CapEx, this higher cost was guided for and particularly the fact that it was weighted to the first half of the year. We have already incurred 65% of the nonsustaining CapEx guidance, and on a stand-alone basis, and 85% of our exploration budget, as mentioned by Sébastien. If we move to the next slide, you can see the evolution of our net free cash flow compared to the first half of 2019. Overall our net free cash flow before repayment or proceeds from long-term debt increased significantly from an outflow of $126 million in the first half of 2019 to an inflow of $42 million in the first half of 2020. There are a couple -- there are a couple of items that I'd like to speak to in more detail as we look at how free cash flow resulted from our all-in results. Compared to last year, we had a smaller investment in working capital and long-term assets, as you can see in point 1 on the right-hand side of the slide. Moving down the page. Our cash outflow related to a decrease in taxes, which is the result of the installment payment approach now in place at Houndé. Interest payments increased slightly, while cash settlement on the hedging program in H1 2020 include a $5 million fee for the gold collar program and $20 million for its associated settlements. Moving on further, you will see that the gross project capital has seen a large decrease compared to last year as a result of the completion of the Ity CIL plant during Q1 2019. Moving on -- in terms of M&A, restructuring and asset sale on purchase. This includes a $12 million inflow relating to the sale of the Karma mining fleet and associated spare parts resulting from a switch to contract mining, a $7 million outflow relating to M&A fees and $5 million outflow for contingent payments for the increased Ity ownership agreed to in 2017 and which is based on ounces found. Finally, as we discussed previously, $120 million was drawn in Q2 on the RCF as part of our COVID business continuity response. And given the better outlook and in line with what we have seen from the industry, we have decided to reimburse this amount following the quarter end. On Slide 21, moving on to net debt. We have prepared a variation analysis of our cash position, started with the end of the year cash balance and rising at our pro forma position to show the impact of the Semafo transaction as well as the one of the La Mancha financing that has closed soon after the end of Q2. As you can see here, we generated $183 million from operations in the first half while investing $105 million in the business and having a net drawdown on our available financing of $84 million, including the $120 million drawdown on the revolving facility, as we discussed earlier. On a pro forma basis, this addition of the $100 million investment from La Mancha as well as Semafo's H1 2020 cash balance of $93 million, leaves us with approximately $545 million of cash at the start of this semester. Combined with our pro forma debt, we are left with a pro forma net debt of $309 million, which amounts to 0.44x. So reducing our leverage has been a significant focus for us and will continue to be through the rest of the year and onward. Slide 22, you can see how we arrive at our adjusted net earnings. For ease, we have indicated the letter A to the adjusted line items. So if we scroll down the page, you can see that the largest item relates to the loss on financial instruments, which is mainly driven by the unrealized accounting loss on the convertible bond; and to a lesser extent, the realized loss of the now-expired gold collar program. So overall, our adjusted net earnings per share strongly increased compared to the same period last year to 0.78, as shown in the second to last line of the table. I would like to close this section by taking a closer look on Slide 23 at our adjusted earnings per share over time. And we are pleased that our adjusted EPS has grown steadily over the past 5 consecutive quarters, and it's now sitting at $0.48 per share. I will now hand over to Mark for and overview in more detail of the performance of the site.
Thanks, Henri, and hello to everyone on the call. I hope that you are all managing well given the current situation and coping with all of the various restrictions that have been put in place wherever you live. At least the gold price has made it far more interesting for many of us. Starting on Slide 25. This graph compares the 6-month performance for this year, which clearly benefited from the startup of the Ity CIL, which was only in operation for 2 months in the corresponding period last year. This was offset by lower grade at Agbaou, though the net result was a 10% increase in production to 321,000 ounces for the period. For illustrative purposes, we have included Mana and Boungou which show a pro forma production of 479,000 ounces for the first half of this year, during which time Boungou recommenced with the processing of stockpiles. As Sébastien mentioned, we have maintained our production guidance despite the challenges presented by the COVID environment. This is our collective goal and commitment to our stakeholders. All of us have had to make significant changes to the way we operate. And throughout the heart of the COVID uncertainty, safety has been our highest priority, both with our workforce and surrounding communities. We have lost some efficiencies along the way, which is to be expected. Though I really appreciate the leadership and ingenuity shown by all to overcome any challenge presented. Many of our colleagues have worked extended rosters on site to counteract quarantine requirements and travel restrictions. I would like to thank so many people, not just from Endeavour or our contractors, but the host governments and local communities, too, for their direct or tacit support throughout. Turning to Slide 26. Our operational review starts with Ity. As you can see on the chart, production decreased over the previous quarter as we prioritized waste extraction and the completion of the Walter pit diversion and TSF raise, which now provides for increased operational flexibility. The 2 key factors for the production decrease was recovery rate and plant throughput. As mentioned on our last call, we were predicting that recovery rates would decline due to the greater proportion of Daapleu transitional and fresh ore processed. Regarding throughput, we had some issues with the variable speed drives on the mills which required our guys on-site to fault-find remotely with technical experts in Europe, coupled with longer airfreight times to bring in spare parts. Though the downtime was longer than it should have been in a non-COVID environment, I was impressed with the way in which our team stuck to the task and the resolved the issue. From a mining perspective, as mentioned, the focus was on moving additional waste to source suitable material for the construction of the downstream walls of the TSF. We also commenced mining at the Colline Sud pit to provide additional all-source optionality. Overall, we expect Ity to have a stronger second half of the year, and in particular after the rainy season. I'll hand over briefly to Patrick to talk about our exploration efforts at Ity, which have been keeping us busy as we are working on converting the Le Plaque resources to reserves. We expect to publish an updated reserve estimate along with life-of-mine plan during the quarter. Patrick?
Thanks, Mark, and hello to everyone on the call. We were very pleased with the newly published resource at Le Plaque, which is, I remind you, located only 6 kilometers away from the processing plant. We are leveraging the same strategy of intensive recognizant drilling before ramping up to resource delineation through infill drilling that we applied to the Ity complex prior to 2018. At the time, the priority was to quickly delineate resource to justify the construction of the CIL plant. And so we focused on infill drilling to leverage the knowledge that has been acquired through the previous recognizant drilling. This strategy resulted in the discovery of more than 1.6 million ounces of indicated resource at the -- during -- at the end of 2016 and the 2017 years, at a cost -- discovery cost of $15 per ounce. On the Floleu license itself, to date, we -- 65% of the drill holes have been aimed at making a new discovery, which has led to several targets being identified. And only 35% of all the drilling has been dedicated to delineation of resource at La Plaque. So far, our resources have been outstanding, both in terms of the high-grade nature of mineralization extension. La Plaque indicated resource recently increased by 43% to nearly 700,000 ounces. And it now ranks as Ity's second largest and highest grade deposit. Looking ahead, we are excited by the upside potential of the Le Plaque deposit itself, which remains open at depth and in several directions and also by its neighboring targets. We expect to continue to delineate resources and remain on track to achieve the 5 years exploration target which we set late in 2016. Mark, back to you.
Turning to Houndé on Slide 28. It is interesting to see that the mine's production profile has been stable over the last 5 quarters. All-in sustaining cost has increased as expected due to the guided higher waste capitalization activity. It is noted that quarter 2 production and all-in sustaining costs were better than initially anticipated as we delayed a portion of the scheduled waste capitalization activity until later in the year. This was done to focus on opening up all blocks in [indiscernible] mine. We've already started to mine at the Kari pump deposit and expect a stronger second half of the year due to the contribution from there in quarter 4, in particular. We're very proud of this achievement as we went from discovery to production in under 3 years. It has been a collective effort from the exploration team to move quickly to indicated status and then complete the initial grade control drilling program. Also to our technical team for completing appropriate test working studies for reserves conversion, and our public affairs team for their efforts in obtaining the mining permit on time despite COVID-19. Patrick, over to you for an exploration update as there is a lot happening in Houndé as we work on upgrading the newly added Kari resources to reserves. We expect to publish maiden reserves release in quarter 3, along with an updated life-of-mine plan for Houndé. Patrick?
Thank you, Mark. As you saw a few weeks ago, we published a resource increase of around, let's say, 550,000 ounce of indicated resource following further resource delineation at the Kari area. We are very pleased with the additional resources designated in all this area for a number of reason. Firstly, the very favorable mineralization characteristics. A large portion of the resource is quite high grade, especially those at Kari West. A large portion of this is also oxide and transitional material, while the Vindaloo itself, deposit itself, being mined currently is mainly fresh ore. These deposits are also amenable to open-pit mining with potential strip ratio significantly lower than that currently being seen at the Vindaloo deposit. And more than half of those are at the high-grade Kari Pump deposit. Lastly, the attractive metallurgy provides for potential gold recovery rates above 90%. As we continue to drill in the Kari area later this year and also indeed in 2021, we are confident that we will continue to delineate and add resource along the Kari Pump which remains open to date. Taking a step back, in our 5-year exploration plan, we were a bit optimistic in the sense that we thought it would only take us a year to drill the entire Kari area. But given the larger-than-expected success, it take us 3 years. We are super keen and impatient to now start drilling other high-priority targets that were relayed due to our very high success in the Kari area. All these targets are quite close from the mill. And it will also mean that we will need to revise upward our discovery ounce target, the global one, for all the Houndé area. Mark, back to you.
Thanks, Patrick. Moving back to Côte d'Ivoire and our Agbaou operation on Slide 30. Production decreased due to lower average process grades and throughput while recovery rates remained flat. In addition, mining at deeper elevations in the North and South pits was impacted by lower equipment availability. This was due to a combination of the time taken for the mining contractor to get essential parts to site and key maintenance personnel stuck in home countries for a number of months due to COVID-19 restrictions. These issues have been largely overcome. As we've been guiding, Agbaou is progressively shifting to a high proportion of fresh ore in the mill feeds, which results in a reduction in throughput, grade decrease over the previous quarter due to the high contribution from the lower grade to our pit and the use of lower-grade stockpiles to supplement yield feed. Looking ahead to the latter part of the year, we will continue to operate in harder fresh ore, although the average head grade for the mill is expected to increase. Mining volumes have increased back to normal levels, and as such, we expect to meet guidance. Turning now to Slide 31 for an update on Karma. So the quarter production decreased compared to Q1 mainly due to lower grade stacked and an increase in gold in circuit. The decline in grade was expected as a higher proportion of ore was sourced from the lower grade and lower recovery GG1 pit. In terms of the buildup of gold on the heap leach pads, we estimate there to be a progressive increase of approximately 6,000 to 7,000 ounces. There are a number of reasons for this, and an action plan has been developed to mitigate these issues. We expect to be able to recover some of this gold in the coming quarters. During the quarter, we also transitioned to contractor mining as we believe this is the right strategy for Karma at this time in order to limit investment into assets which are not cornerstone within our portfolio. Following a well-coordinated tender process, the contract was awarded to a West African contractor, SFTP, who has purchased the mining fleet and spares and taken on almost the entire mining and maintenance crew from Endeavour. The transition was really smooth, and I'd like to thank everyone involved in the process. Looking ahead, given the additional gold we expect to recover from the gold in circuit, we expect Karma to meet the bottom end of full year guidance. Turning now to Slide 32. And I'm excited to be able to talk for the first time about the Mana gold mine in Burkina Faso as it joins the Endeavour portfolio. Although we only took full control of the mine at the start of July, we've been working closely with the Semafo team since we announced the transaction, and I'm pleased to say the integration process has gone well. I was at Mana for a brief visit last week to meet the team and for a tour of the Wona open pit, Siou underground and the processing plan, all of which are performing well. It was great to see everyone wearing our Endeavour shirt, and I really appreciated the openness of our discussion. The operation has been set up well, and we trust that through ongoing exploration success, Mana will be a key asset for us for many years to come. Turning to the quarter's performance. Production was slightly impacted at the early days of COVID-19 as most of the underground mining team was placed in a 14-day quarantine as a preventative measure after some positive cases were recorded. This resulted in a temporary halt of the underground operation, which limited higher-grade ore feed. In addition, the mill experienced some downtime following staffing shortages due to initial quarantine periods impacting existing worker rosters. Looking ahead, we will continue with the integration of systems and processes as we prepare for updated life-of-mine plans and 2021 budget. During the second half of the year, we expect underground mining activity to ramp up with more stope production, and open pit mining activity to focus solely on the Wona pit once mining at Siou is completed. As for the guidance, we have retained that published by Semafo earlier this year. Moving to Slide 33 and the second operation we acquired from Semafo, the Boungou mine. I was also at Boungou last week to meet the team there and tour the plant and infrastructure. The airstrip construction is progressing well, and we expect to have fixed-wing aircraft operating to the site in quarter 3. As many of you know, Boungou is currently processing stockpiles, and we plan to restart operations there by the end of the year. I was impressed by the way in which the team at Boungou had just got on with life following last year's incident. And they are all looking forward to full-scale operations in quarter 4. They have been busy dewatering the pit and even mining some of the broken stocks with small earth force equipment to supplement stockpiles. Production for Q2 decreased slightly compared to the prior quarter as lower processed grades from stockpiles were partially offset by increased mill throughput. As expected, the process grade decreased due to the declining grade profile available on the stockpiled ore. Looking ahead, we are busy working on our restart plan, which includes awarding a new mining contract. The process is going well, and the contract will be awarded in the coming weeks. We have had a thorough review of both mine and regional security and have commenced some minor upgrade works to the regional access road whilst we finalize longer-term plan. Lastly, we have recently appointed a West African General Manager, who previously managed our Ity mine, to be the new GM for Boungou. As for the guidance, we've also maintained the guidance published by Semafo earlier this year. Turning now to the next slide for our projects review. As Sébastien mentioned, while our main focus for 2020 is cash flow generation, we have been steadily building optionality within our portfolio, which now comprises 4 development projects, as you can see from the table. We are very excited by our Fetekro property, where we completed a scoping study on the previous 1.2 million ounces resource base and look forward to completing a PEA based on the larger resource, which we expect to publish later this year. Patrick, without giving too much away, would you like to give a quick update?
Yes. Thank you, Mark. At Fetekro, we almost spent $8 million during the first semester of 2020 and around 78,000 meters were drilled since we published the last resource update back at the end of October 2019. An update on Lafigué deposit resources is planned to be published very soon. Actually, we are working on it right now. We are very happy with the drilling campaign results there, and we look forward to publishing the results in the coming weeks. I believe that we have obtained critical mass in just one deposit, the Lafigué deposit, which we discussed before, which is justified a project today. And we are excited to start drilling other nearby targets as quickly as the fourth quarter this year and drilling also in 2021. I will now hand over to Sébastien for the conclusion before I say too much on Fetekro.
Thank you, Mark and Patrick. As we look to the second half of the year, we see a number of catalysts that we expect to be important to our business, many of which will occur during Q3. And we've already commenced mining at the Kari Pump deposit as we received the mining permit much faster than planned. As I mentioned earlier, we'll have updated reserves at both Ity and Houndé as well as associated mine plan updates. We've also got both an updated resource and a PEA for Fetekro, which is shaping up to be a strong contender for development. And finally, in Q4, we've got the restart of mining operations at Boungou. We're excited for the present, where soon we'll be generating very strong cash flow; as well as the future with our ability to generate near-term growth while also adding to long-term upside through exploration. As I mentioned earlier, these are exciting times for Endeavour. We are now a million-ounce producer, and we have solidified our position as the go-to name in West Africa. Our all-in sustaining cost and production guidance continue to extend our mine lives and portfolio optionality through exploration, deleverage our balance sheet and move towards a financial position where we can begin to return cash to shareholders in the form of dividends and share buyback. Thank you for taking the time to listen today, and we will now open the line for questions. Operator, can we take our first question, please?
[Operator Instructions] And the first question comes from the line of Ovais Habib.
Thanks, operator, and hi Sébastien and team. Congrats on a great quarter. So Sébastien, a couple of questions from me. Number one, looks like the integration with the Semafo assets is going well, and you seem to be getting close to choosing a contractor for Boungou. Can you give us a little bit color on how the discussions are moving forward with the government of Burkina Faso in regards to security in the region, especially on the road to Boungou?
Sure. Thanks, Ovais. Yes, I can say that the integration is progressing well. As you know, since the announcement in March of this transaction, we've been in already working on the integration pre-closing on the first of July. So a lot of things have been so far already achieved. The new organization has been put in place. Synergies are already starting to come in, and we've identified over $20 million of net savings that we are expecting through this transaction on our cost structure. In last week, I spent 2 days at Boungou and 2 days at Mana to welcome the team and also be able to review some of the plans and progress that we've been asking. And I think that things are progressing very well. As I mentioned, I spent 36 hours also in the Capital city in Wagadugu, where I was able to meet 5 different ministers, and the Prime Minister and the President, to advocate for different improvements that we are expecting on our side. And I think the quality of the relationship was shown with the number of meetings and also the attention that the government has paid to our different requests. One has been on improving our VAT recovery, and we would be expecting some strong payments and inflows in Q3 from the government on VAT credit. And the second one was continuing to discuss and finalize the security plan for the restart of the Boungou mining operations. I must say that the discussion went very well, in particular, with the President. I'm not in a position to describe the security plans that we are putting forward. I would only say that we'll be very happy in September when, hopefully, we'll be able to announce the restart of the mining operations for beginning of Q4. And we'll give some more details at this point in time. When I was at Boungou, we saw the air strip, which is now completed. And we are expecting the [ ANAC ], so the approval of the local authorities to come over the next few days. So this will give us a lot of flexibility in the short term. We've been also discussing the work that needs to be done on the RR-28 road that you were referring to, which is the road between Ouagadougou to Boungou. And interestingly, the government has just approved, with the financing of the African Development Bank, for reworking the main highway between Fada to the border of Niger. Four companies have been awarded the contract that will start in the beginning of September. So it will be very interesting for us to start same work on the junction between the A-4 and the R-28 at about the same time. And this is why I met with the Minister of Infrastructure, which is very open, including this work as part of their continued work on the A-4. So yes, overall, I would say very pleased with the progress we've been making. And I think that this integration is going in the right direction and progressing quickly.
And just moving on, I mean, you guys have a lot of catalysts coming in Q3 regarding resource and reserve updates at Ity and Houndé. But the one that's really intriguing me is Fetekro. Now in terms of coming up with the resource and coming out with the PEA, what would be your cutoff point for this PEA in terms of drilling? And do you think now Fetekro, the fact that it's moving forward into a study right now, are you seeing Fetekro becoming your next project that you put into construction?
Sure. I think that all of us are quite excited with Fetekro. And as you probably hear with Patrick, he doesn't want to say too much about the results that we will be publishing probably next week. But you can expect a big jump in the Fetekro resources. We always said that our objective was to ensure that our projects could reach a 10 years mine life at 200,000 ounce annual production, and I think that Fetekro is heading into that direction. So based on the very strong campaign that was done in the first half, I think that we'll have enough indicated resources on the book to be able to come up with an attractive PEA that can meet the criteria that we are looking for in a project for Endeavour. And then anything else that will come after that will just be a plus to continue to optimize that project. But yes, I think that the market will be very excited by the results that we'll be providing and the quality of this potential project.
And we will now take our next question, and this one comes from the line of James Bell.
Maybe 2 from me. So firstly, we've seen 1 of your Toronto and New York listed peers announce a decision to proceed with a secondary listing in London. Do you think an additional listing destination looks more attractive now the Semafo transaction is closed and you've got that materially larger market capital liquidity? And if so, what would you see as criteria when you're considering a potential destination for an additional listing?
Thanks, James. I think you're completely right. The objective for us was first to close the transaction with Semafo and progress on the integration. I believe that things are now into the right place. And we always said that at the right time, we would consider secondary listing. That's something that we are currently investigating. I would say that we are balancing between a U.K. listing, London listing, and a New York listing. But we will definitely proceed with 1 of the 2 in the coming months. I think that there are some pros and cons on both listings. We need to do the -- to finalize because we've been, in fact, working hard on this subject over the last few months. So we just need to close up this approach. There are some pros and cons on both. As you know, management is based in London, and I do believe that London would be a natural landing for us. But New York has also some interest. So we just need to finalize that work. We've been sharing yesterday with our Board, our thoughts on the options between the 2. And I wouldn't be surprised if we come up with a formal recommendation or decision over the next 2, 3 months.
Okay. That's very interesting. And then maybe just one on the kind of gold price outlook and how you think about the business. I mean, obviously, we're at record highs. When you're looking ahead to reserves and reserve prices and prices for planning for mine plans next year, what are you thinking in terms of where that might come out? And maybe as an extension of that, are there any changes you're making in terms of underlying mine plans given where prices have moved to in the short term?
Thanks. Well, for the time being, and we might have a different view during our next budget session in November, December. But for the time being, we want to remain very disciplined. I think that the good thing of having assets which are able to produce at below $900, $800, $850 all-in sustaining cost is that you're maximizing your cash flow. So we are not anticipating to change our cutoff grade. We've been using so far $1,300 gold price for our reserves, and I think it will be important moving forward, in particular, on new projects, I mean, to keep a very low gold price in order to maintain a very disciplined approach and ensure, I would say, strong return on capital employed. So at this stage, not anticipating to change cutoff grade or to change mine plan to take a higher advantage on volumes with a higher gold price.
Okay. That's great. And then maybe just one more quick one, if I can, just on the dividend. When taking a dividend up to the Board for approval, do you think you'll be trying to benchmark yourself off your TSX peers? Or do you think you'll take a more global outlook in terms of targeting payouts and yields?
I like the question. It's a very fair one. I think we need to look at the overall market and the overall peers, not just the TSX. But obviously, I'm not going to take the UK peers as a reference. I think that if you take Randgold and the way Randgold was operated, you'd probably have an interesting peer that fits very much into the type of business that we are running. And I think they're probably a good benchmark on what we should be doing.
And we'll now take our next question. And this comes from the line of Fahad Tariq.
Just one from me. Can you talk a little bit about the synergies that you're seeing with Semafo on the operational side, whether it's procurement or logistics. You've had some time now to do some integration work. Maybe touch on the opportunities to lower the all-in sustaining costs going forward.
Sure. Well, so we've got several layers, I would say, of synergies. The first one, obviously, is on corporate G&A. And as part of the review that we've done, what we see is some improvement on the overall G&A. I think that something fair to say is when you add the 2 corporate G&A cost of Semafo plus Endeavour and then you look at the resulting once the integration is done, you have a significant saving between the combination of the 2 entities. So I would be expecting, in particular, given our production increase, that the overall corporate G&A on the dollar per ounce will be lower than the combined and also lower than the Endeavour ones on the stand alone. So that's one aspect. Second aspect is obviously on the supply chain side. So we've already, I would say, banked in since the closing of the transaction, the quick wins on the supply chain. This was mainly in aligning all the key contracts on reagents and so on by taking the best price between the 2 companies and making and applying them with the new volumes and getting a further discount on those volumes. So we are expecting some, between now and the end of the year, already some impact on the volumes and on the prices for those reagents, fuel included. Then we've got other, I would say, more that will take a bit more time over the next quarter on renegotiating some key contracts, contract mining and others. We are -- we have launched also key initiatives on putting in place a shared service center in Burkina Faso. That's the interest of having 4 mines in 1 country, is instead of having a lot of redundant support functions on each of the mines, ensuring that you put in place one function in the capital city that can serve the 4 mines instead of duplicating 4 times those resources. So those are all examples of immediate synergies that you should be able to see in terms of impact progressively in Q3, Q4 and on a full year basis next year in '21. And I would say that we're going to be between $20 million and $25 million minimum of annual synergies through this transaction.
And we will now take our next question, and this comes from the line of Raj Ray.
Just a couple of questions from me. First up on your COVID-related costs in Q2. Can you give some -- give us an idea what, on a per ounce basis, what additional costs might have been? And if you expect that to continue for the next couple of quarters? I see that your AISC guidance is unchanged, so I just wanted to see what the cost was in Q2.
Sure. I think the overall, I would say, donations and impact of COVID-19 in terms of putting in place contingency plan and so on has been between $7 million to $8 million. So if you look on a per ounce basis, with 150,000 ounces produced, that's about probably $40 an ounce -- $4 an ounce. So I mean, it's not a big impact. And in fact, we are expecting that the fuel cost decrease should cover between now and end of the year, those additional costs that we had. I think the biggest impact for us of COVID-19 was mainly to reshuffle a bit some of the mine plans and projects in Q2 in order to accelerate some items and free capacities on site in order not to have too many people on site. So this has been the main impact in order to prepare and ensure that we had everything prepared for a strong H2, which is why we are highly confident in maintaining and confirming the overall guidance for the Semafo and Endeavour and large group.
Okay. And then on the deferral for stripping at Houndé and Agbaou, is that going to be undertaken in the second half? Or do you think the Kari Pump mining starting at Houndé, and that stripping could be deferred to later years?
Mark, do you want to comment on the main plans?
Yes. On that one, with Kari Pump coming in, we can balance the stripping needs. So we'll just sort of push it out progressively. There will be an increase in overall mining tons in future years as part of the life-of-mine plan.
And we'll now take our next question, and this comes from the line of Lawson Winder.
Maybe just a follow-up question on the dividend. Sébastien, you mentioned a buyback in your concluding comments as well. I'm just curious, do you think of the buyback in terms of potentially offsetting a dividend or just being something that's incremental?
Thanks, Lawson. No, I think the current view is that dividend is the right instrument to put in place, and we see that to be put in place as soon as we reach a net cash position, which depending on the gold price forecast, can come quickly. I think the buyback is just an additional instrument depending on where and how our share price will be. So we'll continue to monitor what's the best tools, I mean, to return value to shareholders. So clearly, dividend is one, but we keep in mind that a share buyback at some point might be something that is available in case we believe that our share price is undervalued compared to our intrinsic value.
I also wanted to ask about the other projects. I mean, clearly, Fetekro seems to be the favorite son at this point. Although of course, that could very well change. But just putting Fetekro aside and looking at some of the other key potential projects you have, there's Bantou, Nabanga and Kalana. Can you give us any updated indication as to which one might appeal the most of those 3 at this point?
Sure. So I think that with the current gold price environment, obviously, we're juggling with optionalities. I think we are progressing on the updated DFS for Kalana. And I think that with a gold price like the one we're enjoying right now, Kalana is also becoming very interesting in terms of capacity to generate strong cash flow and strong returns. Bantou, I think, is a bit too early. Bantou has 2 million ounces of inferred resources. We need to go through an extensive drilling program there to convert those inferred into indicated and look at the potential for extensions. It's still very open and highly promising. So I do believe that Bantou seems to be attractive, but probably needs more work compared to where we are at in terms of progress at both Fetekro and Kalana. So as we said, the objective is by end of '21, to have 2 strong DFS which are well optimized for both Kalana and Fetekro; and be able to decide by end of '21 which one should go first in terms of returns. And in parallel, obviously, we'll be continuing to work on the others, including Bantou and Nabanga.
And just on Bantou also, there is a minority interest there. Maybe you could comment on whether or not there would be any interest in consolidating that. And then just in that same vein, maybe just discussing if you're seeing any transactions that might make sense, and I'm fully acknowledging that you've made it abundantly clear that you won't do deals that [ don't ] make sense. But I'm just curious if you're seeing acquisition transactions that actually might make sense.
Well, we always very opportunistic and looking at the right opportunities. In the case of Bantou, that's been -- there was an earning plan with Sarama on some of the properties. So we are increasing progressively our shareholding into that project. And as I said, I think the objective over the next 12 months is to drill extensively at Bantou in order to convert inferred into indicated resources and to see the potential to go beyond the current resources. I think we would like -- for the next projects, we would like to focus on projects that are able to produce at least 200,000 ounces on an annual basis and for a 10-year period. So we need to do more exploration there.
And then maybe just one final one for me on Boungou. Patrick mentioned seeing quite a bit of potential with that particular asset. Now. In terms of timing, when can you start drilling there, or at least any significant drilling there? And how does the security situation play into that? And that's all for me.
No problem. Were you talking about Bantou?
No Boungou.
Boungou. Sorry, Boungou, Yes. So Boungou is going to be, I think, with Mana -- both Mana and Boungou will be the 2 biggest exploration budget for next year. We see potential at both assets, including at Boungou. In terms of security, first of all, there are some targets which are within, in fact, the perimeter of the mine. So those are the priority ones that we'll start drilling as early as in Q4 this year. And then as we grow in terms of security environment and dispatching the right security around the perimeter of the mine, we should be able to start some drilling campaigns in the vicinity of the mine. All the key targets are within 5 kilometers around the mine. And at some point, once the security plan will be fully in place with the restart of the mining, we believe that we'll be also in a position to restart the exploration.
And we will now take the next question, and this comes from the line of Chris Thompson.
Congratulations on a great quarter. I've just got one quick question. Maybe this is for you, Sébastien. Just curious about Karma and Agbaou. Obviously, they're not cornerstone mines. I guess the question is whether they are core assets for the company right now. Can you give us a sense of the future that you see for both of these mines?
Sure. Thanks, Chris. Well, we always said that we'll continue to have a very active portfolio management approach. Which means that once we believe that a mine is not fitting in the portfolio, we don't hesitate to find a new potential owner. I think that, obviously, the gold price environment is reflecting and changing some of their approach from day-to-day. When we look at, in particular, the Agbaou mine plan for next year, we see very strong cash flow coming from the mine next year. And Agbaou has been performing very well. We see strong synergies -- not synergies, but I would say, strong calendar approach between the potential end of Agbaou and the start of a project like Fetekro, which are in the same country. I think the subject that we'll probably have to review more carefully in Q3 and Q4 is Karma. Karma, there are some interesting optionality on a lot of refractory ore that could become much more economic than they were at $1,300 gold price. So those are the works that we need to do. And if it's not attractive enough for us, we've already been approached by several potential buyers who are interested in buying this asset. So I think we have options on the table. We'll continue to assess them and take a decision on what's the best in terms of capital employed and allocation of management time and returns for our shareholders.
Thanks for the candid answer, I really appreciate. Congratulations.
Thank you very much, Chris.
And the next question comes from the line of Anita Soni.
So Chris basically asked my question about Karma -- sorry, about Abgaou and Karma and their future given the gold price right now. But -- so I'll just ask 1 final question on the dividend. And I'm just trying to understand what kind of targets are you setting for the dividend? Is it sort of a sustainable dividend at a certain payout ratio, maybe more sort of onetime? Or is it tied to your free cash flow? Tied to dollars per ounce or anything like that? Or is there any kind of color you can give in that regard?
Sure. Thanks, Anita. What I think, first, that what we're trying to message and focus on is strength of the balance sheet. So step 1 for us is to reach a net cash positive. I think the second step will probably be to ensure that we have a minimum net cash position on the balance sheet because I think that this will give even more confidence to the market and to investors that, despite the perceived, I would say, geographical risk and exposure, we have a very strong balance sheet that can support the business going forward. So that's the real -- the first step. In terms of dividend, obviously, and this is why we've been deferring to ensuring that we have, first, a net cash position because we want the dividend to be something which is sustainable, that we can maintain over time, and that will probably grow in terms of yield as the cash flow and the net cash increases on the balance sheet. So that's probably the best way to frame it at this stage, is -- it's something that will be evolutive as the strength on the balance sheet increases so that we can return properly cash to shareholders.
And the next question comes from the line of Mark Bentley.
I have 2 questions, if I may. First of all, what mitigating measures have been taken against the impact of the rainy season on Q3 production?
Sure, Mark. Well, I think the biggest thing that we tend to work on year-on-year is -- and last year, I must say, was a bit of a tough one because with a very heavy rainy season, in particular, that started late. And at a point where we were commissioning a new pit, Bouere in particular at Houndé. And at the time where we were ramping up progressively the Ity mine. So last year was a pretty tough rainy season environment. This year, I'm expecting that this will be much more smooth unless we have an unprecedented rainy season. But it should be much more smooth, given that we are preparing all our pits to be able to work properly during the rainy season with basically different levels in the different pits that are in the mine plan for Q3 and Q4, so that when you have a rain, you are able to move on your shovels and trucks on a high level, and while waiting for the dewatering after the rain for the sub level. So this is the way we've been working, in particular, at Agbaou, Ity and Houndé, which are the most affected usually by rainy season. Mark, I don't know if you want to give some additional color on that.
I think you covered it pretty well, Sébastien.
Okay.
Okay. Then my second question is, do you see value in preserving cash so that you'll be able to repay the convertible debt in cash in 2023 rather than through shares, given that the conversion price is now significantly below the share price?
I fully -- I would say that I fully agree. At this time, I fully agree with this comment, Mark. That has been our strategy so far, and in particular, when we come up with the issue of the convertible bond instead of doing either an equity raise and impacting dilution for shareholders at the time of the issue or going for a high bond yield that would have been at 7% or 8% interest rate. As you saw, the current coupon on the convert is 3%. And we always said that we were expecting Ity and Houndé to generate significant cash flow once in full operations. And enough cash flow to ensure that we have the ability to buy back these bonds, limit, therefore, the dilution for our shareholders and justify through that a pretty attractive overall financing cost for building mines in West Africa. So that's been clearly said and still on the radar today.
Thank you. And no further questions that came through, sir. You may continue.
Thank you very much, operator. I would just like to thank, first, my team for putting this quarter up. And I would like to thank you all for attending our quarterly release. Thank you very much, and have a lovely day.
Thank you. That concludes our conference for today. Thank you all for participating. You may now disconnect.