Endeavour Mining : Quarterly Reporting Document

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EDITED TRANSCRIPT

EDV.TO - Q1 2021 Endeavour Mining Corp Earnings Call

EVENT DATE/TIME: MAY 13, 2021 / 12:30PM GMT

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MAY 13, 2021 / 12:30PM, EDV.TO - Q1 2021 Endeavour Mining Corp Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Joanna Pearson Endeavour Mining Corporation - Executive VP & CFO

Mark Morcombe Endeavour Mining Corporation - Executive VP & COO

Martino De Ciccio Endeavour Mining Corporation - VP of Strategy & IR

Patrick Bouisset Endeavour Mining Corporation - EVP of Exploration & Growth

Sebastien de Montessus Endeavour Mining Corporation - President, CEO & Executive Director

C O N F E R E N C E C A L L P A R T I C I P A N T S

Anita Soni CIBC Capital Markets, Research Division - Research Analyst

Don DeMarco National Bank Financial, Inc., Research Division - Analyst

Mark Bentley

Ovais Habib Scotiabank Global Banking and Markets, Research Division - Research Analyst of Mining

Raj Udayan Ray BMO Capital Markets Equity Research - Analyst

P R E S E N T A T I O N

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Endeavour Mining's Q1 2021 Results Conference Call. (Operator Instructions) Today's conference call is being recorded, and a transcript of the call will be available on Endeavour's website tomorrow.

I would now like to hand the call over to management. Please go ahead.

Martino De Ciccio - Endeavour Mining Corporation - VP of Strategy & IR

Hi, everyone. I am Martino, Vice President, Strategy and Investor Relations, and I'd like to welcome you to our Q1 2021 results webcast. On the call, I am joined by Sebastien, Mark, Joanna and Patrick.

Today's call will follow our usual format. We'll first present our results at a group level and then dive into by asset. We'll be as quick as possible to leave time for questions at the end. Before we start, please note our usual disclaimer.

And now I'll hand it over to our CEO, Sebastien, to walk you through our Q1 results. Sebastien?

Sebastien de Montessus - Endeavour Mining Corporation - President, CEO & Executive Director

Thank you, Martino. I'm very excited to share our results for the quarter as it shows the success of the transformation we have executed over the past year and resulted in a more resilient business. We are well positioned to deliver strong cash flow and organic growth, while at the same time rewarding shareholders through our dividend and buyback programs.

You can see a summary of our Q1 results here on Slide 6. We achieved a great outcome in our first quarter, both operationally and financially, and we are on track to meet guidance. Production more than doubled versus Q1 2020 due, of course, to our acquisitions and in particular, the recent successful integration of the Teranga assets.

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MAY 13, 2021 / 12:30PM, EDV.TO - Q1 2021 Endeavour Mining Corp Earnings Call

Looking at our per share metrics, our operating cash flow per share is up nearly 50%, while the adjusted EPS is up 111%, consistent with our expectation that the transaction would be accretive to our shareholders while also benefiting from the continued strong gold price environment. Strategically, we are focused on ensuring our shareholders realize strong returns. As such, we have paid out our first $60 million dividend in January and started during Q2 our buyback program which will run over the year.

On Slide 7, you can see some of our key performance indicators for the quarter. We've continued to focus on our safety performance, with our ultimate goal of zero harm. On production, we are solidly on track relative to our full year guidance, and we will see a full quarter of production at Sabodala-Massawa and Wahgnion included in our results in Q2, and we anticipate our run rate to increase for the balance of the year. It's important to note that for Q1, it is only 1.5 months out of 3 for the Teranga assets that is consolidated here.

Similarly, all-in sustaining costs came in at the bottom half of our target range for the full year. Again, we expect to see the impact of a full quarter from the lower-costSabodala-Massawa operation in Q2 and no further impact from the higher-cost Agbaou operation that was sold in March. As such, we are confident in our progress towards our full year target range of $850 to $900 per ounce.

Safety, as I mentioned earlier, we continue to focus on improving our safety performance across the board, with several operations added into our platform. We are pleased with the strong safety culture at our newly acquired operation. You can see that our LTI remains low. However, with 4 LTIs that we have suffered in the last 12 months, we always seek to improve, and we continue to evaluate ways to move towards zero of this metric.

On Slide 9, you can see our production and all-in sustaining cost results for the past 5 quarters. The key to remember here is that we had what was truly an exceptional quarter from the Endeavour and former SEMAFO assets in Q4 last year, which returned to a more normalized output in Q1. The quarter also factored in the sale of Agbaou and part of a quarter's production from Sabodala-Massawa and Wahgnion. We, therefore, expect improving consolidated production numbers in the upcoming quarters as we will report a full quarter of operations across our assets.

On the right side of the page, you can see that our consolidated production has increased by 175,000 ounces in Q1 '21 versus Q1 '20, while our production per share has increased by 23% year-over-year.

On Slide 10, I'd like to point out our portfolio's strong diversification across both assets and countries. This is a big shift compared to the portfolio we had 12 months ago. The pie chart shows the native -- the relative contribution of our operations to our production versus the same quarter last year. We've gone from 4 operations in 2 countries with 2 mines contributing 2/3 of our production to now 7 operations in 3 countries with no single operations accounting for more than 25% of our production. This contributes significantly to a reduction in our risk profile and helps to ensure that we can meet our guidance based on greater flexibility within the portfolio.

Moving to Slide 11. You can see how our all-in sustaining margin has trended over the last several quarters. As discussed previously, our production increased modestly with just over 1.5 months of Sabodala-Massawa and Wahgnion included in Q1 and Agbaou was sold. But we were ultimately in a weaker gold price environment during the first quarter which impacted margin versus Q4. Nevertheless, on a year-over-year basis, our all-in sustaining margin increased by $220 million from Q1 '20 to the current quarter, while all-in sustaining margin per share increased by 30%.

On Slide 12, you can see the trend of our operating cash flow which increased by $137 million over the prior year quarter, with operating cash flow per share before working capital increasing by 47% compared with last year. A lower oil price resulted in a relatively modest decrease in the quarter under review.

Looking now at Slide 13, you can see the steady improvement in the strength of our balance sheet from the completion of the major build of our Ity mine in 2019 through to the end of 2020 when we reached a net cash position. As part of the Teranga acquisition, we took about $332 million in net debt on the balance sheet. And despite this at the end of March, we were still left with a very healthy balance sheet. Our goal is to quickly build a strong net cash position, which, at current gold prices, should happen over the next quarters.

Having this strong balance sheet position with a net debt-to-EBITDA leverage ratio currently sitting below 2.2x gives us the flexibility to focus on both shareholder returns and on investing to unlock our organic growth potential. One of the best features of our new portfolio is the ability to

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MAY 13, 2021 / 12:30PM, EDV.TO - Q1 2021 Endeavour Mining Corp Earnings Call

generate sufficient cash to pay dividends and do buybacks while also being able to reinvest in the business to support organic growth projects and exploration.

On the next slide, we highlight the strength of some of those near-term development projects. The Phase 1 expansion at Sabodala-Massawa is well underway. Phase 1 will allow the plant to better handle the higher-grade ore which come from the newly added higher-grade deposits on the Massawa property for a relatively modest investment of about $20 million in the back end of the plant. The DFS for Phase 2 is underway for the BIOX plant which will focus on processing the significant quantity of high-grade refractory ore from Massawa through a newly built BIOX plant.

Beyond Sabodala-Massawa, we have the Fetekro and the Kalana projects, respectively, in Cote d'Ivoire and in Mali, where we recently released the results of positive prefeasibility studies which showed both projects to have attractive operating metrics and attractive economic returns. We are focused on showing strong returns across the business, and this package of growth project is a great example of how we intend to continue to build on our existing portfolio to deliver just that.

Moving to Slide 15. You can see the key target areas for our 2021 exploration budget of between $70 million to $90 million. Patrick and his team are expected to break a new record this year with over 600,000 meters of drilling. A large portion will be targeted at our most recently acquired assets where we see significant opportunities to apply our proven exploration model to the newly acquired tenement. In addition, we will continue to allocate a meaningful portion of our exploration budget to greenfield exploration where we have repeatedly created value through the drill bit.

In Q1, $16 million was spent at the newly acquired assets as well as at Hounde and Ity, where a series of new targets are being delineated. In addition, about $4 million was spent on greenfield and development projects. We anticipate activity will continue to ramp up in Q2 ahead of the rainy season before slowing down again during Q3. I am truly excited to see all of the organic opportunities that will play out over the course of the year.

Moving now on to Section 2, I will now hand things over to Joanna, who will take you through the financial results in detail. Joanna?

Joanna Pearson - Endeavour Mining Corporation - Executive VP & CFO

On Slide 17, we show a breakdown of our all-in sustaining margin on a nominal and a per ounce basis. Because of the substantial changes within our portfolio of assets, this tells a more interesting story than on a nominal basis alone. At a group level, we had a strong improvement in our all-in sustaining margin which was up $150 per ounce. For reference, on this page, we inserted variance explanations for key line items. But overall, the margin was helped by a stronger gold price, lower cash cost per ounce and lower sustaining capital.

Moving to Slide 18, you can see a breakdown of our free cash flow, beginning with the all-in sustaining margin. As we talked about, the all-in sustaining margin has increased over Q1 2020 by a nominal $220 million to $330 million in Q1 of this year. Similarly, our all-in margin increased by $190 million. This in turn led to a total cash inflow of $154 million during the quarter. The main cash outflows during the quarter were an increase in our working capital, primarily from our acquired businesses; cash used in financing activities from our discontinued operations for the payment of dividends and taxes prior to the disposition; and increase in taxes paid due to the larger portfolio of operations; and increased spending on growth projects, primarily due to the acquisition of the Fetekro license in the quarter. These were offset by cash inflows from financing activities related to the private placement, which was completed at the end of the quarter as well as additional drawdowns on the financing.

On Slide 19, we have a waterfall chart which shows how our cash position has evolved during the quarter. Our operations generated around $198 million of net cash, while we spent approximately $105 million on our properties and paid $20 million to increase our ownership of Fetekro, while we also added $27 million in cash from the acquisition of Teranga. In the financing column, we received $200 million from La Mancha near the end of the quarter as well as $47 million in net proceeds from the refinancing of long-term debt, offset by the $50 million dividends that we paid in Q1 as well as $50 million paid to settle Teranga's gold offtake liability.

We ended the quarter with a net debt about only $162 million despite absorbing approximately $332 million of net debt from Teranga, which corresponds to a leverage ratio of below 0.2x. At current gold prices, we expect to quickly return to a net cash position.

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MAY 13, 2021 / 12:30PM, EDV.TO - Q1 2021 Endeavour Mining Corp Earnings Call

Moving to Slide 20. We have a detailed breakdown of our net earnings. I won't go through every line here, but we'll address a few of the most significant items. I do want to start from the bottom of the slide, where you can see that we achieved 111% improvement in earnings per share from continuing operations compared to the prior year quarter. This is an important measure to consider as we look at the success of our recent corporate transaction which have clearly contributed to improvements on a per share basis.

Perhaps the most significant single line item impacting our earnings at the corporate level was our increased current income tax expense. This is higher in Q1 2021, due primarily to the inclusion of the tax expenses from our newly acquired operations. Beyond that, we saw higher corporate costs resulting from our larger overall business as well as increased acquisition and restructuring costs related to the Teranga and SEMAFO acquisitions. Our corporate exploration expense also increased due to increased greenfield exploration activity, primarily on the newly acquired Teranga assets.

I'll now hand things over to Mark, who will go through the details of our operations on a mine-by-mine basis. Thank you.

Mark Morcombe - Endeavour Mining Corporation - Executive VP & COO

You, Joanna, and hello to everyone on the call. I've just returned from visiting a number of our mines, and we'll happily trade the 40-degree heat at Sabodala for the current English weather any day.

Starting on Slide 22, you can see our production bridge, which primarily shows the significant positive impact of the recently acquired operations as well as organic improvement at Hounde meeting. For Boungou, in particular, the difference derives from the fact that the prices and was idle for a number of months in late 2019 and early 2020 compared to a full quarter of operating in quarter 1 this year. As you have heard, the last quarter results includes only 1.5 months of performance from Sabodala-Massawa and Wahgnion. Overall, our production has increased by 175,000 ounces compared to the prior year's quarter.

Moving to Slide 23. I will begin the review of our individual mining operations with Sabodala-Massawa, which is now our flagship asset. I was at the mine yesterday and can attest to the fact that the team have continued to make great progress on a number of fronts. Mining in the Sofia pit is continuing, with another new PC 3000 shovel commission during the quarter, so the digging fleet is in good shape. The hall road construction to enable us to mine a CZ and NZ ore bodies is progressing well as other innovations to the former Barrick exploration camp which is housing the mining crews for the Massawa crew.

Moving to Slide 24, you can see an overview of our Phase 1 expansion plan. The first phase of upgrades to the processing plant are focused on debottlenecking the back end of the existing CIL to increase capacity to process the higher-gradefree-milling Massawa ore. The civil works for the various work packages are all progressing well and are largely complete. The electrowinning cell has been installed and the elution column, acid wash column and regeneration kiln are all on site. Direction of steel work will commence in the coming weeks. These upgrades are anticipated to be completed in quarter 4 and have the potential to add production of up to 90,000 ounces per year by allowing the processing of higher-grade ore without excessive loss of gold curtailing.

On Slide 25, you can see some pictures illustrating the Phase I work in progress. Starting at the top left, the foundations for the electric carbon regeneration kiln and various transfer tanks are complete. Part of the steel structure has been increased in the background. On the top right, the crew is finalizing preparations for the last concrete both for dilution and acid wash com. In the bottom left, the kiln and the 2 columns are now on site. The last photo shows the leach tank bases with all concrete to be completed by next week. ENERCON, who are undertaking both the civil and SMP work, are currently fabricating various components and readiness for the next phase of construction.

On Slide 26, you can see an indicative schematic of the proposed Phase 2 expansion of the processing plant to incorporate the BIOX circuit to treat the refractory ore, place to include refractory plant, tailings facilities, water management and (inaudible) session upgrade. The DFS will incorporate several optimizations of the PFS completed by Teranga, including improved geometallurgical modeling to incorporate more information on sulfur and arsenic, which are key drivers of the BIOX process and pit optimization to determine the appropriate split of ore feed between the 2 processing plants. So the processing optimization will be undertaken in the crushing, milling and flotation circuits. We anticipate completion of the DFS in quarter 4 this year.

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